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You are an expert at summarizing long articles. Proceed to summarize the following text: Although Congress has not established mechanisms for regularly adjusting for inflation the fixed dollar amounts of civil tax penalties administered by IRS, it has done so for penalties administered by other agencies. When the Federal Civil Penalties Inflation Adjustment Act of 1990 (Inflation Adjustment Act) was enacted, Congress noted that inflation had weakened the deterrent effect of many civil penalties. The stated purpose of the 1990 act was “to establish a mechanism that shall (1) allow for regular adjustment for inflation of civil monetary penalties; (2) maintain the deterrent effect of civil monetary penalties and promote compliance with the law; and (3) improve the collection by the Federal Government of civil monetary penalties.” Congress amended the Inflation Adjustment Act in 1996 and required some agencies to examine their covered penalties at least once every 4 years thereafter and, where possible, make penalty adjustments. The Inflation Adjustment Act exempted penalties under the IRC of 1986, the Tariff Act of 1930, the Occupational Safety and Health Act of 1970, and the Social Security Act. As stated earlier, some civil tax penalties are based on a percentage of liability and therefore are implicitly adjusted for inflation. For example, the penalty for failure to pay tax obligations is 0.5 percent of the tax owed per month, not exceeding 25 percent of the total tax obligations. However, other civil penalties have fixed dollar amounts, such as minimums or maximums, which are not linked to a percentage of liability. For example, a minimum penalty of $100 exists for a taxpayer who fails to file a tax return. Adjusting civil tax penalties for inflation on a regular basis to maintain their real values over time may increase IRS assessments and collections. Based on our analysis, if the fixed dollar amounts of civil tax penalties had been adjusted for inflation, the increase in IRS assessments potentially would have ranged from an estimated $100 million to $320 million and the increase in collections would have ranged from an estimated $38 million to $61 million per year from 2000 to 2005, as shown in table 1. The majority of the estimated increase in collections from adjusting these penalties for inflation was generated from the following four types of penalties: (1) failure to file tax returns, (2) failure to file correct information returns, (3) various penalties on returns by exempt organizations and by certain trusts, and (4) failure to file partnership returns. The estimated increases in collections associated with these penalties for 2004 are shown in table 2. We highlight 2004 data because, according to IRS officials, approximately 85 percent of penalties are collected in the 3 years following the assessment. The same four penalty types account for the majority of the estimated increase in collections for the prior years. Our analysis showed that these four penalties would account for approximately 99 percent of the estimated $61 million in additional IRS collections for assessments made in calendar year 2004. Because penalty amounts have not been adjusted for decades in some cases, the real value of the fixed dollar amounts of these penalties has decreased. For example, the penalty for failing to file a partnership return was set at $50 per month in 1979, which is equivalent to about $18 today, or a nearly two-thirds decline in value, as shown in table 3. If the deterrent effect of penalties depends on the real value of the penalty, the deterrent effect of these penalties has eroded because of inflation. In addition, not adjusting these penalties for inflation may lead to inconsistent treatment of otherwise equal taxpayers over time because taxpayers penalized when the amounts were set could effectively pay a higher penalty than taxpayers with the same noncompliance pay years later. Finally, if the real value of penalties declines, but IRS’s costs to administer them do not, imposing penalties becomes less cost-effective for IRS and could lead to a decline in their use. In the past, Congress has established fixed penalty amounts, increased fixed penalty amounts, or both in order to deter taxpayer noncompliance with the tax laws. For example, the $100 minimum for failure to file a tax return was created in 1982 because many persons who owed small amounts of tax ignored their filing obligations. In addition, Congress increased penalties for failure to file information returns in 1982 because it believed that inadequate information reporting of nonwage income was a substantial factor in the underreporting of such income by taxpayers. As recently as 2006, IRS’s National Research Program confirmed Congress’s belief that compliance is highest where there is third-party reporting. Congress has also recently adjusted some civil penalties that have fixed dollar amounts. For example, the minimum penalty for a bad check was raised from $15 to $25 in May 2007, and the penalty for filing a frivolous return was raised from $500 to $5,000 in December 2006. We spoke with officials from offices across IRS whose workloads would be affected if regular adjustments of penalties occurred. IRS officials from all but one unit said that regularly updating the fixed dollar amounts of civil tax penalties would not be a significant burden. Officials from one relatively small office—the Office of Penalties—said that such adjustments might be considerable depending on the number of penalties being adjusted and would require a reprioritization of their work since their office would have lead responsibility for monitoring the administrative steps necessary to implement the adjustments and coordinating tasks among a wide range of functions within IRS. In addition, the limited number of tax practitioners we interviewed told us that the administrative burden associated with adjusting these penalties for inflation on a regular basis would be low. Officials from all but one unit we spoke to within IRS said that regularly adjusting civil tax penalties for inflation would not be burdensome. Some officials added that adequate lead time and minimally complex changes would reduce the administrative impact. For example, officials from the Office of Forms and Publications and the Office of Chief Counsel said that adjustments to civil penalty amounts would not affect their work significantly. While each office would have to address the penalty changes in documents for which they are responsible, in some cases these documents are updated regularly already. Similarly, officials responsible for programming IRS’s computer systems explained that these changes would not require out of the ordinary effort, unless they had little lead time in which to implement the changes. However, officials from the Office of Penalties within the Small Business/Self-Employed division (SB/SE)—the unit which would be responsible for coordinating IRS’s implementation of any adjustments to penalties among a wide range of functions within IRS—felt that the administrative burden associated with these changes might be considerable depending on the number of penalties being adjusted. The Office of Penalties, which currently consists of 1 manager and 10 analysts, provides policies, guidelines, training, and oversight for penalty issues IRS- wide, not just within SB/SE. When legislation affecting penalties is enacted, the Office of Penalties creates an implementation team that helps determine what IRS needs to do to implement the new legislation. In the case of adjusting penalties for inflation, the Office of Penalties would work with numerous other IRS units to coordinate the necessary changes to forms, training materials, computer systems, and guidance, among other things. Regularly changing four penalties would take less effort than regularly changing all penalties. In addition, the ability of the office to make these changes would require reprioritization of its work or receiving more resources. While the Office of Penalties has not done a formal analysis of the resources needed, an official stated that the additional work would not require a significant increase in staffing, such as a doubling of the size of the office. As a result, the amount of additional resources necessary for the penalty adjustment do not appear to be of sufficient scale to have a large impact on IRS overall. Further, officials we interviewed from other IRS units who would perform the work described by the Office of Penalties said that the administrative burden would not be significant for them. Some IRS officials who oversee the implementation of other periodic updates to IRS databases and documents said that the legislative changes requiring regular updates are most burdensome initially but become less of an issue in each subsequent year. Some officials also said that with enough advance notice, they would be able to integrate the necessary changes into routine updates. For example, program changes could be integrated into the annual updates that some Modernization and Information Technology Service programs receive. Other areas in IRS, such as the Office of Forms and Publications, already conduct annual and in some cases quarterly updates of their forms, and according to officials, a change to the tax penalty amount could easily be included in these regularly scheduled updates. IRS has a variety of experiences that may provide guidance that would be relevant to adjusting civil tax penalties with fixed dollar amounts for inflation. IRS has extensive procedures for implementing statutory changes to the tax code. Further, IRS has experience implementing inflation adjustment calculations. For example, tax brackets, standard deduction amounts, and the itemized deduction limit are among the inflation adjustments conducted annually by IRS. In addition, the administrative changes associated with regular updates to the interest rate have some similarities to the types of changes that an inflation adjustment may require. For example, the Office of Chief Counsel issues quarterly guidance on interest rates and the Communications & Liaison Office provides regular updates on interest changes to the tax professional community, including practitioner associations. Changes to the civil tax penalty fixed dollar amounts could be handled in a similar manner. The limited number of tax practitioners that we spoke with also expected the impact on their work from adjustments to the fixed dollar amounts of civil tax penalties for inflation to be relatively low. For example, one tax practitioner said that he expected to spend more time explaining different penalty amounts to clients, particularly in situations where taxpayers who receive the same penalty in different tax years may not understand why different penalty amounts were applied. In addition, three other practitioners we spoke with said that the changes may lead to an increased reliance on software programs that tax preparers often use to assist them with determining penalty amounts since making the calculations involving inflation adjustments could become more onerous for the tax practitioners to do without software. The real value and potential deterrent effect of civil tax penalties with fixed dollar amounts has decreased because of inflation. Periodic adjustments to the fixed dollar amounts of civil tax penalties to account for inflation, rounded appropriately, may increase the value of collections by IRS, would keep penalty amounts at the level Congress initially believed was appropriate to deter noncompliance, and would serve to maintain consistent treatment of taxpayers over time. Regularly adjusting the fixed dollar amounts of civil tax penalties for inflation likely would not put a significant burden on IRS or tax practitioners. Congress should consider requiring IRS to periodically adjust for inflation, and round appropriately, the fixed dollar amounts of the civil penalties to account for the decrease in real value over time and so that penalties for the same infraction are consistent over time. On July 30, 2007, we sent a draft of this report to IRS for its comment. We received technical comments that have been incorporated where appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its date. At that time, we will send copies of this report to appropriate congressional committees and the Acting Commissioner of Internal Revenue. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-9110 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 II. To determine the potential effect that adjusting civil tax penalties for inflation would have on the dollar value of penalty assessments and collections, we used the Consumer Price Index-Urban (CPI-U) to adjust actual penalty assessment and collection information contained in the Enforcement Revenue Information System (ERIS), which was created to track Internal Revenue Service (IRS) enforcement revenues. We provided inflation-adjusted estimates for penalties that had been assessed for at least $1 million in any one year from 2000 to 2005 and had either a fixed minimum or set amount. This excluded less than two one- hundredths of a percentage of all assessments each year. In addition, we assumed that assessment rates and collection rates would stay the same regardless of penalty amount. This assumption may bias our estimates upwards because higher penalties may encourage taxpayers to comply with tax laws and, therefore, IRS would not assess as many penalties. However, improved compliance could also increase revenues. For collections, we assumed that a particular collection would increase the inflation-adjusted penalty amount only if the unadjusted penalty assessment had been paid in full. For example, if a taxpayer paid $50 of a $100 penalty assessment, we assumed that the $50 collected was all that would have been collected even with a higher assessment, and therefore did not adjust the collection amount. We made this assumption in order to avoid overstating the effect that adjusting penalties for inflation would have on collections because the data did not tell us why a penalty was partially collected. To the extent that taxpayers who paid the unadjusted penalty amount in full would not pay the adjusted penalty amount in full, our estimates would overstate additional collections. One reason for a partial collection is that it is all the taxpayer can afford. We did not include penalties that are percentage based but have a fixed maximum in our inflation adjustments. Two penalty categories in the ERIS data set that we received have fixed maximums and had total assessments of over $1 million for at least 1 year from 2000 to 2005. In both cases, we could not determine how much a penalty assessment for the current maximum would have risen if the maximum had been higher. However, we estimated an upper bound for the potential increase in collections due to adjusting the maximums for inflation by assuming that penalties assessed at the current maximum would have increased by the full rate of inflation. As a result, we concluded that at most, collections would have risen by approximately $196,000 over the years 2000 to 2005 if these maximums had been adjusted for inflation. We also did not include penalties that are based solely on a percentage of tax liability in our analysis because they are implicitly adjusted for inflation. The data contained in the ERIS database were reliable for our purposes, but some limitations exist. To assess the reliability of the data, we reviewed relevant documentation, interviewed relevant IRS officials, and performed electronic data testing. One limitation of the ERIS data is that it does not include penalties that are self-assessed and paid at the time of filing. IRS officials estimated that this is about 6 to 7 percent of all penalty assessments, but that a large majority of these are percentage based with no fixed dollar amount. For example, many people self-assess and pay the penalty for withdrawing money from their Individual Retirement Accounts early. Further, IRS officials acknowledged that some penalties were incorrectly categorized in the database making it impossible for us to determine which penalties were being assessed. We determined that 0.4 percent to 1.4 percent of assessments per year from 2000 to 2005 were incorrectly categorized. For example, in 2000, over $144 million in assessments and over $28 million in collections were incorrectly categorized. In 2005, over $343 million in assessments and over $86 million in collections were incorrectly categorized. These two limitations may bias our estimates downwards. The federal government produces several broad measures of price changes, including the CPI-U and the Gross Domestic Product (GDP) price deflator. The CPI-U measures the average change over time in the prices paid by consumers for a fixed market basket of consumer goods and services. The GDP price deflator measures changes over time in the prices of broader expenditure categories than the CPI-U. We used the CPI-U for the purposes of this analysis because it is used currently in the tax code to make inflation adjustments to several provisions, such as the tax rate schedule, the amount of the standard deduction, and the value of exemptions. To determine the likely effect that regularly adjusting penalties for inflation would have on the administrative burden of IRS officials, we interviewed officials in offices across IRS who would be affected if regular adjustments of penalties occurred. These offices are the Office of Penalties within the Small Business/Self Employed division (SB/SE); Learning and Education within SB/SE; Wage and Investment division (W&I); Tax Exempt/Government Entity division; Large and Mid-Size Business division; Research, Analysis and Statistics division; Legislative Analysis Tracking and Implementation Services; Office of Chief Counsel; Business Forms and Publications within W&I; Enforcement Revenue Data; Communications and Liaison; and Modernization and Information Technology Services, including officials who work on the Business Master File, the Financial Management Information System, the Automated Trust Fund Recovery system, Report Generation Software, Automated Offers in Compromise, Penalty and Interest Notice Explanation, Integrated Data Retrieval System, and the Payer Master File Processing System. To determine the likely effect that regularly adjusting penalties for inflation would have on the administrative burden of tax practitioners, we interviewed tax practitioners affiliated with the American Institute of Certified Public Accountants, the National Association of Enrolled Agents, the National Society of Tax Professionals, and the American Bar Association. In total, we spoke with 28 practitioners. Results from the nongeneralizable sample of practitioners we selected cannot be used to make inferences about the effect of regular adjustments of penalties on the work of all tax practitioners. Additionally, those we spoke with presented their personal views, not those of the professional associations through which they were contacted. We conducted our work from September 2006 through July 2007 in accordance with generally accepted government auditing standards. In addition to the contact named above, Jonda Van Pelt, Assistant Director; Benjamin Crawford; Evan Gilman; Edward Nannenhorn; Jasminee Persaud; Cheryl Peterson; and Ethan Wozniak made key contributions to this report.

Civil tax penalties are an important tool to encourage taxpayer compliance with the tax laws. A number of civil tax penalties have fixed dollar amounts--a specific dollar amount, a minimum or maximum amount--that are not indexed for inflation. Because of Congress's concerns that civil penalties are not effectively achieving their purposes, we agreed to (1) determine the potential effect of adjusting civil tax penalties for inflation on the Internal Revenue Service's (IRS) assessment and collection amounts and (2) describe the likely administrative impact of regularly adjusting civil tax penalties on IRS and tax practitioners. GAO examined IRS data on civil tax penalties and conducted interviews with IRS employees and tax practitioners. Adjusting civil tax penalties for inflation on a regular basis to maintain their real values over time may increase IRS collections by tens of millions of dollars per year. Further, the decline in real value of the fixed dollar amounts of civil tax penalties may weaken the deterrent effect of these penalties and may result in the inconsistent treatment of taxpayers over time. If civil tax penalty fixed dollar amounts were adjusted for inflation, the estimated increase in IRS collections would have ranged from $38 million to $61 million per year from 2000 to 2005. Almost all of the estimated increase in collections was generated by four penalties. These increases result because some of the penalties were set decades ago and have decreased significantly in real value--by over one-half for some penalties. According to those we interviewed, the likely administrative burden associated with adjusting the fixed dollar amounts of civil tax penalties for inflation on a regular basis would not be significant for IRS and would be low for tax practitioners. However, officials from the Office of Penalties, a relatively small office that would be responsible for coordinating the required changes among multiple IRS divisions, said that such adjustments might be considerable depending on the number of penalties being adjusted and would require a reprioritization of work. IRS officials said that the work required would be easier to implement with each subsequent update.

You are an expert at summarizing long articles. Proceed to summarize the following text: SSA offers a range of services, which includes providing financial assistance to eligible individuals through the following three major benefit programs: Old-Age and Survivors Insurance (OASI)—provides benefits to older workers and their families and to survivors of deceased workers. Disability Insurance (Disability)—provides benefits to eligible workers who have qualifying disabilities, and their eligible family members. Supplemental Security Income (SSI)—provides income for aged, blind, or disabled individuals with limited income and resources. In fiscal year 2009, these three benefit programs provided a combined total of approximately $704 billion in benefit payments to nearly 59 million beneficiaries. SSA projects that the benefit payments and number of beneficiaries for the three programs will increase in fiscal year 2010. Besides paying benefits through these three programs, SSA issues Social Security cards, maintains earnings records, and performs various other functions through a network of field office and headquarters operations using an administrative budget of over $10 billion. SSA’s field operations consist of: field offices, which serve as the agency’s primary points for face-to-face contact; Social Security Card Centers, which issue original Social Security numbers, and replacement Social Security cards; Teleservice Centers, which offer national, toll-free telephone service; and Program Service Centers, which make entitlement decisions for benefits, as well as assist in answering 800-number calls. Field offices are located in communities across the United States, the Virgin Islands, Puerto Rico, and Guam, delivering services through face-to- face contact, over the phone, and through the mail. Field offices range in size from large urban offices with 50 or more employees to very small offices in remote areas called resident stations. SSA currently has 1,259 field offices, 8 Social Security Card Centers, and 29 resident stations. Resident stations have more limited services, and are staffed by one or two individuals. Field offices also offer services to the public through 571 contact stations. These stations provide very limited functions and are staffed with one SSA field office employee who travels once a month to certain locations, such as a hospital, to provide service to customers who lack transportation or telephone access. Additionally, SSA has begun using video conferencing to take claims and provide other services to customers in remote locations. Forty-one field offices are currently using video conferencing to provide service to customers and SSA is preparing to roll- out video conferencing to 80 additional offices. SSA also has a separate video service project in the Denver region to help service geographically diverse areas and provide tribal outreach. In addition to field offices, SSA offers customers a variety of other options for conducting their business. Individuals may call SSA’s toll-free helpline to file for benefits or to obtain general information. They also may use the Internet to file for benefits, or visit a Social Security Card Center to request a Social Security card. While SSA field offices take applications and determine if claimants meet basic, nonmedical eligibility requirements for benefits, state Disability Determination Services (DDS) that are under contract with SSA make medical eligibility determinations for Disability and SSI claims. SSA’s Hearing Offices and Appeals Council make decisions on appeals of these determinations. DDSs also conduct continuing disability reviews for Disability and SSI beneficiaries to ensure that individuals are still medically eligible for payments. For beneficiaries found eligible for disability benefits, SSA periodically conducts disability reviews (CDR) of beneficiaries’ earnings and work activity to determine if they are still financially eligible to receive Disability benefits. SSA refers to these reviews as “work CDRs.” SSA also conducts periodic reviews to determine if SSI beneficiaries are still eligible to receive SSI payments based on the beneficiary’s income, living arrangement, and other non- medical factors related to SSI—these reviews are referred to as SSI redeterminations. One type of redetermination is a limited issue review, which does not require a full review of eligibility. Since we last examined service at SSA field offices, SSA has expanded the level of staffing, and encouraged greater use of automated services. However, rapidly rising workloads have adversely affected customer service and the quality of some work, despite SSA’s efforts. Field office staffing stayed about the same from fiscal year 2005 through 2009, despite recent hiring, while the amount of work that field offices produced increased by 2.1 percent (see table 1). As a result of greater efficiency, the average amount of work produced by field office employees increased by 2.6 percent from fiscal year 2005 to 2009. In fiscal years 2008 and 2009, SSA hired a combined number of 4,931 staff for field offices, which helped to almost restore field offices to their fiscal year 2005 staffing level. The additional staffing helped to nearly erase field office staffing reductions in fiscal years 2006 and 2007. In our January 2009 report, we reported that field office staffing declined by 4.4 percent from fiscal years 2005 through 2008, but the amount of work that field offices produced had decreased by only 1.3 percent. Increases in SSA’s fiscal year 2008 and 2009 budget appropriations and American Recovery and Reinvestment Act of 2009 (ARRA) funding enabled SSA to provide more staffing resources to field offices. Table 2 shows SSA’s final appropriations for fiscal years 2002 through 2009. The table also shows the changes in recent staffing. According to SSA officials, SSA plans to maintain field office staffing levels in fiscal years 2010 and 2011 by providing for a 1:1 replacement rate for staff who leave the agency. SSA is planning to use its fiscal year 2010 and 2011 funding to increase staffing in state DDS offices and SSA hearing offices to reduce disability backlogs; the Commissioner has identified reducing the appeals hearing backlog for disability cases as the agency’s top priority. The demand for field office service and claims workloads has grown to record levels. Comparing fiscal years 2006 and 2009, visitor volume increased by about 3.2 million customers, from 41.9 million to 45.1 million. If the visitor volume during the second half of fiscal year 2010 is the same as the volume during the first half, the volume will again be 45.1 million by the end of the fiscal year. Also, from fiscal year 2005 through 2009, SSA processed a growing number of OASI, Disability, and SSI claims (nonmedical determinations only), which SSA attributes to the onset of the baby boom generation’s retirements and the economic downturn (see fig. 1). Even with the increases in field office staffing in fiscal years 2008 and 2009, and some increases in average productivity by employees, many field office managers, responding to a survey conducted in February 2010 by the National Council of Social Security Management Association, Inc. (NCSSMA), stated that staffing levels are inadequate to deal with the growing public service challenges they face daily in field offices. In this survey, over 95 percent of the managers said that they need to hire at least one more employee to provide adequate public service, 89.2 percent said they need at least two more employees, and 71.2 percent said that they need at least three more employees. SSA continues to use various strategies to manage work in field offices, such as shifting work among field offices, based on their workloads, encouraging customers to make greater use of automated services, and deferring certain field office work. For example, if an office has work demands that it cannot immediately cover, that office can request that some work be transferred to another office. SSA is also encouraging customers to use automated services. SSA reported that in fiscal years 2008 and 2009, respectively, the public performed 4.0 million and 6.1 million electronic transactions. SSA reported that electronic filings for retirement benefits grew from approximately 407,000 to 833,000 from fiscal year 2008 to 2009, respectively; this represented 18.9 percent and 32.2 percent of the total retirement applications filed in fiscal years 2008 and 2009. As result, SSA is making progress toward achieving the goal it set in its fiscal year 2008 Agency Strategic Plan to achieve an online filing rate of 50 percent of retirement applications by 2012. With regard to deferring work, SSA has deferred a significant number of SSI redeterminations since fiscal year 2003. Although SSA increased the number of SSI redeterminations in fiscal year 2009 above the 2008 level, the number of reviews remains significantly below the fiscal year 2003 level. Specifically, SSA conducted about 719,000 or 30 percent fewer SSI redeterminations in fiscal year 2009 than it did in fiscal year 2003. However, if SSA completes the number of SSI redeterminations it is projecting for fiscal year 2010, it will be close to the fiscal year 2003 level. Further, the Congress has stated that it is concerned about delays in processing work-related CDRs. Our data show that SSA increased work- related CDRs from about 106,500 in fiscal year 2003 to about 175,600 in fiscal year 2006. However, the number of work CDRs has decreased slightly since 2006, and SSA projects that it will conduct about 174,200 work CDRs in fiscal year 2010 (see fig. 2). Reviews of continuing eligibility are key activities in ensuring that benefits are paid only to those individuals entitled to them. A fiscal year 2008 Supplemental Security Income Stewardship Report showed the correlation between the number of SSI redeterminations conducted and the overpayment accuracy rate. The data showed that as the number of SSI redeterminations and limited issue reviews decreased, the overpayment accuracy rate for SSI payments declined from 93.6 percent in fiscal year 2005 to 89.7 percent in fiscal year 2008, the lowest level in over 30 years. The report stated that the primary reason for overpayment inaccuracies is failure of SSI recipients and their representative payees to report changes that affect payment, such as changes in income and resources. SSA estimates that CDRs yield a lifetime savings of about $10 for every dollar invested, while SSI redeterminations save $8 over 10 years for every dollar invested. Pressures on field office staff to meet increased workload demands may have adversely affected the quality of some work. According to the 2010 NCSSMA report, 87.4 percent of survey respondents reported that they receive complaints weekly from the public about the accuracy or timeliness of the work being produced, and 82.5 percent reported that the number of quality case reviews performed in their office is insufficient to ensure an accurate and timely work product. Also, although the percentage of customers rating SSA service favorably (excellent, very good, or good) has remained stable at 81 percent since fiscal year 2007, the rating has declined from its fiscal year 2005 level of 85 percent, and continues to fall short of the agency’s 83 percent goal. Pressures on field office staff may have also contributed to a further decline in customers’ satisfaction with field office service than in previous years. According to SSA’s fiscal year 2008/2009 field office caller survey, 58 percent of callers got a busy signal or a recording that lines were busy when they called field offices—up from 45 percent in fiscal year 2007, and 55 percent in fiscal year 2008. Because SSA based its results only on customers who were ultimately able to get through to the field offices, the actual percentage of customers that had unanswered calls was likely higher. The decline in field office phone service is further evidenced by results of the 2010 NCSSMA report—64.6 percent of managers said that they were able to provide prompt telephone service less than half the time; virtually all of the managers (98.1 percent) reported that they receive weekly complaints about telephone service provided by their office; and another 67.8 percent of survey respondents said that the increased volume of visitors coming into their office is due in moderate or large part to the inability of their office to provide prompt telephone service. SSA has undertaken efforts to improve telephone service in field offices. SSA initiated a pilot program in 2007 called “Forward on Busy” in 25 field offices to address deficiencies with phone service. SSA has since converted the pilot into a regular program, and 147 offices are participating. Under the program, calls receiving a busy signal at field offices are automatically forwarded to a Teleservice Center. In another effort to improve its telephone service, SSA awarded a $300 million contract to build a Voice over Internet Protocol telephone system for field operations. This system will allow SSA to fully integrate its telephone system and data network, which will provide for faster call routing to any geographic location, and quicker access to caller information. While SSA made some improvements in customer waiting times in fiscal year 2009, SSA data show that the number of customers waiting for over 2 hours remained about the same. Compared to fiscal year 2008 waiting times, SSA increased the number of customers who waited from 0-60 minutes from 92.1 percent to 92.5 percent; decreased the number of customers who waited for 61-120 minutes from 6.8 percent to 6.6 percent; and remained about the same (1 percent) for customers who waited for more than 2 hours (see table 3). In our January 2009 report, we recommended that SSA establish standards for field office customer waiting times and phone service to help identify and improve offices with poor service. SSA did not act on this recommendation stating that it would create problems by diverting staff already spread thin across field offices. SSA has not yet offered a plan to detail how it will continue to do more work with fewer resources and achieve its strategic goals. In our 2009 report and prior reports, we recommended that SSA develop a service delivery plan to outline how it would deliver quality service while managing growing work demands and limited resources. SSA partially agreed with our recommendation, stating that it had a number of documents, including its strategic plan, which discusses how it will meet future service delivery needs. However, because of a continuing concern about the agency’s lack of a consolidated plan to address service and staffing, SSA agreed to develop a single document to describe its plan for addressing future service delivery challenges. SSA officials did not provide us with an update on where the agency stood in developing this plan. With projected increases to SSA’s workload from retirement and disability filings from the nation’s baby boom generation, and a continued wave of retirements of experienced staff, the need for such a plan is greater than ever. For fiscal years 2010 through 2017, SSA projects that the agency will consistently have workloads of approximately 11 million claims (see fig. 3), which is significantly higher than the workloads processed during fiscal years 2005 through 2008, as previously noted in figure 1. As we stated in our January 2009 report, it will be more difficult for SSA to meet higher workload challenges as a result of the anticipated retirement of many of the agency’s most experienced field office workers. Based on SSA’s projections, 22 percent of SSA’s current workforce will retire by fiscal year 2013, and the figure will grow to 41 percent by fiscal year 2018. SSA’s projections show that a significant portion of the losses will come from supervisory staff, who are among the agency’s most experienced staff. For example, SSA projects that 38 percent of supervisory staff are eligible to retire now, 54 percent will be eligible in five years, and 66 percent will be eligible in 10 years. It will take years for SSA to rebuild the decades of knowledge that will be lost from these retirements. Field office managers and staff we spoke to told us that it typically takes 2 to 3 years for new employees to become fully proficient. Given this, SSA is likely to experience declines in productivity as new staff replace more experienced staff. Therefore, SSA will need to do more to compensate for such declines. While SSA is managing increasing workloads resulting from growing retirement and disability claims, it still faces the challenge of providing quality service. SSA’s management of increased workloads came at a cost—the accuracy rate for SSI overpayments fell to the lowest level in 30 years, and some customer service continues to decline. These problems may become more severe as workloads continue to grow from the nation’s baby boom generation, waves of SSA’s most experienced staff retire, and the current level of field office staffing stays flat. Such challenges make it essential for SSA to develop a plan to manage its increasing workload. Whether SSA will need more resources or an altered field office infrastructure, or both, is unclear. We still believe that a detailed service delivery plan should make this clear, and if additional resources are needed to achieve agencywide goals, SSA should identify the resources required to meet long-term service delivery needs. 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 questions about this statement, please contact Barbara D. Bovbjerg at (202) 512-7215 or [email protected]. Individuals making key contributions to this statement included Blake Ainsworth, Mary Crenshaw, Paul Wright, and Charlie Willson. 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.

Millions of people rely on the services of Social Security Administration (SSA) field offices. In fiscal year 2009, SSA's approximately 1,300 field offices provided service to a record 45.1 million customers. People visit field offices to apply for Social Security cards, apply for retirement and disability benefits, request replacement benefit checks, and a host of other services. Over the last several years, growing workloads have challenged field offices' ability to manage work while continuing to deliver quality customer service. The Subcommittee asked GAO to discuss our January 2009 report on SSA field office service delivery challenges. Specifically, this testimony will discuss (1) the state of SSA field office operations, and (2) the status of SSA's efforts to develop a plan to address future service delivery challenges. To respond to the request, GAO relied primarily on the January 2009 report titled Social Security Administration: Service Delivery Plan Needed to Address Baby Boom Retirement Challenges ( GAO-09-24 , Jan. 2009), and updated it with additional information provided by SSA. In that report, GAO recommended that SSA develop a service delivery plan that explains how it will deliver quality service while managing growing work demands. SSA agreed to develop a document that describes service delivery and staffing plans. No new recommendations are being made in this testimony. Since we last examined service at SSA field offices, SSA has expanded the level of staffing, and encouraged greater use of automated services. However, rapidly rising workloads have adversely affected customer service and the quality of some work, despite SSA's efforts. Recent hiring by SSA nearly restored field offices to their fiscal year 2005 level, but field offices have experienced rapid growth in their retirement and disability claims workloads. SSA used various strategies to manage the growing workload, including deferring some reviews of beneficiaries' continuing eligibility. However, deferring these reviews means that beneficiaries who no longer qualify for benefits may still receive payments erroneously. Key customer service indicators were also affected. In fiscal year 2009, more than 3 million customers waited over 1 hour to be served. Further, SSA's Field Office Caller Survey found that 58 percent of customers calling selected field offices had at least one earlier call that had gone unanswered, but for methodological reasons, the unanswered call rate was likely even higher. SSA has not yet offered a plan to detail how it will address future service delivery challenges as GAO recommended in January 2009. With projected increases to SSA's workload from retirement and disability filings from the nation's baby boom generation, and a continued wave of retirements of experienced staff, the need for such a plan is greater than ever. SSA estimates about a 14 percent rise in Old-Age and Survivors Insurance, Disability Insurance (Disability), and Supplemental Security Income claims over the next 10 years, rising from a combined total of 9.4 million, in fiscal year 2008 to 10.7 million in fiscal year 2017. In addition, based on SSA's projections, 41 percent of the current workforce will retire by fiscal year 2018. With such challenges, it is critical for SSA to develop a plan to discuss how it will address future challenges. SSA officials did not provide GAO with an update on where the agency stood in developing such a plan.

You are an expert at summarizing long articles. Proceed to summarize the following text: The Superfund process begins with the discovery of a potentially hazardous site or notification to EPA of the possible release of hazardous substances, pollutants, or contaminants that may threaten human health or the environment. EPA’s regional offices may discover potentially hazardous waste sites, or such sites may come to EPA’s attention through reports from state agencies or citizens. As part of the site assessment process, EPA regional offices use a screening system called the Hazard Ranking System to guide decision making, and as needed, to numerically assess the site’s potential to pose a threat to human health or the environment. Those sites with sufficiently high scores are eligible to be proposed for listing on the NPL. EPA regions submit sites to EPA headquarters for possible listing on the NPL based on a variety of factors, including the availability of alternative state or federal programs that may be used to clean up the site. In addition, EPA officials have noted that, as a matter of policy, EPA seeks concurrence from the Governor of the state or state environmental agency head in which a site is located before listing the site. Sites that EPA proposes to list on the NPL are published in the Federal Register. After a period of public comment, EPA reviews the comments and decides whether to formally list the sites on the NPL. EPA places sites into the following six broad categories based on the type of activity at the site that led to the release of hazardous material: Manufacturing sites include wood preservation and treatment, metal finishing and coating, electronic equipment, and other types of manufacturing facilities. Mining sites include mining operations for metals or other substances. “Multiple” sites include sites with operations that fall into more than one of EPA’s categories. “Other” sites include sites that often have contaminated sediments or groundwater plumes with no identifiable source. Recycling sites include recycling operations for batteries, chemicals, and oil recovery. Waste management sites include landfills and other types of waste disposal facilities. After a site is listed on the NPL, EPA or a potentially responsible party (PRP) will generally begin the remedial cleanup process (see fig. 1) by conducting a two-part study of the site: (1) a remedial investigation to characterize site conditions and assess the risks to human health and the environment, among other actions, and (2) a feasibility study to evaluate various options to address the problems identified through the remedial investigation. The culmination of these studies is a record of decision (ROD) that identifies EPA’s selected remedy for addressing the contamination. A ROD typically lays out the planned cleanup activities for each operable unit of the site. EPA then plans the selected remedy during the remedial design phase, which is then followed by the remedial action phase when one or more remedial action projects are carried out. The number of operable units and planned remedial action projects at a site may increase or decrease over time as knowledge of site conditions changes. When all physical construction at a site is complete, all immediate threats have been addressed, and all long-term threats are under control, EPA generally considers the site to be construction complete. After construction completion, most sites then enter into the post-construction phase, which includes actions such as operation and maintenance during which the PRP or the state maintains the remedy such as groundwater restoration or a landfill cover, and EPA ensures that the remedy continues to protect human health and the environment. Eventually, when EPA and the state determine that no further site response is needed, EPA may delete the site from the NPL. According to a 2000 Federal Register notice, during the first 10 years of the Superfund program, the public often measured Superfund’s progress in cleaning up sites by the number of sites deleted from the NPL as compared to the number of sites on the NPL. However, according to the same Federal Register notice, this measure did not recognize the substantial construction and reduction of risk to human health and the environment that had occurred at some NPL sites. In response, EPA established the sitewide construction completion measure to more clearly communicate to the public progress in cleaning up sites on the NPL. Similarly, according to EPA documents, in 2010, to augment the sitewide construction completion measure and reflect the amount of work being done at Superfund sites, EPA developed and implemented a new performance measure, remedial action project completions. EPA includes these two performance measures in its Annual Performance Plan. The cleanup of nonfederal NPL sites is generally funded by one or a combination of the following methods; Potentially responsible parties are liable for conducting or paying for site cleanup of hazardous substances. In some cases, PRPs cannot be identified or may be unwilling or financially unable to perform the cleanup. CERCLA authorizes EPA to pay for cleanups at sites on the NPL, including these sites. To fund EPA-led cleanups at nonfederal NPL sites, among other Superfund program activities, CERCLA established the Hazardous Substance Superfund Trust Fund (Trust Fund). Historically, the Trust Fund was financed primarily by taxes on crude oil and certain chemicals, as well as an environmental tax on corporations. The authority to levy these taxes expired in 1995. Since fiscal year 2001, appropriations from the general fund have constituted the largest source of revenue for the Trust Fund. About 80 percent of the funds EPA spent to clean up nonfederal NPL sites from 1999 through 2013 came from annual appropriations. The remaining roughly 20 percent came from special accounts and state cost share. EPA has limited cost data where a PRP has conducted the cleanup. Under CERCLA, EPA is authorized to enter into settlement agreements with PRPs to pay for cleanups, and EPA may retain and use these funds for cleanups. Funds from these settlements may be deposited into site-specific subaccounts in the Trust Fund, which are referred to as “special accounts” and are generally used for future cleanup actions at the sites associated with a specific settlement, or to reimburse funds that EPA had previously used for response activities at these sites. According to EPA documents, in fiscal year 2013, there were a total of 993 open special accounts with an end of year balance of about $1.7 billion. Most of these funds could be used for a limited number of sites—for example, 3 percent of the open accounts representing 33 sites had about 56 percent of the total special account resources available. States are required to pay 10 percent of Trust Fund-financed remedial action cleanup costs and at least 50 percent of cleanup costs for facilities that were operated by the state or any political subdivision of the state at the time of any hazardous substances disposal at the facility. States may pay their share of response costs using cash, services, credit, or any combination thereof. Under CERCLA, states are also required to assure provision of all future maintenance of a Trust Fund-financed remedial action. In fiscal year 2014, EPA updated its information system for the Superfund program from CERCLIS to the Superfund Enterprise Management System (SEMS). According to EPA officials and documents, SEMS consolidated five stand-alone information systems and reporting tools into one system. These systems include CERCLIS, the Superfund Document Management System (SDMS), the Institutional Controls Tracking System (ICTS), the eFacts reporting tool, and ReportLink. CERCLIS contained information on, among other things, the contaminated sites’ cleanup status and cleanup milestones reached. The SDMS was a national electronic records collection system mostly with site cleanup records; ICTS was a database with legal data related to controlling access to sites; eFacts was a visual reporting tool that generated charts and graphs; and ReportLink was a traditional reporting tool that allowed regions and headquarters to share reports. According to EPA officials, SEMS should be more user-friendly and provide more mobility, thus allowing EPA regional staff to access the system in the field through various devices. Currently, regions are in the process of entering data for each site into SEMS. The process of converting entirely to SEMS has taken additional time because, according to EPA officials, the complexity of the new software and its difference from CERCLIS has created a more significant obstacle than anticipated. In addition, EPA officials stated that the agency will not be in a position to release data comparable to the data previously shared from CERCLIS until EPA officials are confident that all regions have mastered the software to update site schedules. According to EPA officials, SEMS should be fully operable in fiscal year 2016. According to our analysis of EPA and Census data, as of fiscal year 2013, an estimated 39 million people—about 13 percent of the U.S. population—lived within 3 miles of a nonfederal NPL site. Many of these people—an estimated 14 million—were either under the age of 18 or 65 years and older, which EPA describes as sensitive subpopulations. EPA Region 2 had the largest number of people living within 3 miles of a nonfederal NPL site—an estimated 10 million or about one-third of the region’s total population. Figure 2 provides information on the number of nonfederal NPL sites in each region and the estimated number of people that lived within 3 miles of those sites as of fiscal year 2013. The state of New York had the largest number of people living within 3 miles of nonfederal NPL sites—an estimated 6 million or about 29 percent of the state’s population. The state of New Jersey had the largest percentage of its estimated population living within 3 miles of a nonfederal NPL site— about 50 percent. Appendix II provides information on the estimated population that lived within 3 miles of a nonfederal NPL site, by state, as of fiscal year 2013. Annual federal appropriations (appropriations) to EPA’s Superfund program generally declined from about $2 billion to about $1.1 billion from fiscal years 1999 through 2013. EPA expenditures—from these federal appropriations—of site-specific cleanup funds (funds spent on remedial cleanup activities at nonfederal NPL sites) declined from about $0.7 billion to about $0.4 billion during the same time period. Because EPA prioritizes funding work that is ongoing, the decline in funding led EPA to delay the start of about one-third of the new remedial action projects that were ready to begin in a given fiscal year at nonfederal NPL sites from fiscal years 1999 through 2013, according to EPA officials. EPA spent the largest amount of cleanup funds in Region 2, which accounted for about 32 percent of cleanup funds spent at nonfederal NPL sites from fiscal years 1999 through 2013. During the same time period, EPA spent the majority of cleanup funds in seven states, with the most in New Jersey— over $2.0 billion or more than 25 percent of cleanup funds. According to our analysis of EPA data, the median per-site annual expenditures for cleanup at nonfederal NPL sites declined by about 48 percent from fiscal years 1999 through 2013, and EPA spent the majority of cleanup funds on an average of about 18 sites annually. Unless otherwise indicated, all dollars and percentage calculations are in constant 2013 dollars. From fiscal years 1999 through 2013, the annual appropriations to EPA’s Superfund program generally declined. Annual appropriations declined from about $2 billion to about $1.1 billion—about 45 percent—from fiscal years 1999 through 2013. Under the American Recovery and Reinvestment Act of 2009 (Recovery Act), EPA’s Superfund program received an additional $639 million in fiscal year 2009. Figure 3 shows the annual federal appropriations from fiscal years 1999 through 2013. EPA allocates annual appropriations to the Superfund program among the remedial program and other Superfund program areas, such as enforcement (see fig. 4). The remedial program generally funds cleanups of contaminated nonfederal NPL sites. EPA headquarters allocates funds for the remedial program to various categories: payroll and other administrative activities; preconstruction and other activities (such as remedial investigations and feasibility studies); and construction (such as remedial action projects) and post-construction activities. EPA allocates funds for preconstruction and other activities to its regional offices using a model based on a combination of historical allocations and a scoring system based on regions’ projects planned for the upcoming year. Each region decides how it will spend funds allocated by headquarters for its preconstruction and other remedial activities. EPA headquarters, in consultation with the regions, allocates site-specific cleanup funds for construction and post-construction activities between ongoing work and new remedial action projects. From fiscal years 1999 through 2013, the decline in appropriations to the Superfund program led EPA to decrease expenditures of site-specific cleanup funds on remedial cleanup activities from about $0.7 billion to about $0.4 billion. We define site-specific cleanup funds as those funds spent on preconstruction, construction, and postconstruction, which comprise remedial cleanup activities. Expenditures of Recovery Act funds account for the increase in cleanup funds expenditures from fiscal years 2009 through 2011. Figure 5 shows EPA’s expenditures of cleanup funds at nonfederal NPL sites for fiscal years 1999 through 2013. EPA policy prioritizes funding ongoing work over starting new remedial action projects. EPA officials explained that funding ongoing work is prioritized for a variety of reasons, such as the risk of recontamination and the additional cost of demobilizing and remobilizing equipment and infrastructure at a site. To establish funding priorities for new remedial action projects, EPA’s National Risk-Based Priority Panel (Panel)— comprised of EPA regional and headquarters program experts—ranks new remedial action projects based on their relative risk to human health and the environment. The Panel uses five criteria to evaluate proposed new remedial action projects: (1) risks to human population exposed (e.g., population size and proximity to contaminants), (2) contaminant stability (e.g., use and effectiveness of institutional controls like warning signs), (3) contaminant characteristics (e.g. concentration and toxicity), (4) threat to a significant environmental concern (e.g., endangered species or their critical habitat), and (5) program management considerations (e.g., high-profile projects). Each criterion is ranked on a weighted scale of one to five with the highest score for any criterion being five. According to EPA documents, the priority ranking process ensures that funding decisions for new remedial action projects are based on common evaluation criteria that emphasize risk to human health and the environment. The Panel then recommends the new projects to fund to the Assistant Administrator of the Office of Solid Waste and Emergency Response who makes the final funding decisions. A decline in funding delayed the start of some new remedial action projects, according to EPA officials. Over the 15-year time period from fiscal years 1999 through 2013, EPA generally did not fund all of the new remedial action projects that were ready to begin in a given fiscal year, according to our analysis of EPA data, (see table 1). During this time, EPA did not fund about one-third of the new remedial action projects in the year in which they were ready to start. According to EPA officials in headquarters and Region 2, delays in starting new remedial action projects can potentially lead to elevated costs. For example, site conditions can change, such as contaminants migrating at a groundwater site, which will require recharacterization of the location. Also the extent of the contamination may change or adjustments may be necessary to the remedy designs which could take additional time and money. In addition, there may be unmeasured economic costs to the community by delaying the productive reuse of a site, according to EPA officials. Due to an increase in funding from the Recovery Act, EPA started all new remedial action projects ready to start in fiscal years 2009 and 2010, and most new remedial action projects in fiscal year 2011, according to our analysis of EPA data. However, in fiscal year 2012, EPA did not fund and start any of the 21 new remedial action projects through the Panel process that were ready to begin that year. The 21 unfunded projects were estimated to have cost over $117 million in 2012, according to EPA officials. In fiscal year 2013, EPA did not fund 22 out of 30 projects due to priorities for declining funds as well. According to EPA officials, in that year, these unfunded projects were estimated to have cost approximately $101 million. EPA officials stated that they expect the trend of being unable to fund all new remedial action projects to continue. According to EPA officials, prior to funding new remedial action projects, EPA considers both the funds needed in the current fiscal year to begin the project and ongoing funds that will be required in subsequent fiscal years to complete the project. According to EPA officials, as annual appropriations have declined, EPA has generally relied on funds available from prior year Superfund appropriations to fund new remedial action projects and some other work. According to EPA officials, funds from prior year appropriations generally become available for use through deobligations and special account reclassifications. Typically, deobligations occur when EPA determines that some or all of the funds the agency originally obligated for a contract to conduct an activity are no longer needed (e.g., EPA will deobligate funds that it had previously obligated to construct a landfill cover because the final costs were less than originally anticipated). According to EPA officials, reclassifications occur when EPA uses special account funds to reimburse itself for its past expenditures of annually appropriated funds, which then makes the funds originally used for these activities available for the agency to use. Starting in fiscal year 2003, EPA began distributing deobligated funds in a 75/25 percent split so that headquarters kept 75 percent of the deobligated funds for national remedial program priorities, which have been, in large part, used to begin new remedial action projects, and returned 25 percent to the region that provided the deobligated funds. On average, EPA annually provided about $58 million in deobligated funds for construction and post-construction activities during fiscal years 2003 through 2013, according to our analysis of EPA data. According to EPA officials, deobligations are an unpredictable funding stream, and our analysis of EPA data indicates that the amount of deobligations and reclassifications provided for cleanup fluctuated during the fiscal years 2003 through 2013 time period, from a high in fiscal year 2003 of about $102 million to a low in fiscal year 2009 of about $32 million. EPA spent the most cleanup funds from annual appropriations on nonfederal NPL sites in Region 2 from fiscal years 1999 through 2013, according to our analysis of EPA data. EPA spent almost $2.5 billion in this region—which is about 32 percent of the total cleanup funds on nonfederal NPL sites during that time frame and over three times the cleanup funds spent on any other region. According to EPA officials, Region 2 has a significant number of large, EPA-funded sites that have required considerable expenditures to clean up over a long period of time. The agency does not expect this trend to continue, but anticipates that more cleanup funds will be devoted to the cleanup of large mining and sediment sites in the West. Region 8 received the second most in cleanup funds with about $0.7 billion over the same time period. Figure 6 shows EPA’s expenditure of cleanup funds at nonfederal NPL sites in each region from fiscal years 1999 through 2013. According to our analysis of EPA data, EPA spent the majority of nonfederal NPL cleanup funds in seven states—New Jersey, California, New York, Massachusetts, Idaho, Pennsylvania, and Florida—during the 15-year period from fiscal years 1999 through 2013. New Jersey sites received the most cleanup funds with over $2.0 billion (or more than 25 percent of cleanup funds over this period). The agency also spent the largest portion of Recovery Act funds in New Jersey. According to EPA officials, New Jersey has a large number of sites that do not have PRPs to perform the cleanup and needs federal appropriations to cleanup these sites. In addition, sites in areas of highly dense population like many in New Jersey cost more to cleanup, according to EPA officials. Agency officials expect the current level of expenditures in New Jersey to decline in the future because the cleanup at some of the sites will be completed. Figure 7 shows EPA’s expenditure of cleanup funds in the seven states from fiscal years 1999 through 2013. According to our analysis of EPA data, the median per-site annual expenditures on remedial cleanup activities at nonfederal NPL sites generally declined from fiscal years 1999 through 2013. The median per-site annual expenditures declined by about 48 percent from about $36,600 to about $19,100 from fiscal years 1999 through 2013. The decline was more pronounced in recent years, decreasing by about 35 percent from fiscal years 2009 through 2013, compared to about a 12 percent decline from fiscal years 1999 through 2003. Figure 8 shows the median per-site annual expenditures of cleanup funds from annual appropriations at nonfederal NPL sites from fiscal years 1999 through 2013. According to EPA officials, these declines mirror, with some lag time, declines in appropriations, the most significant of which occurred starting in fiscal year 2000 and then again starting in fiscal year 2011. In addition, the agency expects to see further declines in annual cleanup funds expenditures following the same pattern in the near future, according to EPA officials. Specifically, given recent declines in appropriations, EPA expects to see declines in expenditures after a short lag time, while outyear trends would depend on future appropriations. EPA spent the majority of cleanup funds on a few sites—on average about 18 sites—each year from fiscal years 1999 through 2013, according to our analysis of EPA data. The specific sites where EPA spent the majority of cleanup funds varied from year to year, but 6 sites were part of the 18 in more than half the years of the 15-year period— Vineland Chemical Company, Inc. (New Jersey), Bunker Hill Mining and Metallurgical Complex (Idaho), Welsbach and General Gas Mantle- Camden Radiation (New Jersey), Tar Creek-Ottawa County (Oklahoma), New Bedford (Massachusetts), and Federal Creosote (New Jersey). EPA spent at least $175 million from annual appropriations at each of these 6 sites over the 15 years. EPA’s costs to clean up sites differed depending on the type of site. According to our analysis of EPA data on expenditures of cleanup funds from annual appropriations, mining sites were the most expensive to clean up. From fiscal year 1999 through 2013, EPA spent, on average, from about 7 to about 52 times the annual amount per site at mining sites than at the other types of sites. For example, the average median per-site annual expenditure of cleanup funds was about $750,000 for mining sites compared to about $104,000 for “other” sites and to about $14,000 for waste management sites. According to EPA officials, mining sites are costly to clean up because, among other characteristics, they typically cover a large area and have many sources of contamination. One example of a mining site is the Bunker Hill Mining and Metallurgical Complex in Idaho where EPA spent almost $330 million to clean up part of the site from fiscal years 1999 through 2013. Figure 9 shows the average median per-site annual expenditure of cleanup funds from annual appropriations at nonfederal NPL sites by type of site from fiscal years 1999 through 2013. According to our analysis of EPA data, the total number of nonfederal sites on the NPL annually remained relatively constant, while remedial action project completions and construction completions generally declined during fiscal years 1999 through 2013. The total number of nonfederal sites on the NPL increased from 1,054 in fiscal year 1999 to 1,158 in fiscal year 2013 and averaged about 1,100 annually. According to our analysis of EPA data, the number of remedial action project completions at nonfederal NPL sites generally declined by about 37 percent during the 15-year period. Similarly, from fiscal years 1999 through 2013, the number of construction completions at nonfederal NPL sites generally declined by about 84 percent. From fiscal years 1999 through 2013, the number of new nonfederal sites added to the NPL and the number of nonfederal sites deleted each year from the NPL generally declined, while the total number of nonfederal sites on the NPL remained relatively constant, according to our analysis of EPA data. More specifically, during the fiscal years of our review, there was a period of decline in the number of sites added to the NPL followed by a few years where there was a slight increase. For example, the number of new nonfederal sites added to the NPL each year declined steadily from 37 sites in fiscal year 1999 to 12 in fiscal year 2007. According to EPA officials, there are several reasons for the decline in the number of new nonfederal sites added to the NPL. For example, some states may have been managing the cleanup of sites with their own state programs, especially if a PRP was identified to pay for the cleanup. Additional reasons for the decrease during this time period include: (1) funding constraints that led EPA to focus primarily on sites with actual human health threats and no other cleanup options, (2) use of the NPL as a mechanism of last resort, and (3) referral of sites assessed under Superfund to state cleanup programs. In contrast, from fiscal years 2008 through 2012, there was a general increase in the number of new nonfederal sites added to the NPL annually, according to our analysis of EPA data. In fiscal year 2008, EPA added 18 sites and by 2012, the number of sites added annually had increased to 24. According to EPA officials, the numbers may have increased from fiscal years 2008 through 2012, because the agency expanded its focus to consider NPL listing for sites with potential human health and environmental threats, and it shifted its policy to use the NPL when it was deemed the best approach for achieving site cleanup rather than using the NPL as a mechanism of last resort. Also, states’ funding for cleanup programs declined, and states agreed to add sites to the NPL where they encountered difficulty in getting a PRP to cooperate or where the PRP went bankrupt, according to EPA officials. Furthermore, these same officials stated that the increase in the number of new sites added to the NPL could be due to referrals from the Resource Conservation and Recovery Act program because of business bankruptcies, especially in the most recent years. In fiscal year 2013, however, the number of new nonfederal sites added to the NPL declined to 8, the lowest number since fiscal year 1999. In total, EPA added 304 nonfederal sites to the NPL—an average of about 20 sites annually—from fiscal years 1999 through 2013. Figure 10 summarizes the number of new nonfederal sites added to the NPL each year from fiscal years 1999 through 2013. In terms of the types of sites added to the NPL from fiscal years 1999 through 2013, the largest number of sites added to the list were manufacturing sites (120 sites or about 40 percent) followed by “other” sites (90 sites or about 30 percent). In addition, EPA added 35 mining sites (about 12 percent), 32 waste management sites (about 11 percent), 21 recycling sites (about 7 percent), and 6 “multiple” sites (about 2 percent)—sites that fell into more than one of these categories— according to our analysis of EPA data. During this time frame, the amount of time between when a site was proposed to be added to the NPL and when it was added to the NPL ranged from 2 months to over 18 years, with a median amount of time of about 6 months. According to EPA officials, there are a variety of reasons to explain why some sites take longer to add to the NPL. For example, EPA could propose a site to be added to the NPL and, in response to the Federal Register notice announcing the proposal, EPA could receive numerous, complex comments that required considerable time and EPA resources to address. In addition, a proposal to add a site to the NPL could act as an incentive for PRPs to resume negotiations with EPA or the state to clean up the site. Moreover, large PRPs with greater financial assets may request additional time to pursue other cleanup options; hire law firms and technical contractors to submit challenging comments to EPA on the proposal to add the site to the NPL; and support outreach efforts that generate state and local opposition to the proposal. EPA officials also noted that certain sites, such as recycling and dry cleaning, are generally added quickly to the NPL because other alternatives may not be available. From fiscal years 1999 through 2013, the number of nonfederal sites deleted from the NPL generally declined, according to our analysis of EPA data. EPA deleted 22 nonfederal sites in fiscal year 1999 and, in fiscal year 2013, EPA deleted only 6 nonfederal sites. In total, EPA deleted 185 nonfederal sites from the NPL during these years. According to EPA officials, the decline in the number of nonfederal sites deleted from the NPL is due to the decline in annual appropriations and the fact that the sites remaining on the NPL are more complex, and they take more time and money to clean up. The median number of years from the time a nonfederal site was added to the NPL to the time EPA deleted it from the NPL ranged from about 13 years for those sites deleted in fiscal year 1999, to about 25 years for those sites deleted in fiscal year 2013, with an average median of about 19 years. Region 2 had the largest number of nonfederal sites—41—deleted from the NPL, followed by Regions 6, 3, 4, and 5, which deleted 29, 25, 23, and 23 nonfederal sites, respectively. Figure 11 shows the number of nonfederal sites EPA deleted from the NPL each year from fiscal years 1999 through 2013. From fiscal years 1999 through 2013, according to our analysis of EPA data, the total number of nonfederal sites on the NPL remained relatively constant, and averaged about 1,100 sites annually. From fiscal years 1999 through 2013, the total number of nonfederal sites on the NPL increased less than 10 percent—from 1,054 sites to 1,158 sites as of the end of these fiscal years. In addition, the type of nonfederal sites on the NPL changed during this same time period. For example, in fiscal year 1999, there were 10 mining sites on the NPL or about 1 percent of all nonfederal NPL sites. By fiscal year 2013, there were 44 mining sites on the NPL, which was about 4 percent of all nonfederal NPL sites. Appendix III provides more detailed information from fiscal years 1999 through 2013 on the number of nonfederal sites on the NPL at the end of each fiscal year, following any additions and deletions; as well as the number of nonfederal sites on the NPL each fiscal year by type. According to our analysis of EPA data, from fiscal years 1999 through 2013, the number of remedial action project completions at nonfederal NPL sites declined by about 37 percent, and the length of time to complete the projects increased slightly. The number of remedial action project completions in each year gradually declined by about 59 percent from 116 projects (fiscal year 1999) to 47 projects (fiscal year 2010). For fiscal years 2011 through 2012, the number of remedial action project completions increased to 75 and 87, respectively. According to EPA officials, these increases were due to the increase of funds from the Recovery Act. In fiscal year 2013, the number of remedial action project completions dropped to 73. In total, 1,181 remedial action projects were completed from fiscal years 1999 through 2013. In general, according to EPA officials, the decline in remedial action project completions is due to the decline in appropriations and the complexity of current projects, which take longer to complete. These officials also stated that the decline in staffing, especially in the last few years, and particularly in the regions, had a negative impact on the Superfund remedial program and made it difficult to complete work. Figure 12 provides information on the number of remedial action project completions at nonfederal NPL sites from fiscal years 1999 through 2013. According to our analysis of EPA data, Region 2 had the highest number of remedial action project completions (242 projects or about 20 percent of the total project completions), followed by Regions 3, 5, and 4 at 171 projects (or about 14 percent), 140 projects (or about 12 percent), and 128 projects (or about 11 percent), respectively. New Jersey, Pennsylvania, and New York completed the most remedial action projects—over 100 projects in each state—during the 15-year time frame. In addition to fewer remedial action project completions, our analysis of EPA data also shows that the length of time to complete these projects increased slightly from one year to the next. From fiscal years 1999 through 2013, the average median length of time to complete these projects was about 3 years. In fiscal year 1999, the median amount of time to complete projects was about 2.6 years. Over time, the median amount of time gradually increased to almost 4 years in fiscal year 2013. Regions 6 and 3 had the lowest average median times of about 2 years to complete projects. In contrast, Region 10 had the highest average median time of over 5 years to complete projects. According to EPA officials, remedial action project completions are taking longer to complete because they are getting more complex. In addition, these officials stated that, as noted above, shortages in EPA regional staffing levels and a decline in state environmental agency personnel are causing delays throughout the Superfund program from site assessments to completion of remedial action projects. Similar to the decline in the number of remedial action project completions, from fiscal years 1999 through 2013, the number of construction completions at nonfederal NPL sites generally declined by about 84 percent, according to our analysis of EPA data. Specifically, fiscal years 1999 and 2000 had the largest number of construction completions at nonfederal NPL sites—80 sites each fiscal year. In contrast, in fiscal year 2013, the number of construction completions at nonfederal NPL sites declined to 13. During the 15-year time frame, 516 nonfederal NPL sites reached construction completion. According to EPA officials, the decline in the number of construction completions at nonfederal NPL sites is because, as noted above, the sites are getting more complex and difficult to clean up, funds available to perform the cleanup are declining, the number of sites available for construction completion have declined from fiscal years 1999 through 2013, and regional staff is declining. In addition, adverse weather conditions, such as excessive rain, and the discovery of new contaminants can delay progress at some sites, according to these same officials. Figure 13 shows the trend in the number of construction completions at nonfederal NPL sites from fiscal years 1999 through 2013. In fiscal year 1999, the median number of years to reach construction completion was about 12 years, and in fiscal year 2013, it was about 16 years. During the 15-year period, Region 2 had the largest number of construction completions at nonfederal NPL sites, 104, followed by Region 5 with 95 sites. According to EPA officials, one of the reasons for the decrease in the number of construction completions was the decline from fiscal years 1999 through 2013 in the total number of nonfederal sites that were available for construction completion. Our analysis of EPA data indicates that, while the number of sites available for construction completion has declined, so too has the number of construction completions compared to those sites available for construction completion as shown in figure 14. For example, in fiscal year 1999, there were 80 construction completions at nonfederal NPL sites out of 630 available for construction completion (or about 13 percent). However, in fiscal year 2013, there were 13 construction completions out of 428 (or about 3 percent). We requested comments on a draft of this product from EPA. EPA did not provide written comments. In an e-mail received on September 11, 2015, the Audit Liaison stated that EPA agreed with our report’s findings and provided technical comments. We incorporated these technical comments, 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 Administrator of EPA, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix IV. This appendix provides information on the objectives, scope of work, and the methodology used to determine, for fiscal years 1999 through 2013, the trends in (1) the annual federal appropriations to the Superfund program and Environmental Protection Agency (EPA) expenditures for remedial cleanup activities at nonfederal sites on the National Priorities List (NPL) and (2) the number of nonfederal sites on the NPL, the number of remedial action project completions, and the number of construction completions at nonfederal NPL sites. To determine the trend in the annual federal appropriations to the Superfund program and EPA expenditures for remedial cleanup activities at nonfederal sites on the NPL from fiscal years 1999 through 2013, we reviewed and analyzed Superfund program funding data. In addition, we analyzed expenditure data from EPA’s Integrated Financial Management System for fiscal years 1999 through 2003, and from its replacement financial system Compass, for fiscal years 2004 through 2013. These data included Superfund agency expenditures from annual appropriations, including American Recovery and Reinvestment Act of 2009 funds, but they excluded expenditures of Homeland Security Supplemental appropriation, special accounts, and state cost share funds, as well as funds received from other agencies (i.e., funds-in interagency agreements and intergovernmental personnel agreements) and expenditures in support of Brownfields program activities. EPA provided agencywide data for site and nonsite expenditures segregated by expenditure category and source of funding. EPA provided the financial data in nominal values, which we converted to constant 2013 dollars. We analyzed these data to identify the trend in total expenditures of annual federal appropriations for, among other things, the remedial action cleanup process and the median expenditure by site and type of site (e.g., mining and manufacturing). The scope of our analyses for both objectives varied from year-to-year because we examined only nonfederal sites that were “active,” i.e., on the NPL at any given point during the fiscal year. We also obtained and analyzed information on the nonfederal NPL sites that, according to EPA, had remedial action projects that were ready to begin but were not funded because of resource constraints. To determine the trend in the number of nonfederal sites on the NPL, the number of remedial action project completions, and the number of construction completions at nonfederal NPL sites from fiscal years 1999 through 2013, we analyzed EPA’s program data from fiscal years 1999 through 2013. At the time of our analysis, EPA officials stated that 2013 would be the most recent year with complete and stable data, and these data were available in the agency’s Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS) database. As of June 2015, EPA officials stated that the agency was not in a position to release data for fiscal year 2014 that would be comparable to the fiscal years 1999 through 2013 data until fiscal year 2016. However, in July 2015, EPA officials were able to provide fiscal year 2014 data on the number of new nonfederal sites added to the NPL, nonfederal sites deleted from the NPL, remedial action project completions, and construction completions because the agency gathers these data through manual data requests for which each EPA regional office certifies the data that it provides to EPA Headquarters. We obtained data from EPA for all of the nonfederal sites that were or had been on the NPL, as of the end of fiscal year 2013. One site, the Ringwood Mines/Landfill site, had two final dates—the date a site is formally added to the NPL via a Federal Register notice—because the site was restored to the NPL after it had been deleted. We used the latest final date that was provided by EPA in our analysis. The Ringwood Mine/Landfill site was included in the results of our analysis of new nonfederal sites added to the NPL and number of nonfederal sites on the NPL, but we excluded it from our analysis of the median amount of time between when a site is proposed and when it is added to the NPL. Our analysis included nonfederal sites that were on the NPL, including sites that had been deleted, through fiscal year 2013. We analyzed site-level data for nonfederal NPL sites to summarize trends in the number of new nonfederal sites added to the NPL and the number of nonfederal sites that reached construction completion and deletion. We also analyzed the number of remedial action project completions in each of the 15 years in our analysis. Our analysis did not include (1) four sites that started off on the NPL but were deferred to another authority and deleted from the NPL and (2) five sites that were proposed but never became final on the NPL. To address both objectives, we reviewed agency documents including, for example, the Superfund Program Implementation Manual, and we interviewed EPA officials in headquarters and Region 2 to discuss the trends we identified in our analyses and potential reasons for these trends. We spoke with EPA staff in Region 2 because Region 2 sites received the most site-specific cleanup funds for remedial cleanup activities, Region 2 had the state—New York—with the largest population living within a 3-mile buffer of its nonfederal NPL sites, as of fiscal year 2013, and included the state—New Jersey—that had the largest number of nonfederal NPL sites in fiscal year 2013. We also interviewed knowledgeable stakeholders from the Association of State and Territorial Solid Waste Management Officials and the National Academy of Sciences. Additionally, we reviewed prior GAO reports on EPA’s Superfund program. A list of related GAO products is included at the end of this report. To assess the reliability of the data from the EPA databases used in this report, we reviewed relevant documents, such as the 2013 CERCLIS data entry control plan guidance and regions’ CERCLIS data entry control plans; examined the data to identify obvious errors or inconsistencies; compared the data that we received to publicly available data; and interviewed EPA officials. We determined the data to be sufficiently reliable for the purposes of this report. In addition, to determine the estimated population that lived within 3 miles of nonfederal sites on the NPL, we generally relied on EPA’s Office of Solid Waste and Emergency Response methodology and analyzed data from (1) CERCLIS on the 1,158 nonfederal sites on the NPL in the 50 states and U.S. territories (Guam, Puerto Rico, and the Virgin Islands), as of the end of fiscal year 2013, and (2) Census from the 2009 through 2013 American Community Survey 5-year estimate for the 1,141 nonfederal sites in the 50 states and the District of Columbia. A circular site boundary, equal to the site acreage, was modeled around the latitude/longitude for each site and then a 3-mile buffer ring was placed around the site boundary. For the 138 sites in 34 states that EPA did not have acreage information, a circular site boundary was modeled around the latitude/longitude point, and then a 3-mile buffer ring was placed around the point. American Community Survey data was then collected for each block group with a centroid that fell within the 3-mile area and rounded. Percentage numbers were rounded to the nearest whole percent. We conducted this performance audit from October 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 based on our audit objectives. Estimated state population 65 years and older that lived within 3 miles of a nonfederal NPL site (thousands) 29 . . . . . . . . . . . . . . . . . . . . Appendix III provides information from fiscal years 1999 through 2013 on the number of nonfederal sites on the National Priorities List (NPL) at the beginning and end of the fiscal year after accounting for new sites added to and existing sites deleted from the NPL during the fiscal year (table 2); and the number of nonfederal sites on the NPL by site type for each fiscal year (table 3). In addition to the individual named above, Vincent Price and Diane Raynes (Assistant Directors), Antoinette Capaccio, Katherine Carter, John Delicath, Michele Fejfar, Diana C. Goody, Catherine Hurley, John Mingus, David Moreno, and Dan Royer made key contributions to this report. Hazardous Waste Cleanup: Observations on States’ Role, Liabilities at DOD and Hardrock Mining Sites, and Litigation Issues. GAO-13-633T. Washington, D.C.: May 22, 2013. Superfund: EPA Should Take Steps to Improve Its Management of Alternatives to Placing Sites on the National Priorities List. GAO-13-252. Washington, D.C.: April 9, 2013. Superfund: Status of EPA’s Efforts to Improve Its Management and Oversight of Special Accounts. GAO-12-109. Washington, D.C.: January 18, 2012. Superfund: Information on the Nature and Costs of Cleanup Activities at Three Landfills in the Gulf Coast Region. GAO-11-287R. Washington, D.C.: February 18, 2011. Superfund: EPA’s Costs to Remediate Existing and Future Sites Will Likely Exceed Current Funding Levels. GAO-10-857T. Washington, D.C.: June 22, 2010. Superfund: EPA’s Estimated Costs to Remediate Existing Sites Exceed Current Funding Levels, and More Sites Are Expected to Be Added to the National Priorities List. GAO-10-380. Washington, D.C.: May 6, 2010. Superfund: Litigation Has Decreased and EPA Needs Better Information on Site Cleanup and Cost Issues to Estimate Future Program Funding Requirements. GAO-09-656. Washington, D.C.: July 15, 2009.

Under the Superfund program, EPA places some of the most seriously contaminated sites on the NPL. At the end of fiscal year 2013, nonfederal sites made up about 90 percent of these sites. At these sites, EPA undertakes remedial action projects to permanently and significantly reduce contamination. Remedial action projects can take a considerable amount of time and money, depending on the nature of the contamination and other site-specific factors. In GAO's 2010 report on cleanup at nonfederal NPL sites, GAO found that EPA's Superfund program appropriations were generally declining, and limited funding had delayed remedial cleanup activities at some of these sites. GAO was asked to review the status of the cleanup of nonfederal NPL sites. This report examines, for fiscal years 1999 through 2013, the trends in (1) the annual federal appropriations to the Superfund program and EPA expenditures for remedial cleanup activities at nonfederal sites on the NPL; and (2) the number of nonfederal sites on the NPL, the number of remedial action project completions, and the number of construction completions at nonfederal NPL sites. GAO analyzed Superfund program and expenditure data from fiscal years 1999 through 2013 (most recent year with complete data available), reviewed EPA documents, and interviewed EPA officials. Annual federal appropriations to the Environmental Protection Agency's (EPA) Superfund program generally declined from about $2 billion to about $1.1 billion in constant 2013 dollars from fiscal years 1999 through 2013. EPA expenditures—from these federal appropriations—of site-specific cleanup funds on remedial cleanup activities at nonfederal National Priorities List (NPL) sites declined from about $0.7 billion to about $0.4 billion during the same time period. Remedial cleanup activities include remedial investigations, feasibility studies, and remedial action projects (actions taken to clean up a site). EPA spent the largest amount of cleanup funds in Region 2, which accounted for about 32 percent of cleanup funds spent at nonfederal NPL sites during this 15-year period. The majority of cleanup funds was spent in seven states, with the most funds spent in New Jersey—over $2.0 billion in constant 2013 dollars, or more than 25 percent of cleanup funds. From fiscal years 1999 through 2013, the total number of nonfederal sites on the NPL annually remained relatively constant, while the number of remedial action project completions and construction completions generally declined. Remedial action project completions generally occur when the physical work is finished and the cleanup objectives of the remedial action project are achieved. Construction completion occurs when all physical construction at a site is complete, all immediate threats have been addressed, and all long-term threats are under control. Multiple remedial action projects may need to be completed before a site reaches construction completion. The total number of nonfederal sites on the NPL increased from 1,054 in fiscal year 1999 to 1,158 in fiscal year 2013, and averaged about 1,100 annually. The number of remedial action project completions at nonfederal NPL sites generally declined by about 37 percent during the 15-year period. Similarly, the number of construction completions at nonfederal NPL sites generally declined by about 84 percent during the same period. The figure below shows the number of completions during this period. GAO is not making any recommendations in this report. EPA agreed with GAO's findings.

You are an expert at summarizing long articles. Proceed to summarize the following text: The U.S. Census Bureau reported in 2013 that American Indians and Alaska Natives were almost twice as likely to live in poverty as the rest of the population. A 2014 Interior report estimated that between 43 and 47 percent of American Indian families in South Dakota earned incomes below the poverty line, compared with a national average of about 23 percent for all Native American families. In addition, according to DOE documents, Indian communities are more likely to live without access to electricity and pay some of the highest energy rates in the country— hindering economic development and limiting the ability of tribes to provide their members with basic needs, such as water and wastewater services and adequate health care. Considerable energy resources, including domestic mineral resources such as oil, gas, and coal, and resources with significant potential for renewable energy development, including wind, solar, hydroelectric power, geothermal, and biomass, exist throughout Indian country. Tribes may seek opportunities to use these resources as an option to create economic benefits that provide revenue for government operations and social service programs, create high- quality jobs, and offset power costs by increasing access to reliable and affordable energy for tribal buildings and individual homes. For instance, in fiscal year 2015, the development of Indian-owned oil and gas resources generated more than $1 billion in revenue for tribes and individual Indian mineral owners, according to Interior, making oil and gas resources one of the largest revenue generators in Indian country. In addition, tribes are taking advantage of renewable energy sources and developing projects that range from facility- and community-scale production, such as rooftop solar panels or a wind turbine to power a community center, to utility-scale production of hundreds of megawatts of electricity (see fig. 1). However, the development of Indian energy resources can be a complex process involving a range of stakeholders, including federal, tribal, and state agencies. The specific role of federal agencies can vary on the basis of multiple factors, such as the type of resource, location of development, scale of development, ownership of the resource, and Indian tribe involved. Figure 2 shows various roles federal agencies may have in the development of Indian energy resources. A short description of the agencies’ roles follows. Resource Identification. To develop energy resources, developers and operators must locate a suitable resource. To locate potential oil and gas resources, most operators use seismic methods of exploration. For renewable projects, developers conduct a feasibility assessment to evaluate the potential of the resource for development and determine the viability of the project, which may include evaluating market demand for power and financing opportunities. Both IEED and IE help tribes identify resource potential. For example, according to IE data, IE provided a tribe $210,000 in 2012 to identify available solar and biomass energy resources, characterize solar and biomass energy technologies, and analyze the technical and potential economic viability of projects. Technical and financial assistance. IE and IEED manage the federal government’s financial and technical assistance programs dedicated to Indian energy development. IE provides federally recognized tribes and tribal entities financial and technical assistance to promote Indian energy development and efficiency, reduce or stabilize energy costs, and bring electrical power and service to tribal communities and the homes of tribal members. For example, in 2015, IE awarded technical assistance to an intertribal corporation for a survey of wind resources, a survey of transmission and environmental constraints, and market analysis for 16 potential wind turbine deployment sites. According to a DOE report, IE provided $48 million to assist more than 180 tribal energy projects from 2002 through 2014. IE also offers education through webinars, forums, and workshops. IEED serves tribes and their members by providing technical and financial assistance for the exploration, development, and management of tribal energy resources. According to IEED officials, IEED provided about $52 million to assist 340 tribal energy projects from 2002 through 2015. According to its data, IEED is assisting a tribal member to develop a 5,000-acre solar project by helping secure transmission line access with potential right-of-way landowners, and by meeting with county commissioners to gain support for the project. In some instances, both IE and IEED provide assistance for a project. For example, IE and IEED coordinated to help a tribal solar project. IEED provided an engineering design grant, and IE provided an installation grant and technical assistance. For the past 6 years, IEED has also provided assistance on an as-needed basis to BIA agency offices by assigning staff for a period of time— generally a year or longer—to perform such tasks as organizing oil and gas records, clearing backlogs of energy-related documents, reviewing leases, and helping BIA agencies fulfill requirements under the National Environmental Policy Act (NEPA). For instance, according to a BIA official, IEED helped a BIA agency office by conducting 1,584 NEPA and right-of-way compliance inspections for energy-related activities involving oil and gas well pads, access roads, and pipelines. In another example, IEED helped a BIA agency office by reviewing environmental documents and conducting site surveys for 77 proposed oil and gas well pads. Other federal agencies, including USDA, HUD, Commerce’s Economic Development Administration, and Treasury, can also provide financial assistance to tribes to explore and develop their energy resources. For example, according to its data, USDA awarded a $500,000 grant through its Rural Energy for America Program in fiscal year 2015 to a tribal entity seeking to develop a hydroelectric project. Also, HUD data shows that in fiscal year 2015 a tribe used funds provided through HUD’s block grant program to extend transmission lines to communities that lack basic electrical service. Regulate. Multiple federal agencies have a regulatory role associated with Indian energy development. For example, BIA approves seismic exploration permits for operators to identify oil and gas resources, maintains surface and mineral ownership records, identifies and verifies ownership of land and resources, and reviews and approves a number of energy-related documents—such as surface leases, mineral leases for the right to drill for oil and gas resources, and right-of-way agreements. In addition, BLM issues drilling permits to operators developing Indian oil and gas resources after receiving BIA concurrence to approve the permits. Further, EPA issues permits for air emissions that may be required for some oil and gas development, and FWS issues permits for incidental deaths of certain wildlife species, which may be needed for a wind project. If energy development affects navigable waters, the U.S. Army Corps of Engineers may need to issue a permit. Provide transmission access assistance. Utility-scale renewable energy projects need to connect to the electric grid to transmit power generated from the project, along transmission lines, to a destination. DOE’s Western Area Power Administration, along with other power administration agencies, is responsible for marketing and transmitting electricity across the United States and can help tribes to better understand transmission capacity, identify options for accessing available capacity on transmission lines, and assist with interconnection requirements. For example, according to officials from the Western Area Power Administration, it partnered with a tribal utility authority to resolve transmission congestion affecting a proposed 27-megawatt utility-scale solar project. Purchase power. To be economically feasible, utility-scale renewable energy projects need a customer to purchase their power. The federal government is the nation’s largest energy consumer. In fiscal year 2013, the government spent about $6.8 billion on energy for over 3.1 billion square feet of buildings and facilities—an area about the size of 50,000 football fields. GSA has general statutory authority to enter into utility services contracts of up to 10 years for all federal agencies. GSA has delegated the authority to enter into contracts for public utility services to the Department of Defense (DOD) and to DOE for procurements by those agencies. The Energy Policy Act of 2005 encourages federal agencies to purchase electricity, energy products, and by-products from tribal entities. Specifically, the act includes a provision authorizing federal agencies to give preference to a tribe or tribal enterprise when purchasing electricity or any other energy or energy by-product as long as federal agencies do not pay more than the prevailing market prices or obtain less than prevailing market terms and conditions. The Council was established by executive order in June 2013. The executive order calls for the Secretary of the Interior to lead the Council, the Council to meet at least three times per year, and Interior to provide funding and administrative support to the Council. According to an Interior document, the Council will improve efficiencies by coordinating work across the federal government and use an “all-of-government approach” to find solutions that address tribal needs. To accomplish its goals, the Council includes five subgroups—(1) energy; (2) health; (3) education; (4) economic development and infrastructure; and (5) environment, climate change, and natural resources—to discuss current initiatives and identify interagency solutions. The Energy Subgroup was formed in November 2013 with the Secretaries of Energy and the Interior as co-chairs. In May 2014, the Energy Subgroup identified nine additional federal agencies that should be included as participants and established policy goals for the Subgroup that, if accomplished, may help to overcome some of the factors that we previously identified as hindering Indian energy development. For example, in June 2015, we reported that tribes’ limited access to capital had hindered development. One of the Energy Subgroup’s goals is to evaluate, align and coordinate financial and technical assistance programs to leverage agency resources, funding, and expertise. Similarly, in June 2015, we found that the development of Indian energy resources is sometimes governed by multiple federal, tribal, and, in certain cases, state agencies and can involve significantly more steps, cost more, and take more time than the development of private and state resources. One of the Energy Subgroup’s goals is to evaluate opportunities to streamline and accelerate regulatory processes. According to DOE and Interior officials, since May 2014, the federal agencies that formed the Energy Subgroup have taken the following actions: IE and IEED signed a memorandum of understanding in June 2016 as a format for collaboration between the two agencies; IE and IEED began to meet regularly in August 2015 to discuss projects involving both agencies and grant release dates, among other things; IE, with input from numerous other agencies, developed a web-based tool that provides information about grant, loan, and technical assistance programs available to support tribal energy projects; IE hosted events to encourage tribal engagement, such as the September 2015 National Tribal Energy Summit: A Path to Economic Sovereignty; and IE, Interior, USDA, GSA, DOD, and Treasury convened a meeting to discuss opportunities to provide technical and financial assistance to a planned 1-gigawatt wind and transmission infrastructure project. In response to tribal requests for increased coordination and more efficient management of their resources from the numerous regulatory federal agencies involved with Indian energy development, in 2014, Interior took initial steps to form a new office, the Service Center, composed of staff from four Interior agencies—BIA, BLM, ONRR, and OST—with BIA as the lead agency. BIA’s fiscal year 2016 budget included $4.5 million to form the Service Center in Lakewood, Colorado. According to Interior’s fiscal year 2016 budget justification, the Service Center is intended to, among other things, help expedite the leasing and permitting processes associated with Indian energy development. Among its accomplishments, the Service Center has (1) developed a memorandum of understanding among BIA, BLM, ONRR, and OST outlining the management and operation of the Service Center; (2) developed and conducted a training course on oil and gas development standard operating procedures for 462 Interior employees at eight locations across the country; and (3) hired several positions, including a Director and Deputy Director. The Energy Subgroup has not fully incorporated leading practices that can help agencies enhance and sustain collaborative efforts, which may limit its effectiveness in addressing long-standing factors that hinder Indian energy development. Our prior work on issues that cut across multiple agencies, as Indian energy development does, has shown that collaborative approaches can increase the effectiveness of federal efforts. Our prior work has also found that agencies face numerous challenges in their efforts to collaborate. To overcome differences in agency missions, cultures, and established ways of doing business, collaborative efforts, such as the Energy Subgroup, can use leading practices that have been shown to enhance and sustain these efforts. Specifically, in September 2012, we identified sustained leadership, dedicated resources and staff, and active participation of all relevant stakeholders, among other things, as leading practices for effective collaboration. Specific leading practices the Energy Subgroup has not fully incorporated in its implementation efforts following. Sustained leadership is uncertain. DOE has not designated a career employee of the federal government to serve as its co-chair of the Energy Subgroup. Instead, DOE designated an appointed official to serve as the co-chair, and that individual may not remain in the position with the upcoming presidential transition. According to agency officials, their focus has been to complete more time-sensitive tasks, and selecting a long- term co-chair has not been a priority. Similarly, Interior originally designated an appointed official to serve as its co-chair of the Energy Subgroup, but in August 2016 Interior designated a senior-level career employee of the federal government to serve as co-chair, according to Interior officials. Interior officials also cited higher priorities as a reason for not identifying a career employee sooner, but these officials told us that the upcoming presidential transition increased the urgency to identify a long-term leader. The Executive Order establishing the Council allows for senior-level officials to perform Council duties, which may include either appointed or career employees. Our prior work has shown that turnover of political leadership in the federal government has often made it difficult to sustain attention to complete needed changes. Our prior work has also shown that transitions and frequent changes in leadership weakened the effectiveness of a collaborative effort and that a lack of leadership further challenges an organization’s ability to function effectively and to sustain focus on key initiatives. Designating a senior-level career employee to lead the Subgroup can provide some assurance that leadership will remain consistent beyond this administration. Collaborating agencies dedicated few resources and have not identified additional resources needed. Federal agencies have dedicated few staff and financial resources to the Energy Subgroup, have not identified the resources needed to accomplish its goals, and do not have an agreed-upon funding model. Our prior work has shown that collaborating mechanisms should identify the staff and financial resources needed to initiate and sustain their collaborative effort. According to DOE, Interior, and USDA officials, the Energy Subgroup has been staffed on an “other duties as assigned” basis since its creation in November 2013. These officials said that this staffing model, which was also used by the other subgroups, makes it difficult to ensure continued participation by each federal agency because of competing demands for staff and resources. In 2015, more than 2 years after the Council was established, Interior hired a fulltime Executive Director—the only dedicated Council staff—to manage activities of the Council and all subgroups. Beyond the Executive Director position, participating agencies have not dedicated or identified future financial resources for the Energy Subgroup. A few federal officials told us the effectiveness of the Subgroup in accomplishing tasks is limited without dedicated resources. For instance, federal officials told us that the Energy Subgroup has not developed a 5- year strategic plan because no federal entity has dedicated the resources for key planning activities, such as a facilitated planning session that can define and articulate common outcomes. The executive order establishing the Council directs Interior to provide funding and support for the Council. However, according to Interior officials, dedicating resources to the Energy Subgroup would take away from other programs and services that directly support tribes and their activities. Without dedicated resources, key activities completed to date are generally the result of individual federal agencies that voluntarily identified and applied their own budgetary resources to specific work activities. For example, DOE volunteered to use its own financial and information technology resources to develop a web-based tool that provides information about grant, loan, and technical assistance programs available to support tribal energy projects. According to a DOE official, the department voluntarily applied these resources because senior leadership determined the web-based tool was an important information source that could help tribes to identify federal financial assistance. Our prior work has shown it is important for collaborative mechanisms to identify and leverage sufficient funding to accomplish their objectives and that funding models can vary. In some instances, specific congressional authority or dedicated funding from Congress may be used for the interagency funding for collaborative mechanisms. In other instances, we found a collaborative mechanism can be supported by all participating agencies contributing funds as well as in-kind support. Identifying resources needed to accomplish its goals and establishing a funding model agreed upon by participating agencies may provide opportunities for the Energy Subgroup. If the Energy Subgroup does not identify resources and a funding model, it is unclear to what extent the Energy Subgroup’s collaborative efforts can be effectively sustained to accomplish its stated policy goals. The Energy Subgroup has not documented how participating agencies will collaborate. Our prior work found that agencies that articulate their agreements in formal documents strengthen their commitment to working collaboratively. A formal written agreement that includes goals, actions, responsible agencies, and time frames may be a tool to enhance and sustain collaboration. According to federal officials, the Energy Subgroup did not develop formal documentation because developing such documentation would have taken time and resources away from completing work deliverables. However, the lack of a formal agreement may have limited collaboration and involvement of some participating agencies. For example, federal officials told us that numerous Energy Subgroup agencies were actively involved in the effort to develop the web-based tool mentioned above but that after its completion there has been less collaboration between the various federal because there was no longer a clear reason to work together. The Council, including the Energy Subgroup, was established to improve efficiencies by coordinating work across the federal government and using an “all-of-government approach” to find solutions that address tribal needs. However, most of the activities completed to date have been the result of collaboration between only IE and IEED—the only two agencies focused exclusively on Indian energy and also the only two that have a documented agreement to collaborate. The achievements of the Subgroup do not reflect the efforts of the other nine federal agencies that are its members. Without documenting how all members in the Subgroup are expected to collaborate, it is unclear how participating agencies will organize their individual and joint activities to address the factors that hinder Indian energy development. BIA, the lead agency responsible for forming the Service Center, did not follow some leading practices or adhere to agency guidance during early stages of developing the Service Center—which may impact its effectiveness in helping overcome the factors that have hindered Indian energy development. An interagency plan created in response to Executive Order 13604, Interior’s Departmental Manual, and our prior work offer leading practices that have been shown to enhance the effectiveness of collaborative efforts, improve permitting, and increase the likelihood of success for organizational change. These practices include (1) creation of a lead agency or single point of contact to coordinate regulatory responsibilities by multiple agencies, (2) involvement by and active participation with all relevant stakeholders, and (3) clear identification and documentation of the rationale of key decisions. Specific leading practices that BIA did not fully incorporate when implementing the Service Center follow. The Service Center has not been formed as a center point of collaboration for all regulatory agencies involved with energy development. In June 2015, we reported that the added complexity of the federal process, which can include multiple regulatory agencies, prevents many developers from pursuing Indian energy resources for development. Interior has recognized the need for collaboration in the regulatory process and described the Service Center as a center point of collaboration for permitting that will break down barriers between federal agencies. In addition, the memorandum of understanding establishing the Service Center states that it will serve as a center point for collaboration with other federal departments for expediting oil and gas development and as a point of contact for other agencies to resolve development issues. The Service Center may increase collaboration between BIA and BLM on some permitting requirements associated with oil and gas development. This is because, according to BIA officials, only entities that participate in the Indian Energy and Minerals Steering Committee—BIA, BLM, ONRR, and OST—were included in the Service Center. According to BIA officials, no other federal agencies were included because of concerns that including them would delay establishing the Service Center. BIA has neither included a regulatory agency within Interior, FWS, as a partner in the Service Center nor identified opportunities to incorporate other regulatory agencies outside of Interior, such as EPA, USDA, and the Army Corps of Engineers, as partners. As a result, the Service Center has not been formed as the center point to collaborate with all federal regulatory partners generally involved with energy development nor is it a single point of contact for permitting requirements. According to a tribal chairman, issues raised by FWS often create significant delays in permit approvals, and Interior’s failure to include FWS as part of the Service Center is a great error. Similarly, we reported in June 2015 that delays in the regulatory review and approval process can result in lost revenue and missed development opportunities. Our prior work has shown that having a lead agency for permitting is a management practice that helps increase efficiencies for the permitting process. In addition, the Quadrennial Energy Review Task Force recommended that, when possible, federal agencies should co-locate dedicated cross-disciplinary energy infrastructure teams that consist of environmental review and permitting staff from multiple federal agencies. By not serving as a central point of contact or lead agency, the Service Center will be limited in its ability to improve efficiencies in the federal regulatory process to only those activities that can benefit from increased coordination between BIA and BLM. BIA did not involve key stakeholders in the development of the Service Center. Interior’s fiscal year 2016 budget justification stated that BIA was working with DOE to develop and implement the Service Center and leverage and coordinate with DOE-funded programs to provide a full suite of energy development-related services to tribes. Further, BIA guidance states that it will seek the participation of agencies with special expertise regarding proposed actions. However, BIA did not include DOE in a participatory, advisory, or oversight role in the development of the Service Center. Further, although IEED developed the initial concept and proposal for the Service Center, BIA did not include IEED in the memorandum of understanding establishing the Service Center. Our prior work has shown that involvement by all relevant stakeholders improves the likelihood of success of interagency collaboration. DOE and IEED possess significant energy expertise. By excluding these agencies from the development and implementation of the Service Center effort, BIA has missed an opportunity to incorporate their expertise into its efforts. Moreover, BIA did not effectively involve employees to obtain their ideas and gain their ownership for the transformation associated with development of the Service Center—a leading practice for effective organizational change. Most of the BIA agency officials we met with told us they were not aware of implementation plans for the Service Center or its intended purpose. BIA identified its agency offices as the primary customers of the Service Center, yet BIA did not request their ideas or thoughts or identify potential employee concerns. Several BIA and tribal officials said they are concerned that the creation of a new office (the Service Center) may add another layer of bureaucracy to the process of reviewing and approving energy-related documents. We have previously reported that, as a leading practice, successful change initiatives include employee involvement to help create the opportunity to increase employees’ understanding and acceptance of organizational goals and objectives, and gain ownership for the changes that are occurring in the organization. Such involvement strengthens the transformation process by allowing employees to share their experiences and shape policies. By not involving its employees in the development of the Service Center, BIA is missing an important opportunity to ensure the success of the changes that it hopes to achieve. BIA did not document its basis for key decisions. The process BIA followed to develop the Service Center and the basis for key decisions it made are unclear because BIA did not document the rationale for key management decisions or the alternatives considered. According to Interior’s Departmental Manual, agencies that propose a new office are to document the rationale for selecting the proposed organizational structure and to consider whether the new office contributes to fragmentation of the organization. Our prior work has shown that effective organizational change is based on a clearly presented business-case or cost-benefit analysis and grounded in accurate and reliable data, both of which can show stakeholders why a particular initiative and alternatives are being considered. BIA officials said they did not document the basis for key decisions because they were not aware of the requirement. In addition, a few Interior officials said that BIA did not present alternatives to the full Indian Energy and Minerals Steering Committee, even though it was making decisions about the structure and placement of the Service Center. Without documentation to justify the rationale behind key management decisions, it is unclear if the Service Center, as currently designed, is the best way to address the identified problem. Further, several tribal organizations and tribal leaders made recommendations related to the creation of the Service Center that are not currently reflected in BIA’s implementation of the Service Center. For example, the Coalition of Large Tribes Resolution calls for the Service Center to be the central location for permit review and approval support for Indian energy development. Without documentation of alternatives considered or key management decisions, it is unclear whether these requests were appropriately considered. Our prior work has shown that fixing the wrong problems, or even worse, fixing the right problems poorly, could cause more harm than good. In June 2015, we reported that BIA’s long-standing workforce challenges, such as inadequate staff resources and staff at some offices without the skills needed to effectively review energy-related documents, were also factors hindering Indian energy development. In this review, we found that BIA also has high vacancy rates at some agency offices, and it has not conducted key workforce planning activities that may be further contributing to its long-standing workforce challenges. Federal internal control standards, Office of Personnel Management standards, and our prior work identify standards or leading practices for effective workforce management. The standards and leading practices include the following: (1) possessing and maintaining staff with a level of competence that allows them to accomplish their assigned duties; (2) identifying the key skills and competencies the workforce needs to achieve current and future agency goals and missions, assessing any skills gaps, and monitoring progress towards addressing gaps; and (3) conducting resource planning to determine the appropriate geographic and organizational deployment to support goals and strategies. BIA has not taken steps to provide reasonable assurance it has staff with the skills needed to accomplish their assigned duties and has not conducted workforce planning activities consistent with these standards and leading practices. Some BIA offices have high vacancy rates and may not have staff with the level of competence that allows them to review some energy development documents. We found that some BIA offices have high vacancy rates for key energy development positions, and some offices reported not having staff with key skills to review energy-related documents. For example, according to data we collected from 17 BIA agency offices between November 2015 and January 2016, vacancy rates ranged from less than 1 percent to 69 percent in those offices. Vacancy rates for the realty position—a key position to process leases and other energy-related documents—ranged from no vacancies in five offices to 55 percent in one office. In some cases, these vacancies have been long-standing. For example, at the BIA Uintah and Ouray Agency, located in Utah, two of the six vacant realty positions have been vacant since September 2014. According to BIA officials, the high vacancy rates can be generally attributed to a number of factors, including: employee early-out and buy-out retirements in 2013, difficulties hiring qualified staff to work in geographically remote locations, and staff transfers to other positions. For example, several realty positions in BIA agency offices were vacated because staff transferred to positions in BIA’s Land Buy- Back Program. According to BIA officials, as of May 2016, the Land Buy-Back Program had hired 15 realty staff, 12 whom were from BIA regions and agency offices. In addition to high vacancy rates at some offices, some BIA agency and regional offices may lack the expertise needed to review and approve energy-related documents. For example, BIA agency officials in an area where tribes are considering developing wind farms told us that they would not feel comfortable approving proposed wind leases because their staff do not have the expertise to review such proposals. Consequently, these officials told us that they would send a proposed wind lease to higher ranking officials in the regional office for review. Similarly, an official from the regional office stated that it does not have the required expertise and would forward such a proposal to senior officials in Interior’s Office of the Solicitor. The Director of BIA told us that BIA agency offices generally do not have the expertise to help tribes with solar and wind development because it is rare that such skills are needed. In another example, a BIA agency office identified the need for a petroleum engineer to conduct technical reviews of oil and gas documents in a timely manner. However, the office has been unable to hire a petroleum engineer because it cannot compete with private industry salaries. According to BIA officials, additional staff resources and key skills related to energy development will be provided through the Service Center, once it is fully implemented. BIA has not identified key skills needed or skill gaps. The extent to which BIA does not have key skills throughout the bureau is unknown because BIA has not identified the key skills it needs and the extent to which it has skill gaps. BIA officials said that a skill gap assessment is not needed at this time because of the additional staff being hired through the Service Center. However, without key information on its workforce, as called for by Office of Personnel Management standards and our prior work, the agency risks hiring personnel that do not fill critical gaps, and the extent to which the Service Center will be able to address these gaps is unknown at this time. A BIA official also told us that in August 2015, the Assistant Secretary for Indian Affairs contracted with a consultant to develop a strategic workforce plan for BIA and the Bureau of Indian Education. However, according to a BIA official, the Bureau of Indian Education and BIA management are the primary focus of the work, and the resulting plan will not include agency offices, the level at which tribes generally interact with BIA for energy-related activities. BIA does not have a documented process to provide reasonable assurance that workforce resources are appropriately deployed in the organization and align with goals. According to several BIA and tribal officials, the workforce composition of agency offices is not regularly reviewed to provide reasonable assurance it is consistent with BIA’s mission and individual tribes’ priorities and goals. BIA officials said that an agency office’s workforce composition is routinely carried over from year to year, and positions are filled based on the budget, without consideration of existing workload needs or current tribal and agency priorities. A BIA official told us that this practice can result in a surplus of staff in some departments and staff shortages in others. In some of our meetings with BIA agency and tribal officials, we were told that BIA agency offices are not aware of tribal priorities, in part, because of poor relations between BIA agency offices and tribal leadership. Officials from one tribe said that because of concerns that BIA was not routinely seeking tribal input on priorities and goals, the tribe created a position to serve as a liaison between the BIA and tribal leadership. Among other things, the liaison routinely meets with both tribal leaders and BIA officials to ensure BIA is aware of tribal priorities and goals. Without current workforce information on key skills needed for energy development, tribal goals and priorities, and potential workforce resource gaps, BIA may not have the right people with the right skills doing the right jobs in the right place at the right time and cannot provide decision makers with information on its staffing needs going forward. In 2012 and 2013 respectively, DOE issued policy guidance and procurement guidance to give preference to tribes when DOE facilities contract to purchase renewable energy products or by- products, including electricity, energy sources, and renewable energy credits, but this guidance applies only to DOE, and GSA has not issued government- wide guidance. The purchase preference provision in the Energy Policy Act of 2005 authorizes federal agencies to give preference to a tribe or tribal enterprise when purchasing electricity or any other energy or energy by-product as long as federal agencies do not pay more than the prevailing market prices or obtain less than prevailing market terms and conditions. According to DOE documentation, several tribes had approached federal agencies to negotiate the sale of electricity from tribal renewable energy generation facilities, but negotiations had not resulted in federal purchases for a variety of reasons, including a lack of policy support and implementing guidance for the tribal preference provision. In response, DOE developed a policy to better enable the department to use the tribal preference provision. Under DOE’s policy statement and procurement guidance, DOE facilities can use a purchase preference when a tribal nation holds a majority ownership position in a renewable energy project, provided that the agency does not pay more than the prevailing market price or obtain less than prevailing market terms and conditions. The guidance provides for limiting competition to qualified Indian tribes and tribal majority-owned organizations for the purchase of renewable energy, renewable energy products, and renewable energy by- products. In contrast, GSA, the federal entity with general statutory authority to enter into utility service contracts of up to 10 years for all federal agencies, has not developed implementing guidance for the tribal preference provision contained in the Energy Policy Act of 2005, according to GSA officials. During our review, we identified one instance in which a tribe owned a majority position in a renewable energy project and submitted a bid in response to a GSA solicitation for energy. In this instance, GSA officials told us that they did not apply the tribal preference provision because GSA lacked implementing guidance. In addition, GSA officials said that the existence of the tribal preference provision and corresponding lack of implementing guidance created uncertainty and increased the time and costs associated with the solicitation review process. GSA officials also told us that they do not need to issue separate tribal preference provision guidance because DOE’s guidance is comprehensive. However, the DOE guidance is intended only for DOE, and GSA has not adopted the guidance for any GSA purchases of energy products. Without GSA guidance on the tribal preference provision—even if that guidance mirrors DOE’s guidance— it is unclear if GSA’s procurement officials will have the information they need to apply the preference to its purchases. We discussed our findings with members of the FAR Council, which is the regulatory body established to lead, direct, and coordinate government- wide procurement guidance and regulations in the federal government. According to officials, in response to our finding, the FAR Council plans to revisit the tribal preference provisions and survey agencies to seek their input on whether government-wide guidance to implement the preference should be included in the FAR. Officials said the FAR Council will consider agencies’ input and determine if it should issue regulations implementing the preference authority. Additionally, the officials told us the FAR Council will examine DOE’s guidance in this area, as well as GSA’s plans to make other agencies aware of this preference and the DOE guidance in all future delegations for renewable energies. Numerous federal agencies offer programs that could be used to assist tribes with energy development activities. However, a few stakeholders said impediments may limit or restrict tribal participation in some of these programs. Federal agencies could identify and seek to remove regulatory, statutory, and procedural impediments that limit or restrict tribal participation. For example, according to a 2016 DOE report, DOE’s Title XVII loan program provides loan guarantees to accelerate the development of innovative clean-energy technology and has more than $24 billion in remaining loan authority to help finance clean-energy projects. However, according to DOE officials, no tribes have applied to DOE’s Title XVII loan program because various program requirements discourage tribal participation. For instance, according to officials, DOE considers whether applicants have prior experience and knowledge to execute the kind of project for which they are seeking a DOE loan guarantee. The officials told us that because tribes have not had significant development opportunities that would provide prior experience, this consideration limits tribes’ abilities to compete with other applicants seeking limited resources. A few stakeholders also told us that extensive time and monetary resources are required to apply for assistance from some federal programs, making it difficult for some tribes to seek assistance. For example, DOE requires an application fee of $50,000 for its Title XVII loan program. According to DOE officials, high application fees discourage some tribes from applying. Two other stakeholders told us that tribes and tribal entities dedicate significant financial resources and time to complete grant applications for federal programs. Because of this extensive resource commitment, combined with the low probability of receiving assistance, a few stakeholders said they are reluctant to seek federal assistance in the future. Several stakeholders said the typical size of awards from IEED limit the type of projects that benefit from assistance. Projects that require significant funds are generally not awarded because officials want to fund numerous projects, according to Interior officials. For instance, according to a 2015 Interior report, a tribe requested $321,000 from IEED to drill a geothermal well, but the request was rejected because of the expense relative to funds available. DOE and Interior officials told us they receive significantly more requests for assistance with viable projects than they can fund within existing budget levels. For instance, in 2015, IEED received 22 requests for assistance through its Tribal Energy Development Capacity Program and was able to fund 10 projects, according to IEED officials. In 2014, IEED received requests for $27.5 million in assistance through its Energy and Mineral Development Program and was able to award $9.5 million. Recognizing the importance of a collaborative federal approach to help Indian tribes achieve their energy goals and to more efficiently fulfill regulatory responsibilities and manage some Indian energy resources, the President and Interior undertook two key initiatives, in the form of the Energy Subgroup and the Service Center. However, to be effective these initiatives rely on collaboration among federal agencies and programs, which can be difficult to achieve. Leading practices can help agencies enhance and sustain their collaborative efforts; however, federal agencies involved in both of these efforts have not incorporated some of these practices. The Energy Subgroup has not identified the resources it needs to achieve its goals or a funding model, and the roles of each partnering agency have not been identified and documented. In addition, BIA, in leading the creation of the Service Center, has not established a single point of contact or lead agency for regulatory activities; has not sought or fully considered input from key stakeholders, such as BIA agency office employees; and has not documented the rationale for key decisions. By following leading collaborative practices, both the Energy Subgroup and the Service Center have the potential to more effectively assist tribes in overcoming the factors that hinder Indian energy development. In addition, through the Service Center, BIA plans to hire numerous new staff over the next 2 years, which could resolve some of the long-standing workforce challenges that have hindered Indian energy development. However, BIA is hiring new staff without incorporating effective workforce planning principles. Specifically, BIA has not assessed key skills needed to fulfill its responsibilities related to energy development or identified skill gaps, and does not have a documented process to provide reasonable assurance its workforce composition at agency offices is consistent with its mission, goals, and tribal priorities. As a result, BIA cannot provide reasonable assurance it has the right people in place with the right skills to effectively meet its responsibilities or whether new staff will fill skill gaps. The Energy Policy Act of 2005 authorization of a preference for tribal entities has the potential to increase tribal access to the largest single purchaser of energy in the United States—the federal government. However, GSA—the primary entity responsible for purchasing power for the federal government—has not developed guidance to implement the authority to provide a tribal preference government-wide. By developing such guidance, GSA would help ensure that contracting officials are aware of when the authority for a tribal preference is applicable and how it should be applied to future purchases of electricity and energy products. We recommend that the Secretary of Energy, the Secretary of the Interior, and the Administrator of the General Services Administration, as appropriate, take the following 10 actions. We recommend that the Secretary of Energy designate a career senior-level federal government employee to serve as co-chair of the White House Council on Native American Affairs’ Energy Subgroup. We recommend that the Secretary of the Interior, as Chair of the White House Council on Native American Affairs, direct the co-chairs of the Council’s Energy Subgroup to take the following two actions: (1) Identify appropriate resources needed for the Subgroup to accomplish its goals, as well as a funding model. (2) Establish formal agreements with all agencies identified for inclusion in the Subgroup to encourage participation. We recommend that the Secretary of the Interior direct the Director of the Bureau of Indian Affairs to take the following six actions: (1) Include the other regulatory agencies in the Service Center, such as FWS, EPA, and the Army Corps of Engineers, so that the Service Center can act as a single point of contact or a lead agency to coordinate and navigate the regulatory process. (2) Establish formal agreements with IEED and DOE that identify, at a minimum, the advisory or support role of each office. (3) Establish a documented process for seeking and obtaining input from key stakeholders, such as BIA employees, on the Service Center activities. (4) Document the rationale for key decisions related to the establishment of the Service Center, such as alternatives and tribal requests that were considered. (5) Incorporate effective workforce planning standards by assessing critical skills and competencies needed to fulfill BIA’s responsibilities related to energy development and by identifying potential gaps. (6) Establish a documented process for assessing BIA’s workforce composition at agency offices taking into account BIA’s mission, goals, and tribal priorities. We recommend that the Administrator of the General Services Administration develop implementing guidance to clarify how contracting officials should implement and apply the statutory authority to provide a tribal preference to future acquisitions of energy products. We provided a draft of this report for review and comment to the Secretary of the Interior, the Secretary of Energy, and the Administrator of the General Services Administration. All three agencies provided written comments. Interior agreed with all 8 recommendations directed to the agency and described some actions it intends to take. Interior’s comments are reprinted in appendix I. DOE agreed with the 1 recommendation directed to the agency and provided technical comments. DOE’s comments are reprinted in appendix II. GSA also agreed with the 1 recommendation directed to the agency and described the actions it intends to take. GSA’s comments are reprinted in appendix III. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 7 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretaries of the Interior and Energy, the Administrator of the General Services Administration, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. In addition to the individual named above, Christine Kehr (Assistant Director), Patrick Bernard, Richard Burkard, Patricia Chen, Cindy Gilbert, Alison O’Neill, Daniel Purdy, and Jay Spaan made key contributions to this report.

Indian tribes and their members hold considerable energy resources and may use these resources to provide economic benefits and improve the well-being of their communities. However, GAO and others have found that Indian energy development is hindered by several factors, such as a complex regulatory framework, BIA workforce challenges, and limited access to energy markets. Tribes and their members determine how to use their energy resources. In doing so, they work with multiple federal agencies with various roles in the development process—including a regulatory role, a role as provider of technical and financial assistance, or as a purchaser of energy. GAO was asked to evaluate issues related to Indian energy development. This report examines, among other things, (1) federal efforts to help overcome factors that hinder development, (2) BIA's efforts to address workforce challenges, and (3) federal efforts to implement a preference authority to purchase energy from tribes. GAO analyzed federal data and documents and interviewed tribal and federal officials. Two key federal initiatives led by the Department of the Interior (Interior)—the interagency White House Council on Native American Affairs’ Energy Subgroup (Energy Subgroup) and Interior’s Indian Energy Service Center (Service Center)—were implemented to help improve collaboration and the effectiveness of federal efforts to fulfill management responsibilities for Indian lands, assist tribes in developing their energy resources, and overcome any related challenges. However, the Energy Subgroup and the Service Center have not incorporated leading collaborative practices, which may limit the effectiveness of these initiatives to address the factors that hinder Indian energy development. For example, GAO found the following: Energy Subgroup: Participating agencies have dedicated few staff and financial resources to the Subgroup and have not identified resources needed or a funding model—a leading practice to sustain collaborative efforts. Some participating agency officials noted that the effectiveness of the Subgroup is limited without dedicated resources. They also stated that key activities completed to date by the Subgroup are the result of agencies voluntarily applying budgetary resources to specific activities. Without dedicated resources and a funding model to support its activities, the extent to which the Energy Subgroup will be able to effectively accomplish its goals is unclear. Service Center: Interior has recognized the need for collaboration in the regulatory process and described the Service Center as a central point of collaboration for permitting that will break down barriers between federal agencies. However, some regulatory agencies, such as the Fish and Wildlife Service, the Environmental Protection Agency, and the U.S. Army Corps of Engineers have not been included as participants. Without the involvement of key regulatory agencies, the Service Center will be limited in its ability to improve efficiencies in the regulatory process for Indian energy development. GAO and others have previously reported that Interior’s Bureau of Indian Affairs (BIA) has longstanding workforce challenges that have hindered Indian energy development. In this review, GAO found that BIA has high vacancy rates at some agency offices and that the agency has not conducted key workforce planning activities, such as an assessment of work skills gaps. These workforce issues further contribute to BIA’s inability to effectively support Indian energy development. Federal internal control standards recommend agencies identify the key skills and competencies their workforces need to achieve their goals and assess any skills gaps. Until BIA undertakes such activities, it cannot ensure that it has a workforce with the right skills, appropriately aligned to meet the agency’s goals and tribal priorities. A provision in the Energy Policy Act of 2005 authorizes the federal government, the largest single consumer of energy in the nation, to give preference to tribes for purchases of electricity or other energy products. However, the General Services Administration (GSA), the federal agency with primary responsibility for purchasing energy, has not developed guidance to implement this provision government-wide; doing so could help to increase tribal access to the federal government’s energy purchasing programs. GAO is making 10 recommendations, including that the Secretary of the Interior identify resources and a funding model for the Energy Subgroup, involve other agencies in the Service Center so it is a single point of contact for the regulatory process, and require BIA to undertake workforce planning activities. GAO is also recommending that the Administrator of the GSA develop implementing guidance relating to purchasing energy from tribes. Interior, DOE, and GSA concurred with GAO's recommendations.

You are an expert at summarizing long articles. Proceed to summarize the following text: Interstate compacts are legal agreements between states designed to address issues that transcend state lines. Compacts enable states to act jointly on matters that are beyond the authority of an individual state but are not within the specific purview of the federal government. States have entered into interstate compacts to act jointly to address a variety of concerns including resolving border disputes, allocating interstate waters, enhancing law enforcement, disposing of radioactive waste, and developing regional transportation systems, among other issues. According to the Council of State Governments, more than 200 interstate compacts exist today, and most of those are for purposes other than managing interstate crossings. To form an interstate compact, two or more states typically negotiate an agreement, and each state legislature enacts a law that is identical to the agreement reached. Once all states specified in the compact have enacted such laws, the compact is formed. In cases where the compact affects the balance of power between the federal government and the states, the states must obtain the consent of Congress for the compact to be valid. Congress can give its consent by passing legislation that specifically recognizes the compact as enacted by the states, at which time the compact becomes federal law. Congress may impose conditions as part of granting its consent, and it typically reserves the right to alter, amend, or repeal its consent in the compact itself. Congress included such a provision in each of the public laws consenting to the four interstate compacts in this review. In establishing an interstate compact, states usually delegate authority to an independent entity, such as a bi-state tolling authority, that is created to administer and implement the compact’s provisions. Decision-making for each bi-state tolling authority is the responsibility of a board of commissioners composed of representatives of the member states, who are appointed by a state’s governor, such as local government officials, or serve by virtue of their elected position, such as a state treasurer. In addition to appointing commissioners, state governors may have authority to veto decisions made by commissioners from their state if such authority is specified in the compact or provided through reciprocal legislation passed by the states. The interstate compact includes the terms to which both states have agreed, and to which Congress has provided its consent. Some compacts include language that enables states to modify a compact through reciprocal legislation. Unless the bi- state authorities engage in programs that receive federal funds, such as operating transit systems or airports, they are generally not subject to federal oversight. The four bi-state tolling authorities manage a wide range of facilities, but the PANYNJ is significantly larger than the other three in terms of assets owned. At the end of fiscal year 2011, the PANYNJ reported that the total value of its assets was approximately $33.9 billion, which includes its five airports, six tolled crossings between New York and New Jersey, the World Trade Center properties, and other assets. By comparison, the DRPA’s $1.8 billion in total assets in 2011 was the next-largest asset value. New Jersey has a unique stake in these bi-state tolling authorities as it is the only state that is a party to each of the four interstate compacts in our review. See table 1 for a summary of the assets maintained by the four bi-state tolling authorities in our review. The bi-state tolling authorities primarily fund the operation and maintenance of these facilities through tolls and other user fees collected from assets they manage. Many of these bridges and tunnels require significant renovations due to their age, and the costs of maintaining these facilities are substantial. For example, the PANYNJ began construction on the George Washington Bridge in 1927 and the bridge opened to traffic in 1931. Approximately 270,000 vehicles cross it every day, and the PANYNJ plans to spend $544 million to replace the suspender ropes on the bridge from 2011 through 2020. Each of the bi- state tolling authorities has instituted a toll increase in the past 5 years to help fund such renovations, and the toll rates may vary based on the type of vehicle crossing the facility (e.g., passenger vehicles or commercial trucks), whether cash or electronic payment (EZPass) is used, and the time of day. For example, the PANYNJ, which collects tolls from eastbound drivers entering New York City on its facilities, raised the toll rates for automobiles paying cash from $8 to $12 in September 2011, with an additional increase of $1 for cash tolls in December 2012 and additional $1 increases effective in December 2014 and December 2015. Passenger vehicles using EZPass pay less—$8.25 during off-peak hours and $10.25 during peak hours. See table 2 for an overview of the passenger vehicle toll rate ranges and bi-state tolling authorities’ operating revenues and expenses in fiscal year 2011. To secure financing for capital improvements to their facilities, bi-state tolling authorities issue bonds to creditors and pledge tolls and other revenues for the repayment of the bond principal and interest. The four bi- state tolling authorities are required through either their bond agreements with creditors or bylaws to have an annual audit of their consolidated financial statements by an independent audit firm, which provides assurance that financial information reported to the public is accurate and fairly presented. These audits are generally not designed to evaluate the effectiveness of an entity’s internal controls or management’s overall performance in achieving its objectives, but are meant to provide assurance that the financial information provided to creditors and the public—including assets, liabilities, revenues, and expenditures—are free from material misstatement. In recent years, the operations of two bi-state tolling authorities, the DRPA and the PANYNJ, have been the subject of public scrutiny and media attention. In response, the governors of New York, New Jersey, and Pennsylvania directed the authorities to allow reviews that identified concerns about the management and operations of the two authorities. Specifically, as a condition of the governors’ approval of the PANYNJ’s 2011 toll increase, the PANYNJ contracted with two consulting firms to undertake a comprehensive review and audit of the PANYNJ’s finances and operations. Generally, this audit (1) found, among other things, concerns with the PANYNJ capital-planning process, cost controls, and oversight of the World Trade Center program, and (2) summarized reform initiatives undertaken by PANYNJ to address concerns. In July 2010, the governors of New Jersey and Pennsylvania directed the DRPA to agree to an independent investigation of its operations by the New Jersey Office of the State Comptroller. The State Comptroller found issues with the transparency of DRPA’s practice of sharing insurance commissions, providing unlimited free bridge passes to DRPA employees, and the conduct of its economic development program. DRPA has passed several board resolutions to address concerns. During the course of our review, DRPA reported that its economic development program was under review by a federal grand jury led by the U.S. Attorney’s Office in Philadelphia. Interstate compacts provide the bi-state tolling authorities with broad authority to set toll rates and use revenues for a range of purposes, including capital improvements for their transportation infrastructure and, in certain cases, economic development projects. In setting tolls, bi-state tolling authorities are primarily influenced by bond agreements, as well as operations and maintenance costs and other factors. To obtain financing for capital projects, bi-state authorities pledge through bond agreements to maintain specific revenue required to repay their debt. The bi-state authorities set toll rates to meet these revenue requirements, while also accounting for the costs of maintaining the infrastructure given economic conditions, traffic levels, and other factors. Federal law has less influence on tolling decisions because currently no federal agency has the authority to enforce the federal requirement that bridge tolls be “just and reasonable.” In addition, some federal courts have questioned whether a private party has the right to challenge toll increases in court under this requirement. However, private parties also have been able to challenge toll increases in federal court under the Commerce Clause of the U.S. Constitution. The interstate compacts generally provide the bi-state tolling authorities with broad authority to set rates and use toll revenues to maintain, repair, and improve their transportation infrastructure and cover other expenses. Although the specific language in the interstate compacts varies, the bi- state authorities are permitted to set tolls and use tolls and other revenues for bridges, tunnels, and other infrastructure. The bi-state authorities are also generally permitted to use tolls and other revenues to cover operations and maintenance costs, make capital improvements, repay debt obligations, maintain reserve funds to address contingencies, or to make other investments. The bi-state tolling authorities prepare capital plans that prioritize their large-scale projects to improve and maintain their facilities, such as bridge resurfacing, painting and de- leading, and replacing and repairing bridge cables and transit cars over a period of several years. For example, PANYNJ officials reported that over the past 5 years, the PANYNJ has spent approximately $2.5 billion on capital projects for its “interstate transportation network,” which includes its bridge, tunnel, PATH train system, and bus and ferry facilities. Similarly, DRPA’s approved 2013 capital plan identifies more than $746 million in capital improvement projects for its four bridges, transit line, and other facilities over the next 5 years. The DRPA reported that in 2010, its board approved two contracts totaling nearly $140 million to replace the deck of the Walt Whitman Bridge and monitor construction of the project. Bi-state authorities are also permitted to use toll revenues to subsidize other operations, such as transit services. For example, the DRPA reported that in its 2012 capital plan, it provided about $33 million to its PATCO train line for capital projects, such as rehabilitating tracks and other improvements, representing about 26 percent of its total capital program for that year. In addition to using tolls and other revenues for transportation purposes, the PANYNJ, the DRPA, and the DRBA are permitted by either their compact, subsequent compact amendments or bi-state legislation to use revenues for projects to promote their local economies, such as airports, industrial parks, business centers, and waterfront development projects. In certain cases the compacts impose conditions on using revenue for economic development. For example, the DRPA is permitted to use revenues for economic development only after allocating revenues to fund operations and maintenance costs for bridge and other capital facilities. According to DRJTBC officials, its compact does not authorize the DRJTBC to use its toll revenues for economic development projects. The bi-state authorities set tolls and other charges primarily to generate revenues to maintain their operations and infrastructure and meet their debt obligations. On a year-to-year basis, the bi-state tolling authorities’ annual revenues may not be sufficient to fund the infrastructure projects in their long-term capital programs. The authorities enter into bond agreements with creditors in which they pledge the collection of tolls, among other revenues, to secure financing for capital improvements. Such bond agreements provide the authorities with the funding they need to maintain their infrastructure in a state of good repair, but this also can result in the bi-state tolling authorities incurring substantial debt obligations, which must be repaid over time. For example, the four bi- state authorities’ total debt service costs, including the principal and cost of interest, range from $453 million to $30.2 billion over the life of their bonds, which may extend several decades depending on the bond terms. See table 3 for a summary of the principal owed by the four authorities on their bond debt and the total debt service cost over the life of their bonds. Bi-state tolling authorities maintain specific operating revenue levels to pay the annual principal and interest on their debt. One measure of an entity’s ability to repay its debt is the “debt service coverage ratio,” which compares an entity’s annual operating revenues after operating expenses (net revenues) to its annual debt service costs. For example, the DRJTBC is required through a bond agreement to maintain a debt service coverage ratio of 1.3—meaning that it must generate net revenues that are at least 130 percent of its annual debt service costs or risk a default on its debt. Officials from each of the four bi-state tolling authorities reported that they monitor revenues on an ongoing basis and adjust their toll rates, in part, to ensure that future revenues will be adequate to meet their debt coverage requirements. Officials from Moody’s Investors Service, a credit-rating agency, stated that they use the debt service coverage ratio as a metric to assess the credit-worthiness of entities seeking financing through capital markets. Credit-rating agency officials reported that the ability to set toll rates independently to cover debt obligations is the most important factor considered in assigning a credit rating. Bi-state tolling authorities also consider in their toll-setting decisions forecasts of traffic and associated toll revenues. These forecasts are based upon projections of economic factors that underlie traffic demand, such as employment, population, value of goods and services, fuel prices, and other factors that can affect traffic volume and associated toll revenues. For example, officials from the PANYNJ reported that more than 127 million cars, buses, and trucks crossed its bridges and tunnels in 2007. The PANYNJ reported that as a result of the economic recession, elevated gas prices, and its toll increase, traffic declined by about 6 percent to approximately 119 million vehicle crossings in 2011. Additionally, unforeseen weather events that can cause damage to infrastructure can affect revenues and expenses; the bi-state tolling authorities maintain a reserve fund and insure their assets for such events. Although there is a federal statute requiring that bridge tolls be “just and reasonable,” in practice this requirement has less influence on bi-state authorities’ toll-setting decisions than other factors, in that no federal agency currently has the authority to enforce the standard. Since 1906, federal law has required that toll rates for bridges over navigable waters be “just and reasonable,” and until 1987 this provision was enforced by various federal agencies. Originally, the Department of War performed this role, and later the Department of Transportation’s (DOT) Federal Highway Administration (FHWA) performed an administrative review of toll rates if complaints were made by third parties or at the FHWA Administrator’s discretion. From 1970 to 1987, the FHWA Administrator adjudicated several significant toll increase challenges, finding on at least two occasions that proposed toll rates were unjust and unreasonable, and on at least one occasion that proposed toll rates met the “just and reasonable” standard. In 1987, Congress repealed DOT’s authority to determine if toll rates were just and reasonable, but the standard itself remains in statute. While several parties have sought to challenge toll increases under this federal “just and reasonable” standard in court, certain federal courts have questioned whether private parties have the right to raise such court challenges. However, private parties also have been able to challenge toll increases in federal court under the Commerce Clause. Although no federal agency currently enforces the just and reasonable standard, prior administrative decisions and federal court opinions have interpreted how the standard is to be applied. Since 1973, federal administrative and court decisions have generally found that just and reasonable tolls are those sufficient to pay not only the reasonable cost of maintaining, repairing and operating facilities, but also to establish funds to amortize bridge indebtedness, provide a reasonable return on invested capital, and other purposes. These decisions have also found other uses of toll revenues—such as operating public transportation facilities—to be appropriate. In 1987, Congress in effect codified these decisions and repealed provisions that had expressly limited the use of toll revenues to specific purposes, such as maintaining, repairing, and operating a bridge. Key federal administrative and court decisions applying the “just and reasonable” standard are discussed in greater detail in Appendix II. In general, bi-state authorities are not required to follow federal or generally applicable state requirements for involving and informing the public, such as open meeting and open records laws. Instead, they set their own policies, which may be less stringent than those that apply to federal agencies, states, and other organizations. In addition, none of the four interstate compacts we reviewed contains language establishing specific public involvement requirements for toll setting. We found four areas in their most recent toll increases in which the bi-state authorities provided the public limited opportunities to learn about and provide comment on toll proposals, in contrast to federal and state requirements for involving the public, as well as practices used by other tolling authorities. See appendix III for a detailed timeline of public involvement in the four bi-state authorities’ most recent toll increases. The bi-state authorities told us that they are not subject to federal or generally applicable state requirements for informing the public. For example, federal regulations for public participation in transportation decisions require regional planning bodies, known as metropolitan planning organizations (MPOs), to provide adequate notice and time for public review and comment, hold public meetings at convenient and accessible locations and times, and demonstrate explicit consideration and response to public input received in making planning decisions. In addition, each of the four states has established laws governing open meetings and records for public agencies that include requirements such as giving notice before holding public meetings, as well as submitting information to the state on the rationale for a toll increase, the financial position of the agency, and the purposes for which revenues will be used. According to bi-state authority officials, none of these generally applicable laws applies to the four bi-state authorities. However, New York and New Jersey have enacted reciprocal state statutes that require the PANYNJ to hold open meetings. In the absence of federal or state requirements, the bi-state authority officials reported that they have established their own general policies for public involvement, including making records publicly available and holding open board meetings. These internal policies, however, have been criticized for being less open or accessible than federal or state requirements. For example, in September 2011, the New York State Committee on Open Government found that the PANYNJ’s freedom of information policy—which allows the public to request PANYNJ documents—and open meeting policy were more restrictive and provided less access than freedom of information and open meetings laws that apply to state agencies in New York. In addition to federal and state laws for public participation, federal agencies and the Transportation Research Board, a non-government research organization for transportation practice and policy, have identified leading practices that transportation agencies could use to involve the public in decision-making. In reviewing state and federal law and leading practices, we identified several practices used by transportation agencies that are subject to federal and state requirements that provide a useful way to assess whether the bi-state authorities are meeting expectations the public may have for accountability and transparency from public agencies. These practices include: establishing a documented process for public involvement in toll- requiring sufficient opportunities for public comment before approving toll proposals; providing key information to the public to support toll proposals; and summarizing public input for decision makers and the public before toll proposals are put to a vote for approval. We found that the bi-state authorities’ efforts to involve the public during their most recent toll increases were limited in comparison with requirements for state and local transportation agencies and leading practices to involve the public in decision-making. The bi-state authorities did not in all cases (1) have documented public involvement processes for toll-setting; (2) provide the public with key information on their toll proposals in advance of public hearings; (3) offer the public sufficient opportunities to comment on toll proposals; and (4) provide a public summary of comments received before toll increases were approved. According to the Transportation Research Board, establishing a defined, structured, and transparent process for involving the public in key decisions, such as those related to setting tolls, allows the public to understand the process and be aware of critical decision points where they can have influence if a toll increase is announced. At the time of their most recent toll increases, the four bi-state authorities had general policies for holding open board meetings, but these policies did not outline specific steps for involving the public in toll increases. We have previously reported that having a transparent process for reviewing and updating user fees, such as tolls, helps assure payers and other stakeholders that user fees are set fairly and accurately and are spent on intended purposes. Furthermore, soliciting stakeholder input is particularly important in cases where there is a monopoly supplier, where alternatives are limited and fees are not fully voluntary. Because the public may have few alternatives to using the tolled crossings, having a transparent, documented process specific to toll setting could improve the public’s understanding of how the tolls work and what activities they may fund. The four bi-state authorities’ general policies do not provide the public with information specific to the toll-setting process, including: (1) the number of toll hearings the authority will hold, along with locations; (2) the amount of time that will be available to the public to comment on the proposal before it is voted on; and (3) how the authority will use public comments in its decision-making process. In addition, three of the four bi- state authorities did not have policies that specified the amount of advance notice to the public before holding public toll hearings. Only the PANYNJ’s policies specify the length of advance notice (10 days). In contrast, bridge authorities in Michigan are required under state law to hold three public hearings and provide advance notice with dates, times, and locations prior to any proposed toll increase to allow the public an opportunity to comment. A documented process for public involvement also demonstrates to the public and to credit-rating agencies that toll- setting is taking place within a predictable framework and could create institutional memory within the authorities for toll setting in the future. Without a documented process for public involvement, the public lacks a clear view of the bi-state authorities’ decision-making process, which could undermine the authorities’ ability to win the public’s support and secure necessary toll revenues. In commenting on a draft of this report, the PANYNJ stated that its policy is to provide the public with the amount, purpose, and estimated revenues of the proposed toll increase 10 days before convening toll hearings, and that this policy constitutes a documented public involvement process. According to the PANYNJ, this policy was established in 1977 through a resolution passed by its board of commissioners. However, PANYNJ board resolutions and other PANYNJ rules and regulations are generally not available to the public through its web site. Consequently, at the time of the September 2011 toll increase, the public lacked the information needed to understand whether the PANYNJ was following its public involvement policies and making its toll-setting decisions in a predictable framework. In June 2012, the PANYNJ incorporated its 1977 public involvement policy into its publicly available bylaws. While this policy will be in effect for future toll increases, we do not believe that the PANYNJ’s policy can be considered a defined and structured process for involving the public in key decisions because the policy still does not specify the number of toll hearings, the amount of time to be made available for the public to comment, and how the authority will utilize public comments. Federal regulations pertaining to public participation require MPOs to provide adequate public notice and time for public review and comment at key decision points, and to hold any public meetings at convenient and accessible locations and times. As we have previously reported, the public is a key stakeholder in any tolling decision, and providing for stakeholder input may affect support for and acceptance of a fee and contribute to improved understanding about how the fees work and what activities they fund. The four bi-state authorities provided the public limited opportunities to comment before toll proposals were put to a vote for approval. For example, the DRJTBC did not hold any public hearings to receive public comment before approving its 2011 toll increase during an open board meeting. The DRPA and the DRBA each held one hearing per state to receive comment before approving their respective toll increases in open board meetings. Prior to convening toll hearings, the DRBA discussed the need for its toll increase in several board meetings that were open to the public. The PANYNJ held ten hearings on a toll proposal in various locations, including an online forum; however, those hearings were held in a single day. In contrast, officials from the Blue Water Bridge Authority and Mackinac Bridge Authority in Michigan reported that they typically provide 30 days after public notice is given for comment on toll proposals before approving an increase. Further, officials from the Golden Gate Bridge, Highway and Transportation District stated that they engaged the public through meetings, hearings, open houses, and other outreach for about 8 months prior to its last increase. The Bay Area Toll Authority in California began the public involvement process for its toll increase more than 6 months before the proposal was implemented with three public meetings held in locations around the region. According to state and federal requirements and leading practices, agencies should provide key information to the public in advance of a toll proposal to give the public the opportunity to understand the agency’s rationale for a toll increase and provide meaningful input to the decision- making process. However, the three bi-state authorities that held public toll hearings provided only limited information such as short descriptions of the capital projects they intended to implement using revenue from their proposed toll increases. The PANYNJ reported that at the time of its most recent toll proposal, it had not made a long-term capital plan available to the public detailing the full uses of the proposed toll and fare increases for the public to review. In prior work, we found that leading organizations prepare long-term capital plans that usually cover a 5- to 10-year period to document specific planned projects, plan for resource use, and establish priorities for implementation, and those plans are updated on an annual or biennial basis. The PANYNJ reported that the June 2012 policy changes to its bylaws give the public information on the purposes for which tolls and fares are being adjusted and an estimate of the overall increase in revenues resulting from the change at least 10 days prior to holding public toll hearings. However, this policy is less stringent than a requirement applicable to state tolling authorities in New York, which must provide the governor, state comptroller, and legislators a special report supporting the proposed toll increase at least 120 days in advance. This report must include the authority’s operation, debt service, and capital construction costs for the next 5 years, as well as estimates of the impact that revenues from the toll increase will have on the authority. Similarly, the public notice for the Golden Gate Bridge, Highway and Transportation District’s 2010 toll increase proposal included information on its budget shortfall and need for new revenue, the proposed toll schedule and dates of implementation, revenues anticipated from the increase, and a comparison of the District’s toll rates with similar bridge authorities around the country. Additionally, the Transportation Research Board has reported that those who are proactive in providing information are better able to guide public dialogue about the authority and its activities. According to the Transportation Research Board, one goal of a good public involvement process in transportation decisions is the incorporation of citizen input into decision making. Providing the public the opportunity to voice its opinion on toll increases is important, and the ideas, preferences, and recommendations contributed by the public should be documented and seriously considered by decision makers. Additionally, federal regulations require that MPOs demonstrate explicit consideration and response to public input received during the transportation planning process. Final toll-setting decisions should be communicated to the public with a description of how public input was considered and used. According to the Transportation Research Board, a decision-making process that has public involvement inputs but no clear effect on the outputs is not a successful program. Only one of the four bi-state authorities created a summary of public input received during toll hearings and made it available to decision makers and the public. The PANYNJ provided a report to its commissioners summarizing the oral comments received at each of its ten public hearings, as well as written comments submitted, and made a transcript of each hearing publicly available on its website. After receiving public comment, the PANYNJ received a letter from the governors of New York and New Jersey voicing their disapproval of the initial increase, and modified its toll proposal to provide for more gradual toll increases over several years. The Mackinac Bridge Authority in Michigan also prepares a summary of public comments it receives at each hearing that categorizes responses according to those in favor of and opposed to the toll increase. This analysis distills the viewpoints of the public into a format that is readily useful to decision makers. Without evidence that decision-makers are considering the public’s input before voting, the public lacks an assurance that its participation affects the tolling decision. The Transportation Research Board has found that ongoing two-way communication is essential to a good public involvement program and that successful strategies provide continuous opportunities for the public to learn about and engage in the process. Organizations that maintain an ongoing conversation with the public through the media, open houses, and outreach efforts may improve the public’s buy-in and understanding of toll increases and how revenues will be used. Officials from the Golden Gate Bridge, Highway and Transportation District reported that regardless of whether a toll increase is being considered, engaging with the media regularly to discuss maintenance and capital projects is important so that the public is continually aware of the needs of the Golden Gate Bridge and how toll revenue is being used. By engaging the public in an ongoing conversation on how toll revenues are put to use, bi-state authorities have an opportunity to make a more convincing and transparent case for their toll proposals to secure necessary revenues. The external oversight of the bi-state authorities has been limited as only one of the four bi-state authorities has been regularly audited by a state audit entity. Specifically, the Office of the New York State Comptroller has conducted three audits of the PANYNJ in the past 5 years. The New Jersey Office of the State Comptroller conducted an investigation of the DRPA at the request of the governors of New Jersey and Pennsylvania in 2010, and with the approval of the DRPA board. Neither the DRJTBC nor the DRBA has been subject to an audit by state audit entities in their respective states. New Jersey State Comptroller and New Jersey State Auditor officials stated that they have authority to audit the four state bi- state authorities, but have not prioritized further audits of the authorities due to limited staffing resources and competing demands, such as auditing state agencies that receive state funds. The few audits conducted have identified areas of concern in two bi-state tolling authorities. For example, in its July 2011 report on the PANYNJ’s use of consulting, construction management, and other contracted services, the New York State Comptroller found that the PANYNJ lacked supporting documentation for 57 of the 75 contracts it reviewed, with a total value of $1.18 billion in contracts lacking justification that the services were needed. Although the New York State Comptroller made several recommendations to improve the transparency of PANYNJ contracting, the PANYNJ does not have the same requirements as New York state agencies to report its progress in implementing recommendations, and it has not done so for this audit. As a result, the status of any actions taken by the PANYNJ to address the New York State Comptroller’s recommendations is not publicly available. New York State Comptroller officials stated that in May 2013 it initiated a follow-up audit of the PANYNJ’s contracting procedures in which it will report on the status of any reforms taken by the PANYNJ. The New Jersey State Comptroller’s investigation found that the DRPA did not follow its own policies for approving and monitoring economic development projects and raised questions as to whether selected projects were properly vetted. The report also found that insurance brokers in New Jersey and Pennsylvania shared more than $1.5 million in commissions from the purchase of DRPA insurance policies, regardless of whether the brokers actually placed the policies “or performed any service at all.” Although the sharing of insurance commissions is legal in New Jersey, the report noted that the practice was potentially wasteful of toll-payer funds. In response, the DRPA has adopted new competitive procurement policies to select insurance brokers to reduce the potential waste of toll-payer revenues. DRPA officials also reported that the board passed a resolution in August 2010 that prohibited the use of DRPA revenues for projects that are not directly connected to the assets under the board’s direct control; however, another resolution in December 2011 permitted the allocation of DRPA’s remaining economic development funds to complete seven economic development projects. The authority of state audit agencies to oversee the bi-state authorities is in many cases unclear. Prior work by GAO and others has found that audit authorities should be clearly established to ensure that those authorities are widely understood by the agencies responsible for oversight and among the communities they oversee. However, differences in states’ laws and disagreements between the bi-state authorities and the state audit agencies have prompted questions about the authority of several states to provide oversight. Some of the states with bi-state tolling authorities have similar, but not identical legislation pertaining to their audit authorities, and some could not point to any concurring language in their state laws. For example, New Jersey State Comptroller officials stated that the office has standing authority to provide oversight of each of the bi-state tolling authorities under the New Jersey state law that enables it to audit New Jersey public agencies and independent state authorities. The New Jersey State Auditor—a separate office from the New Jersey State Comptroller—also reported that its office has standing authority to audit the four bi-state authorities under a separate New Jersey state law. Nonetheless, officials in both offices could not point to reciprocal legislation in Delaware and Pennsylvania establishing their authorities in those states. In some cases, state audit agencies and bi-state authorities expressed disagreements over the extent of the state’s audit authority, or stated that audit authority was not established. Specifically, New Jersey State Auditor officials reported that the office attempted to initiate an audit of the DRJTBC in July 2013, but the DRJTBC rejected the request stating in a letter that the audit was not authorized by the DRJTBC interstate compact or by state laws in New Jersey and Pennsylvania. DRJTBC officials also stated that the New Jersey State Comptroller does not have standing audit authority. In addition, the Delaware Office of Auditor of Accounts reported that it does not have the authority to audit the DRBA, and the Pennsylvania Auditor General reported that it does not have the authority to audit the DRPA and the DRJTBC. The DRBA and the DRPA took no position as to whether New Jersey or the other states have standing audit authority. Appendix IV provides additional information about oversight authorities for the four bi-state authorities in the four states. In addition to state audit agencies, other state agencies may also have limited authority to review the activities of bi-state authorities. In one case we found that these limits posed risks to the accountability of federal transportation programs because the federal government lacked assurance that credits claimed by New Jersey to waive federal-aid matching fund requirements were in fact eligible and accurate. Under the federal-aid highway program, which provides about $40 billion annually to states to build and improve highways and bridges, states are typically required to provide a 20-percent funding match. However, a state may receive “toll credits” to reduce its matching requirement if it can demonstrate that toll revenues were spent on facility improvements and met other requirements. According to FHWA officials, from fiscal year 2008 through 2011, FHWA approved over $334 million in federal toll credits from the four bi-state tolling authorities. New Jersey applied these toll credits and others earned from other tolling authorities in the state to eliminate the state’s entire required match for highway and transit projects from fiscal year 2008 through 2011. FHWA officials in New Jersey stated that they rely on the state to self-certify the accuracy and eligibility of its own toll credits. However, New Jersey Department of Transportation (NJDOT) officials stated that NJDOT does not request or review underlying project documentation, such as contract awards or project schedules, from the bi-state authorities to support their eligibility certifications. NJDOT officials stated that they would have authority to conduct audits and spot checks of the bi-state authorities but they could not provide any documentation to that effect. The officials also stated that NJDOT has never conducted an audit or spot-check of any of the bi-state authorities’ expenditures to confirm their eligibility for toll credits. As a result of states’ limited oversight of bi-state tolling authorities, FHWA lacks assurance that the states are able to fully verify the information collected from the bi-state authorities before it is provided to FHWA for approval. Officials from certain bi-state tolling authorities told us that the states exercise oversight through the governor’s veto of the voting decisions of the commissioners from that state. This veto authority may provide an important check and balance on the boards’ decisions with regard to the governors’ priorities. However, such a veto power is limited to the voting decisions of the board and does not provide the public insight into the internal activities of the bi-state authorities that would otherwise be provided by an independent auditor. Moreover, this veto power is not always available to both governors. Specifically, according to DRJTBC and DRPA officials, the governor of Pennsylvania does not have veto authority over the DRJTBC or the DRPA because its state legislature has not provided that authority in state law. According to the New Jersey Governor’s office, New Jersey state law provides that the New Jersey Governor may veto actions of DRJTBC commissioners representing that state; however, that authority has not been exercised because substantially similar legislation has not been passed in Pennsylvania. DRJTBC reported that the New Jersey Governor may not unilaterally enforce its veto authority without reciprocal legislation enacted in Pennsylvania, as well as an act of Congress to amend the compact. In contrast, New Jersey and New York governors both have veto authority over the PANYNJ, and New Jersey and Delaware governors have veto authority over the DRBA. Each of the four interstate bi-state tolling authorities has established internal oversight mechanisms with responsibilities that vary based on the size and complexity of the organization. The four bi-state tolling authorities each have an audit committee comprised of board commissioners that is charged with activities such as overseeing the auditing and financial reporting processes of the authority, coordinating external financial or management audits, and directing the activities of internal audit departments, if applicable. For example, every 2 years DRPA’s audit committee selects an independent firm to conduct a management performance audit of DRPA business activities, which is intended to enhance transparency and enable the DRPA to more quickly identify issues that require the attention of the board and management. DRJTBC officials reported that the audit committee coordinates the annual audit of its financial statements and directs the auditors to perform stress tests of various functional areas, including management controls. In addition to the activities of the audit committees, the two largest authorities, the PANYNJ and the DRPA, have also established separate inspectors general and internal audit departments that conduct their own performance and financial audits and respond to public or internal allegations of waste, fraud, and abuse. In general, internal audit entities are organizations that are accountable to senior management and those charged with governance of the audited entity. Internal audit entities typically follow audit procedures and practices based on the standards established by the Institute of Internal Auditors, and they are generally not subject to the standards that guide federal or state external auditors or inspectors general. For example, they do not generally report the results of their work to the public, Congress, or to their state’s legislature. However, like external audit agencies, internal audit entities are expected to be free from impairments to their independence and must avoid the appearance of any impairment to independence to meet professional auditing standards. Although auditor independence is required by professional internal auditing standards, the DRPA has yet to establish clear access authorities for its inspector general. As a result, the DRPA office of inspector general lacks an assurance of independence. DRPA officials reported that the DRPA inspector general’s office was established in 2012 in response to a 2010 bill introduced in the House of Representatives that called for Congress to withdraw its consent from DRPA’s interstate compact if certain reforms, including creating the position, were not made. However, the DRPA resolution establishing the inspector general did not establish authorities for it to access DRPA records and personnel, and according to DRPA officials, such written authorities did not exist at the time of our review. The DRPA inspector general reported that he had drafted standard operating procedures for his office based on standards for state or local inspectors general, which included audit authorities and oversight responsibilities, and submitted those procedures to DRPA’s audit committee for its review. Although the DRPA inspector general maintains that he does not need the board’s approval for these standard operating procedures, the inspector general reported that members of the DRPA board attempted to weaken the authorities, including inserting a provision to require that the inspector general report any potential criminal activity to DRPA management rather than directly to legal authorities. The DRPA inspector general reported that he would not abide by this provision if enacted by the DRPA board. We requested from DRPA a copy of the standard operating procedures prepared by the inspector general; however, DRPA officials stated that these procedures have not been approved by the board and did not make them available for our review. As a result, we were unable to verify whether the authorities pursued by the DRPA inspector general were sufficient to enable the office to independently conduct its oversight responsibilities. In addition, the DRPA and PANYNJ declined our request to meet independently with officials from their respective inspectors general and internal audit departments without DRPA and PANYNJ management officials present. By design, internal audit entities do not generally publically report their findings, and thus the public is usually not aware of the accountability efforts taken by these entities. For example, in 2011 the PANYNJ’s internal audit department office completed 271 audits of PANYNJ activities and reported $12.9 million in estimated savings as a result of its audits. However, the PANYNJ audit department does not publically report findings. While the PANYNJ provided us with summaries of several audit reports, it declined our request to provide selected full audit reports for our review. DRPA’s inspector general reported that it has conducted several audits and investigations and has released one report to the public. Although the Institute of Internal Auditors standards do not require internal audit departments to report audit results to the public, by not doing so, the public may be unaware of the efforts taken by bi-state authorities to safeguard toll payer revenues and improve management performance and operations. Congress has given wide latitude to four states to address infrastructure needs in the Northeast by consenting to the creation of bi-state tolling authorities that operate some of the most highly traveled interstate crossings in the United States. These public authorities have broad authority to manage their operations without the same constraints, requirements, and oversight to which state and federal agencies are subject. Because these authorities are neither federal nor state entities, and because GAO does not make recommendations to non-federal entities, we are not making any recommendations in this report. The bi- state tolling authorities have recognized that the traveling public pays for these facilities, and that they must be accountable to the public. However, issues of transparency and accountability could undermine the authorities’ ability to win the public’s support and secure necessary toll revenues. As such, states have both the incentive and the opportunity to enhance the transparency and accountability of the bi-state tolling authorities. Specifically, the bi-state tolling authorities would benefit from clear and consistent requirements for public involvement in decision-making to ensure a documented process for public involvement and meaningful and sufficient opportunities for the public to comment, among other measures. In addition, the states have the incentive to work together to clarify the lines of external oversight over the bi-state tolling authorities, so that each state’s audit entity has sufficient standing authority and access to conduct audits and investigations of the operations of the bi-state tolling authorities. Furthermore, the internal audit entities of the bi-state tolling authorities are uniquely positioned to provide ongoing oversight and accountability. The DRPA established its inspector general in response to congressional concerns, and has the opportunity to more fully address those concerns by assuring the independence of its inspector general by establishing clear authorities for it to perform its work. We submitted a draft of this report to the DOT and the four bi-state tolling authorities for review and comment. The DOT and the DRPA had no comments on the draft. We received technical comments from the DRBA, the DRJTBC, and the PANYNJ, and we incorporated those comments as appropriate. We also provided sections of the draft report relating to the external oversight of the bi-state tolling authorities to state audit agencies in Delaware, New Jersey, New York, and Pennsylvania and received technical comments, which we incorporated as appropriate. In addition to providing technical comments, the PANYNJ disagreed with our finding that it did not have a documented and structured public involvement process for setting tolls. The PANYNJ stated that its policy of providing 10-days advance notice before convening toll hearings and providing the public with the amount and purpose of proposed toll rates constituted a documented public involvement process. According to the PANYNJ, this policy was established in 1977 through a resolution passed by its board of commissioners. However, PANYNJ board resolutions and its other rules and regulations are generally not available to the public. Consequently, at the time of the September 2011 toll increase, the public lacked the information needed to understand the PANYNJ’s public involvement policy, and whether the PANYNJ was following that policy and making its toll-setting decisions in a predictable framework. In June 2012, the PANYNJ incorporated its 1977 policy into its publicly available by-laws. While this policy will be in effect for future toll increases, we do not believe that it can be considered a defined and structured process for involving the public in key decisions because, as stated in our report, the policy does not specify the number of toll hearings, the amount of time to be made available for the public to comment, and how the authority will utilize public comments. The PANYNJ also disagreed with our finding that it did not offer the public sufficient opportunities to comment during its most recent toll increase, and stated that as a matter of practice, it has held multiple toll hearings in both states prior to toll increases. Our draft report recognized that the PANYNJ held 10 hearings in various locations for its proposed 2011 toll increase, including an online forum. However, because those hearings were held in a single day—and only 3 days prior to the board of commissioners’ vote to approve toll increases—we believe that the accelerated schedule did not provide sufficient, convenient and accessible opportunities for the public to comment on the proposal. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to congressional committees with responsibilities for surface transportation issues and the Secretary of Transportation. In addition, this report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made significant contributions to this report are listed in appendix V. Our three objectives were to assess: (1) the authority of bi-state tolling authorities to set and use tolls and the factors that influence toll setting, (2) the extent to which bi-state tolling authorities involve and inform the public in their toll-setting decisions, and (3) the extent to which bi-state tolling authorities are subject to external and internal oversight. To assess the authority of bi-state tolling authorities to set and use tolls and the factors that influence toll setting, we reviewed the interstate compacts of the four bi-state tolling authorities: the Port Authority of New York and New Jersey (PANYNJ), the Delaware River Port Authority (DRPA), the Delaware River and Bay Authority (DRBA), and the Delaware River Joint Toll Bridge Commission (DRJTBC). We also interviewed bi-state tolling authority officials for their perspectives of the key drivers that influence their tolling decisions. We corroborated testimonial evidence by (1) reviewing of the bi-state tolling authorities’ most recent financial statements and annual reports, as well as recent official statements and related documentation provided by the bi-state tolling authorities; and (2) by interviewing credit rating agency officials and reviewing information that evaluates the financial standing of the bi-state tolling authorities. To assess the purposes for which toll revenues can be used, we reviewed the interstate compact agreements, including any amendments, and interviewed authority officials on their permitted use of toll revenues. We reviewed the allowable uses for toll revenues, but due to ongoing litigation between the PANYNJ and the American Automobile Association regarding recent toll increases by the PANYNJ, we did not assess the specific purposes and projects for which the PANYNJ uses its toll revenues. For consistency, we did not assess the specific purposes and projects for which the other bi-state authorities use their toll revenues. To determine the extent to which bi-state tolling authorities are influenced by the federal requirement that tolls be just and reasonable, we interviewed bi-state tolling authority officials and reviewed the federal “just and reasonable” standard for evaluating toll increases, in section 508 of title 33, U.S. Code and conducted a legal review of how this standard has been interpreted and enforced by federal courts and federal agencies. The results of our legal review are provided in appendix II. To assess the extent to which the bi-state tolling authorities involve and inform the public in their toll-setting decisions, we interviewed officials from each of the bi-state authorities regarding their efforts to involve the public in recent toll increases. We also reviewed documentation on each authority’s most recent toll increase—such as public notices, newspaper articles, meeting minutes, board resolutions, and official statements—as provided by the authorities and collected from their public websites. We also examined the bi-state authorities’ interstate compacts and bylaws to determine whether their policies for public involvement met several practices that incorporate federal and state requirements for involving the public, as well as practices used by other tolling authorities. These practices include: (1) establishing a documented process for public involvement, (2) requiring sufficient opportunities for public comment, (3) providing key information to the public, and (4) summarizing public comments. We selected these practices through analysis of federal requirements for public participation by metropolitan planning organizations, state laws for public involvement in tolling decisions, guidance on involving the public in transportation decisions from the Transportation Research Board, and our previous work on designing user fees. We also interviewed officials from five bridge toll authorities in California and Michigan that were not created by interstate compacts regarding their efforts to involve and inform the public in recent toll-setting decisions. We selected these authorities because they manage and operate tolled bridges that are similar in scale to the bi-state authorities, have similar governance structures, and recently implemented a toll increase. To assess the extent to which bi-state tolling authorities are subject to external and internal oversight, we reviewed available audit reports and interviewed and collected information from the state audit agencies of each of the four charter states in our review (New Jersey, New York, Pennsylvania, and Delaware) and from the audit organizations within the bi-state tolling authorities. To assess external oversight, we reviewed the results of recent audits and investigations of the bi-state tolling authorities, including an investigation of DRPA completed by the New Jersey Office of the State Comptroller in 2012, and several audits of the PANYNJ conducted by the Office of the New York State Comptroller. We also reviewed relevant state laws in New Jersey, New York, and Pennsylvania regarding the oversight of the bi-state tolling authorities in those states and we interviewed officials with the New Jersey Office of the State Comptroller, the New Jersey State Auditor, the Office of the New York State Comptroller, the Pennsylvania Department of the Auditor General, and the Delaware Office of Auditor of Accounts in order to describe statutory audit authorities pertaining to the bi-state tolling authorities. Because this is a discussion of state law, we are not providing an independent analysis as to whether these laws establish audit authority over the bi-state authorities. To assess the internal oversight of the bi-state authorities, we collected information on the internal audit mechanisms in place in each of the bi-state tolling authorities and we interviewed the officials from the offices of the inspector general within the PANYNJ and DRPA. We compared the external oversight structure with GAO’s Government Auditing Standards and other relevant GAO work on oversight of non-federal entities, and we compared the activities of the internal audit entities with the International Standards for the Professional Practice of Internal Auditing published by the Institute of Internal Auditors and related GAO work on internal auditing. We conducted this performance audit from July 2012 through August 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In order to describe the current federal oversight environment, we provide this summary of the development of the just and reasonable standard for setting tolls on bridges, of significant federal administrative and court decisions interpreting it, and of whether courts have found there is a private right of action to enforce it. In addition, we discuss several cases challenging toll increases brought under the Commerce Clause of the U.S. Constitution. As detailed below, the federal standard for the setting of bridge tolls by states—that tolls be “just and reasonable”—was established in federal law in 1906. While the standard has remained unchanged to the present day, the federal government no longer has an oversight role in its implementation. The Secretary of War initially had responsibility for enforcing the standard, and this responsibility was transferred to the Secretary of Transportation in 1968, where it remained until the Department of Transportation’s (DOT) oversight authority was repealed in 1987. Since that time, a handful of lawsuits have been filed in the federal courts in effect seeking to enforce the just and reasonable standard. Rather than addressing what that standard means, however, most of these cases have grappled with who has the right to enforce it, that is, whether the statute creates a “private right of action” for private individuals or entities to bring suit to enforce the standard. The U.S. Court of Appeals for the Third Circuit has ruled that the statute does not provide a private right of action. The U.S. Court of Appeals for the Second Circuit has issued a ruling applying the “just and reasonable” standard, but did not address whether a private right of action to enforce the standard exists. Lower federal courts have not formally decided the issue but have discussed it generally. A few of these courts also analyzed a challenge to a toll increase using a Constitutional “dormant commerce clause analysis,” which focuses on whether state taxation discriminates against or unduly burdens interstate commerce and thereby impedes free private trade in the national marketplace. These cases are discussed in more detail below. “f tolls shall be charged for the transit over any bridge constructed under the provisions of said sections,…such tolls shall be reasonable and just and the Secretary of War may, at any time, and from time to time prescribe the reasonable rates of tolls for such transit over such bridge…” It was not until 1926 that informal congressional guidance specified what was entailed in the “reasonable and just” standard. As articulated by key House and Senate members, the standard meant that tolls for bridges should be limited to those necessary to provide a fund sufficient to pay for the cost of maintaining, repairing and operating the bridge, and to provide a sinking fund to amortize the cost of the bridge, including reasonable interest and financing costs, as soon as possible under reasonable charges. After the sinking fund had been provided, the bridge was to be operated toll-free or with tolls adjusted so as not to exceed its operating and maintenance costs. It would take another 20 years before these principles were put into legislation under the General Bridge Act of 1946 (1946 Act). The Secretary of War issued very few decisions during the period he was responsible for overseeing and enforcing the 1906 and 1946 Acts. However, one of the more significant cases involved a complainant who argued that it was unjust and unreasonable to divert automobile users’ tolls for the purpose of paying the costs of port development and improvements. The Secretary ruled against the complainant saying that because Congress had approved the bi-state compact establishing the Delaware River Port Authority, which authorized the Authority to pool revenues from all of its income-producing activities, and authorized the expenditure of revenues so pooled for port development and port promotion purposes, the Authority’s decision to use toll revenues for those purposes was within its sound managerial discretion. Hence, the Secretary determined, the higher tolls could not be said to be unjust or unreasonable simply because they contributed to financing operations that did not directly benefit highway users. The duties for administering the 1906 and 1946 Acts were transferred to the Secretary of Transportation by the Department of Transportation Act of 1966. In addition, the Secretary was given jurisdiction over international bridges in the International Bridge Act of 1972 (1972 Act). The 1972 Act also included a “just and reasonable” clause where tolls could be collected for amortization of the construction or acquisition costs of the bridge, including interest and financing costs, and for earning a reasonable return on invested capital. From 1970 until 1987, the Federal Highway Administration (FHWA) Administrator, to whom the Secretary of Transportation delegated his toll- oversight authority, determined whether bridge toll increases were “just and reasonable” under the 1906, 1946, and 1972 Acts. The first significant case in which a court reviewed FHWA’s determinations occurred in 1973. The U.S. Court of Appeals for the Eighth Circuit, in the Burlington v. Turner case, reviewed a decision of the Federal Highway Administrator that the toll structure set by the City of Burlington, Iowa for its toll bridge over the Mississippi River was unjust and unreasonable under the 1906 Act. The court found that toll rates for the Macarthur Bridge between Iowa and Illinois should be limited to an amount sufficient to pay the reasonable cost of maintaining, repairing and operating the bridge and its approaches under economical management; to provide a sinking fund for amortization of the bridge indebtedness; and to provide a reasonable return on invested capital. In 1974, the year after the Burlington decision, the FHWA administrator, in the Keokuk Bridge Tolls case, applied the principles of the Burlington case and found that an 8 percent rate of return with added operating and maintenance expenses was reasonable. However, because half of the toll revenues went to municipal programs and projects unrelated to the bridge, the Administrator determined that the rates were not reasonable and just. Then in 1979, the U.S. Court of Appeals for the Second Circuit, in Automobile Club of New York v. FHWA, 592 F. 2d 658 (2d Cir. 1979), upheld the decision of the FHWA Administrator and a lower court allowing inclusion of complementary capital improvements to highways or transit systems in the rate base for setting tolls for bridges for the Port Authority of New York and New Jersey (PANYNJ). The Surface Transportation and Uniform Relocation Act Assistance Act of 1987 (1987 Act) repealed DOT’s authority to review bridge toll increases, but maintained the requirement that tolls on bridges constructed under the authority of the 1906, 1946 and 1972 Acts must be “just and reasonable.” The 1987 Act also repealed the 1946 Act’s express limitation of the use of toll revenues to specific bridge-related purposes such as maintaining, repairing, and operating a bridge. Since DOT’s authority for reviewing bridge toll increases was repealed in 1987, the federal courts have become the sole forum for challenges to tolls both under the statutory “just and reasonable” standard of the 1987 Act as well as under the Commerce Clause of the U.S. Constitution. A handful of federal court cases have applied the “just and reasonable” standard and addressed whether private parties can bring suit to enforce it. As summarized below, courts in different circuits have reached different conclusions or expressed different views regarding whether private parties have the right to raise such challenges in court under the “just and reasonable” standard. This has not been an issue for those cases brought under the Commerce Clause. (1) Automobile Club of New York, Inc. v. Port Authority of New York and New Jersey, 887 F. 2d 417 (2d Cir. 1989) – The central issue of this case was whether it was “just and reasonable” for the PANYNJ to include losses from the Port Authority Trans-Hudson (PATH) Railroad in the Port Authority’s rate base for determining the tolls to be charged for passage over the bridges owned by the PANYNJ between New York and New Jersey. The plaintiffs contended that that the bridge toll increases violated both the statutory “just and reasonable” standard in the 1987 Act and the Constitution’s Commerce Clause. The federal district court dismissed the “unjust and unreasonable” argument, finding that the statutory standard had sufficient “flexibility” to allow inclusion of functionally-related but non- bridge (PATH) costs in the PANYNJ’s rate base. The court also rejected the argument that including non-bridge costs in setting bridge tolls imposed an excessive and unconstitutional burden on interstate commerce, Applying a three-part test previously established by the Supreme Court, the lower court found that (1) the challenged state action regulated evenhandedly, with only “incidental” effects on interstate commerce; (2) the state action served a legitimate local purpose; and (3) there were no alternative means to promote this local purpose that would not also affect interstate commerce. On appeal, the Second Circuit, in a 2-1 decision, upheld the lower court’s ruling that PATH was sufficiently related to the PANYNJ’s bridges and tunnels to warrant its inclusion in the rate base on which “just and reasonable” bridge tolls were based. The Commerce Clause challenge was not raised on appeal. Neither the district court nor the Court of Appeals, however, explicitly addressed the issue of whether the 1987 Act creates a private right of action. (2) Wallach v. Brezenoff, 930 F. 2d 1070 (3d Cir. 1991) – In this case, New Jersey citizens brought suit against the PANYNJ challenging toll increases both under the “just and reasonable” standard found in the 1987 Act and the Commerce Clause. At the district court level, the court granted the PANYNJ’s motion for summary judgment and the plaintiffs appealed solely based on the Commerce Clause issues. The Third Circuit court rejected the appeal by pointing to the reasons given by the district court in Automobile Club of New York, Inc. v. Port. Auth. of New York and New Jersey, 706 F. Supp. 264 (S.D.N.Y. 1989), i.e., that (1) the challenged state action regulated evenhandedly, with only “incidental” effects on interstate commerce; (2) the state action served a legitimate local purpose; and (3) there were no alternative means to promote this local purpose that would not also affect interstate commerce. (3) Molinari v. New York Triborough Bridge and Tunnel Authority, 838 F.Supp. 718 (E.D.N.Y. 1993) – The plaintiffs in Molinari brought suit against the New York Triborough Bridge and Tunnel Authority, challenging the 1989 and 1993 toll increases on the Verrazano-Narrows Bridge. They maintained that the tolls were “unjust and unreasonable” within the meaning of the 1987 Act solely because they were used to subsidize the mass transportation components of the Metropolitan Transportation Authority. The district court granted the Authority’s motion for summary judgment, finding that “plaintiffs have failed to create even a triable issue of fact on their claim that the challenged toll increases on the Verrazano-Narrows Bridge are unjust and unreasonable.” “f a bridge toll generates more revenue than necessary to provide a fair profit or rate of return,” the court continued, “the toll may not be challenged successfully if it is used to support a single integrated transportation system in which the successful operation of the bridge is dependent in whole or in part on the operation of the other related facilities.” The court also raised serious questions regarding whether a private right of action exists under the 1987 Act, finding that not only does the statute not explicitly create such a right, it also lacks the kind of “right- or duty- creating language” that has generally been the most accurate indicator of the propriety of implication of a cause of action.” Finally, the court noted that the “Supreme Court has . . . been ‘especially reluctant to imply causes of action under statutes that create duties on the part of persons for the benefit of the public at large” and that there was a compelling case to be made that a private right of action should not be implied. (4) American Trucking Association v. Delaware River Joint Toll Bridge Commission, 458 F.3d 291 (3d Cir. 2006) – In this case, the U.S. Court of Appeals for the Third Circuit found that the 1987 Act’s “just and reasonable” provision did not create a private right of action for truck drivers to challenge the reasonableness of tolls on bi-state bridges operated by the Delaware River Joint Toll Bridge Commission. The court ruled that the statute contained no language that might suggest a congressional desire to allow a private suit to enforce the “just and reasonable” provision. In the absence of explicit language conferring a private right of action, the court addressed whether a private right of action could be implied under the Supreme Court’s four-factor test in Cort v. Ash: (1) does the statute create a federal right in favor of the particular plaintiff?; (2) is there any indication of legislative intent either to create such a remedy or to deny one?; (3) is it consistent with the underlying purposes of the legislative scheme to imply such a remedy for the particular plaintiff?; and (4) is the cause of action one traditionally relegated to state law so that it would be inappropriate to infer a cause of action based solely on federal law? Under the Supreme Court’s first factor, the Third Circuit found that the 1987 Act was designed to benefit the public at large, not truckers specifically. Under the second factor, the Third Circuit found legislative history on both sides of the issue and thus no clear expression of legislative intent that a private right of action was supported. This was sufficient for the court to find that there was no private right of action under the 1987 Act. The Court noted, as an aside, that the truckers had not raised any constitutional challenge in this case. (5) Auto Club of New York, Inc. v. Port Authority of New York and New Jersey, 842 F. Supp. 2d 672 (S.D.N.Y. 2012) – In this case, the Auto Clubs of New York and New Jersey (together AAA) sought to halt toll increases proposed by the PANYNJ for its bridges and tunnels, arguing that they violated the Constitution’s Commerce Clause and the just and reasonable standard of the 1987 Act. In particular, AAA argued that 2011 toll increases on PANYNJ bridges and tunnels which were earmarked to fund cost overruns in the PANYNJ’s real estate development at the World Trade Center violated the statutory “just and reasonable” standard because the increases were not functionally related to the PANYNJ’s integrated, interdependent transportation network and so should not have been included in the rate base. AAA also claimed the toll increases were unreasonable under the Constitution’s so-called dormant Commerce Clause because the tolls were not “based on a fair approximation of…use” of the bridges and tunnels and are “excessive in relation to the benefits conferred” on the users. AAA sought to stop the toll increases both temporarily—on an emergency basis—and permanently. The district court rejected AAA’s request for immediate relief to stop the toll increases, finding that AAA did not show, as required, that it would likely win the case when all the facts are heard (the case is still ongoing). The court stated that it did not need to reach the question of whether AAA had a private right of action under the 1987 Act. It did, however, raise questions about the Third Circuit’s reasoning in the American Trucking case (discussed above) saying that it “leaves no means of enforcement , making the words ‘just and reasonable’ mere surplusage and conflicting with the text and structure of the rest of the act.” The district court also questioned American Trucking’s suggestion that “the state political process could be the venue that Congress had in mind for the airing of toll grievances” since one state’s legislature cannot unilaterally modify tolls on a bi-state bridge without impinging on the rights of the other state’s citizens in violation of the Commerce Clause. Further, the district court questioned the American Trucking court’s use of legislative history to justify its decision, since it “waived away Committee reports from two earlier (but unpassed) versions of the Highway Act containing similar ‘just and reasonable’ language, reports which stated that ‘the Committee has created a basis for which a user may commence a suit in Federal Court’ upon belief ‘that actions of a toll authority are not just and reasonable.’” The parties agreed that a 3-prong test applied by the Supreme Court in 1994 was applicable to determine the reasonableness of fees for the use of state-provided facilities by those engaged in interstate commerce. Under this test, a fee is reasonable, and thus constitutionally permissible, “if it (1) is based on some fair approximation of the use of the facilities, (2) is not excessive in relation to the benefits conferred, and (3) does not discriminate against interstate commerce.” Applying this test, the district court found that AAA failed to show it likely will succeed on either on its Commerce Clause claim or its claim under the Highway Act, even assuming a private right of action exists under the 1987 Act. Officials from the New Jersey Office of the State Comptroller stated that, the office, established in 2007, has standing oversight authority over DRBA—and the three other bi-state authorities—under the New Jersey state law that enables it to audit and investigate New Jersey “public agencies” and “independent state authorities.” However, it has not been firmly established in state law or state judicial cases that these bi-state authorities are considered “public agencies” or “independent state authorities” for the purposes of this law. The New Jersey State Auditor—a separate agency from the New Jersey Office of the State Comptroller— also reported that it has authority to audit the four bi-state tolling authorities under a New Jersey state law that provides for a performance audit of “any independent authority, or any public entity or grantee that receives state funds.” However, the New Jersey State Auditor also stated that receiving state funds is not necessarily a precondition for its audit authority over DRBA or any of the bi-state tolling authorities. Nonetheless, officials with the New Jersey Office of the State Comptroller and the New Jersey State Auditor were unaware of reciprocal legislation in Delaware recognizing their offices’ audit authority over DRBA. The Delaware Office of the Auditor of Accounts stated that it does not have audit authority over DRBA because it is not a state agency and does not receive state funds. Neither New Jersey nor Delaware has audited DRBA. DRBA officials took no position as to whether either state had standing audit authority, but stated that DRBA would entertain a request for audit if contacted by either state auditor. Although the New Jersey Office of the State Comptroller has not been refused access by any of these entities there remains an open question as to the applicability of these provisions to these bi-state authorities. As with the other three bi-state authorities, New Jersey Office of the State Comptroller officials reported that they have standing oversight of DRJTBC under New Jersey state law. However, DRJTBC officials reported that the New Jersey Office of the State Comptroller does not have authority to audit or investigate DRJTBC because its audit authority is limited to entities within its state and does not extend to bi-state authorities. The New Jersey Office of the State Comptroller has not audited the DRJTBC, and it could not point to reciprocal legislation in Pennsylvania recognizing the New Jersey State Comptroller’s audit authority. The Pennsylvania Department of the Auditor General reported that under Pennsylvania state law, the DRJTBC must submit biennially to a performance audit jointly conducted by the Auditor General of Pennsylvania and the State Auditor of New Jersey with a report to be issued every odd-numbered year. The first report was to be completed by December 31, 1997. Similar legislation was passed in New Jersey that would require the Pennsylvania Auditor General and the New Jersey State Auditor to jointly conduct annual financial and management audits. However, an official of Pennsylvania’s Department of the Auditor General reported there is a conflict between the two states’ laws with regard to the joint authority and audit schedule, and that this conflict needs to be resolved in order for the audit authority to be clear. DRJTBC officials stated that neither state’s laws amended DRJTBC’s interstate compact because the laws were not identical and the two separate requirements for annual and biennial audits and different work products cannot be reconciled, and any amendments to the compact would require an act of Congress. As such, DRJTBC reported that neither New Jersey nor Pennsylvania state audit entities have authority to audit or investigate DRJTBC. The Pennsylvania Department of the Auditor General and the New Jersey State Auditor officials stated that none of the annual or biennial audits of DRJTBC cited in the state laws have been conducted by their offices either separately or jointly. During the course of our review, New Jersey State Auditor officials reported that its office sent the DRJTBC a letter to initiate an audit in July 2013, but DRJTBC rejected the request stating in a letter that the audit was not authorized by the DRJTBC interstate compact or by state laws in New Jersey and Pennsylvania. This disagreement between the DRJTBC and the State Auditor of New Jersey was yet to be resolved at the time of our report. According to officials from Pennsylvania’s Department of the Auditor General, it does not have the authority to audit or investigate DRPA because DRPA is an independent authority and not a state agency. A Pennsylvania Department of the Auditor General official also stated that because the Auditor General holds a standing, ex officio position as a voting member of the DRPA’s Board of Commissioners, he or she cannot use his office to audit or investigate the DRPA, and has not conducted any audits of DRPA. According to New Jersey Office of the State Comptroller officials, the comptroller has standing oversight authority over DRPA, and exercised that authority in its 2012 investigative report. However, this investigation was conducted in response to the request of the governors of both states and with the approval of the DRPA board. Furthermore, New Jersey State Comptroller officials could not point to any reciprocal legislation in Pennsylvania recognizing standing authority to conduct future audits of DRPA. DRPA officials took no position as to whether New Jersey or Pennsylvania have standing audit authority and that any decision as to whether to adhere to any state audit requests would be a matter for its board to decide. Officials with the Office of the New York State Comptroller and the New Jersey Office of the State Comptroller officials stated that their offices have audit authority over the PANYNJ. The PANYNJ confirmed this audit authority; and while the Office of the New York State Comptroller has conducted several audits, the New Jersey Office of the State Comptroller has yet to do so. However, because the access authorities claimed by the New Jersey Office of the State Comptroller over PANYNJ in its enabling legislation differ from the access authorities recognized by the PANYNJ, it is unclear what specific authorities would be available to the New Jersey Office of the State Comptroller if it attempted to conduct an audit of PANYNJ. Furthermore, according to officials with the Office of the New York State Comptroller, the PANYNJ does not have the same requirements as New York state agencies to report its progress in implementing recommendations to the Office of the New York State Comptroller. In addition to the contact named above, Steve Cohen, Assistant Director; Matt Barranca; Melissa Bodeau; Mya Dinh; Dave Hooper; Joah Iannotta; Hannah Laufe; Josh Ormond; and Justin Reed made key contributions to this report.

The Northeast is home to some of the most highly traveled interstate crossings in the United States, funded by toll revenues collected from the traveling public. Since 1921, Congress has provided its consent to New York, New Jersey, Pennsylvania, and Delaware to enter into legal agreements known as interstate compacts, establishing four bi-state tolling authorities to build and maintain toll bridges and tunnels. In recent years, bi-state tolling authorities have come under scrutiny for toll increases and other concerns, and GAO was asked to review their toll-setting decisions and oversight framework. GAO examined: (1) the authority of bistate tolling authorities to set and use tolls and the factors that influence toll setting; (2) the extent to which the authorities involve and inform the public in toll-setting decisions; and (3) the extent to which the authorities are subject to external and internal oversight. GAO reviewed federal and state laws, bi-state tolling authority documents, and interviewed officials from the authorities and state audit offices. GAO does not make recommendations to non-federal entities; nonetheless the authorities could benefit from greater transparency in public involvement and clearer lines of external oversight. DOT had no comments on a draft of this report and three authorities provided technical comments, which GAO incorporated as appropriate. In addition, the Port Authority of New York and New Jersey disagreed, stating its policies constituted a documented public involvement process. GAO maintains that these policies were not publicly available, or a defined and structured process. Bi-state tolling authorities have broad authority to set toll rates and use revenues for a range of purposes, including maintaining, repairing, and improving their infrastructure. In setting tolls, bi-state tolling authorities are primarily influenced by debt obligations and maintain specific operating revenues to repay their debt. A federal statute requiring bridge tolls to be "just and reasonable" has less influence on tolling decisions, in part, because no federal agency has authority to enforce the standard. Bi-state tolling authorities are not required to follow federal or general state requirements for involving and informing the public; they set their own policies that can be less stringent than practices of transportation agencies that follow federal or state requirements. In their most recent toll increases, the bi-state authorities generally provided the public limited opportunities to learn about and comment on proposed toll rates before they were approved. For example, one bistate authority did not hold any public toll hearings, while another provided one day for hearings. In contrast to federal and general state requirements and leading practices, the bi-state authorities did not in all cases (1) have documented public involvement procedures for toll setting; (2) provide the public with key information on the toll proposals in advance of public hearings; (3) offer the public sufficient opportunities to comment on toll proposals; and (4) provide a public summary of comments received before toll increases were approved. External oversight of the bi-state authorities is limited as only one of the four authorities has been regularly audited by a state audit entity. While these audits have uncovered areas of concern, the authority of most state audit entities to oversee the bi-state authorities is unclear. Differences in states' laws and disagreements between the bi-state authorities and state audit agencies have raised questions about the authority of several states to provide oversight. Each of the four bi-state authorities provides some internal oversight, but one has not established access authority for its inspector general, which, as a result, lacks an assurance of independence. Because internal auditors are generally not required under internal audit standards to report to outside audiences, the public may lack knowledge of their efforts to ensure accountability for the use of toll revenues.

You are an expert at summarizing long articles. Proceed to summarize the following text: S. 261 would change the cycle for the President’s budget, for the budget resolution, for enactment of appropriations, and for authorizations to a biennial cycle. The President would be required to submit a 2-year budget at the beginning of the first session of a Congress; this budget would contain proposed levels for each of the 2 fiscal years in the biennium and planning levels for the 4 years beyond that. The budget resolution and reconciliation instructions would also establish binding levels for each year in a given biennium—and for the sum of the 6-year period. The bill requires appropriations to be enacted every 2 years. It contains a two-pronged mechanism to ensure this. First, it provides for a point of order against appropriation bills not covering 2 years. Second, if that does not work, S.261 provides for an automatic second-year appropriation at the level of the first year of the biennium. During the first year of the biennium, authorizations and revenue legislation would be expected to wait until completion of the budget resolution and appropriations bills. At the beginning of the second session of the Congress the President would submit a “mid-biennium review.” This second year then would be devoted to authorizations, which would be required to cover at least 2 years; to revenue legislation, which also would be required to cover at least 2 years; and to oversight of federal programs. S. 261 would also change some reporting requirements in GPRA and add some new reports. Attached to this testimony are two illustrations of the proposed timelines for both budget and GPRA reports. As we read the legislation, it does not direct changes in the period of availability of appropriated funds. The bill consistently refers to each fiscal year within a biennium. Although appropriations bills must cover a 2-year period, the bill seems to require separate appropriations for each of the 2 fiscal years within the biennium. It would seem, therefore, that appropriations committees could—as they do today—provide funds available for one, 2 or more years. This serves to remind us that there is a distinction between the frequency with which the Congress makes appropriations decisions and the period for which funds are available to an agency. Even in today’s annual appropriations cycle, the Congress has routinely provided multiple-year or no-year appropriations for accounts or for projects within accounts when it seemed to make sense to do so. As I noted in my previous testimony, about two-thirds of budget accounts on an annual appropriation cycle contain multiple-year or no-year funds. In addition, for those entities for which the Congress has recognized a programmatic need to have appropriations immediately available at the beginning of the fiscal year (such as grants to states for Medicaid), the Congress has accommodated this need with advance appropriations. The second year of the proposed biennium seems, in effect, to provide advance appropriations to all programs. Whether a biennial budget and appropriations cycle truly saves time for agency officials and reduces the time members of the Congress spend on budget and appropriations issues will depend heavily on how mid-biennium changes are viewed. Will there be a presumption against supplementals? Will changes in the second year be limited to responses to large and significant, unforeseen or unforeseeable events? Even with an annual cycle the time lag between making initial forecasts and budget execution creates challenges. Indeed, increased difficulty in forecasting was one of the primary reasons states gave for shifting from biennial to annual budget cycles. Even in this era of discretionary spending caps, the Congress has demonstrated the need to address changing conditions among the numerous budget accounts and program activities of the federal government. Although in the aggregate there may be little change, individual agencies or accounts have seen significant changes from year to year. Some statistics may give an indication of the extent of that change. While total current appropriations grew by only 0.9 percent between 1994 and 1995, more than half of all budget accounts that received current appropriations had net changes greater than plus or minus 5 percent. More recently, between 1996 and 1997, almost 55 percent of budget accounts with current appropriations experienced changes of more than plus or minus 5 percent although total current appropriations declined by about 0.5 percent. Because these are account-level statistics, it is possible that annual changes at the program activity level may have been even greater. Dramatic changes in program design or agency structure, such as those considered in the last Congress and those being considered now, will make budget forecasting more difficult. For biennial budgeting to exist in reality rather than only in theory, the Congress and the President will have to reach some agreement on how to deal with the greater uncertainty inherent in a longer budget cycle and/or a time of major structural change. You also asked me to review the information on state experiences with biennial budgeting and to comment on any issues I thought pertinent in considering S. 261, with particular attention to (1) the requirement directing that “during the second session of each Congress, the Comptroller General shall give priority to requests from Congress for audits and evaluations of Government programs and activities” and (2) issues involved in the integration of GPRA into a biennial budget cycle. Let me turn now to these areas. Advocates of biennial budgeting often point to the experience of individual states. In looking to the states it is necessary to disaggregate them into several categories. In 1996, when we last looked at this data, 8 states had biennial legislative cycles and hence necessarily biennial budget cycles.As the table below shows, the 42 states with annual legislative cycles present a mixed picture in terms of budget cycles: 27 describe their budget cycles as annual, 12 describe their budget cycles as biennial, and 3 describe their budget cycles as mixed. The National Association of State Budget Officers reports that those states that describe their system as “mixed” have divided the budget into two categories: that for which budgeting is annual and that for which it is biennial. Connecticut has changed its budget cycle from biennial to annual and back to biennial. In the last 3 decades, 17 other states have changed their budget cycles: 11 from biennial to annual, 3 from annual to mixed, and 3 from annual to biennial. Translating state budget laws, practices, and experiences to the federal level is always difficult. As we noted in our review of state balanced budget practices, state budgets fill a different role, may be sensitive to different outside pressures, and are otherwise not directly comparable. In addition, governors often have more unilateral power over spending than the President does. However, even with those caveats, the state experience may offer some insights for your deliberations. Perhaps most significant is the fact that most states that describe their budget cycles as biennial or mixed are small and medium sized. Of the 10 largest states in terms of general fund expenditures, Ohio is the only one with an annual legislative cycle and a biennial budget. According to a State of Ohio official, every biennium two annual budgets are enacted, and agencies are prohibited from moving funds across years. In addition, the Ohio legislature typically passes a “budget corrections bill.” A few preliminary observations can be made from looking at the explicit design of those states that describe their budget cycles as “mixed” and the practice of those that describe their budget cycles as “biennial.” Different items are treated differently. For example, in Missouri, the operating budget is on an annual cycle while the capital budget is biennial. In Arizona, “major budget units”—the agencies with the largest budgets—submit annual requests; these budgets are also the most volatile and the most dependent on federal funding. In Kansas, the 20 agencies that are on a biennial cycle are typically small, single-program or regulatory-type agencies that are funded by fees rather than general fund revenues. In general, budgeting for those items that are predictable is different from budgeting for those items subject to great volatility whether due to the economy or changes in federal policy. Section 8 of S. 261 directs that “During the second session of each Congress, the Comptroller General shall give priority to requests from Congress for audits and evaluations of Government programs and activities.” GAO has long advocated regular and rigorous congressional oversight of federal programs. Such oversight should examine both the design and effectiveness of federal programs and the efficiency and skill with which they are managed. Indeed, much of GAO’s work is undertaken with such oversight purposes in mind. For example, financial management is one area in which GAO assists the Congress with its oversight responsibilities. The Chief Financial Officers (CFO) Act of 1990, as amended, directs that 24 major agencies have audited annual financial statements beginning with fiscal year 1996. It also requires the preparation of annual governmentwide financial statements and calls for GAO to audit these statements beginning with fiscal year 1997. As you know, there have been serious problems with financial management processes in many agencies. We have been both auditing these agencies and working with them to improve the quality of their financial management. Careful management of taxpayer funds is critical to ensuring proper accountability and keeping the faith of the American people. These annual audited financial statements can serve as an important oversight tool. Good evaluation often requires a look at a program over some period of time or a comparison of several approaches. This means that in order for the results of audits and evaluations to be available for the second year of the biennium, it is important for the committees and GAO to work together in the first year—or even in the prior biennium—to structure any study. As part of our planning process, we strive to maintain an ongoing dialogue with Members and staff to identify areas of current and emerging interest so that the work is completed and we are ready to report when the results will be most useful. It is important to our ability to assist you that we understand your areas of concern and be able to accumulate a body of knowledge and in-depth analysis in those areas. Mr. Chairman, GAO stands eager to assist the Congress in the performance of its oversight responsibilities at all times. Many of you and your colleagues in the House and the Senate currently use us in this way. Let me note just a few examples. Our work on the Internal Revenue Service (IRS) Tax System Modernization program has uncovered major flaws, such as the lack of basic elements needed to bring it to a successful conclusion. We have worked closely with this Committee, other IRS oversight committees, and the Appropriations Committees in an effort to move IRS toward (1) formulating a much needed business strategy for maximizing electronic filings, (2) implementing a sound process to manage technology investments, (3) instituting disciplined processes for software development and acquisition, and (4) completing and enforcing an essential systems architecture including data and security subarchitectures. Our work regarding aviation safety and security has noted that serious vulnerabilities exist in both domestic and international aviation systems. Recent experiences during 1996 have served to raise the consciousness of the Congress, the Administration, and the public of the need to expand the existing margin of safety. Recent proposals have merit and would fundamentally reinvent the Federal Aviation Administration, but challenges remain, including key questions about how and when the recommendations would be implemented, how much it will cost to implement them, and who will pay the cost. GAO reviews of the Supplemental Security Income program have highlighted several long-standing problem areas: (1) determining initial and continuing financial eligibility for beneficiaries, (2) determining disability eligibility and performing continuing disability reviews, and (3) inadequate return-to-work assistance for recipients who may be assimilated back into the work force. We have reported on long-standing serious weaknesses in the Department of Defense’s (DOD) financial operations that continue not only to severely limit the reliability of DOD’s financial information but also have resulted in wasted resources and undermined its ability to carry out its stewardship responsibilities. No military service or other major DOD component has been able to withstand the scrutiny of an independent financial statement audit. These, and other areas included in our High-Risk Series, which we prepare for each new Congress, are examples of our efforts to assist the Congress in its oversight responsibilities. In fiscal year 1996, almost 80 percent of GAO’s work was done at the specific request of the Congress. GAO testified 181 times before 85 committees and subcommittees, presented 217 formal congressional briefings, and prepared 908 reports to the Congress and agency officials. Existing provisions of law requiring GAO to assist the Congress are sufficiently broad to encompass requests such as those envisioned in Section 8 of S. 261. However, the decision about whether to modify the existing provisions to add a more specific requirement is appropriately a decision for the Congress to make. Before turning to the interrelationship of this proposal and GPRA, let me note a few BEA-related issues that would need to be addressed should S. 261 be enacted. The bill explicitly modifies the rules for the pay-as-you-go (PAYGO) scorecard in the Senate by specifying three time periods during which deficit neutrality is required: the biennium covered by the budget resolution, the first 6 years covered by the budget resolution, and the 4 fiscal years after those first 6 years. That is, it retains the form of the current rules. The bill, however, is silent on the existence of discretionary spending limits. It does specify that in the Senate, the joint explanatory statement accompanying the conference report on the budget resolution must contain an allocation to the Appropriations Committee for each fiscal year in the biennium. One might infer from this that if discretionary caps are to be extended, they will continue to be specified in annual terms. However, this bill does not extend the caps. Other issues regarding the interaction of S. 261 and BEA (assuming its extension) also need to be considered. Would biennial budgeting change the timing of BEA-required sequestration reports? How would sequestrations be applied to the 2 years in the biennium and when would they occur? For example, if annual caps are maintained and are exceeded in the second year of the biennium, when would the Presidential Order causing the sequestration be issued? Would the sequestration affect both years of the biennium? These questions may not necessarily need to be answered in this bill, but they will need to be considered if BEA is extended under a biennial budgeting schedule. There are a number of other smaller technical issues on which we would be glad to work with your staff should you wish. Let me turn now to the interaction between this proposal and the Government Performance and Results Act (GPRA). S. 261 makes a number of changes to GPRA—most designed to make the requirements of GPRA consistent with the proposed biennial budget cycle, but others that seek to make substantive revisions to GPRA. I’ll discuss each separately. GPRA is part of a statutory framework for addressing long-standing management challenges and helping the Congress and the executive branch make the difficult trade-offs that the current budget environment demands. The essential elements of this framework include, in addition to GPRA, the CFO Act, as amended, and information technology reform legislation, including the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act. These statutes collectively form the building blocks to improved accountability—both for the taxpayer’s dollar and for results. GPRA, the centerpiece of this statutory framework, is intended to promote greater confidence in the institutions of government by encouraging agency managers to shift their attention from traditional concerns, such as staffing and workloads, toward a single overriding issue: results. GPRA requires agencies to set goals, measure performance, and report on their accomplishments. It also defines a set of interrelated activities and reporting requirements, which are designed to make performance information more consistently available for congressional oversight and resource allocation processes. Specifically, GPRA requires: strategic plans to be issued for virtually all executive agencies by September 30, 1997. The plans are to cover at least a 5-year period; be updated at least every three years; and describe the agency’s mission, its outcome-related goals and objectives, and how the agency will achieve its goals through its activities and available resources. annual performance plans that include performance indicators for the outputs, service levels, and outcomes of each program activity in an agency’s budget. The first performance plans are to cover fiscal year 1999 and will be submitted to the Congress in February 1998, along with a governmentwide plan prepared by the Office of Management and Budget (OMB). annual performance reports that compare actual performance to goals and indicators established in annual performance plans, and that explain the reasons for variance and what actions will be taken to improve performance. The first reports, covering fiscal year 1999, will be issued to the President and the Congress no later than March 31, 2000. The Congress recognized that implementing GPRA will not be easy. Accordingly, GPRA incorporates several critical design features—phased implementation, pilot testing, and iterative planning and reporting processes—designed to temper immediate expectations and allow for an orderly but well-paced transition. Following the completion in 1996 of about 70 pilot projects, OMB has been working with federal agencies to ensure that the first strategic plans are submitted to the Congress by the end of September and performance plans 5 months later with the President’s fiscal year 1999 budget submission. S. 261 capitalizes on these initial GPRA implementation efforts by making the effective date of its proposed changes—March 31, 1998—after the first strategic plans and performance plans have been completed and submitted to the Congress. Other changes in timelines proposed in S. 261 also appear consistent with GPRA requirements. For example, S. 261 requires strategic plans in September 2000 consistent with its proposed biennial cycle. This should pose no problem for agencies, which under, current GPRA provisions, are expected to complete updates by this date of the plans submitted in September 1997. Similarly, changing the governmentwide performance plan to the year 2000 merely updates GPRA timelines to reflect the biennial timelines proposed by S. 261. S.261 also proposes several substantive changes to GPRA, including revised requirements for agency performance plans and new requirements for preliminary agency performance plans and governmentwide performance reports. Although it would be important to adjust the timelines in GPRA should the Congress shift to a biennial budget process, the proposals for substantive changes can be considered separately. As a group, they raise the question of whether the Congress wishes to make changes in GPRA during the first implementation cycle. Individually, they raise other issues—which I will discuss below. This bill proposes adding several new requirements to the annual agency performance plans currently required by GPRA beyond changing them to a biennial cycle, including (1) adding an executive summary focusing on the most important goals of an agency, but limited to a maximum of 10 goals and (2) requiring that the Congress be consulted during the preparation of these plans. The bill also adds a new reporting requirement for draft preliminary performance plans. While the change to a biennial cycle is consistent with the overall goals of S. 261, the bill is silent as to whether performance goals and indicators associated with each program activity would be required for each fiscal year. However, as I noted earlier, because the bill appears to require separate appropriations for each year of the biennium, annual performance goals and indicators, as now required for GPRA performance plans, would presumably still be required. Requiring an executive summary within annual performance plans makes sense. However, it is worth considering whether limiting an agency’s performance goals to a fixed number—10 in S. 261—could prove unnecessarily restraining. OMB guidance to date has largely refrained from specifying form and content standards for GPRA documents, allowing agencies substantial discretion while emphasizing the need for clarity and completeness. We generally agree with that approach, at least in the formative years of GPRA. Further, we have endorsed OMB pilot projects on accountability reports, which seek to integrate a wide range of required reports. A decision to incorporate fixed form and content rules in statutory language might better be delayed until after several years’ experience. While we agree with the premise of S. 261 that performance goals should be reduced to a “vital few,” it may make sense to give agencies the flexibility to define the absolute number shown in their plans within the circumstances of their program activities. As noted above, S. 261 proposes two additional changes to GPRA’s requirements regarding the preparation of performance plans. First, it adds a requirement that agencies consult the Congress in the preparation not only of their strategic plans but also of their performance plans. Second, it also adds a new reporting requirement: agencies would be required to submit preliminary drafts of performance plans for the upcoming biennium to their committees of jurisdiction in March of each even-numbered year. We have strongly endorsed the need for the Congress to be an active participant in GPRA and are currently assisting the Congress in its ongoing consultations on the development of agency strategic plans. Currently, GPRA requires congressional consultation for strategic plans but not for annual performance plans. As essential components of the President’s budget development process, an Administration is likely to see biennial performance plans as documents captured under the established policy of administrative confidentiality prior to formal transmission of the President’s budget to the Congress. Moreover, because these biennial plans would accompany the President’s budget submission, they would likely become the basis for extensive discussions, both as authorizing committees prepare their views and estimates to submit to the Budget Committees and as part of the budget and appropriations process. The new requirement that agencies submit preliminary drafts of performance plans for the upcoming biennium to their committees of jurisdiction raises related but not identical issues. Currently, GPRA performance plans are expected to explicitly establish goals and indicators for each program activity in an agency’s budget request, thus allowing the Congress to associate proposed performance levels with requested budget levels. The proposal in this bill appears to require a similar level of specification almost a year before the President submits a budget for that period. It is unlikely that agencies would be able to provide any degree of specificity with this draft plan. The lengthening of the budget cycle might raise one additional question about the cycle for performance plans: Should there be updates in mid-biennium? Currently, GPRA allows but does not require updated performance plans, but that decision was made on the assumption of an annual cycle. Whether performance plans should be updated is part of two larger issues: (1) What is Congress’ view about changes in mid-biennium? and (2) Should GPRA be substantively changed during its initial phase-in cycle? Finally, S. 261 proposes that a biennial governmentwide performance report be submitted as part of the President’s biennial budget request. This report would compare “actual performance to the stated goals” as expressed in previous governmentwide performance plans. This proposal raises both substantive and operational questions. The underlying premise of GPRA is that the day-to-day activities of an agency should be directly tied to its annual and strategic goals. GPRA performance reports are to be linked, just as the goals and indicators of performance plans are linked, to an agency’s activities. A governmentwide performance report would need to be fundamentally different. If the Congress wishes to require such a report, careful consideration should be given both to its likely content and to its timing. As to content, the question arises: Would a governmentwide report become a report on selected national indicators, and how would they be selected? If the governmentwide performance report is envisioned not as a rollup of agency reports but rather as a broad report on how well government has performed, then the question arises as to whether it is tied most appropriately to the President’s budget, as proposed in S. 261, or to a narrative discussion associated with the consolidated financial statement required by the CFO Act of 1990, as amended. Mr. Chairman, we have previously testified that the decision to change the entire budget process to a biennial one is fundamentally a decision about the nature of congressional oversight. Biennial appropriations would be neither the end of congressional control nor the solution to many budget problems. Whether a biennial cycle offers the benefits sought will depend heavily on the ability of the Congress and the President to reach agreement on how to respond to the uncertainties inherent in a longer forecasting period and on the circumstances under which changes should be made in mid-biennium. If biennial appropriations bills are changed rarely, the planning advantages for those agencies that do not now have multiyear or advance appropriations may be significant. Whether a biennial cycle would in fact reduce congressional workload and increase the time for oversight is unclear. A great many policy issues present themselves in a budget context—one thinks of welfare reform and farm policy. It will take a period of adjustment and experimentation and the results are likely to differ across programs. Finally, we are pleased to see so much thought go into the integration of GPRA into this process. GPRA represents a thoughtful approach to systematizing serious and substantive dialogue about the purposes of government programs and how they operate. Today, I have raised some issues that I think need careful attention should you decide to move to a biennial budget process while GPRA is being implemented. I have tried to differentiate between those changes necessary for consistency with a biennial cycle and those which represent substantive changes to GPRA independent of such a change. We, of course, stand ready to assist you as you proceed. Performance Budgeting: Past Initiatives Offer Insights for GPRA Implementation (GAO/AIMD-97-46, March 27, 1997). Managing for Results: Using GPRA to Assist Congressional and Executive Branch Decisionmaking (GAO/T-GGD-97-43, February 12, 1997). High-Risk Series: An Overview (GAO/HR-97-1, February 1997). High-Risk Series: Quick Reference Guide (GAO/HR-97-2, February 1997). Budget Process: Issues in Biennial Budget Proposals (GAO/T-AIMD-96-136, July 24, 1996). Budget Issues: History and Future Directions (GAO/T-.Al.MD-95-214, July 13, 1996). Budget Process: Evolution and Challenges (GAO/T-AIMD-96-129, July 11, 1996). Managing for Results: Key Steps and Challenges In Implementing GPRA In Science Agencies (GAO/T-GGD/RCED-96-214, July 10, 1996). Correspondence to Chairman Horn, Information on Reprogramming Authority and Trust Funds (GAO/AIMD-96-102R, June 7, 1996). Executive Guide: Effectively Implementing the Government Performance and Results Act (GAO/GGD-96-118, June 1996). Budget and Financial Management: Progress and Agenda for the Future (GAO/T-AIMD-96-80, April 23, 1996). Managing for Results: Achieving GPRA’s Objectives Requires Strong Congressional Role (GAO/T-96-79, March 6, 1996). GPRA Performance Reports (GAO/GGD-96-66R, February 14, 1996). Financial Management: Continued Momentum Essential to Achieve CFO Act Goals (GAO/T-AIMD-96-10, December 14, 1995). Budget Process: Issues Concerning the Reconciliation Act (GAO/AIMD-95-3, October 7, 1995). Budget Account Structure: A Descriptive Overview (GAO/AIMD-95-179, September 18, 1995). Budget Issues: Earmarking in the Federal Government (GAO/AIMD-95-216FS, August 1, 1995). Budget Structure: Providing an Investment Focus in the Federal Budget (GAO/T-AIMD-95-178, June 29, 1995). Managing for Results: Status of the Government Performance and Results Act (GAO/T-GGD/AIMD-95-193, June 27, 1995). Managing for Results: Experiences Abroad Suggest Insights for Federal Management Reforms (GAO/GGD-95-120, May 2, 1995). Correspondence to Chairman Wolf, Transportation Trust Funds (GAO/AIMD-95-95R, March 15, 1995). Managing for Results: State Experiences Provide Insights for Federal Management Reforms (GAO/GGD-95-22, Dec. 21, 1994). Budget Policy: Issues in Capping Mandatory Spending (GAO/AIMD-94-155, July 18, 1994). Executive Guide: Improving Mission Performance Through Strategic Information Management and Technology (GAO/AIMD-94-115, May 1994). Budget Process: Biennial Budgeting for the Federal Government (GAO/T-AIMD-94-112, April 28, 1994). Budget Process: Some Reforms Offer Promise (GAO/T-AIMD-94-86, March 2, 1994). Budget Issues: Incorporating an Investment Component in the Federal Budget (GAO/AIMD-94-40, November 9, 1993). Budget Policy: Investment Budgeting for the Federal Government (GAO/T-AIMD-94-54, November 9, 1993). Correspondence to Chairmen and Ranking Members of House and Senate Committees on the Budget and Chairman of Former House Committee on Government Operations (B-247667, May 19, 1993). Performance Budgeting: State Experiences and Implications for the Federal Government (GAO/AFMD-93-41, February 17, 1993). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO discussed the provisions of S. 261, focusing on: (1) state experiences with biennial budgeting; and (2) provisions regarding GAO, the Budget Enforcement Act, and the Government Performance and Results Act (GPRA). GAO noted that: (1) in 1996, when GAO last looked at this data, 8 states had biennial legislative cycles and hence necessarily biennial budget cycles; (2) the 42 states with annual legislative cycles present a mixed picture in terms of budget cycles; (3) 27 describe their budget cycles as annual, 12 describe their budget cycles as biennial, and 3 describe their budget cycles as mixed; (4) perhaps significant is the fact that most states that describe their budget cycles as biennial or mixed are small and medium sized; (5) of the 10 largest states in terms of general fund expenditures, Ohio is the only with an annual legislative cycle and a biennial budget; (6) a few preliminary observations can be made from looking at the explicit design of those states which describe their budget cycle as "mixed" and the practice of those which describe their budget cycle as "biennial"; (7) in general, budgeting for those items which are predictable is different than for those items subject to great volatility whether due to the economy or changes in federal policy; (8) existing provisions of law requiring GAO to assist the Congress are sufficiently broad to encompass requests such as those envisioned in Section 8 of S. 261; (9) the bill explicitly modifies the rules for the pay-as-you-go scorecard in the Senate by specifying three time periods during which deficit neutrality is required: (a) the biennium covered by the budget resolution; (b) the first 6 years covered by the budget resolution; and (c) the 4 fiscal years after those first six; (10) S. 261 makes a number of changes to GPRA, most designed to make the requirements of GPRA consistent with the proposed biennial budget cycle, but others which seek to make substantive revisions to GPRA; (11) other changes in timelines proposed in S. 261 also appear consistent with GPRA requirements; (12) S. 261 also proposes several substantive changes to GPRA, including revised requirements for agency performance plans and new requirements for preliminary agency performance plans and governmentwide performance reports; (13) this bill proposes adding several new requirements to the annual agency performance plans currently required by GPRA beyond changing them to a biennial cycle, including: (a) adding an executive summary focusing on the most important goals of an agency, but limited to a maximum of 10 goals; and (b) requiring that the Congress be consulted during the preparation of these plans; and (14) the bill also adds a new reporting requirement for draft performance plans.

You are an expert at summarizing long articles. Proceed to summarize the following text: DOD recognizes that it is neither practical nor feasible to protect its entire infrastructure against every possible threat and, similar to DHS, it is pursuing a risk-management approach to prioritize resource and operational requirements. Risk management is a systematic, analytical process to determine the likelihood that a threat will harm assets, and then to identify actions to reduce risk and mitigate the consequences of the threat. While risk generally cannot be eliminated, enhancing protection from threats or taking actions—such as establishing backup systems or hardening infrastructure—to reduce the effect of an incident can serve to significantly reduce risk. DOD’s risk-management approach is based on assessing threats, vulnerabilities, criticalities, and the ability to respond to incidents. Threat assessments identify and evaluate potential threats on the basis of capabilities, intentions, and past activities before they materialize. Vulnerability assessments identify weaknesses that may be exploited by identified threats and suggest options that address those weaknesses. For example, a vulnerability assessment might reveal weaknesses in unprotected infrastructure, such as satellites, bridges, and personnel records. Criticality assessments evaluate and prioritize assets on the basis of their importance to mission success. For example, certain power plants, computer networks, or population centers might be identified as important to the operation of a mission-critical seaport. These assessments help prioritize limited resources while reducing the potential for expending resources on lower-priority assets. DOD’s risk-management approach also includes an assessment of the ability to respond to, and recover from, an incident. The amount of non-DOD infrastructure that DOD relies on to carry out missions has not been identified; however, it is immense. To date, DHS has identified about 80,000 items of non-DOD infrastructure, some of which is also critical to DOD. Additionally, according to the Office of the Deputy Under Secretary of Defense for Installations and Environment, DOD owns more than 3,700 sites with more than half a million real property assets worldwide that could also qualify as critical infrastructure. The methodology DOD uses to identify critical infrastructure involves linking DOD missions to supporting critical infrastructure. Figure 2 shows three representative types of DOD-owned and non-DOD-owned critical infrastructure. In 1998, the Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence was responsible for DOD’s critical infrastructure protection efforts; however, in September 2003, the Deputy Secretary of Defense moved this program to the newly established Office of the Assistant Secretary of Defense for Homeland Defense. DOD’s critical infrastructure efforts were formalized in August 2005 with the issuance of DOD Directive 3020.40, which established DCIP. On December 13, 2006, this office was renamed the Office of the Assistant Secretary of Defense for Homeland Defense and Americas’ Security Affairs. Shortly after the office became responsible for DOD’s critical infrastructure protection efforts in October 2003, ASD(HD&ASA) established the Defense Program Office for Mission Assurance in Dahlgren, Virginia, to manage the day-to-day activities of DCIP. The Program Office—now a Mission Assurance Division—was responsible for coordinating DCIP efforts across DOD components and sector lead agents, developing training and exercise programs, overseeing the development of analytical tools and standards to permit DOD-wide analyses, and developing a comprehensive system to track and evaluate critical infrastructure. DOD organizations that have significant DCIP roles and responsibilities are shown in figure 3. The COCOMs, in collaboration with the Joint Staff, identify and prioritize DOD missions that are the basis for determining infrastructure criticality. The military services, as the principal owners of DOD infrastructure, identify and link infrastructure to specific COCOM mission requirements. Defense sector lead agents address the interdependencies among infrastructure that cross organizational boundaries, and evaluate the cascading effects of degraded or lost infrastructure on other infrastructure assets. Further, DOD officials told us that DTRA performs infrastructure vulnerability assessments for the Joint Staff in support of DCIP to determine single points of failure from all hazards. DOD has taken some important steps to implement DCIP; however, it has not developed a comprehensive management plan to guide its efforts. Although an ASD(HD&ASA) official told us they are preparing an outline for a plan to implement DCIP, it is unclear the extent to which such a plan will address key elements associated with sound management practices, including issuing guidance, coordinating program stakeholders’ efforts, and identifying resource requirements. DOD has been slow finalizing DCIP guidance and policies. As of May 2007, most of DOD’s DCIP guidance and policies were either newly issued or still in draft, which has resulted in DOD’s components pursuing varying approaches to implement DCIP. DOD has taken steps to improve information sharing and coordination within and outside of DOD. Finally, through DOD’s budget process, DCIP has received over $160 million from fiscal years 2004 to 2007. Of this amount, the components and sector lead agents have received $68.6 million, of which about 21 percent is from supplemental appropriations. Our prior work has shown that supplemental funding is not an effective means for decision makers to effectively and efficiently plan for future years resource needs, weigh priorities, and assess budget trade-offs. Until DOD completes a comprehensive management plan to implement DCIP, which includes issuing remaining DCIP guidance and fully identifying funding requirements, its ability to implement DCIP will be challenged. While our prior work has shown that issuing timely guidance is a key element of sound management, as of May 2007, the majority of DCIP guidance and policies were either newly issued or still in draft form, more than 3½ years after the Deputy Secretary of Defense assigned DCIP to ASD(HD&ASA) in September 2003 (see table 1). In the absence of finalized guidance and policies, DOD components have been pursuing varying approaches to implement their critical infrastructure programs, a condition that has not changed markedly with the issuance of several guidance documents in the past year. According to officials responsible for the critical infrastructure programs from several of the DOD components, they were either unaware that the guidance had been finalized or had decided to continue the approach they had previously adopted. Although DOD issued a DCIP directive in August 2005, ASD(HD&ASA) lacks a chartering directive that, among other things, clearly defines important roles, responsibilities, and relationships with other DOD organizations and missions—including the relationship between ASD(HD&ASA) and the Assistant Secretary of Defense for Special Operations and Low-Intensity Conflict and Interdependent Capabilities. At present, responsibility for antiterrorism guidance resides with the Assistant Secretary of Defense for Special Operations and Low-Intensity Conflict and Interdependent Capabilities. A memorandum entitled Implementation Guidance Regarding the Office of the Assistant Secretary of Defense for Homeland Defense issued by the Deputy Secretary of Defense in March 2003 required the Director of Administration and Management within the Office of the Secretary of Defense to develop and coordinate within 45 days a chartering DOD Directive that would define, among other things, the relationship between ASD(HD&ASA) and the Assistant Secretary of Defense for Special Operations and Low-Intensity Conflict and Interdependent Capabilities. However, more than 4 years later, this chartering DOD directive still has not been accomplished. Currently, DCIP implementation is diffused among program stakeholders, such as the COCOMs and the military services. As a consequence, some components, such as the U.S. Northern Command and U.S. Special Operations Command, leveraged DOD’s antiterrorism guidance to develop critical infrastructure programs, while other components, such as the U.S. Strategic Command and U.S. European Command, have kept the two programs separate. Until DOD addresses the need for a chartering directive to properly identify the relationship between DCIP and the antiterrorism program, and sets timelines for finalizing its remaining guidance, it cannot be assured that components and sector lead agents identify, prioritize, and assess their critical infrastructure in a consistent manner. This lack of consistency could impair DOD’s ability to perform risk-based decision making across component lines over the long term. Existing DCIP guidance emphasizes information sharing and collaboration with relevant government and private-sector entities. While DOD has taken steps to facilitate information sharing and coordination within the department, as well as with other federal agencies and private sector companies, we believe additional measures could be taken, such as greater cooperation with federal-level counterparts on the identification, prioritization, and assessment of critical infrastructure. Since 2003, ASD(HD&ASA) has established and sponsored several information sharing and coordination forums, such as the Defense Infrastructure Sector Council and Critical Infrastructure Program Integration Staff. The Defense Infrastructure Sector Council provides a recurring forum for DCIP sector lead agents to share information, identify common areas of interest, and leverage the individual activities of each sector to eliminate duplication. The Critical Infrastructure Program Integration Staff is comprised of representatives from more than 30 DOD organizations. Additionally, ASD(HD&ASA) maintains an Internet site that is used to post relevant information, such as policies, available training, and announcement of meetings and conferences. ASD(HD&ASA) also is a member of several critical infrastructure forums whose membership extends beyond DOD, such as the Homeland Infrastructure Foundation Level Database Working Group, and several Critical Infrastructure Partnership Advisory Council Committees, including those pertaining to communications, electricity, and dams. In another effort to coordinate DOD components’ and sector lead agents’ critical infrastructure protection practices, DOD released, in September 2006, its DCIP Geospatial Data Strategy, which lays out a standardized approach to depict geographically critical infrastructure data. Both DHS and DOD officials acknowledged the potential benefits of increasing collaborative efforts, particularly with respect to critical infrastructure identification, tracking, and assessing. To promote clear and streamlined communication, ASD(HD&ASA) has directed DOD components and sector lead agents to channel their interactions with DHS through them. However, with the exception of the Health Affairs and Financial Services defense sectors, there has been little to no coordination between the defense sectors and their corresponding federal-level critical infrastructure sector counterparts due to the immaturity of the program. Table 2 shows the defense-level sectors that are comparable to those at the federal level. DOD components are collecting different data to track and monitor their critical infrastructure to meet the needs of DCIP as well as their own, which could impede information sharing and analysis over time, and hinder DOD’s ability to identify and prioritize critical infrastructure across DOD components and sector lead agents. ASD(HD&ASA) guidance on how DOD components and sector lead agents should track and monitor their critical infrastructure is in various stages of development and review. For example, in May 2006, ASD(HD&ASA) issued a draft version of the DCIP Data Collection Essential Elements of Information Data Sets requiring DOD components and sector lead agents to collect a common set of data on their critical infrastructure. However, officials from several of the COCOMs and defense sectors told us that they have not incorporated the DCIP Data Collection Essential Elements of Information Data Sets into their data collection efforts because the guidance has not been finalized. These officials further stated that they are following departmental guidance not specific to DCIP that pertains to database interoperability and data sharing. During fiscal year 2006, ASD(HD&ASA) tasked the Mission Assurance Division to develop the capability to geospatially display DOD components’ and sector lead agents’ critical infrastructure and interdependencies. The Mission Assurance Division has received and modeled critical infrastructure data from several defense sector lead agents, but according to division officials, the combination of funding constraints and the components and sector lead agents independently acquiring technical support for their individual critical infrastructure programs, has limited its utility. In an effort to maximize the potential information DOD could receive about critical infrastructure it does not own, DOD officials told us that they plan to obtain Protected Critical Infrastructure Information (PCII) accreditation from DHS. The PCII program was established by DHS pursuant to the Critical Infrastructure Information Act of 2002. The act provides that critical infrastructure information that is voluntarily submitted to DHS for use by DHS regarding the security of critical infrastructure and protected systems, analysis, warning, interdependency study, recovery, reconstitution, or other informational purpose, when accompanied with an express statement, shall receive various protections, including exemption from disclosure under the Freedom of Information Act. If such information is validated by DHS as PCII, then the information can only be shared with authorized users. Before accessing and storing PCII, organizations or entities must be accredited and have a PCII officer. Authorized users can request access to PCII on a need-to-know basis, but users outside of DHS do not have the authority to store PCII until their agency is accredited. However, the lack of accreditation does not otherwise prevent entities from sharing information directly with DOD. For example, in the aftermath of September 11, 2001, the Association of American Railroads began prioritizing railroad assets and vulnerabilities— information that it shares with DOD—on the more than 30,000 miles of commercial rail line used to transport defense critical assets. DOD officials told us that DOD has not yet fully evaluated the costs and benefits of accreditation for its purposes. We noted in our April 2006 report that nonfederal entities continued to be reluctant to provide their sensitive information to DHS because they were not certain that their information will be fully protected, used for future legal or regulatory action, or inadvertently released. Since our April report, DHS published on September 1, 2006, its final rule implementing the act, but we have not examined whether nonfederal entities are more willing to provide sensitive information to DHS under the act at this time, or DOD’s cost to apply for, receive, and maintain accreditation. It is unclear to us, at this time, the extent to which obtaining accreditation would be beneficial to DOD when weighed against potential costs. DCIP has received about $160 million from fiscal years 2004 to 2007, through DOD’s budget process. Of this amount, ASD(HD&ASA) received approximately $86.8 million, while the Joint Staff received approximately $5.3 million. The DOD components and sector lead agents, which are responsible for identifying critical infrastructure, received $68.5 million during the same 4-year period, of which $14.3 million (about 21 percent of the component and sector lead agents’ combined funding) has come from supplemental appropriations. Figures 4 and 5 show how much DCIP funding was received by the components and sector lead agents during fiscal years 2004 to 2007. The extent to which individual components and sector lead agents relied on supplemental funding for their critical infrastructure programs varied by fiscal year. In fiscal year 2005, for example, both the U.S. Special Operations Command and the Health Affairs defense sector did not receive any programmed funding and relied exclusively on supplemental appropriations. The Defense Intelligence Agency, the lead agent for the Intelligence, Surveillance, and Reconnaissance defense sector, received 78 percent of its fiscal year 2005 critical infrastructure funding from supplemental appropriations. Likewise, the U.S. Northern Command received almost three-quarters (72 percent) of its critical infrastructure funding from supplemental appropriations in fiscal year 2006. Management control standards contained in the Standards for Internal Control in the Federal Government and sound management practices emphasize the importance of effective and efficient resource use. Relying on supplemental funding to varying degrees for their DCIP budget prevents the components and sector lead agents from effectively planning future years’ resource needs, weighing priorities, and assessing budget trade-offs. DCIP funding has been centralized in ASD(HD&ASA) since fiscal year 2004; however, beginning in fiscal year 2008, the military departments will be required to fund service critical infrastructure programs as well as the nine COCOM critical infrastructure programs. According to DOD Directive 3020.40, the military departments and COCOMs are required to provide resources for programs supporting DCIP. This responsibility is reiterated and amplified in a memorandum from the Principal Deputy Assistant Secretary of Defense for Homeland Defense that instructs the military departments and the COCOMs to include DCIP funding in their fiscal year 2008 to 2013 budget submissions. ASD(HD&ASA) will continue to fund defense sector critical infrastructure programs for fiscal years 2008 and 2009, and ASD(HD&ASA) officials stated that they will work with the defense sector lead agents to obtain funding through the lead agents’ regular budget process, beginning in fiscal year 2010. Including DCIP in the lead agents’ baseline budgets should reduce reliance on supplemental appropriations to implement critical infrastructure responsibilities. Overall DCIP funding received (fiscal years 2004 to 2007), and requested (fiscal years 2008 to 2013) is shown in figure 6. If DCIP is funded at requested levels in future years, then it will represent a substantial increase over current actual funding levels. However, in previous years, DCIP consistently has been funded at less than the requested amounts. For example, in fiscal year 2005, the military services collectively requested approximately $8 million in DCIP funding from ASD(HD&ASA) and received $2.1 million. That year, the military services also received an additional $2.3 million in supplemental appropriations, raising their total funding in fiscal year 2005 to $4.4 million, which is approximately 55 percent of what was requested. Even if DCIP funding is substantially increased, without a comprehensive management plan in place, it is not clear that the funds would be allocated to priority needs. DOD estimates that it has identified about 25 percent of the critical infrastructure it owns, and expects to finish identifying the remaining 75 percent by the end of fiscal year 2009. DOD has identified considerably less of its critical infrastructure owned by non-DOD entities, and has not set a target date for its completion. A principal reason why DOD has not identified a greater amount of its critical infrastructure is the lack of timely DCIP guidance and policies, which has resulted in DOD’s components pursuing varying approaches in identifying their critical infrastructure. DOD has been performing a limited number of vulnerability assessments on DOD-owned infrastructure; however, until DOD identifies and prioritizes all of the critical infrastructure it owns, results have questionable value for deciding where to target funding investments. Currently, DOD includes the vulnerability assessment of DOD-owned infrastructure as a module to an existing assessment. However, it has not formally adopted this practice DOD-wide, which would reduce the burden on installation personnel and asset owners. Moreover, DOD does not have a mechanism to flag domestic mission-critical infrastructure for DHS to consider including among its assessments of the nation’s critical infrastructure, and has delayed coordinating the assessments of non-DOD critical infrastructure located abroad. DOD has not identified funding to remediate vulnerabilities identified through the assessment process. DOD estimates that it has identified about 25 percent of the critical infrastructure it owns, and ASD(HD&ASA) officials anticipate identifying all DOD-owned critical infrastructure (estimated to be about 15 percent of the total) by the fiscal year 2008–2009 time frame. DOD has identified considerably less critical infrastructure that it does not own (estimated to be about 85 percent of the total), but that it relies upon to perform its missions (see fig. 7). Without knowing how much non-DOD-owned infrastructure is mission critical, ASD(HD&ASA) officials were unable to estimate how much of the non-DOD infrastructure has already been identified or a completion date. DOD has determined that a small portion of the non-DOD infrastructure— about 200 assets—that belongs to the defense industrial base sector are mission critical. The Mission Assurance Division developed a database to track and geospatially display defense critical infrastructure both within the United States and overseas, and its associated interdependencies. According to Mission Assurance Division officials, the willingness of DOD components to share their critical infrastructure information has varied. For example, division officials told us that the defense sectors have been more forthcoming than either the military services or the COCOMs. Consequently, the database provides an incomplete view of defense critical infrastructure, which significantly reduces DOD’s ability to analyze the importance of infrastructure across the components and sector lead agents. ASD(HD&ASA) officials are aware that several of the DOD components and sector lead agents have developed databases to track their specific infrastructure. For example, the Air Force, Marine Corps, Health Affairs sector, Space sector and Personnel sector have each developed their own databases. According to ASD(HD&ASA) officials, they are focusing on ensuring compatibility among the databases rather than prescribing a central database. Until DOD identifies the remaining portion of its critical infrastructure, including the portion owned by non- DOD entities, it cannot accurately prioritize and assess the risks associated with that infrastructure. Table 3 shows the amount of infrastructure assets—rounded to the nearest hundred—that the DOD components have provisionally identified as critical as of December 2006. DOD officials cautioned that not all of this information has been validated and is subject to change. For example, some infrastructure may be counted more than once due to components performing multiple missions or being assigned dual roles. The numbers in table 3 are presented to provide an order of magnitude. According to the Standards for Internal Control in the Federal Government, appropriate policies and procedures should exist with respect to an agency’s planning and implementation activities. The length of time DOD has taken to issue DCIP guidance and policies has resulted in components pursuing varying approaches in identifying and prioritizing critical infrastructure, approaches that may not be complementary. For example, Navy officials told us that, prior to 2004, they were basing infrastructure criticality on its importance to Operation Enduring Freedom, whereas Army officials indicated that they are using wartime planning scenarios based on the 2006 Quadrennial Defense Review to determine criticality. The COCOMs and the Joint Staff are basing infrastructure criticality on its importance in accomplishing individual COCOM mission requirements—an idea proposed by the Mission Assurance Division. In 2003, the Mission Assurance Division proposed linking infrastructure criticality with COCOM mission requirements, and Joint Staff officials stated that a preliminary list has been formulated and will undergo further review in 2007. Furthermore, defense sector lead agents, such as Financial Services and Personnel, are identifying all of their infrastructure regardless of COCOM mission requirements. These variations in approaches used to determine criticality exist because DOD’s published policy, the DCIP Criticality Process Guidance Document, which directs the components and sector lead agents to use one set of criteria—COCOM mission requirements—was not finalized until December 2006. DOD has begun conducting a limited number of infrastructure vulnerability assessments on the infrastructure it owns. Between calendar years 2004 and 2007, DTRA will have conducted approximately 361 antiterrorism vulnerability assessments, 45 (about 12 percent) of which will include an assessment of critical infrastructure. Which installations receive antiterrorism vulnerability assessments with a module that focuses on critical infrastructure is based on perceived infrastructure criticality, as determined by the Joint Staff in coordination with the COCOMs, and to a lesser extent the military services. However, we believe DOD cannot effectively target infrastructure vulnerability assessments without first identifying and prioritizing its mission-critical infrastructure. Depending on the amount of infrastructure that DOD deems critical, it may not be able to perform an on-site assessment of every DOD asset. To address this limitation, ASD(HD&ASA) officials told us that they plan to implement a self-assessment program that the military services—the infrastructure owners—can conduct in lieu of or in between the scheduled vulnerability assessments. DOD is in the process of developing a vulnerability self- assessment handbook that would provide guidance on how to conduct these assessments but, as of May 2007, a release date had not been set. To reduce the burden of multiple assessments on installation personnel and asset owners, in 2005, DOD incorporated an all-hazards infrastructure assessment module into its existing antiterrorism vulnerability assessments. Including the vulnerability assessment of DOD infrastructure in an established assessment program, such as the one that exists for antiterrorism, has not been formally adopted as a departmentwide practice. Unless this practice is adopted, it is possible that infrastructure assessments could be conducted independently, thereby increasing the burden on installation personnel and asset owners that the modular approach alleviates. Beginning in calendar year 2006, the Air Force piloted its own critical infrastructure assessments at those Air Force installations not receiving DTRA-led vulnerability assessments. The Air Force completed two of these pilot critical infrastructure assessments in 2006, and has nine additional assessments planned in 2007. Unlike the DTRA-led assessments, the Air Force pilot assessments are based on risk rather than vulnerabilities. We did not examine the quality or the sources of the threat, asset criticality, and vulnerability data that the Air Force is using to perform its risk assessments. We did not evaluate the effectiveness of either the DTRA-led or Air Force assessments as part of our review. DOD is not in a position to address domestic, non-DOD, mission-critical infrastructure, with the exception of defense industrial base assets and transportation infrastructure supporting seaports and airports, much less perform vulnerability assessments on them. DHS conducts on-site vulnerability assessments of domestic non-DOD-owned critical infrastructure and has developed a model that enables owners of private- sector critical infrastructure to perform vulnerability self-assessments. DOD currently does not have a mechanism to flag mission-critical infrastructure for DHS to consider including among its assessments of the nation’s critical infrastructure. For example, if DOD knew that DHS was planning to conduct a vulnerability assessment of critical infrastructure in the Atlanta, Georgia, area, it could flag for DHS’s consideration privately- owned infrastructure that DOD deemed critical—such as an electrical substation or a railroad junction. Officials from both agencies expressed an interest in coordinating vulnerability assessments of non-DOD-owned critical infrastructure. DOD has delayed coordinating the assessments of non-DOD-owned infrastructure located abroad because it has decided to focus on identifying infrastructure that it owns. For example, U.S. European Command and U.S. Central Command officials stated that they are concentrating on identifying critical infrastructure located on their installations. In addition, DTRA officials pointed out that gaining access to relevant information about foreign-owned infrastructure is more challenging than for infrastructure owned domestically. Future DCIP funding requests may be understated because current funding levels, including supplemental appropriations, do not include the resources that may be needed to remediate vulnerabilities. Our prior work has shown the importance of identifying all program costs to enable decision makers to weigh competing priorities. According to critical infrastructure officials from several DOD components and sector lead agents, there is insufficient funding to remediate vulnerabilities identified through the assessment process. Remediation in the form of added protective measures, backup systems, hardening infrastructure against perceived threats, and building redundancy could be costly. As a point of reference, the Joint Staff spent $233.7 million from fiscal years 2004 through 2007 to correct high-priority antiterrorism vulnerabilities—more than the $160 million spent on all DCIP activities over this same period. Additionally, these antiterrorism remediation expenditures were for DOD- owned assets only and do not reflect costs to remediate vulnerabilities to infrastructure not owned by DOD. In 2000, the Congress directed the Secretary of Defense to establish a loan guarantee program that makes a maximum of $10 million loan principal guarantee available each fiscal year for qualified commercial firms to improve the protection of their critical infrastructure at their facilities or refinance improvements previously made. Once DOD identifies the critical infrastructure it relies on but does not own and its associated vulnerabilities, this program could potentially be utilized to help qualified commercial firms obtain funding for remediation. DOD depends on critical infrastructure to project, support, and sustain its forces and operations worldwide, but its lack of a comprehensive management plan to guide its efforts that addresses guidance, coordination of program stakeholders’ efforts, and resource requirements, has prevented the department from effectively implementing an efficient critical infrastructure program. ASD(HD&ASA) has overseen DCIP since September 2003; however, because key DCIP guidance has either recently been issued or remains in draft more than 3½ years later, DOD components have been pursuing different approaches to fulfill their DCIP missions—approaches that are not optimally coordinated and may conflict with each other or their federal-level counterparts. Moreover, because the relationship between the Directorates for HD&ASA and Special Operations and Low-Intensity Conflict and Interdependent Capabilities regarding the DCIP and antiterrorism missions remains undefined, some components are relying on antiterrorism guidance to implement their critical infrastructure programs while others take different approaches. Furthermore, some DCIP funding for the components and sector lead agents has come from supplemental appropriations, which, as we have reported previously, is not a reliable means for decision makers to effectively and efficiently assess resource needs. Until DOD develops a comprehensive management plan for DCIP—that includes timelines for finalizing remaining guidance and actions to improve information sharing, its ability to implement DCIP will be challenged. In addition, until DOD identifies and prioritizes what infrastructure is critical, the utility of vulnerability assessments is limited in targeting funding and investments and could lead to an inefficient use of DOD resources. Combining the infrastructure vulnerability assessment with an existing assessment, as DOD is currently doing on infrastructure that it owns, has the added advantage of reducing the burden of multiple assessments on installation personnel and asset owners. However, because DOD has not formally adopted this modular approach as a DOD- wide practice, the possibility exists that infrastructure vulnerability could be assessed separately. Still, to date, no DCIP funds have been spent on reducing vulnerabilities to infrastructure. Remediation of risk identified in the assessment process could be costly—possibly more than doubling current identified funding requirements. Finally, by not coordinating with DHS on vulnerability assessments of non-DOD domestic infrastructure, DOD is missing an opportunity to increase awareness of matters affecting the availability of assets that it relies on but does not control. When DOD components and sector lead agents consistently identify, prioritize, and assess their critical infrastructure, as well as including the remediation of vulnerabilities in their funding requirements, DOD’s ability to perform risk- based decision making and target funding to priority needs will be improved. To guide DCIP implementation, we recommend that the Secretary of Defense direct ASD(HD&ASA) to develop and implement a comprehensive management plan that addresses guidance, coordination of stakeholders’ efforts, and resources needed to implement DCIP. Such a plan should include establishing timelines for finalizing the DCIP Data Collection Essential Elements of Information Data Sets to enhance the likelihood that DOD components and sector lead agents will take a consistent approach in implementing DCIP. To implement the intent of the Deputy Secretary of Defense’s memorandum Implementation Guidance Regarding the Office of the Assistant Secretary of Defense for Homeland Defense dated March 25, 2003, we recommend that the Secretary of Defense direct the Director of Administration and Management to issue a chartering directive to, among other things, define the relationship between the Directorates for HD&ASA and Special Operations and Low-Intensity Conflict and Interdependent Capabilities. As part of this comprehensive management plan, to increase the likelihood that the defense sector lead agents are able to make effective budgetary decisions, we recommend that the Secretary of Defense direct ASD(HD&ASA) to assist the defense sector lead agents in identifying, prioritizing, and including DCIP funding requirements through the regular budgeting process beginning in fiscal year 2010. In addition, as part of developing a comprehensive management plan for DCIP, we recommend that the Secretary of Defense direct ASD(HD&ASA), in coordination with the DOD components and sector lead agents, to determine funding levels and sources needed to avoid reliance on supplemental appropriations and identify funding for DCIP remediation. We further recommend that the Secretary of Defense direct ASD(HD&ASA) to take the following actions to increase the utility of vulnerability assessments: Complete the identification and prioritization of critical infrastructure before increasing the number of infrastructure vulnerability assessments performed. Adopt the practice of combining the defense critical infrastructure vulnerability assessment module with an existing assessment as the DOD-wide practice. Issue guidance and criteria for performing infrastructure vulnerability self-assessments. Identify and prioritize domestic non-DOD-owned critical infrastructure for DHS to consider including among its assessments of the nation’s critical infrastructure. In written comments on a draft of this report, DOD concurred with all of our recommendations. DOD also provided us with technical comments, which we incorporated in the report, as appropriate. DOD’s comments are reprinted in appendix II. DHS also was provided with an opportunity to comment on a draft of this report, but informed us that it had no comments. In its written comments, DOD stated that it expects to issue its DCIP management plan by September 2007 and a chartering directive for ASD(HD&ASA) by July 2007—guidance that we believe will contribute to a more efficient and effective critical infrastructure program. Although DOD did not describe the contents of the management plan, we encourage the department to address points raised in our report—guidance, coordination of stakeholders’ efforts, and resource requirements. DOD concurred with our recommendations pertaining to infrastructure vulnerability assessments. Specifically, it agreed to identify and prioritize all DOD-owned critical infrastructure before increasing the number of assessments; to codify the practice of combining the infrastructure assessment with an existing vulnerability assessment, thereby reducing the burden of multiple assessments on installation personnel and asset owners; and to issue self-assessment guidance and criteria. In its comments, DOD stated that vulnerability assessments are a valid tool to address risk and support risk management decisions, and that delaying these assessments until all assets are identified—projected in fiscal year 2009—is unadvisable. While we agree that infrastructure vulnerability assessments can reveal exploitable weaknesses, without evaluating the capabilities, intentions, or probability of occurrence of human and natural threats, as well as the importance of a particular asset to accomplishing the mission, reducing vulnerabilities may result in little, if any, risk reduction. We agree with the department that it should continue to perform infrastructure vulnerability assessments, but believe that increasing the number of assessments performed above current levels will have limited value without considering threat and asset criticality. With respect to our recommendation on vulnerability self-assessments, DOD’s expectation that installation personnel and asset owners have the expertise and resources to apply standards and criteria that mirror what DTRA is using to perform its DCIP vulnerability assessments may be unrealistic. We believe that DOD’s earlier approach of preparing a self- assessment handbook tailored to meet a range of installation and asset requirements and capabilities will likely result in more and higher-quality self-assessments. DOD also agreed with our recommendation to identify and prioritize non-DOD-owned domestic infrastructure for DHS to consider including among its assessments of the nation’s critical infrastructure. We expect that this action will increase DOD’s awareness of vulnerabilities associated with infrastructure that it relies on but does not control. As agreed with your offices, we are sending copies of this report to the Chairman and Ranking Member of the Senate and House Committees on Appropriations, Senate and House Committees on Armed Services, and other interested congressional parties. We also are sending copies of this report to the Secretary of Defense; the Secretary of Homeland Security; the Director, Office of Management and Budget; and the Chairman of the Joint Chiefs of Staff. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-5431 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To conduct our review of the Department of Defense’s (DOD) Defense Critical Infrastructure Program (DCIP), we obtained relevant documentation and interviewed officials from the following DOD organizations: Office of the Secretary of Defense Under Secretary of Defense for Personnel and Readiness, Under Secretary of Defense for Acquisition, Technology, and Logistics, Office of the Deputy Under Secretary of Defense for Industrial Policy; Under Secretary of Defense for Intelligence, Counterintelligence & Security, Physical Security Programs; DOD Counterintelligence Field Activity, Critical Infrastructure Protection Program Management Directorate; Under Secretary of Defense (Comptroller)/Chief Financial Officer; Deputy Under Secretary of Defense for Installations and Environment, Business Enterprise Integration Directorate; Assistant Secretary of Defense for Homeland Defense and Americas’ Security Affairs (ASD), Critical Infrastructure Protection Office; Assistant Secretary of Defense for Special Operations and Low- Intensity Conflict and Interdependent Capabilities, Antiterrorism Policy; Assistant Secretary of Defense for International Security Policy, Deputy Assistant Secretary of Defense for Forces Policy, Office of Space Policy; Assistant Secretary of Defense for Health Affairs, Force Health Protection & Readiness; and Assistant Secretary of Defense for Networks and Information Integration, Information Management & Technology Directorate; Joint Staff, Directorate for Operations, Antiterrorism and Homeland Defense Threat Reduction Agency (DTRA), Combat Support Department of the Army, Asymmetric Warfare Office, Critical Infrastructure Risk Management Branch; Office of the Chief Information Officer; Mission Assurance Division, Naval Surface Warfare Center, Dahlgren Division, Dahlgren, Virginia; Department of the Air Force, Air, Space and Information Operations, Plans, and Requirements, Homeland Defense Division; and Headquarters, U.S. Marine Corps, Security Division, Critical Headquarters, U.S. Central Command, Defense Critical Infrastructure Program Office, MacDill Air Force Base, Florida; Headquarters, U.S. European Command, Critical Infrastructure Protection Program Office, Patch Barracks, Germany; Headquarters, U.S. Joint Forces Command, Critical Infrastructure Protection Office, Norfolk, Virginia; Headquarters, U.S. Northern Command, Force Protection/Mission Assurance Division, Peterson Air Force Base, Colorado; Headquarters, U.S. Pacific Command, Critical Infrastructure Protection Plans & Policy Office, Camp H.M. Smith, Hawaii; Headquarters, U.S. Southern Command, Joint Operations Support Division, Miami, Florida; Headquarters, U.S. Special Operations Command, Mission Assurance Division, MacDill Air Force Base, Florida; Headquarters, U.S. Strategic Command, Mission Assurance Division, Offutt Air Force Base, Nebraska; and Headquarters, U.S. Transportation Command, Critical Infrastructure Program, Scott Air Force Base, Illinois; Headquarters, Defense Intelligence Agency, Office for Critical Infrastructure Protection & Homeland Security/Defense; Headquarters, Defense Information Systems Agency, Critical Headquarters, Defense Finance and Accounting Service, Critical Infrastructure Protection Program Office, Indianapolis, Indiana; Headquarters, Defense Logistics Agency, Logistics Sector Critical Headquarters, U.S. Army Corps of Engineers, Directorate of Military Under Secretary of Defense for Personnel and Readiness, Assistant Secretary of Defense for Health Affairs, Directorate of Force Health Protection & Readiness; Headquarters, U.S. Transportation Command, Critical Infrastructure Program, Operations Directorate, Scott Air Force Base, Illinois; and Headquarters, U.S. Strategic Command, Mission Assurance Division, Offutt Air Force Base, Nebraska. To evaluate the extent to which DOD has developed a comprehensive management plan to implement DCIP, we reviewed and analyzed policies, assurance plans, strategies, handbooks, directives, and instructions, and met with officials from each of the military services, combatant commands (COCOM) (hereafter referred to as “DOD components”), and the defense sector lead agents, as well as the Joint Staff. We compared DOD’s current approach to issuing guidance, stakeholder coordination, and resource requirements to management control standards contained in the Standards for Internal Control in the Federal Government. We also attended the August 2006 DCIP tabletop exercise sponsored by the Defense Intelligence Agency, and the October 2006 Homeland Infrastructure Foundation Level Database Working Group meeting. We met with representatives from ASD(HD&ASA), the Joint Staff, and several offices within the Office of the Secretary of Defense assigned DCIP responsibilities in DOD Directive 3020.40, Defense Critical Infrastructure Protection (DCIP), as well as the Office of the Assistant Secretary of Defense for Special Operations and Low-Intensity Conflict and Interdependent Capabilities. Further, we met with officials from the Department of Homeland Security’s (DHS) Office of Infrastructure Protection to discuss mechanisms to coordinate and share critical infrastructure information with DOD. To determine DCIP funding levels for fiscal years 2004 through 2013, we met with officials from ASD(HD&ASA) and each of the DOD components and sector lead agents, and analyzed actual and projected funding data. We also met with an official from the Office of the Under Secretary of Defense (Comptroller)/Chief Financial Officer familiar with DCIP. Additionally, we obtained information from the Joint Staff on funds expended to remediate high-priority antiterrorism vulnerabilities to illustrate the potential cost of critical infrastructure remediation. We found the data provided by DOD to be sufficiently reliable for representing the nature and extent of DCIP funding. To evaluate the extent to which DOD has identified, prioritized, and assessed its critical infrastructure, we met with officials and obtained relevant documentation from each of the DOD components, sector lead agents, ASD(HD&ASA), the Joint Staff, and the Mission Assurance Division. We examined various data collection instruments and databases DOD components and sector lead agents are using to catalog, track, and map infrastructure, including the Mission Assurance Division’s database, the Air Force’s Critical Asset Management System, the Health Affairs defense sector’s Primary Health Assets Staging Tool, the Personnel defense sector’s Characterization and Dependency Analysis Tool, and the Space defense sector’s Strategic Mission Assurance Data System. We also received a demonstration of DHS’s National Asset Database, which catalogs the nation’s infrastructure. We did not verify the accuracy of infrastructure provisionally identified as critical by the DOD components and sector lead agents because the data is incomplete and, has not been validated by the department. Further, we did not verify the interoperability of these databases because it was outside the scope of our review. We met with DTRA officials to obtain information on the scope, conduct, and results of infrastructure vulnerability assessments. We also met with Air Force officials to discuss their infrastructure risk assessments. We did not evaluate the effectiveness of either the DTRA-led or Air Force assessments as part of our review. Finally, to become familiar with prior work relevant to defense critical infrastructure, we met in Arlington, Virginia, with officials from the George Mason University School of Law’s Critical Infrastructure Protection Program and in Washington, D.C., with the Congressional Research Service (Resources, Science, and Industry Division and Foreign Affairs, Defense, and Trade Division). We conducted our review from June 2006 through May 2007 in accordance with generally accepted government auditing standards. Mark A. Pross, Assistant Director; Burns D. Chamberlain; Alissa Czyz; Michael Gilmore; Cody Goebel; James Krustapentus; Kate Lenane; Thomas C. Murphy; Maria-Alaina Rambus; Terry Richardson; Jamie A. Roberts; Marc Schwartz; and Tim Wilson made key contributions to this report.

The Department of Defense (DOD) relies on a network of DOD and non-DOD infrastructure assets in the United States and abroad so critical that its unavailability could hinder DOD's ability to project, support, and sustain its forces and operations worldwide. DOD established the Defense Critical Infrastructure Program (DCIP) to identify and assure the availability of mission-critical infrastructure. GAO was asked to evaluate the extent to which DOD has (1) developed a comprehensive management plan to implement DCIP and (2) identified, prioritized, and assessed its critical infrastructure. GAO analyzed relevant DCIP documents and guidance and met with officials from more than 30 DOD organizations that have DCIP responsibilities, and with Department of Homeland Security (DHS) officials involved in protecting critical infrastructure. While DOD has taken important steps to implement DCIP, it has not developed a comprehensive management plan to guide its efforts. GAO's prior work has shown the importance of developing a plan that incorporates sound management practices, such as issuing guidance, coordinating stakeholders' efforts, and identifying resource requirements and sources. Most of DOD's DCIP guidance and policies are either newly issued or in draft form, leading some DOD components to rely on other, better-defined programs, such as the antiterrorism program, to implement DCIP. Although DOD issued a DCIP directive in August 2005, the lead office responsible for DCIP lacks a chartering directive that defines important roles, responsibilities, and relationships with other DOD organizations and missions. DOD has created several information sharing and coordination mechanisms; however, additional measures could be taken. Also, DOD's reliance on supplemental appropriations to fund DCIP makes it difficult to effectively plan future resource needs. Until DOD completes a comprehensive DCIP management plan, its ability to implement DCIP will be challenged. DOD estimates that it has identified about 25 percent of the critical infrastructure it owns, and expects to identify the remaining 75 percent by the end of fiscal year 2009. In contrast, DOD has identified significantly less of the critical infrastructure that it does not own, and does not have a target date for its completion. Among the non-DOD-owned critical infrastructure that has been identified are some 200 assets belonging to private sector companies that comprise the defense industrial base--the focus of another report we plan to issue later this year. DOD estimates that about 85 percent of its mission-critical infrastructure assets are owned by non-DOD entities, such as the private sector; state, local, and tribal governments; and foreign governments. DOD has conducted vulnerability assessments on some DOD-owned infrastructure. While these assessments can provide useful information about specific assets, until DOD identifies and prioritizes all of the critical infrastructure it owns, assessment results have limited value for deciding where to target funding investments. For the most part, DOD cannot assess assets it does not own, and DOD has not coordinated with DHS to include them among DHS's assessments of the nation's critical infrastructure. DOD has delayed coordinating the assessment of non-DOD-owned infrastructure located abroad while it focuses on identifying the critical infrastructure that it does own. Regarding current and future DCIP funding levels, they do not include the cost to remediate vulnerabilities that are identified through the assessments. When DOD identifies, prioritizes, and assesses its critical infrastructure, and includes remediation in its funding requirements, its ability to perform risk-based decision making and target funding to priority needs will be improved.

You are an expert at summarizing long articles. Proceed to summarize the following text: The UI program was established in 1935 and serves two primary objectives: (1) to temporarily replace a portion of earnings for workers who become unemployed through no fault of their own and (2) to help stabilize the economy during recessions by providing an infusion of consumer dollars into the economy. UI is made up of 53 state-administered programs that are subject to broad federal guidelines and oversight. In fiscal year 2004, these programs covered about 129 million wage and salary workers and paid benefits totaling $41.3 billion to about 8.8 million workers. Federal law provides minimum guidelines for state programs and authorizes grants to states for program administration. States design their own programs, within the guidelines of federal law, and determine key elements of these programs, including who is eligible to receive state UI benefits, how much they receive, and the amount of taxes that employers must pay to help provide these benefits. State unemployment tax revenues are held in trust by the Department of Labor (Labor) and are used by the states to pay for regular weekly UI benefits, which typically can be received for up to 26 weeks. During periods of high unemployment, the Extended Benefits program, funded jointly by states through their UI trust funds and by the federal government through the Unemployment Trust Fund, provides up to 13 additional weeks of benefits for those who qualify under state program rules. Additional benefits, funded by the federal government, may be available to eligible workers affected by a declared major disaster or during other times authorized by Congress. To receive UI benefits, an unemployed worker must file a claim and satisfy the eligibility requirements of the state in which the worker’s wages were paid. Although states’ UI eligibility requirements vary, generally they can be classified as monetary and nonmonetary. Monetary eligibility requirements include having a minimum amount of wages and employment over a defined base period, typically, about a year before becoming unemployed, and not having already exhausted the maximum amount of benefits or benefit weeks to which they would be entitled because of other recent unemployment. In addition to meeting states’ monetary eligibility requirements, workers must satisfy their states’ nonmonetary eligibility requirements. Nonmonetary eligibility requirements include being able to work, being available for work, and becoming unemployed for reasons other than quitting a job or being fired for work-related misconduct. In all states, claimants who are determined to be ineligible for benefits are entitled to an explanation for the denial of benefits and an opportunity to appeal the determination. Since UI was introduced, researchers and those responsible for overseeing the program have monitored the size, cost, and structure of the program and its effects on individuals’ movement into and out of the workforce, including which types of workers receive UI benefits. Much of what is known about the dynamics of the UI program has been based on snapshots of the UI beneficiary population at any given time. Labor regularly gathers UI program data from the states, including each state’s eligibility requirements, employers’ UI tax rates, program revenues and costs, and numbers of claims received and approved. An extensive amount of research has been devoted to the effect of UI benefit receipt on unemployment duration. Specifically, researchers have found that receiving UI benefits increases unemployment duration. Much of this research is focused on measuring how changes in the amount of UI benefits increase the amount of time that an unemployed worker takes to find a new job. Although much is known about UI caseloads and about the relationship between UI benefits and unemployment duration, less is known about the patterns of UI receipt among individual workers over their entire working careers. What is known about the patterns of UI benefit receipt over an extended period for individual workers comes from a few studies that are fairly limited in scope. In one study, researchers analyzed 1980-1982 survey data and found that among unemployed workers who were eligible for UI, younger or female workers were less likely to receive UI benefits, while union workers, workers from large families, or those with more hours of work from their previous jobs were more likely to receive UI. In another study, using UI administrative data from five states, researchers found that between 36 and 44 percent of UI claims from 1979 to 1984 were from workers who had received UI benefits more than once and that middle- aged workers and workers with higher earnings were more likely to be repeat UI recipients. Another study, based on survey data from the NLSY79, found that 16 percent of young adults had received UI benefits more than once between 1978 and 1991 and that as many as 46 percent of those who received UI were repeat recipients. This study also found that workers who were women or Hispanic or whose fathers had more years of education were less likely to become repeat recipients than workers who were men or non-Hispanic or whose fathers had fewer years of education. In 2005, we analyzed the NLSY79 to determine the extent to which individual workers received UI benefits during their early working lives. We found that 38 percent of workers born between 1957 and 1964 received UI at least once between 1979 and 2002, with almost half of these individuals receiving UI benefits more than once. (See fig. 1.) We also found that the rate at which unemployed workers received UI benefits varied across industries, but we did not control for any of the other factors that may have helped to explain this variation. Earnings, age, education, and most notably past UI benefit receipt are all associated with the likelihood of receiving UI benefits for UI-eligible workers. Education, earnings, and union membership, and current UI benefit receipt, are associated with unemployment duration. Unemployed workers are more likely to receive UI benefits if they have higher earnings prior to becoming unemployed, are younger or have more years of education, or have a history of past UI benefit receipt, when compared to workers with similar characteristics. We found that past experience with the UI program has a particularly strong effect on the future likelihood of receiving UI benefits. In addition, UI-eligible workers are more likely to receive UI when the local unemployment rate is high. However, some characteristics, such as the weekly UI benefit amount that a worker is eligible to receive, are not associated with a greater likelihood of receiving UI benefits. Unemployed workers who have higher earnings or are younger or who are more educated are more likely to receive UI benefits than otherwise similar workers. With respect to earnings, our simulations show that the likelihood of receiving UI tends to increase as the amount earned in the year prior to becoming unemployed increases (see fig. 2). For example, a UI-eligible worker with earnings between $10,000 and $11,999 in the year before becoming unemployed has a 36 percent likelihood of receiving UI, whereas a worker who earned roughly twice as much (between $20,000 and $24,999) has a 45 percent likelihood of receiving UI. The likelihood of receiving UI is lowest among workers with the lowest earnings (i.e., less than $10,000 in the year before becoming unemployed). There is generally little difference in the likelihood of receiving UI among workers earning $18,000 or more. This result confirms our 2000 finding that low-wage workers are less likely to receive UI benefits than workers with higher earnings even when they have worked for the same amount of time. Our current result also controls for other worker differences, such as which industries the workers were employed in or whether they were ineligible for benefits, which we had not previously been able to rule out as explanations for the variation in likelihood of receiving UI. The relationship between higher earnings and a higher likelihood of receiving UI benefits is also consistent with economic theory that predicts that workers with higher earnings prior to becoming unemployed will be more reluctant to accept lower reemployment wages and are therefore more likely to take advantage of UI benefits as a way to subsidize their job search efforts. Concerning age, our simulations show that the likelihood of receiving UI peaks at about age 25 and decreases thereafter (see fig. 3). More specifically, a 25-year-old unemployed worker who is eligible for UI is more than twice as likely to receive UI as an otherwise similar 40-year-old unemployed worker. Previous studies have found that younger workers are less likely to receive UI benefits than older workers. However, these previous studies did not include as much information about workers’ past unemployment and UI benefit receipt histories as our current analysis. Therefore, because older workers have more of this experience than younger workers, it is possible that our analysis has controlled for the effect of this past experience more completely than these previous studies, resulting in a more precise estimate of the effect of age. We are unable to explain why younger workers are more likely to receive UI benefits than otherwise similar older workers. However, it is possible that older workers, who have had more time to accumulate financial assets, may have more private resources available to help them cope with unemployment than younger workers. Alternatively, younger workers may be less optimistic about how long it will take for them to become reemployed. Unemployed workers with more years of education are more likely to receive UI benefits than otherwise similar workers with fewer years of education. Specifically, our simulations show that the likelihood of receiving UI increases for each additional year of schooling that a UI- eligible worker has completed before becoming unemployed (see fig. 4). For example, a UI-eligible worker with a college education (one who has completed 16 years of schooling) when he or she becomes unemployed is almost one-fifth more likely to receive UI than a UI-eligible worker with a high school education (12 years of schooling). Although the impact of education on the likelihood of receiving UI benefits has been analyzed in other research, this research found no significant education effect. However, to the extent that workers with more years of education are better able to access and understand UI program rules, they may also be more likely to know when they are entitled to benefits and to have the information that they need to file successful benefit claims. Other factors, including gender, marital status, job tenure, and the local unemployment rate are also associated with UI benefit receipt. Controlling for all other characteristics among this UI-eligible group, a woman is 29 percent more likely to receive UI benefits than a man, a married worker is 13 percent more likely to receive UI than an a longer tenured worker is more likely to receive UI—for example, a worker with 4 years of tenure at his or her most recent job is 12 percent more likely to receive UI than a worker with 1 year of job tenure, and being in an area with high unemployment raises the likelihood that an unemployed worker will receive UI—for example, a worker living in an area with an unemployment rate of 9 percent is 10 percent more likely to receive UI than a worker living in an area with an unemployment rate of 5 percent. Our finding that women are more likely to receive UI benefits than otherwise similar men differs from the results of previous research, which generally found no statistically significant differences. Nevertheless, our analysis controls for more worker characteristics than these previous studies, and it is likely that we have more carefully isolated the effect of gender from that of other characteristics related to gender, such as workers’ occupations or industries. It is not immediately clear why women are more likely to receive UI benefits, however. We are likewise unable to explain why married workers are more likely to receive UI benefits than otherwise similar unmarried workers. Our findings on job tenure are consistent with previous research. However, the higher likelihood of UI benefit receipt associated with more years of job tenure is likewise difficult to explain. It might be that workers with longer job tenures have acquired more skills that are not as easy to transfer to another employer, relative to workers with less job tenure, and anticipate longer job searches. The higher likelihood of receiving UI benefits among workers living in areas with higher unemployment is likely due to the higher number of unemployed workers relative to available jobs, which may make workers more willing to apply for UI benefits as they engage in what are likely to be longer job searches. In contrast to our findings above, a key UI program element, the weekly UI benefit amount that UI-eligible workers are entitled to, is not associated with a greater likelihood of receiving UI benefits. Using our model estimates, we simulated increases in weekly UI benefit amounts of 10 percent and 25 percent and a decrease of 10 percent and found that these changes had no effect on the likelihood of UI benefit receipt. This finding is consistent with the work of others, who have found that increases in the weekly benefit amount have mixed, but generally small effects on UI benefit receipt. Collectively, these results suggest that UI benefit levels have modest effects on individuals’ decisions about whether or not to receive UI benefits, after controlling for other factors. Unemployed workers who have received UI benefits during a prior period of unemployment are more likely to receive UI benefits during a current period of unemployment than otherwise similar workers who never received UI benefits (see fig. 5). For example, when workers experience their first UI-eligible period of unemployment, their likelihood of receiving UI is 33 percent. During a second UI-eligible period of unemployment, the likelihood of receiving UI is 48 percent for workers who received UI during the first unemployment period but only 30 percent for workers who did not receive UI. Furthermore, the likelihood that these UI-eligible workers will receive UI benefits during successive periods of unemployment increases each time that they receive UI benefits and decreases each time that they do not. This finding suggests that a worker’s first unemployment experience has a lasting and self-reinforcing effect. To the extent that workers know about the UI program and whether or not they are eligible, receiving or not receiving UI benefits may be a personal choice based on unobserved worker characteristics or preferences. Alternatively, if workers do not have good information about UI, those who receive UI benefits may know more about the UI program than those who do not receive UI, and their knowledge about the program could make it easier to apply for and receive benefits during a subsequent period of unemployment. Overall, unemployed workers who receive UI benefits have longer unemployment duration than otherwise similar workers who do not receive UI benefits. Several other characteristics are also associated with unemployment duration. Specifically, UI-eligible workers are more likely to experience longer unemployment duration if they have lower earnings before becoming unemployed or have fewer years of education. Other characteristics associated with longer unemployment duration, after controlling for other factors, include being African-American or female or not belonging to a union. We found no relationship between past UI benefit receipt and subsequent unemployment duration. Whether or not an unemployed worker receives UI during a specific period of unemployment has the strongest effect on how long that period of unemployment is likely to last. Overall, UI-eligible workers who receive UI benefits during a period of unemployment remain unemployed for about 21 weeks on average, whereas otherwise similar workers who do not receive UI remain unemployed for about 8 weeks. This result is consistent with economic theory that predicts that receiving UI benefits reduces the costs associated with unemployment and allows workers to engage in longer job searches. That is, an unemployed worker who receives UI benefits faces less pressure to accept the first job offer they receive and can search longer for a more desirable job than an unemployed worker who does not receive UI. Another possible explanation for the strong association between UI receipt and longer unemployment duration may be that workers who expect to experience longer unemployment may be more likely to apply for UI than those who expect to return to work quickly. Unemployed workers with lower earnings tend to have longer unemployment duration than otherwise similar workers with higher earnings. This finding holds for workers who are receiving UI benefits, and for workers who are not receiving UI benefits. Specifically, our simulations show that UI-eligible workers who receive UI benefits and have relatively high earnings ($30,000 and higher) in the year prior to becoming unemployed have unemployment duration that is as much as 9 weeks shorter than workers with earnings that are below $16,000. The results are similar for UI-eligible workers who do not receive UI benefits (see fig. 6). Our result is consistent with other research that has found that higher previous earnings tend to reduce unemployment duration. Researchers have suggested that the association between higher earnings and shorter unemployment duration may be due, in part, to the higher cost of unemployment for workers with higher earnings, relative to the cost for workers with lower earnings. Specifically, the cost of unemployment in terms of lost wages is greater for workers with higher earnings, because they forego a higher amount of potential earnings in exchange for the time they spend on unpaid activities, such as job search, home improvement, or recreation. Our model estimates also indicate that unemployed workers who have more education tend to have shorter unemployment duration than otherwise similar workers with less education. For example, simulations show that on average, UI-eligible workers with a 4-year college education (16 years of schooling) who receive UI benefits remain unemployed about 2 weeks less than workers with a high school education (12 years of schooling). (See fig. 7.) The results are similar for UI-eligible workers who do not receive UI benefits. This finding is consistent with past research indicating that less education is associated with longer unemployment duration, because workers with less education have fewer work-related skills. Unemployed workers’ race or ethnicity, gender, union membership status, and length of most recent job tenure are also associated with unemployment duration. Specifically, simulations show that UI-eligible workers who are African-American or women, who do not belong to labor unions, or who have less years of job tenure before becoming unemployed tend to have longer unemployment duration than otherwise similar workers. As seen in table 1, these associations exist whether or not workers receive UI benefits. Our findings are generally consistent with prior research. In particular, longer unemployment durations have been found to be associated with being African-American, female, or not belonging to a union. Two possible explanations for the differences in employment outcomes for African-American workers include labor market discrimination, and limited access to social networks that may enable these workers to find jobs more quickly. Likewise, longer unemployment duration among female workers may be due to labor market discrimination, or to differences in how they value paid work versus nonemployment activities, relative to men. Likewise, the associations between shorter unemployment duration and union membership or longer job tenure may reflect the greater access of these workers to reemployment opportunities than otherwise similar workers or because of a greater likelihood of being recalled to their previous jobs. Past UI receipt has no significant effect on subsequent unemployment duration. Although receiving UI during a current period of unemployment is associated with longer unemployment duration, past UI receipt does not affect current unemployment duration. Specifically, simulations show that unemployment duration tends to decrease by about the same amount (typically, 1 week or less) from one unemployment period to the next, regardless of whether a worker received UI benefits in the past or not, and regardless of whether or not the worker receives UI benefits in the current period. Unemployed workers in certain industries are more likely to receive UI benefits and experience shorter unemployment duration than otherwise similar workers from other industries. Simulations show that first-time unemployed workers from mining and manufacturing are more likely to receive UI than workers from other industries. Moreover, the strength of the association between past and current UI benefit receipt varies across industries. The increase in the likelihood of receiving UI from one unemployment period to the next is highest for public administration and is lowest for agriculture and construction. Furthermore, simulations indicate that UI-eligible workers from industries with higher proportions of unemployment periods that result in UI receipt are no more likely to become repeat UI recipients than workers from other industries. With respect to unemployment duration, UI-eligible workers from construction and manufacturing have shorter unemployment duration than workers from other industries. Unemployed workers from mining and manufacturing are more likely to receive UI than otherwise similar workers from other industries. For example, first-time unemployed workers from the manufacturing industry are about two-thirds more likely to receive UI benefits than workers from the professional and related services industry (see table 2). Although UI- eligible workers from mining are more likely to receive UI benefits than workers from other industries, just 2 percent of the unemployment periods that result in UI benefit receipt come from the mining industry. (See fig. 8.) Unemployed workers who have received UI benefits in the past are more likely to receive UI benefits during a current period of unemployment than otherwise similar workers who never received UI benefits, across each industry (see table 3). However, the increase in the likelihood of receiving UI benefits associated with past UI benefit receipt is not the same across all industries. Specifically, this effect is strongest for workers from public administration and is weakest for workers from agriculture and construction. These results show that although UI-eligible workers in some industries are more likely to receive UI benefits when they experience unemployment for the first time, their likelihood of receiving UI benefits again when they become unemployed a second or third time is not necessarily higher than it is for workers from other industries. For example, the likelihood of receiving UI benefits for workers from the manufacturing industry who are unemployed for the first time is relatively high—about 40 percent. This likelihood increases to 52 percent during a second period of unemployment for workers who have already received UI benefits, and to 65 percent during a third period of unemployment for workers who received UI each time they were unemployed. By comparison, the increase in the likelihood of receiving UI between the first and third periods of unemployment is higher for most other industries, especially public administration. Specifically, the likelihood of receiving UI benefits for public administration workers who are unemployed for the first time is 37 percent. This likelihood increases to 69 percent during a second period of unemployment for workers who have already received UI, and to 92 percent during a third period of unemployment for workers who received UI each time they were unemployed. (See fig. 9.) Administrative unemployment insurance data have shown that repeat UI recipients tend to be from industries that are more seasonal, such as manufacturing and construction. Our results, however, suggest that this is not because workers with past UI receipt from these industries are more likely to receive UI benefits when they become unemployed than otherwise similar workers from other industries. Rather, it may be that workers from such seasonal industries are unemployed more often on average than workers from other industries, or that a larger proportion of unemployed workers from such industries have collected UI previously. Unemployed workers from construction and manufacturing have shorter unemployment duration than otherwise similar workers from other industries. (See table 4.) Furthermore, simulations based on our model estimates show that differences in unemployment duration across industries exist whether or not UI benefits are received. Specifically, UI- eligible workers from construction who receive UI benefits have the fewest weeks of unemployment on average (17 weeks), when compared with workers from other industries. Likewise, UI-eligible workers from construction who do not receive UI benefits also have the fewest weeks of unemployment, on average (6 weeks). The likelihood of receiving UI benefits varies across occupations, but generally not as much as it does across industries. Specifically, UI-eligible managers are about one-fifth more likely to receive UI than otherwise similar transportation equipment operators, and one-half more likely to receive UI than professional and technical workers (see table 5). UI-eligible workers who have received UI benefits in the past are more likely to receive UI benefits during a current period of unemployment than UI-eligible workers who never received UI benefits, across each occupation. Specifically, this effect is strongest for sales and service workers and weakest for transportation equipment operators and craftsmen (see table 6). Unemployment duration also varies across occupations. UI-eligible professional and technical workers have longer unemployment duration than otherwise similar workers from other occupations. Specifically, professional and technical workers have unemployment duration that is 5 weeks longer than average for workers receiving UI and 3 weeks longer than average for workers not receiving UI (see table 7). Past experience with UI benefit receipt has no significant effect on unemployment duration, regardless of a worker’s occupation. Although the UI program has existed for over 70 years and serves millions of workers each year, little is known about workers who receive UI benefits on a recurring basis or about workers who are eligible for UI benefits but never receive them. We found that UI-eligible workers during the first half of their working lives with certain demographic characteristics and from certain industries have a greater likelihood of receiving UI benefits multiple times and experiencing longer unemployment durations than otherwise similar workers. Although our results are generally consistent with past research, our analysis includes additional information about workers’ past experiences that provides new insight into the factors that distinguish workers who receive UI benefits from those who do not. In fact, the single most important factor associated with eligible workers receiving benefits is whether or not they received benefits during previous unemployment, suggesting that a worker’s perception of UI when they are faced with unemployment is key to whether that worker will ever use the program. Moreover, it does not appear that previous UI recipients from industries where UI benefit receipt is more likely, such as construction and manufacturing, are any more likely to receive benefits if unemployed again than similar workers from other industries. Rather, it appears that workers from these industries are simply more likely to face the choice of whether or not to file for UI benefits more often than their counterparts in other industries. In addition, while the patterns for UI receipt and unemployment duration we identified for this group during the first half of their working lives may not change significantly as they enter the second half of their working lives, it remains to be seen whether the issues they face in the years leading up to their retirement will reshape their use of the UI program. We provided a draft of this report to Labor officials for their review and comment. Labor applauded GAO’s efforts to determine the extent to which an individual worker’s characteristics are associated with the likelihood of UI benefit receipt and with unemployment duration and noted that the study adds to current knowledge of the UI program, particularly with regard to the impact of past UI benefit receipt on current UI receipt. However, Labor also noted that there are several issues related to our methodology that may limit the utility of our findings for policymaking. While we agree that there are limitations inherent in our methodology, we believe that these limitations have been noted throughout the report, and that they do not compromise the overall validity of our results. Nevertheless, we have provided additional clarifications, as appropriate, to address Labor’s technical comments. 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 its date. At that time, we will send copies of this report to relevant congressional committees, the Secretary of Labor, or other interested parties. We will also make copies available to others upon request. The report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or members of your staff have any questions about this report, please contact me at (202) 512-7215. Other major contributors are listed in appendix III. We analyzed the factors affecting unemployment insurance (UI) benefit receipt by statistically modeling the determinants of UI benefit receipt and unemployment durations simultaneously. We model UI benefit receipt in conjunction with unemployment durations to allow for correlations that may exist between the two outcomes for a given individual. For example, an unemployed person anticipating a lengthy unemployment period might be more likely to receive UI benefits than a person expecting a short unemployment period. Alternatively, the receipt of UI benefits may lengthen an unemployment period by allowing an individual to spend more time looking for new employment. In addition, our model controls for a number of observable factors about each unemployed worker’s situation, including recent employment experience, prior unemployment and UI benefit receipt experience, information about UI program factors, including benefit levels, and demographic characteristics. The model was developed and estimated by Dr. Brian McCall, Professor of Human Resources and Industrial Relations, University of Minnesota, under contract to GAO. This appendix describes (1) the data used in the analysis, including how the data were prepared, (2) the econometric model that was estimated, (3) the results from two specifications of the econometric model, and (4) the limitations inherent in the analysis. We used the Bureau of Labor Statistics’ (BLS) National Longitudinal Survey of Youth 1979 (NLSY79) for our analysis. The NLSY79 is an ongoing longitudinal survey of individuals who were between the ages of 14 and 22 in 1979, the first year of the survey. A primary focus of the NLSY79 is on individuals’ labor force patterns, and the data are collected at a very detailed level. This detail allows us to track the weekly employment, unemployment, and earnings histories of the individuals in the sample. The NLSY79 also contains less detailed information about individuals’ UI receipt during unemployment. The NLSY79 does not contain direct information about an individual’s UI eligibility status, which is a function of previous employment and earnings, among other things, and varies by state of employment. We estimate an unemployed individual’s UI eligibility status using data that are available in the NLSY79. There are three main reasons why the NLSY79 database provides the most suitable data for our analysis. First, the longitudinal nature and level of detail of the data allow us to control for an individual’s history of unemployment and UI receipt, which is a major contribution of this work. Second, respondents were first surveyed at a young age, which reduces the likelihood that we do not observe periods of unemployment and UI receipt early in a person’s working career. Third, the detailed data allow us to estimate an individual’s UI eligibility status, allowing us to focus our analysis on unemployed individuals whom we estimated to be eligible for UI benefits while also reasonably controlling for differences in UI program rules across states. A few limitations to the NLSY79 database should be mentioned. First, the sample began with 12,686 individuals in 1979, but has decreased in size over time due to attrition. Second, the data are self- reported and thus subject to recall error. We assessed the reliability of the NLSY79 data by interviewing relevant BLS officials, reviewing extensive NLSY79 documentation, and performing electronic tests of the NLSY79 data for missing or corrupt information that might negatively affect our analysis. On the basis of these reviews and tests, we determined that the data were sufficiently reliable to be used in our analysis. We considered using administrative state UI data as an alternative to the NLSY79. Although such administrative data could provide information about all UI recipients in a state, these data could not provide information about UI-eligible unemployed workers who did not receive benefits. Also, because these data are not designed for research purposes, there is limited information available about individuals that can be used to control for differences, such as demographic characteristics. Finally, there is also no nationally representative data source for administrative UI data. For each individual in the NLSY79 database, we created a detailed weekly history of employment and unemployment, including whether UI benefits were received during unemployment. Our definition of unemployment is not the strict definition used in the BLS’s Current Population Survey (CPS). We define unemployment to include both the weeks in which an out-of-work person is looking for work (the standard CPS unemployment definition) and the weeks during which the individual reports being out of the labor force (OLF). We did require that an individual spend at least 1 week actively looking for work after a job loss to reduce the likelihood that the person had permanently left the labor force. Other research has addressed the effect that the UI program plays on the percentage of weeks of nonemployment that a person reports that he or she was looking for work. For each unemployment period experienced by an individual, we estimate the person’s UI eligibility status. Although states determine UI eligibility using a number of criteria, we focus on the following three: (1) the unemployment must be the result of a job loss that was not caused by the individual, (2) the individual must have earned a specified amount of money during the time preceding the unemployment, and (3) the individual must be actively looking for new employment. The NLSY79 provides the information necessary to estimate whether these criteria are met by an unemployed individual. For criterion 1, the NLSY79 provides information about the reason that a job was lost. Only those unemployed individuals who lost a job through no fault of their own were deemed to be UI-eligible. For the monetary eligibility criterion 2, we compiled a detailed set of UI eligibility and benefit criteria for each of the 50 states and the District of Columbia over the period 1978 to 2002. When these criteria were combined with the NLSY79’s detailed employment and earnings histories, we were able to determine monetary eligibility for UI with reasonable accuracy, as well as the weekly benefit amount and the number of weeks of benefits a person was eligible to receive. For criterion 3, we considered as UI-eligible only those unemployed individuals who reported actively looking for work during at least 1 week of their unemployment. We erred on the side of overestimating the eligibility based on criterion 3, because individuals who self-report information about nonemployment may not fully realize the impact that “looking for work” versus “being out of the labor force” has on UI eligibility, especially if they did not receive UI benefits. Although this estimation method is not perfect, we believe that it captures some of the most important features of UI eligibility. It is similar to the methods used by other researchers. In addition to estimating the UI eligibility status of individuals at the time of each of their unemployment periods, we also created the other variables used in our analysis. The empirical model outlined in the following subsection focuses on UI benefit receipt and unemployment duration. UI benefit receipt during unemployment was determined using the monthly measure provided in the NLSY79. The duration of unemployment, as defined above, is measured in weeks from the week after a job was lost to the week a new job was begun. We censor duration to be no longer than 100 weeks. To isolate the impact that a variable has on the likelihood of UI benefit receipt and unemployment duration, our model controls for a great number of other factors that were observable at the start of, and throughout, the person’s unemployment. One set of variables relates to the employment experience of the individual immediately preceding unemployment, including industry and occupation of the lost job (measured at the one-digit Standard Industrial Classification and Standard Occupational Classification level), union status and tenure at the job lost, earnings (base period earnings and high quarter earnings ), whether the job was lost because of a plant closing, and the calendar year and month the unemployment began. We group both earnings measures into brackets to allow for nonlinear effects. All dollar values are adjusted for inflation to 2002 dollars using the BLS’s Consumer Price Index for All Urban Consumers (CPI-U). We also control for the state unemployment rate during the month that unemployment began, and, in the duration equation, for the time-varying state monthly unemployment rate over the period of unemployment. A second set of variables summarizes UI program factors, such as the weekly benefit amount (WBA) a person is eligible to receive, the number of weeks of benefits a person is eligible to receive, whether the state has a waiting period before benefits can be received, and whether permanent or temporary extended benefits are in effect. We also control for the percentage of new UI claims that are denied by a state (in the receipt equation) and the percentage of continuing UI claims that are denied by a state (in the duration equation). In the unemployment duration equation, we also allow the parameter estimates for WBA, remaining weeks of benefits, and extended benefits to vary over the period of unemployment. This is done by interacting these variables with a cubic function of the number of weeks unemployed. Again, all dollar values are adjusted for inflation to 2002 dollars using the BLS’s CPI-U. A third group of variables relates to a person’s history of unemployment and UI benefit receipt as measured at the start of an unemployment period. This group of variables includes the number of times the person had been unemployed and the number of times a person had received UI benefits previously (in the receipt equation) and whether or not the person had been unemployed and whether or not the person had received UI benefits previously (in the duration equation). We also interact these variables with industry and occupation dummy variables to investigate whether previous unemployment and UI receipt affect the likelihood of current UI receipt and unemployment durations differently across industries. These interactions with industry and occupation are done in separate specifications of the model. A fourth group of variables relates to a person’s demographic characteristics at the time of unemployment. These include age, race, gender, marital status, number of years of schooling, health limitations, whether a spouse has used UI previously, family size, number of children, number of children between the ages of 0 and 2, whether the person lives with his or her parents, state of residence, and whether the person lives in a Standard Metropolitan Statistical Area (SMSA) as opposed to a rural area. We limit our analysis to the nonmilitary sample of NLSY79 respondents. In addition, we drop individuals with insufficient information to estimate UI eligibility with reasonable accuracy. Data for an individual were included up to their first missed interview. Individuals without any unemployment, and those without unemployment that was estimated to be UI-eligible, were not used in the analysis. Also, individuals who were missing data required by our econometric model were not used in the analysis. This yielded a sample of 5,631 individuals who had been unemployed and eligible for UI benefits at least once, resulting in a total of 15,506 separate periods of UI-eligible unemployment. To investigate the key factors associated with UI benefit receipt, including the role of prior UI benefit receipt (repeat UI recipiency), we used a dynamic econometric model that jointly determines UI benefit receipt and unemployment duration. As mentioned above, the reason for modeling these outcomes jointly is to allow for the likely correlations that exist between them. In addition to modeling UI receipt and unemployment duration jointly, our model allows prior unemployment and prior UI receipt to influence current UI receipt and unemployment duration to allow for the correlations that possibly exist over time for an individual. ]) where the kth unemployment period, all of which are assumed to be independent is a vector of exogenous variables measured at the start of of the unobserved random variable , which helps control for unobserved heterogeneity. Variables in characteristics, characteristics about the lost job, and UI program information. The vector pertaining to past unemployment and past UI benefit receipt, which are measured at the start of an individual’s kth unemployment period and may is a vector of endogenous variables . ]) ) is the baseline hazard function. ) ] ) ) ] ) ) 1) ] ) ) ] ) ) ) ) ) ) ) ) ) . This likelihood is computed in FORTRAN and maximized using the BHHH algorithm. A number of features outlined above are simplifications of a more general version of this model, and were introduced to help reduce the number of parameters to be estimated by the model. First, the baseline hazard , was assumed to be independent of the unemployment period number, k. Second, the parameters associated with the exogenous ( d,u) and endogenous ( independent of the unemployment period number, k. Third, the , j = d,u) variables were assumed to be unobserved random variables ( independent of the unemployment period number, k. Although this assumption is not as general as allowing each individual to have different unobserved components over time, it does help control for unobserved differences between individuals that may influence UI receipt and unemployment durations. , j = d,u) were assumed to be Because of the complexity of the empirical model outlined above, interpreting the parameter estimates is difficult. As a result, we use the output from the model to simulate the effect that changes in certain variables have on the likelihood of UI receipt and the duration of unemployment for the average unemployed person in our sample. For example, to understand differences in UI receipt and unemployment durations by industry, we simulate the likelihood of UI benefit receipt and unemployment duration for the average person in our sample for each of the possible industries, and then compare the results. To do this, we use the model’s output to calculate every person’s likelihood of UI receipt and escape rate from unemployment—conditional upon receiving and not receiving UI—assuming all were in the first industry grouping when they lost their job. Averaging over all individuals yields the average probability of UI receipt and the averaged (week by week) survivor function. The averaged survivor function can be used to compute the expected median duration of unemployment. We then repeat this process, successively, assuming that all individuals were in another industry grouping when they lost their jobs, until all industry groups have been simulated. The simulated average likelihood of UI benefit receipt and median unemployment duration can then be compared across industries to estimate the differences by industry. Using all individuals for each simulation, and reporting results for the average unemployed person, helps insure that differences in the simulation results (e.g., industry 1 versus industry 2) reflect only the variables (industry 1, industry 2) being simulated. To describe results that are not related to past experience with unemployment and UI benefit receipt, we present simulations that are specific to first-time unemployment—a simple and clearly defined scenario (the observable trends also hold for unemployed individuals with prior unemployment and UI receipt experience). We report parameter estimates from two specifications of our model. The first specification includes interaction terms between industry and our measures of past UI benefit receipt and past unemployment. These results are presented in tables 8 and 9 for the UI benefit receipt equation and the unemployment duration equation respectively. The second specification includes interaction terms between occupation and our measures of past UI benefit receipt and past unemployment. These results are presented in tables 10 and 11 for the UI benefit receipt equation and the unemployment duration equation respectively. We included the industry and occupation interactions in separate specifications to avoid the issues brought about by multicollinearity. Because the results for the noninteraction terms are similar between the two specifications, we focus on those from the industry-interaction specification (tables 8 and 9). After discussing these results, we discuss the results for the occupation-interaction specification (tables 10 and 11). Tables 8, 9, 10, and 11 are structured as follows. The first column in each table lists the variable names; the second column, the parameter estimates; the third column, the estimated standard errors; and the fourth column, the t-statistics. The last column contains asterisks that signify statistical significance. One asterisk (*) signifies statistical significance at the 90 percent confidence level (t-statistics greater than or equal to 1.65 in absolute value); two asterisks signify statistical significance at the 95 percent confidence level (t-statistics greater than or equal to 1.96 in absolute value) and three asterisks (***) signify statistical significance at the 99 percent confidence level. Parameter estimates discussed below are statistically significantly different from zero at the 95 percent confidence level unless stated otherwise. To conserve space, the tables do not present the parameter estimates for the unobserved heterogeneity ( ), state, year, and month effects. Table 8 summarizes the parameter estimates for the UI receipt equation of the industry-interaction specification. A positive parameter estimate for a variable implies that an increase in the variable increases the likelihood of UI benefit receipt. A negative parameter estimate implies that an increase in the variable decreases the likelihood of UI benefit receipt. For example, the parameter estimate for years of education is 0.569, meaning that unemployed individuals with more years of education have a higher likelihood of receiving UI benefits than otherwise similar individuals with fewer years of education. The single asterisk signifies that the parameter estimate for years of education is statistically significant at the 95 percent confidence level. The results in table 8 show that the number of prior unemployment periods and the number of prior UI benefit receipt periods are strong predictors of an unemployed individual’s likelihood of receiving UI benefits. The parameter estimate for the number of prior unemployment periods is -0.072, which indicates that each additional prior unemployment period experienced by an individual reduces the likelihood of UI benefit receipt during current unemployment. Alternatively, the parameter estimate for the number of prior UI receipt periods is 0.714, which indicates that each additional prior UI receipt period experienced by an individual increases the likelihood of UI benefit receipt during current unemployment. The fact that the parameter estimate for the number of previous UI receipt periods is larger in absolute value suggests that this is the stronger of the two effects. To illustrate the magnitude of the effects, table 12 presents simulations of the likelihood of UI receipt by past unemployment and past UI receipt experience. According to the table, the average simulated likelihood of UI receipt for unemployed individuals with one previous unemployment period is 48 percent if UI was received in the previous unemployment period, but only 30 percent if UI was not received in the previous unemployment period. Thus, for individuals with one previous unemployment period, the average likelihood of UI receipt is 60 percent higher (18 percentage points) for those who received UI benefits in their previous unemployment period. The remainder of the table shows that UI receipt exhibits significant occurrence dependence. Specifically, an individual who does not receive UI benefits during unemployment becomes less likely to receive them during future unemployment, while an individual who does receive UI benefits during unemployment becomes more likely to receive them during future unemployment. Our model and data do not allow us to determine the underlying reasons for these associations. There are several possible reasons for the strong relationship between past UI receipt and current UI receipt, however. If unemployed people do not know they are eligible for benefits, or think that UI benefits are not worth the effort to apply, or are overoptimistic about finding employment, then there may be a “learning effect” that results from having received UI benefits which increases the likelihood of future use. Alternatively, if people do not apply for benefits because of a misperception of UI as a welfare program, then having received benefits once may soften such an outlook and increase the likelihood of future use. The results in table 8 also show that the likelihood of UI benefit receipt varies by the industry of the job lost by unemployed individuals. The industry variable is categorical in nature, so the parameter estimate for a particular category is an estimate of the effect of being in that category relative to an omitted category. The omitted category for industry is professional and related services. Table 8 shows that unemployed individuals from the mining, manufacturing, public administration, wholesale and retail trade, agriculture, forestry and fishing, business services, and construction industries are more likely to receive UI benefits than similar individuals from the professional services industry, because their parameter estimates are positive and statistically significant. To illustrate the magnitudes of these differences, table 13 presents the average simulated likelihood of UI receipt by industry under the specific assumption of first-time unemployment. The average simulated likelihood of UI receipt during first-time unemployment is 45.6 percent for unemployed miners, but only 24.3 percent for unemployed professional service workers. Table 13 clearly demonstrates that there are significant differences across industries in unemployed individuals’ likelihoods of UI benefit receipt during first-time unemployment. To test whether or not the effects of previous experience with unemployment and UI receipt differ by industry, we also included the industry categories interacted with both the number of previous unemployment periods and the number of previous UI receipt periods. As was the case above, the parameter estimates are calculated relative to the omitted professional and related services industry. The parameter estimates for the industry interactions with the number of prior unemployment periods indicate that unemployed individuals from the mining, manufacturing, and wholesale and retail trade industries exhibit stronger occurrence dependence than unemployed individuals from the professional services industry. That is, each additional previous unemployment period has a stronger negative effect on the likelihood of receiving UI benefits for unemployed individuals from these three industries relative to similar individuals from the professional services industry. The parameter estimates for the industry interactions with the number of previous UI receipt periods show that unemployed individuals from the agriculture and construction industries exhibit weaker occurrence dependence than individuals from the professional and related services industry. That is, each additional previous UI receipt period has a weaker positive effect on the likelihood of receiving UI benefits for unemployed individuals from these three industries relative to similar individuals from the professional services industry. Unemployed individuals from the manufacturing industry also have weaker occurrence dependence, but the result is only statistically significant at the 90 percent confidence level. Unemployed individuals from the public administration industry exhibit stronger occurrence dependence than individuals from the professional services industry. A similar result occurs for unemployed workers from the finance, insurance, and real estate industry, but the result is only statistically significant at the 90 percent confidence level. The other industries showed no statistically significant effects compared to those from the professional services industry. To illustrate the magnitudes of these differences, table 14 presents the average simulated likelihood of UI receipt by industry and by the number of previous unemployment and UI receipt periods. Column 1 presents the simulations for first-time unemployment (see table 13). Column 2 presents the simulations assuming one prior unemployment period with UI receipt. Column 3 presents the simulations assuming two prior unemployment periods, both with UI receipt. Table 14 shows that, although unemployed individuals from the mining and manufacturing industries have the highest average simulated likelihoods of UI receipt for first-time unemployment, this is not the case if individuals have received UI benefits previously. For unemployed individuals with two prior UI receipt periods, those from the public administration, wholesale and retail trade, entertainment services, transportation, and business services industries are about as likely or are more likely to receive UI benefits again than similar individuals from the mining and manufacturing industries. Administrative unemployment insurance data have shown that repeat UI recipients tend to be from industries that are more seasonal, such as manufacturing and construction. Our results, however, suggest that this is not because workers from these industries who have received UI before are more likely to receive UI benefits when they become unemployed than similar workers from other industries. Rather, it may be that workers from such seasonal industries are unemployed more often on average than workers from other industries, or that a larger fraction of unemployed workers from such industries have collected UI previously. Our model also controls for UI program factors, but the results in table 8 show that after controlling for other observable characteristics, these factors had no statistically significant impact on an unemployed individual’s likelihood of UI receipt. These program factors include the estimated amount of weekly benefits an unemployed individual was eligible to receive, the estimated duration of those benefits, and the state- specific denial rate for new UI claims. Weekly benefits and the potential duration of benefits are functions of earnings, which we controlled for (and are discussed below). The parameter estimates in table 8 also show that a number of personal characteristics are associated with an unemployed individual’s likelihood of UI benefit receipt, including education, age, and gender. For instance, the parameter estimate on years of education is 0.569, which indicates that each year of education increases an unemployed individual’s likelihood of receiving UI benefits. The direction of the age effect on the likelihood of UI benefit receipt is difficult to interpret from the parameter estimates in table 8, because it is included as a polynomial to allow for nonlinear effects. Figure 10 presents a graph of the average simulated likelihood of UI receipt by age for the specific case of first-time unemployment. The graph shows that the likelihood of UI receipt increases until about the age of 25 and then decreases thereafter. For example, the average simulated likelihood of UI receipt during first-time unemployment for 25-year-olds is 10 percentage points (39 percent) higher than for 35-year-olds. While other research has found that older individuals are more likely to receive UI benefits, other researchers generally do not control for individuals’ past unemployment and UI receipt experience as completely as we did. Because age and experience with both unemployment and UI receipt are correlated, age may act as a proxy for these experience measures when they are not controlled for. Table 8 also shows that several measures relating to the recent employment experience of unemployed individuals (excluding industry and occupation, which are discussed elsewhere) affect an unemployed individual’s likelihood of UI benefit receipt. For instance, table 8 shows that an unemployed individual’s likelihood of receiving UI benefits increases with earnings. We include two earnings measures: base period earnings and high quarter earnings. Each measure is grouped in earnings brackets and entered into the equation as a categorical variable to reflect nonlinear effects. As was the case with industry, each estimated effect is relative to an omitted category. For BPE the omitted earnings bracket is $30,000 and above and for HQE the omitted bracket is $9,000 and above. The pattern of parameter estimates for BPE shows that an unemployed individual is more likely to receive UI benefits, the higher his BPE (at least up to $20,000). The pattern of parameter estimates for HQE shows that an unemployed individual is more likely to receive UI benefits if his HQE are between $2,000 and $6,000. Figure 11 presents a graph of the average simulated likelihood of receiving UI benefits by base period earnings for the specific case of first-time unemployment. The level of HQE is varied to maintain a ratio of HQE to BPE of about 25 percent to approximate steady employment during the base period. The figure shows that unemployed individuals who earned more than $14,000 in their base period had a likelihood of UI receipt of over 40 percent, while individuals who earned less than $6,000 had a likelihood of UI receipt of less than 20 percent. Table 8 shows that employment experience measures other than earnings also affect the likelihood of UI receipt. For instance, an individual’s likelihood of UI receipt increases with tenure up to 9 years, after which it decreases. Also, an individual’s likelihood of UI receipt increases as the state unemployment rate increases. Interestingly, the parameter estimate on the plant closing variable is a statistically significant -0.263, indicating that unemployed individuals are less likely to receive UI benefits if they lost their jobs because of a plant closing. Union status does not have a statistically significant effect on an unemployed individual’s likelihood of UI receipt. Table 9 summarizes the parameter estimates for the unemployment duration equation of the industry interaction specification. A positive parameter estimate implies that an increase in a variable increases the escape rate from unemployment, thereby decreasing the duration of unemployment. A negative parameter estimate implies that an increase in a variable decreases the escape rate from unemployment, thereby increasing the duration of unemployment. For example, the parameter estimate for years of education is a statistically significant 0.235, which implies that unemployed individuals with more years of education have higher escape rates from unemployment than otherwise similar individuals with fewer years of education. As a result, unemployed individuals with more years of education will tend to have shorter unemployment durations than those with fewer years of education. We found that after controlling for other observable characteristics, the single most important predictor of unemployment duration is whether or not an individual receives UI benefits during the current unemployment period. The parameter estimate on the dummy variable for UI receipt status is -1.256, which implies that receiving UI benefits while unemployed reduces an individual’s escape rate from unemployment, thereby increasing unemployment duration. Simulations show that the median duration of unemployment is 8 weeks for individuals who do not receive UI benefits, but 21 weeks when they do receive UI benefits. We also allowed the effect of UI receipt to vary with the number of weeks of unemployment. These results indicate that a UI recipient’s escape rate from unemployment increases until about the 33rd week of unemployment. After 33 weeks, the escape rate decreases again until about the 72nd week, and then increases until 100 weeks. The parameter estimates in table 9 show that having experienced prior unemployment or prior UI receipt has no statistically significant effect on unemployment duration. This result, however, is conditional upon whether or not an individual currently receives UI benefits. The unconditional effect of having previously received UI benefits is to increase unemployment duration. As stated earlier, we found that unemployed individuals who have previously received UI benefits are significantly more likely to receive UI benefits during current unemployment. Because those individuals who receive UI benefits during unemployment have longer unemployment duration, the unconditional effect of having previously received UI benefits is to increase unemployment duration. Table 9 also shows that there is an association between the industry from which an individual lost a job and the duration of unemployment. As in the UI receipt equation, the omitted category for industry is professional and related services. Table 9 shows that unemployed individuals from the construction and manufacturing industries have higher escape rates from unemployment than otherwise similar individuals from the professional services industry, because their parameter estimates are positive and statistically significant. The parameter estimate for business services is also positive, but is only statistically significant at the 90 percent confidence level. The effects for the other industries are not statistically significant relative to the professional services industry. To illustrate the magnitudes of these differences, table 15 presents the median simulated duration of unemployment by industry for the specific case of first-time unemployment. The median duration is about 17 and 19 weeks, respectively, for unemployed individuals from the construction and manufacturing industries who receive UI benefits, but is about 24 weeks for those from the professional services industry. To test whether or not the effects of previous experience with unemployment and UI receipt on the duration of unemployment differ by industry, we also included the industry categories interacted with the indicators for both previous unemployment and previous UI receipt. As stated above, the effects are relative to the omitted category of professional and related services. The parameter estimates in table 9 indicate that there are no statistically significant differences across industry types by previous experience with unemployment or previous UI receipt, conditional upon current UI receipt status. Table 9 also shows that only one UI program factor (other than current UI receipt) has a statistically significant impact on an individual’s unemployment duration. Specifically, individuals who are unemployed in states with higher denial rates for continuing UI claims have higher escape rates from unemployment. That is, these individuals tend to become reemployed more quickly than those in states with lower denial rates. The parameter estimates in table 9 show that a number of personal characteristics affect an individual’s unemployment duration, including education, race, gender, and marital status. For example, the parameter estimate on years of education is 0.235, which indicates that each year of education increases an individual’s escape rate from unemployment. The simulations reported in table 16 show that unemployed individuals with 16 years of education (roughly a college education) have median unemployment duration that is about 1.9 weeks shorter than unemployed individuals with 12 years of education when UI benefits are received, and 1.1 weeks when UI benefits are not received. The parameter estimates for race show that African-Americans have significantly lower escape rate from unemployment than Hispanics, who in turn have slightly lower escape rates than whites. Table 17 displays simulations of median unemployment duration by race for the specific case of first-time unemployment. Simulations showed that the age effect, although statistically significant, did not have much of an impact on the median duration of unemployment. In table 9, the parameter estimates for gender are difficult to interpret because gender is interacted with other variables in our specification, including age. Simulations show that unemployed men have median unemployment durations that are about 2 weeks shorter than for unemployed women when UI benefits are received; and about 1 week shorter when UI benefits are not received. The parameter estimates for marital status show that married women tend to have longer unemployment durations than do unmarried women and married men tend to have shorter unemployment durations than do unmarried men. Although the age effects in table 9 are statistically significant, simulations showed that age had minimal effect on the median duration of unemployment. The last set of parameter estimates in table 9 relates to the recent employment experience of unemployed individuals (excluding industry and occupation, which are discussed elsewhere). Most of the parameter estimates in this grouping are statistically significant at the 95 percent level. Specifically, unemployed individuals who belonged to a union at the job that was lost had a higher escape rate from unemployment than otherwise similar individuals who were not union members. The simulations in table 18 show that union members had median unemployment durations that were 2 weeks shorter than nonunion members when UI benefits were received and 1 week shorter when UI benefits were not received. Simulations also show that an individual’s unemployment duration decreases modestly with job tenure until 7 years, after which it increases slightly. Of our two measures of an individual’s earnings, only the base period earnings proved to have a statistically significant effect on the duration of unemployment. The pattern of parameter estimates for BPE shows that unemployed individuals with low BPE have lower escape rates from unemployment than otherwise similar individuals with higher BPE. That is, lower-earning individuals tend to have longer unemployment periods. Figure 12 graphs simulations of median unemployment duration by BPE for the specific case of first-time unemployment. Individuals with BPE below $6,000 tend to have longer unemployment duration than unemployed individuals with higher BPE. We also estimated a specification of our model with interaction effects between the occupation categories (as opposed to industry) and our measures of past unemployment and past UI receipt experience. These results are presented in tables 10 and 11. A comparison of these results with those from tables 8 and 9 shows that the overall results of the two specifications are very similar. Therefore, only the occupation estimates will be discussed here. Because occupation is included as a categorical variable, the parameter estimates are relative to an omitted group, which is professional and technical workers. The estimates in table 10 show that unemployed managers, machine operators, craftsmen, laborers, transportation workers, and clerical workers are more likely to receive UI benefits than similar professional and technical workers. Table 19 presents the average simulated likelihood of receiving UI benefits by occupation for the specific case of first-time unemployment. Although the range is not as wide as for industry (see table 13), the table shows that there are differences in the likelihood of UI receipt by occupation. The interactions between occupation and the number of previous unemployment periods in table 10 indicate that unemployed machine operators and laborers exhibit stronger occurrence dependence than otherwise similar professional and technical workers. That is, each additional previous unemployment period has a stronger negative effect on the likelihood of receiving UI benefits for unemployed individuals from these two occupations relative to similar professional and technical workers. The parameter estimates for occupation interacted with the number of previous UI receipt periods show that unemployed transportation operators and craftsmen exhibit weaker occurrence dependence than otherwise similar professional and technical workers. That is, each additional previous UI receipt period has a weaker positive effect on the likelihood of receiving UI benefits for unemployed individuals from these two occupations relative to otherwise similar individuals from professional and technical occupations. Managers also showed weaker occurrence dependence, but this estimate is only statistically significant at the 90 percent confidence level. Unemployed sales workers and service workers exhibit stronger occurrence dependence than otherwise similar professional and technical workers. The other occupations showed no statistically significant effects compared with professional and technical workers. To illustrate the magnitudes of these differences, table 20 presents the average simulated likelihood of UI receipt by occupation and by the number of previous UI receipt periods. Column 1 presents the simulations for first-time unemployment (as in table 19). Column 2 presents the simulations assuming one prior unemployment period with UI receipt. Column 3 presents the simulations assuming two prior unemployment periods, both with UI receipt. Table 20 shows that although unemployed managers and machine operators have among the highest average simulated likelihoods of UI receipt for first-time unemployment, this is not the case if individuals have received UI benefits previously. In the case of unemployed individuals with two prior UI receipt periods, sales workers, service workers, clerical workers, and farmers are about as likely, or are more likely, to receive UI benefits than otherwise similar managers and machine operators. Table 11 shows that there is also an association between the occupation from which an individual lost a job and the duration of unemployment. Specifically, unemployed craftsmen and machine operators have higher escape rates from unemployment than similar professional and technical workers, because the estimates are positive and statistically significant. The effects for the other occupations were not statistically significant relative to professional and technical workers. To illustrate the magnitudes of these differences, table 21 presents the median simulated duration of unemployment by occupation for the specific case of first-time unemployment. The median duration is under 20 weeks for unemployed craftsmen and machine operators who receive UI, but is almost 26 weeks for professional and technical workers. To test whether or not the effects of previous experience with unemployment and UI receipt on the duration of unemployment differ by occupation, we also included the occupation categories interacted with the indicators for both previous unemployment and previous UI receipt. As stated earlier, the effects are relative to the omitted category of professional and technical workers. The parameter estimates in table 11 indicate that the interactions for prior unemployment are negative and statistically significant for craftsmen, sales workers, machine operators, laborers, and service workers. This suggests that unemployed workers from these occupations have lower escape rates from unemployment relative to professional and technical workers as the number of past unemployment periods increases. The parameter estimates for the interactions between occupation and past UI receipt showed no individual statistical significance. Although our analysis was performed using the most appropriate dataset and methodology available, there are a number of limitations to the analysis that could not be avoided and should be highlighted. Although the NLSY79 is the best available dataset for our purposes, it lacks some information that could have improved our analysis. It does not provide information about whether an unemployed individual attempted to collect UI benefits or not, only whether the individual did collect benefits. It also does not provide information about whether an individual was aware of his or her eligibility for benefits. As a result, we had to estimate each unemployed individual’s UI-eligibility status. An unemployed worker’s awareness of the UI program and knowledge of its basic rules could have a large impact on his or her decision to apply for benefits. This awareness may also be correlated with other observable characteristics (education and earnings, for example). Not controlling for awareness may affect the estimates of such variables. The NLSY79 also lacks information about an unemployed worker’s former employer that could help estimate UI receipt and unemployment duration. Although our results control for industry, firms within an industry have different labor turnover patterns that result in different UI tax rates through experience rating. The lack of perfect experience rating may even encourage firms to use temporary layoffs and recalls as a way of managing its labor force during demand fluctuations. An individual who works for a firm with high labor turnover or with a high UI tax rate may be more aware of the UI program and, thus, more likely to receive benefits. Another limitation of the NLSY79 is that it includes only information about the specific group of individuals who were between the ages of 14 and 22 in 1979. Thus, any findings based on the NLSY79 are specific to this group and do not represent the experiences of workers of all ages during the 1979-2002 period. A methodological limitation is that we assume that the time between unemployment spells is fixed. One might expect individuals who have been unemployed and received UI benefits to change their subsequent work behavior, either to increase or decrease their chances of using the program in the future. For example, a person who received UI benefits while unemployed may search for more stable employment in order to reduce the likelihood of experiencing a layoff in the future. We do not incorporate such possibilities into our model because this would require a third equation to model employment duration, which would be a more complex and time-consuming analysis. 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Unemployment Insurance (UI), established in 1935, is a complex system of 53 state programs that in fiscal year 2004 provided $41.3 billion in temporary cash benefits to 8.8 million eligible workers who had become unemployed through no fault of their own. Given the size of the UI program, its importance in helping workers meet their needs when they are unemployed, and the little information available on what factors lead eligible workers to receive benefits over time, GAO was asked to determine (1) the extent to which an individual worker's characteristics, including past UI benefit receipt, are associated with the likelihood of UI benefit receipt or unemployment duration, and (2) whether an unemployed worker's industry is associated with the likelihood of UI benefit receipt and unemployment duration. Using data from a nationally representative sample of workers born between 1957 and 1964 and spanning the years 1979 through 2002, and information on state UI eligibility rules, GAO used multivariate statistical techniques to identify the key factors associated with UI benefit receipt and unemployment duration. In its comments, the Department of Labor stated that while there are certain qualifications of our findings, the agency applauds our efforts and said that this report adds to our current knowledge of the UI program. Certain characteristics are associated with the likelihood of receiving UI benefits and unemployment duration. UI-eligible workers that GAO studied are more likely to receive UI benefits if they have higher earnings prior to becoming unemployed, are younger, have more years of education, or if they have a history of past UI benefit receipt when compared with otherwise similar workers. GAO found that past experience with the UI program has a particularly strong effect on the future likelihood of receiving UI benefits. However, some characteristics, such as receiving a higher maximum weekly UI benefit amount, are not associated with a greater likelihood of receiving UI benefits. UI-eligible workers who receive UI benefits have longer unemployment duration than workers with similar characteristics. Also, UI-eligible workers are more likely to experience longer unemployment duration if they have lower earnings before becoming unemployed or have fewer years of education. Other characteristics associated with longer unemployment duration include being African-American, female, or not belonging to a union. GAO found no relationship between past UI benefit receipt and subsequent unemployment duration. UI-eligible workers from certain industries are more likely than similar workers in other industries to receive UI benefits and experience shorter unemployment duration. Specifically, GAO's simulations show that the likelihood of receiving UI benefits during a first period of unemployment is highest among workers from the mining and manufacturing industries. Furthermore, the likelihood of receiving UI benefits when unemployed increases with each previous period of UI receipt across all industries, and the most notable increase occurs in public administration. First-time unemployed workers from construction and manufacturing experience significantly shorter unemployment duration than workers from other industries.

You are an expert at summarizing long articles. Proceed to summarize the following text: In pursuing its mission of assisting small businesses, SBA facilitates access to capital and federal contracting opportunities, offers entrepreneurial counseling, and provides disaster assistance. Program offices are located at SBA’s headquarters and include the offices responsible for oversight of the agency’s key program areas (see fig. 1). For example, the Office of Capital Access delivers services and programs to expand access to capital for small businesses. The Office of Entrepreneurial Development oversees a network of resource partners that offer small business counseling and technical assistance. The Office of Government Contracting and Business Development works to increase participation by small, disadvantaged, and woman-owned businesses in federal government contract awards. The programs it manages include the 8(a) business development program, which is designed to assist small disadvantaged businesses in obtaining federal contracts, and the Historically Underutilized Business Zone (HUBZone) program, which aims to stimulate economic development by providing federal contracting assistance to small firms in economically distressed areas. Finally, the Office of Disaster Assistance makes loans to businesses and families trying to rebuild and recover in the aftermath of a disaster. SBA delivers its services through a network of field offices that includes 10 regional offices and 68 district offices led by the Office of Field Operations (see fig. 2). SBA’s regional offices were established shortly after the agency was created in 1953. These offices, which are managed by politically appointed administrators, play a part in supervising the district offices and promoting the President’s and SBA Administrator’s messages throughout the region. District offices conduct marketing, outreach, and compliance reviews. Considered by officials as SBA’s “boots on the ground,” district offices serve as the point of delivery for most SBA programs and services and work with resource partners to accomplish the agency’s mission. SBA’s field structure has been revised over the years. In response to budget reductions, SBA streamlined its field structure during the 1990s by downsizing regional and district offices and shifting supervisory responsibilities to headquarters. The 10 regional offices originally acted as intermediaries between headquarters and the field and served as communication channels for critical information, policy guidance, and instructions. SBA downsized these offices and reallocated some of the regional offices’ workload to district and headquarters offices and created the Office of Field Operations to act as the field’s representative in headquarters and help facilitate the flow of information between headquarters and district offices. The Office of Field Operations also provides policy guidance and supervision to regional administrators and district directors in implementing SBA’s goals and objectives. Regional offices continue to play a supervisory role by monitoring performance against district goals and coordinating administrative priorities with the districts. Since the early 2000s, SBA has further restructured and centralized some key agency functions. For example, from 2003 through 2006, SBA completed the centralization of its 7(a) loan processing, servicing, and liquidation functions from 68 district offices to 1 loan processing center, 2 commercial loan servicing centers, and 1 loan liquidation and guaranty purchase center. From fiscal years 2003 to 2006, headquarters full-time equivalents (FTE) decreased from 1,154 to 1,089 (see fig. 3). District office FTEs decreased from 1,285 in fiscal year 2003 to 997 in fiscal year 2006, and regional office FTEs remained about the same. In fiscal year 2014, headquarters FTEs were 1,429, district office FTEs were 771, and regional office FTEs were 31. Despite long-standing organizational challenges affecting program oversight and human capital management that we and others have identified, SBA has not documented an assessment of its overall organizational structure, which could provide information on how best to address these challenges. Since its last major reorganization in 2004, the agency has continued to face long-standing organizational and workforce challenges, including complex overlapping responsibilities among offices, poor communication between headquarters and district offices in the administration of programs, and persistent skill gaps, especially in field offices. These challenges can affect SBA’s ability to deliver its programs consistently and effectively, especially in a climate of resource constraints. But its response has been limited to making incremental (piecemeal) changes to some of its divisions to, among other things, consolidate functions or change reporting relationships and offering employees early retirement in an attempt to address skill gaps. SBA told us that it has assessed its organizational structure but did not provide documentation of the results of the assessment. SBA continues to face program oversight and human capital challenges related to its organizational structure. In a January 2003 report on SBA’s management challenges, we found that SBA’s organizational structure created complex overlapping relationships among offices that contributed to challenges in delivering services to small businesses. In 2004, SBA centralized its loan functions by moving responsibilities from district offices to loan processing centers. However, some of the complex overlapping relationships we identified in 2003 still exist (see fig. 4). Specifically, SBA’s organizational structure often results in working relationships between headquarters and field offices that differ from reporting relationships, potentially posing programmatic challenges. District officials work with program offices at SBA headquarters to implement the agency’s programs but report to regional administrators, who themselves report to the Office of Field Operations. For example, the lender relations specialists in the district offices work with the Office of Capital Access at SBA headquarters to deliver programs but report to district office management. Similarly, the business opportunity specialists in the district offices work with the Office of Government Contracting and Business Development at SBA headquarters to assist small businesses with securing government contracts but report to district office management. Further, some officials have the same duties. The public affairs specialists at the district offices and the regional communications directors both handle media relations. In addition, district directors and regional administrators both are to conduct outreach to maintain partnerships with small business stakeholders such as chambers of commerce; lending institutions; economic development organizations; and federal, state, regional, and local governments. They also participate in media activities and speak at public events. In later reports, we and others—including SBA itself—identified organizational challenges that affected SBA’s program oversight and human capital management. In a March 2010 report on the 8(a) business development program, we identified a breakdown in communication between SBA district offices and headquarters (due in part to the agency’s organizational structure) that resulted in inconsistencies in the way district offices delivered the program. For example, in about half of the 8(a) files we reviewed we found that district staff did not follow the required annual review procedures for determining continued eligibility for the program. We found that the headquarters office responsible for 8(a) did not provide clear guidance to district staff. In addition, we found that confusion over roles and responsibilities led to district staff being unaware of the types and frequency of complaints across the agency on the eligibility of firms participating in the 8(a) program. As a result, district staff lacked information that could be used to help identify issues relating to program integrity. We made six recommendations that individually and collectively could improve procedures used in assessing and monitoring the continued eligibility of firms to participate and benefit from the 8(a) program. SBA agreed with the six recommendations when the report was issued. As of July 2015, SBA had taken actions responsive to four of the recommendations. Specifically, it had assessed the workload of business development specialists, updated its 8(a) regulations to include more specificity on the criteria for the continuing eligibility reviews, developed a centralized process to collect and maintain data on 8(a) firms participating in the Mentor-Protégé Program, and implemented a standard process for documenting and analyzing complaint data. Under the Mentor-Protégé Program, experienced firms mentor 8(a) firms to enhance the capabilities of the protégé, provide various forms of business developmental assistance, and improve the protégé’s ability to successfully compete for contracts. The two remaining recommendations yet to be fully implemented as of July 2015 focus on (1) procedures to ensure that appropriate actions are taken for firms subject to early graduation from the program and (2) taking actions against firms that fail to submit required documentation. We maintain that these recommendations continue to have merit and should be fully implemented. noted that this lack of communication could have not only inhibited the sharing of crucial information but also caused inconsistencies in the examinations across field offices. It concluded that these weaknesses in the examination process had diminished the agency’s ability to identify regulator violations and other noncompliance issues in the operation of the program. The OIG recommended that SBA create and execute a plan to improve the internal operations of the examination function, including a plan for better communication. Although SBA disagreed with the recommendation, the agency issued examination guidelines that in 2015 the OIG deemed satisfactory to close the recommendation. In documentation requesting fiscal years 2012 and 2014 Voluntary Early Retirement Authority and Voluntary Separation Incentive Payments (VERA/VSIP) programs, SBA said that long-standing skill gaps (primarily in field offices) that had resulted from the 2004 centralization of the loan processing function still existed. SBA determined that its organizational changes had resulted in a programmatic challenge because employees hired for a former mission did not have the skills to meet the new mission. Specifically, before the centralization field offices had primarily needed staff with a financial background to process individual loans. But the new mission required staff who could conduct small business counseling, develop socially and economically disadvantaged businesses and perform annual financial reviews of them, engage with lenders, and conduct outreach to small businesses. While it has made incremental (piecemeal) changes, SBA has not documented an organizational assessment that it first planned to undertake in 2012. According to federal internal control standards, organizational structure affects the agency’s control environment by providing management’s framework for planning, directing, and controlling operations to achieve agency objectives.A good internal control environment requires that the agency’s organizational structure clearly define key areas of authority and responsibility and establish appropriate lines of reporting. Further, internal control guidance suggests that management periodically evaluate the organizational structure and make changes as necessary in response to changing conditions. Since its last major reorganization in 2004, SBA has seen significant changes, including decreases in budget and an increase in the number of employees eligible to retire. Despite the organizational and managerial challenges it has faced, SBA’s changes to its organizational structure since fiscal year 2005 have been incremental and largely involved program offices at headquarters rather than field offices where we and others have identified many of the organizational challenges. For example, SBA reestablished its Office of the Chief Operating Officer to improve efficiency and restructured the Office of Human Capital Management in response to significant turnover. In addition, following a review of all position descriptions, the Office of Field Operations revamped district office positions to ensure that the positions aligned with SBA’s and its district offices’ strategic plans. No changes to the regional offices were made during the last 10 years. For more information on changes that SBA has made to its organizational structure since fiscal year 2005, see appendix II. In 2012, the agency committed to assessing and revising its organizational structure to meet current and future SBA mission objectives. However, the contractor that SBA hired to assess its organizational structure did not begin its assessment until November 2014. SBA officials told us that the effort was delayed because in February 2013 SBA’s Administrator announced she was leaving the agency and the position was vacant from August 2013 until April 2014. In August 2015, SBA officials told us that after the new administrator reviewed business delivery models and became acclimated to the agency, the agency procured a contractor and work began on the organizational assessment in November 2014. According to the statement of work, the contractor was to assist the chief human capital officer by making recommendations on an agency-wide realignment to improve service delivery models, modernize systems and processes, and realign personnel, among other things. SBA officials told us the contractor completed its assessment in March 2015 and that SBA had completed its assessment of the contractor’s work. However, SBA has not provided documentation that shows when the assessment was completed or that describes the results. Instead of conducting its planned assessment and subsequent reorganization when initially scheduled, SBA used two VERA/VSIP programs to attempt to address workforce challenges, including those related to field offices, resulting from the 2004 reorganization. As noted previously, SBA had identified ongoing skill gaps resulting from the 2004 centralization of the loan processing function. These gaps were primarily in district offices, which are supervised by regional offices. SBA determined that this organizational change had resulted in a gap between the competency mix of the employees who had been hired for one mission (loan processing) and the competency mix needed to accomplish a new mission (business development, lender relations, and outreach). SBA noted that the skill gap was particularly pronounced among 480 employees in two job series—GS-1101 and GS-1102—that included business opportunity specialists, economic development specialists, and procurement staff. In addition, SBA stated that the skill gap had been compounded by recent changes in job requirements and new initiatives that required new skill sets for its employees. SBA’s plans in the aftermath of the fiscal year 2014 VERA/VSIP program include restructuring that would address the skill gaps. Specifically, an October 2014 guidance memorandum on staffing the agency-wide vacancies after the fiscal year 2014 VERA/VSIP stated that an Administrator’s Executive Steering Committee for SBA’s Restructuring would make decisions about restructuring. The memorandum also stated that the chief human capital officer had been tasked with identifying vacant FTEs for new positions that would support any new functions or initiatives envisioned by the administrator’s restructuring efforts. For example, the memorandum noted that 82 of the 147 vacancies would be used to support the restructuring, but did not include details of how these positions would be allocated among program offices. The memorandum added that the remaining 65 vacancies would remain in their respective program offices and that the position descriptions would be modified or positions relocated to meet internal needs. According to SBA, options for restructuring and related hiring were still being considered as of May 2015. We also report on these issues in a related, soon-to-be-released report on SBA’s management and make recommendations as appropriate. Regional administrators supervise and evaluate the district offices within their regions. For example, they help to ensure that the district offices within their boundaries are consistently meeting agency goals and objectives. Field office performance is tracked and assessed by goals, measures, and metrics reports and is largely driven by district office performance. SBA headquarters officials, in consultation with regional and district officials, set the goals and measures for the district offices in part on the basis of a “capacity planner” that considers the number of staff and their positions. Regional office goals are generally the combined goals for the district offices within the region. The six goals are: protecting public funds and ensuring regulatory compliance; supporting lending to small businesses; expanding contracting to small businesses; supporting small business training and counseling; providing outreach to high-growth and underserved communities; and serving as a voice for the small business community. Under these goals are a total of 54 measures that cover specific areas. For example, “maintain and increase active lending” and “expand lender participation through direct outreach” are measures under the goal “supporting lending to small businesses.” According to SBA, 6 of the 10 regions met or exceeded all of their goals in fiscal year 2014. Further, regional administrators are the interface between the district offices and SBA headquarters, overseeing staff across their regions. In particular, they supervise and provide direction to the district directors in their region, who report directly to them. The regional administrators are to meet with district directors quarterly to evaluate progress on meeting critical elements tied to their job descriptions. In addition, according to officials regional administrators may assign district directors tasks to help create a team effort within the region—for example, to explain new legislation that affects small businesses or to focus on alternative financing. Officials we interviewed cited a number of internal communication channels that involved the regional offices. In general, regional administrators help to facilitate communication between headquarters and district offices, specifically concerning program implementation, and serve as the regional points of contact for the Office of Field Operations. As SBA develops proposals for new initiatives, the agency convenes panels that include field officials and are often led by regional administrators. SBA officials cited a panel that was looking at upgrading technology in district offices as an example of a panel that was co-chaired by a regional administrator. In addition, program changes are typically communicated to the Office of Field Operations, which then talks to the regional administrators to get input on how the changes could affect the field offices. Office of Field Operations officials said that they hold a weekly conference call with all 10 regional administrators. If a program is being changed or a new initiative introduced, a manager from the relevant program office would participate in this meeting to provide the information to the regional administrators. The regional administrators share best practices for carrying out their role during these meetings. The regional administrators also told us that they had weekly calls with district office management for their region to discuss agency initiatives and obtain input. Finally, during an annual management conference regional administrators meet with each SBA division to discuss how to implement the programs in the field. Most of the 60 officials we interviewed from the Office of Field Operations and regional and district offices thought that internal communication was effective and sufficient. Senior officials from the Office of Field Operations said that the presence of regional offices enhanced agency communication. All 10 regional administrators pointed to regular communication that occurs between headquarters and the field. For example, one regional administrator noted that having a field office structure fostered effective communication. Fourteen of 19 district managers emphasized that communication within the agency was seamless and that, in addition to scheduled calls and meetings, they communicated with program offices during the course of their work. Twelve of the 28 nonmanagement staff noted that communication was effective and sufficient. However, 5 of the 28 district office nonmanagement staff and 3 of the 19 managers who we interviewed expressed concerns about communication between headquarters and field offices. For example, one district official said that communication was inconsistent and that at times industry officials might know about a program change before district staff had been informed. Another district official said that communications came from too many different sources. For example, program changes were not always consistently communicated to the field offices, and such information could come from the Office of General Counsel instead of a program office. We and the SBA OIG have identified communication challenges that affected program oversight and made recommendations to address these challenges (as discussed earlier in this report). Externally, regional officials are responsible for interpreting, supporting, and communicating the President’s and SBA Administrator’s policies as well as for setting regional priorities. Each regional office has a regional communications director tasked with coordinating SBA’s marketing, communications, and public affairs functions throughout the assigned area. According to SBA, this responsibility includes authorizing all outgoing communication within the region to avoid duplication in communication duties conducted by district offices. Regional administrators attend public speaking engagements, are involved in press activities, and conduct outreach and coordination with small business partners and government officials. Regional administrators also regularly work with representatives from local and state governments and collaborate with economic development departments to help promote SBA’s products and services. In addition, they help manage interagency relations and maintain relationships with industry representatives and suppliers, including in geographic areas that may have unique small business needs. Because regional office costs represent a relatively small part of SBA’s overall costs, closing them would have a limited budgetary effect. However, according to SBA officials closing these offices could cause nonbudgetary challenges such as difficulties in providing supervision to 68 district offices and broadcasting the President’s and SBA administrator’s message. If such closures were to occur, other options exist that could help ensure that these functions are performed effectively. However, it would be important to assess the feasibility of these options and weigh the related costs and benefits before deciding on a course of action. In fiscal year 2013, SBA’s costs for the regional offices totaled slightly more than $4.7 million. Given that these costs constituted less than 1 percent of SBA’s approximately $1 billion appropriation for that year, closing the regional offices would have a limited budgetary effect. The bulk of regional office costs went to compensation and benefits, which totaled $4.5 million in fiscal year 2013. Other administrative costs for the 10 regional offices totaled just $234,539, with individual office budgets ranging from $11,771 to $36,692. According to officials, these funds were spent on travel, equipment, and office supplies. All 10 regional offices are co-located with district offices, so they are not incurring separate rental costs. Further, because (as noted previously) each regional office generally has five employees or fewer, they are not materially affecting district office rental costs. Over half of the headquarters (Office of Field Operations), regional, and district office managers (18 of 32) we interviewed cited challenges that could result if regional offices were to close and their functions were transferred to headquarters and district offices, but a few nonmanagement staff (6 of the 28) offered different views. The challenges managers cited were related to oversight, workload, advocacy, and outreach. First, as mentioned earlier, regional administrators supervise and evaluate the performance of the district offices, responsibilities that would likely have to be transferred to headquarters. The 10 regional administrators oversee between 4 and 10 district offices each. Fifteen headquarters, regional, and district managers we interviewed said that without regional supervision, all 68 district directors would likely report to two senior officials in the Office of Field Operations. Eight of these officials said that it would be difficult for these two individuals to manage all 68 districts and to understand the economic, political, and other nuances of each district. Second, four regional and district managers we interviewed noted that one of the regional administrators’ responsibilities was to help “even out” the workload among district offices to ensure that the offices could continue to carry out their responsibilities even with critical vacancies. For example, regional administrators can request that a lender relations specialist in one district office take on additional duties to help another district office that has lost staff. Thus, the managers were concerned that without regional offices, district offices would be challenged to address such workload issues. Third, according to six district managers, the district offices would lose their advocates for resources if the regional offices closed. For instance, regional administrators identify training and staffing needs across the region and emphasize these issues during their interactions with the Office of Field Operations. Officials we interviewed also noted that without regional offices, SBA would lose its knowledge of regional needs, which headquarters and district offices might not have. These officials stated that regional administrators had a broad view of the district offices in their regions and could see differences and similarities among offices. For example, a district official noted that a regional administrator might be aware of a specific issue within a particular district office, see the similarities with the challenges of another district office, and develop a solution. Fourth, six headquarters, regional, and district managers we interviewed said that SBA would experience challenges in promoting SBA’s message without the regional offices. Thirteen headquarters, regional, and district officials emphasized that as political appointees, regional administrators played a greater role than district directors, who are career officials, in explaining and amplifying the President’s and SBA Administrator’s message and priorities. For example, officials cited the role of regional administrators in informing small businesses, during the time when the Patient Protection and Affordable Care Act was pending, of how the bill might affect them. Conversely, six nonmanagement district staff we interviewed and union officials told us that they did not see a particular need for the regional offices. Three district officials said that they could coordinate directly with headquarters instead of coordinating with the regional offices. One of these district officials noted that SBA would be more efficient if the functions of the regional and district offices were consolidated. Another of these district officials could not identify the impact of the regional offices, despite the regional administrators’ stated roles in providing guidance and supervision. In addition, union officials stated that the outreach responsibilities of the district directors and regional administrators were duplicative, pointing out that both regional and district officials did outreach to small businesses in their communities. However, as noted previously regional communications directors are expected to authorize all outgoing communication within the region to avoid duplication. We recognize that the regional administrators and other staff in the regional offices provide a number of services for SBA. However, if closures were to occur, there are options available to address these challenges. For example, one option could involve adding career senior officials to the Office of Field Operations to address the challenge of overseeing the 68 district offices. In addition, to address the challenge of the potential loss of flexibility in managing district office workloads, district directors could coordinate with each other to help distribute the workload among their offices. Alternatively, this responsibility could be assigned to the Office of Field Operations. An option to address the challenge associated with the loss of regional administrators as advocates would be having district directors collaborate to identify the needs of the various offices and advocate directly to the Office of Field Operations. However, before deciding on whether regional offices should be closed or selecting an alternative option, it is important to carefully assess the feasibility of these options as well as any others and to weigh the costs and benefits associated with available options and closure of the regional offices. We sent a draft of this report to SBA for review and comment. SBA provided technical comments that we incorporated into the report as appropriate. As part of these comments and in response to a GAO point that certain types of statement constitute prohibited “grassroots” lobbying, SBA clarified that “o SBA employee, whether career or political, is authorized or encouraged to ‘grassroot’ lobby … to support or oppose pending legislation.” We modified our draft report to take into account SBA’s clarification. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to SBA and appropriate congressional committees. This report also will be available at no charge on our website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. This report (1) examines any challenges associated with the Small Business Administration’s (SBA) organizational structure; (2) describes the specific responsibilities of the regional offices; and (3) discusses the budgetary effects of closing the regional offices and SBA managers’ and staff’s views on other possible effects of closures. For the background, we analyzed data on staffing levels at headquarters, regional, and district offices from fiscal years 2003 through 2014 (to include staffing levels prior to and after SBA’s last major reorganization in 2004). To assess the reliability of these data, we interviewed SBA officials from the Office of Human Resource Solutions to gather information on the completeness and accuracy of the full-time equivalent database and examined the data for logical inconsistencies and completeness. We determined that the data were sufficiently reliable for the purposes of reporting on staffing levels. For all objectives, we interviewed SBA headquarters officials in the Office of Field Operations, the 10 regional administrators, management and nonmanagement staff at 10 district offices, and union representatives. Specifically, to obtain perspectives from SBA district office officials, we selected a nonrandom, purposive sample of 10 of the 68 district offices, 1 from each SBA region to provide national coverage. We randomly selected 7 of the 10 district offices from those offices located within the continental United States. We selected the Washington, D.C., and Georgia district offices to pre-test our interview questions because of proximity to GAO offices. We selected the New York district office to include an additional large office to better ensure a variety of offices with both a larger and smaller number of employees. During our visit to 9 of the 10 district offices, we interviewed the office managers (district directors and deputy district directors). At the remaining district office, the deputy district director could not attend the meeting. For our interviews with nonmanagement staff at the 10 district offices, district office management invited any interested nonmanagement staff to meet with us. However, as a condition of meeting with nonmanagement staff, SBA’s general counsel required inclusion of district counsel in these interviews. Of the approximately 120 nonmanagement district staff members invited to speak with us, 28 participated in the interviews. We generally met with the participating staff as a group. Because participation by nonmanagement staff members was limited, we provided them an additional opportunity to share their perspectives via e-mail. Specifically, we sent an e-mail to all nonmanagement staff at those 10 district offices, inviting them to share their thoughts on specific topics by sending an e- mail to a specified GAO e-mail address. Nine staff members from 6 of these offices responded to our e-mail, three of whom also attended our interviews. The e-mails were used as additional information sources and to corroborate what we heard in the interviews. The results of our interactions with the 10 district offices cannot be generalized to other SBA district offices. The group of union representatives we interviewed was from headquarters and the field. In conducting this review, we focused on the role of regional offices. A related, soon-to-be-released GAO report addresses a range of SBA management issues. To review SBA’s organizational structure, we reviewed prior GAO and SBA Inspector General reports that discussed, among other things, the effect of the agency’s structure on its human capital management and program oversight. We also examined documentation on changes to SBA's organizational structure from fiscal year 2005 to 2014 (the period after SBA’s last major reorganization in 2004). Specifically, we requested and reviewed all of the forms that SBA used to document organizational changes that were approved during this period. We also reviewed documentation on SBA’s planned efforts to assess its organizational structure—including its Strategic Human Capital Plan Fiscal Years 2013- 2016, guidance implementing its fiscal year 2014 Voluntary Early Retirement Authority (VERA) and Voluntary Separation Incentive Payments (VSIP) programs, and the statement of work for a contractor’s assessment of organizational structure—and compared these plans to federal internal control standards. To determine the specific responsibilities of the regional offices, we reviewed position descriptions for the regional administrator and regional communications director, and compared them to the position descriptions for the district director and public affairs specialist. In addition, we interviewed officials at headquarters, regional, and district offices. We also analyzed data on the 10 regional offices from the field office goals, measures, and metrics reports from fiscal year 2014 (the most currently available data). To assess the reliability of these data, we reviewed the goals, measures, and metric reports for outliers and interviewed officials from the Office of Field Operations to obtain information on the completeness and accuracy of the database. We determined that the data were sufficiently reliable for the purpose of reporting on field performance. To determine how closing SBA’s regional offices could affect SBA, we analyzed fiscal year 2013 operating budgets and compensation and benefits data for the regional offices. SBA had to create a report that separated regional costs from other field office costs, and fiscal year 2013 data were the most recent data available at the time they generated the report. To assess the reliability of these data, we examined the data for logical inconsistencies and completeness and reviewed documentation on the agency’s financial system. We also interviewed officials from the Office of the Chief Financial Officer to gather information on the completeness and accuracy of the budget database. We determined that the data were sufficiently reliable for the purpose of reporting on SBA’s regional office costs. Additionally, we reviewed documentation on the tenure of regional administrators and acting regional administrators from fiscal years 2005 through 2014 to determine turnover. We also interviewed SBA officials about the costs of operating the regional offices and the potential effects of transferring the responsibilities of the regional offices to the district offices. We conducted our work from June 2014 through 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 Small Business Administration (SBA) made a number of incremental (piecemeal) changes to its organizational structure in fiscal years 2005- 2014, as illustrated by the following examples. In 2007, SBA reorganized five program offices and four administrative support functions in order to clearly delineate reporting levels, among other things. The agency also eliminated the Chief Operating Officer as a separate office and integrated its functions into the Office of the Administrator. In 2008, the Office of Equal Employment Opportunity and Civil Rights Compliance began reporting directly to the Associate Administrator for Management and Administration to facilitate better oversight, planning, coordination, and budgeting for all of the agency’s administrative management operations. In 2010, SBA consolidated financial management by moving its procurement function to the Office of the Chief Financial Officer and transferring day-to-day procurement operations from headquarters to the agency’s Denver Finance Center. This change was intended to improve the efficiency and effectiveness of SBA’s acquisition programs. In 2011, SBA restructured the Office of Human Capital Management in response to significant turnover that had a serious effect on the level and scope of services. The reorganization streamlined the office, which was renamed the Office of Human Resources Solutions, by reducing the number of branches and divisions. In 2012, new offices were created in the Office of Capital Access to respond to, among other things, growth in small business lending programs and increased servicing and oversight responsibilities following the 2007-2009 financial crisis. The changes sought to help the agency become a better partner with lending institutions and nonprofit financial organizations to increase access to capital for small businesses. In 2012, SBA established a new headquarters unit within the Office of Government Contracting and Business Development and made it responsible for processing the continued eligibility portion of the annual review required for participants in the 8(a) program. Prior to this change, district officials, who are also responsible for providing business development assistance to 8(a) firms, were tasked with conducting exams of continued eligibility. While district officials have continued to perform other components of the annual review, shifting the responsibility for processing continued eligibility to headquarters was designed to eliminate the conflict of interest for district officials associated with performing both assistance and oversight roles. In 2012, the Office of Field Operations revamped field office operations following a 2010 review of all position descriptions to ensure that they aligned with SBA’s strategic plan and its district office strategic plans. Many position descriptions were rewritten, although there were no changes in grade or series. Before the review, district offices had two principal program delivery positions—lender relations specialist and business development specialist. As a result of the review, descriptions for both positions were rewritten, and the business development specialist position became two—economic development specialist and business opportunity specialist. The skills and competencies for the new position descriptions focused on the change in the district offices’ function from loan processing to compliance and community outreach in an effort to address skill gaps. As a result, staff were retrained for the rewritten positions. In 2013, SBA reestablished the Office of the Chief Operating Officer (formerly the Office of Management and Administration) to improve operating efficiency. Among other things, this change transferred Office of Management and Administration staff to the reestablished office, along with the Office of the Chief Information Officer and the Office of Disaster Planning, which saw its mission expanded to include enterprise risk management. In addition to the contact named above, A. Paige Smith (Assistant Director), Meredith P. Graves (Analyst-in-Charge), Jerry Ambroise, Emily Chalmers, Pamela Davidson, Carol Henn, John McGrail, Marc Molino, Erika Navarro, William Reinsberg, Deena Richart, Gloria Ross, and Jena Sinkfield made key contributions to this report.

SBA was created in 1953, and its regional offices were established shortly thereafter. In the late 1990s and early 2000s, the agency downsized the staff and responsibilities of the regional offices. These offices, which are managed by politically appointed administrators, are currently responsible for supervising SBA's district offices and promoting the President's messages throughout the region. GAO was asked to review SBA's current organizational structure, with a focus on the regional offices. Among other objectives, this report (1) examines challenges related to SBA's organizational structure and (2) discusses the budgetary effects of closing the regional offices and SBA managers' and staff's views on other possible effects of closures. GAO reviewed documentation on changes to SBA's organizational structure from fiscal years 2005-2014 (following SBA's last major reorganization in 2004); analyzed data on fiscal year 2013 regional budgets (the most recent data SBA provided); and interviewed a total of 60 SBA officials at headquarters, all 10 regional offices, and a nongeneralizable sample of 10 of the 68 district offices (one from each region reflecting a variety of sizes). While long-standing organizational challenges affected program oversight and human capital management, the Small Business Administration (SBA) has not documented an assessment of its overall organizational structure that could help determine how to address these challenges. SBA currently has a three-tiered organizational structure—headquarters offices, 10 regional offices, and 68 district offices. SBA's last major reorganization was in 2004, when it moved loan processing from district offices to specialized centers and assigned district offices new duties, such as small business counseling. But the agency has continued to face long-standing organizational and workforce challenges, including complex overlapping responsibilities among headquarters and regional offices and skill gaps in district offices (which are supervised by regional offices). These challenges can affect SBA's ability to deliver its programs consistently and effectively, especially in a climate of resource constraints. SBA's response has been limited to (1) making incremental changes to some of its divisions such as consolidating functions or changing reporting relationships and (2) offering employees early retirement. SBA committed to assessing and revising its organizational structure in 2012 but has not yet documented this effort. Although a contractor studied SBA's organizational structure in March 2015 and SBA stated it had completed its assessment of the contractor's work as of August 2015, it has not provided documentation of this assessment. In a related, soon-to-be-released report on SBA's management, GAO assesses the agency's organizational structure and makes recommendations as appropriate. Closing SBA's 10 regional offices, as some have suggested, would have a limited effect on SBA's budget, but the impact on operations is less clear. Compensation and benefits—totaling $4.5 million in fiscal 2013—were the largest costs of regional offices, which together had other administrative costs totaling about $235,000 and were co-located with district offices. Because these costs constituted less than 1 percent of SBA's approximately $1 billion appropriation in 2013, closing the regional offices would have a limited budgetary effect. But over half of the SBA managers GAO interviewed (18 of 32) said that closing regional offices could pose operational challenges. First, headquarters, regional, and district managers said that eliminating the 10 regional administrators would require one headquarters office to supervise 68 district directors. Second, regional and district officials were concerned that SBA would lose the overall regional perspective and ability to balance workloads within regions. Third, headquarters, regional, and district managers explained that the agency would be challenged to promote SBA's message without regional offices. They emphasized the role that regional administrators play in explaining and amplifying the President's and SBA Administrator's messages and priorities. However, a few (6 of 28) nonmanagement staff GAO interviewed disputed the importance of regional administrators, some stating that district offices could coordinate directly with headquarters offices. GAO recognizes that regional administrators and offices provide a number of services for SBA. If closures were to occur, there are options available to address these challenges. However, it would be important to carefully assess the feasibility of these options and weigh the related costs and benefits before deciding on a course of action. GAO is not making recommendations in this report. However, in a related, soon-to-be-released report examining SBA management issues, GAO assesses organizational structure and makes recommendations as appropriate.

You are an expert at summarizing long articles. Proceed to summarize the following text: In June 2002, the Coast Guard awarded a contract to ICGS to begin the acquisition phase of the Deepwater program. Rather than using the traditional approach of replacing classes of ships or aircraft through a series of individual acquisitions, the Coast Guard chose to employ a “system of systems” acquisition strategy that would replace its aging assets of ships, aircraft, and communication capabilities with a single, integrated package of new or modernized assets and capabilities. The focus of the program is not just on new ships and aircraft, but rather on an integrated approach to modernizing existing or “legacy” assets while transitioning to newer, more capable assets, with improved command, control, communications and computers, intelligence, surveillance, and reconnaissance (C4ISR) capabilities. At full implementation, the Deepwater program will replace the Coast Guard’s entire fleet of current deepwater surface and air assets, comprising three classes of new cutters and their associated small boats, a new fixed-wing manned aircraft fleet, a combination of new and upgraded helicopters, and both cutter-based and land-based unmanned air vehicles (UAVs). In addition, all of these assets will be linked with state-of-the-art C4ISR capabilities and computers and will be supported by an integrated logistics management system. ICGS, a business entity jointly owned by Northrop Grumman and Lockheed Martin, acts as the system integrator to develop and deliver the Deepwater program. They are the two first-tier subcontractors for the program and either provides Deepwater assets themselves or award second-tier subcontracts for the assets. The Coast Guard’s contract with ICGS has a 5-year base period with five additional 5-year options. The Coast Guard is scheduled to decide on whether to extend ICGS’s contract by June 2006, which is 1 year prior to the end of the first 5-year contract term. Although ICGS is responsible for designing, constructing, deploying, supporting, and integrating Deepwater assets, the Coast Guard maintains responsibility for oversight and overall management of the program. To help fulfill this responsibility, the Coast Guard uses several management tools to track progress in the program, such as monthly status reports called quad reports, a performance-based management tool called the Earned Value Management System (EVMS), and a schedule management system called IMS. The quad reports are monthly summaries of the work performed on the various deepwater assets and were developed to give managers a monthly progress report on the performance of the program in such areas as cost, schedule, and contract administration. EVMS is used to track cost and schedule for certain delivery orders that have been placed to manage the risk of the major assets and activities. IMS is a three-tiered, calendar-based schedule used to track the completion of tasks and milestones of the individual Deepwater delivery task orders. However, data reliability with IMS has been an area of concern for the Coast Guard, and it is currently working with a private contractor and ICGS to address these concerns. Currently, the Coast Guard only maintains the lowest and most detailed level of IMS with monthly updates. These updates reflect the status of active contracts of individual assets and feed into EVMS’s monthly cost performance reports of those individual contracts, which allow program management to monitor the cost, schedule, and technical performance of ongoing work at these lowest and most detailed levels. In recent months, we have issued two reports that have raised concern about the Coast Guard’s initial management of the Deepwater program and the potential for escalating costs. In March 2004, we reported that key components needed to manage the Deepwater program and oversee the system integrator’s performance have not been effectively implemented. We recommended that the Secretary of Homeland Security direct the Commandant of the Coast Guard to take a number of actions to improve Deepwater program management and contractor oversight. In April 2004, we testified that the most significant challenge the Coast Guard faces as it moves forward in the Deepwater program is keeping the program on schedule and within planned budget estimates. We noted that the Coast Guard was at risk of having to expend funds to repair deteriorating legacy assets that otherwise had been planned for Deepwater modernization initiatives, which could potentially further delay the program and increase total program costs. We noted further that the Coast Guard’s current estimate for completing the acquisition program within the 20-year schedule has risen to $17.2 billion, an increase of $2.2 billion over the original $15 billion estimate. The degree to which the Deepwater program is on track with regard to its original 2002 acquisition schedule is difficult to determine, because the Coast Guard has not maintained and updated the acquisition schedule. The original acquisition schedule included acquisition phases (such as concept technology and design, system development and demonstration, and fabrication), interim phase milestones (such as preliminary and critical design reviews, installation, and testing), and the critical paths integrating the delivery of individual components to particular assets. However, while the Coast Guard has what is called an integrated master schedule, it currently uses it only at the lowest and most detailed levels and have not updated it to demonstrate whether individual components and assets are being integrated and delivered on schedule and in the critical sequence. There are a number of reasons why tracking the current integrated schedule on a major government investment or acquisition is important, but two stand out. First, our work has shown that it is important to identify potential risks in major acquisitions as early as possible so problems can be avoided or minimized. The ability to achieve scheduled events is a key indicator of risk. Second, cost, schedule, and performance are fundamental to the Congress’s oversight of major acquisitions. In fact, by law, DOD’s major defense acquisition programs have to report cost, schedule, and performance updates to the Congress at least annually and whenever cost and schedule thresholds are breached. In practice, schedules on DOD’s major defense acquisitions are continually monitored and reported to management on a quarterly basis. While Coast Guard officials indicated that the management tools they use are sufficient for tracking delivery dates throughout the acquisition, we found that these tools could not provide a ready and reliable picture of the current integrated Deepwater acquisition schedule. For example, IMS has had problems with data reliability and the monthly status reports, while assessing the progress of individual assets, do not translate those individual assessments into an overall integrated Deepwater acquisition schedule. In fact, the February 2004 status report noted that because there was no accurate overall integrated schedule for the command and control design phase, the linkages with the development of other assets were largely unknown. Although maintaining a current integrated schedule is a best practice for ensuring adequate contract oversight and management and is a requirement for DOD acquisitions, Coast Guard officials said they have not done so because of the numerous changes the Deepwater Program experiences every year and because of the cost, personnel, and time involved in crafting a revised master plan with the systems integrator on an annual basis. The officials said they have not planned to update the original acquisition schedule until just prior to deciding whether to extend the award of the next 5-year Deepwater contract in 2007. However, we have found that in acquisitions of similar scope—and in particular, acquisitions made by DOD—maintaining a current schedule is a fundamental practice that the department considers necessary. While the Coast Guard could not provide us with an updated integrated schedule, we developed the current acquisition status of a number of selected Deepwater assets from documents provided by the Coast Guard. Our analysis indicates that several Deepwater assets and capabilities have experienced delays and are at risk of being delivered later than anticipated in the original implementation plan. For example, the delivery of the first two maritime patrol aircraft is behind schedule by about 1 year, and the delivery and integration of the vertical-take-off-and-land unmanned air vehicle to the first national security cutter has been delayed 18 months. The $168 million appropriated in fiscal year 2004 for the Deepwater program above the President’s request of $500 million will allow the Coast Guard to conduct a number of projects that had been delayed or would not have been funded in fiscal year 2004, but it will not fully return the program to its original 2002 acquisition schedule. Our analysis indicates there are several reasons for this result. First, even with the additional amount, the program still had a cumulative funding shortfall of $39 million through fiscal year 2004, as compared to the Coast Guard’s planned funding amount. Second, because part of the additional $168 million was needed to start work delayed from fiscal year 2003, it did not provide enough funding for the delayed work and for all the work that the Coast Guard had originally planned for fiscal year 2004. As a result, some of this work will have to be delayed to fiscal year 2005. Third, the delivery of some assets has fallen so far behind schedule that it is impossible to ensure their delivery according to the original 2002 implementation schedule by simply providing more money. For example, according to the 2002 implementation schedule, nine maritime patrol aircraft were to be delivered by the end of 2005; according to the current contract, none will be delivered in 2005 and two will be delivered by the end of 2006. Similarly, the original schedule called for completing 18 123-foot patrol boat conversions by the end of 2005; according to the current contract, 8 will be completed by the end of 2005. Fourth, the acquisition of some assets has been delayed for reasons other than funding. For example, greater than anticipated hull corrosion in the 110 ft. patrol boats has delayed the conversion of those into 123 footers and delays in the availability of faster satellite service for legacy cutters has delayed the delivery of those upgraded legacy cutters. Finally, in keeping with appropriations conference committee directives for how the additional amount was to be spent, part of the additional funding went for design of the offshore patrol cutter, work that, under the original schedule, would not begin for another 6 to 8 years. This work may speed up acquisition of these assets, but they were not on the original schedule this early in the program. The Coast Guard is currently revising Deepwater’s mission needs statement in response to increased homeland security requirements resulting from the terrorist attacks of September 11, 2001. According to the Coast Guard, in May 2004 it submitted the revised statement to the Department of Homeland Security’s (DHS) Joint Requirements Council, which conditionally accepted it until the Deepwater contractor, ICGS, completes a new estimate of the costs needed to acquire the necessary functional capabilities resulting from the revised mission needs statement. The council further directed the Coast Guard to complete the new cost estimate in order to brief the DHS Investment Review Board in October 2004. Acting as an agent of the DHS, the board will approve any increases in the Deepwater total ownership cost associated with the revised mission needs statement and any growth in the Deepwater budget. Specifications for some specific Deepwater assets—most notably the National Security Cutter—will be changed in light of the Coast Guard’s added homeland security responsibilities. Coast Guard officials said the main impact of the revision would be to close the gaps in Deepwater asset capabilities created by the expansion of Coast Guard mission requirement after September 11. Regarding DOD’s assistance to the Coast Guard for Deepwater, the Navy budgeted $25 million for the Deepwater program in fiscal years 2002-04, mainly to help outfit the National Security Cutter. The Navy budgeted these funds to provide capabilities and equipment it regarded as important for the Coast Guard to have for potential national defense missions that would be carried out in conjunction with Navy operations. The 2002 Deepwater acquisition schedule showed not only the individual planned phases and interim milestones for designing, testing, and fabricating assets but also the integrated schedules of critical linkages between assets. The absence of an up-to-date integrated acquisition schedule for the Deepwater program is a concern, because it is a symptom of the larger issues we reported in March 2004 that are related to whether this complicated acquisition is being adequately managed and whether the government’s interests are being properly safeguarded. Since the inception of the unique contracting approach to this project, we have pointed out that it poses risks, in that it would be expensive to alter and, because of the unique “systems integrator” approach, does not operate like a conventional acquisition. The recent disclosure that, just 3 years into the acquisition, costs have risen by $2.2 billion points to the need for a clear understanding of what assets are being acquired, when they are being acquired, and at what cost. This lack of such a current schedule lessens the Coast Guard’s ability to monitor the contractor’s performance and to take early action on potential risks before they become problems later in the program. The Coast Guard has so far maintained that it is not worth the time and cost involved to update the acquisition schedule until just before the award of the next 5-year Deepwater contract, but we disagree. We recognize that there are costs involved with keeping an acquisition schedule updated. However, for Department of Defense acquisitions of such scope, maintaining a current schedule is a fundamental and necessary practice. Deepwater remains a program in transition, in that the Coast Guard is currently revising the program’s mission requirements to include increased homeland security requirements. The major modifications that may result to key assets make keeping the program on track that much harder. As evolving mission requirements are translated into decisions about what assets are needed and what capabilities they will need to have, it becomes even more imperative that Coast Guard officials update the acquisition schedule on a more timely basis, so that budget submissions by the Coast Guard can allow DHS and Congress to base decisions on accurate information. We recommend that the Secretary of Homeland Security direct the Commandant of the Coast Guard to update the original 2002 Deepwater acquisition schedule in time to support the fiscal year 2006 Deepwater budget submission to DHS and Congress and at least once a year thereafter to support each budget submission. The updated schedule should include the current status of asset acquisition phases (such as concept technology and design, system development and demonstration, and fabrication), interim phase milestones (such as preliminary and critical design reviews, installation, and testing), and the critical paths linking the delivery of individual components to particular assets. We provided a draft of this report to DHS and the Coast Guard for their review and comment. In written comments, which are reproduced in appendix II, the Coast Guard generally concurred with the findings and recommendations in the report. The Coast Guard also provided technical comments, which we incorporated as appropriate. The Coast Guard, however, did not concur with three areas of discussion. First, the Coast Guard said that our draft report did not accurately portray its current acquisition tools and disagreed with our determination that data within one of those tools, the IMS, was not reliable enough for use in our report. As we noted in the report, at the time of our review Coast Guard officials expressed concerns about the reliability of IMS data, such as out-dated data and less than adequate data input and adjustment, and told us that they had hired a consultant to address those concerns. For that reason and with Coast Guard and ICGS agreement on our methodology, we based our analysis on the same source documents the Coast Guard uses as inputs to IMS’s lowest, most detailed level. The Coast Guard stated in its written comments that while not in the form of an acquisition schedule, IMS’s lower level data are reliable. According to its written comments, the Coast Guard is making improvements in updating IMS at all levels. Second, the Coast Guard said that we did not highlight that delays in the delivery schedule have been caused by a lack of funding and the subsequent need to sustain legacy assets rather than a lack of acquisition schedule updates. The scope of our review was to determine the impact of the additional $168 million in fiscal year 2004 on returning Deepwater to its original 2002 schedule, not to determine effects of receiving appropriations that were less than requested in previous years. However, in explaining why the $168 million will not return the Deepwater to its original schedule, we did note that part of the $168 million was needed to start work delayed from fiscal year 2003, and that the acquisition of some assets had been delayed due to greater than anticipated hull corrosion in legacy 110-foot patrol boats causing the delay in converting them to 123- footers. Finally, we did not intend to imply that the lack of acquisition schedule updates caused delays in delivery schedule. However, we continue to believe that not updating an integrated schedule to show the acquisition linkages between critical assets is a management concern. We believe in the importance of updating acquisition schedules at least annually not only as a best practice for managing and overseeing a complex integrated acquisition such as Deepwater but also as a up-to-date source of information on which DHS and the Congress can base annual budget decisions. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days from its issue date. At that time, we will send copies of this report to the Secretary of Homeland Security, the Commandant of the Coast Guard, appropriate congressional committees, and other interested parties. The 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 questions about this report, please contact me at (415) 904-2200 or by email at [email protected], or Steve Calvo, Assistant Director, at (206) 287-4839 or by email at [email protected]. Other key contributors to this report were Shawn Arbogast, Leo Barbour, David Best, Michele Fejfar, Paul Francis, Sam Hinojosa, David Hooper, Michele Mackin, and Stan Stenersen. the Coast Guard’s status in revising Deepwater’s mission to meet increased homeland security requirements and the amount of funding support the Department of Defense (DOD) has provided for the Deepwater program for fiscal years 2002-2004. Interviewed Coast Guard and contractor officials. Examined delivery task orders and associated statements of work for individual Deepwater assets to establish what work was actually started, when it began, and the period of performance for that work; and monthly status reports of Deepwater program managers assessing the performance of the work. Compared the actual start and end dates of work with what was planned in the original 2002 acquisition schedule. Compared the original plan’s listing of the work scheduled to begin for each fiscal year with the work that was actually begun. Interviewed program officials regarding the reliability of data in the Deepwater integrated master schedule. Interviewed DOD officials and examined Navy budget documents to determine DOD funding support for Deepwater. The degree to which the Deepwater program is on track with regard to its original 2002 acquisition schedule is difficult to determine, because the Coast Guard has not kept the acquisition schedule updated. Several assets are experiencing delays and are at risk for being delivered later than originally planned. The additional $168 million appropriated in fiscal year 2004 will allow the Coast Guard to conduct a number of projects that had been delayed or would not have been funded in fiscal year 2004, but it will not fully return the program to its original 2002 acquisition schedule. Additional information on the Deepwater Program. The Coast Guard submitted a revised Mission Needs Statement to the Department of Homeland Security in May 2004. Navy budgeted $25 million in fiscal years 2002-04 for intermediate gun and combat systems for cutters. of over 90 cutters and 200 aircraft used for missions that generally occur beyond 50 miles from shore but may start at coasts and extend seaward to wherever the Coast Guard is required to take appropriate action. In June 2002, the Coast Guard awarded a 5-year base contract to Integrated Coast Guard Systems (ICGS), Inc., to begin the acquisition phase of the Deepwater program, with five additional 5-year options. The Coast Guard is scheduled to decide on whether to extend ICGS’s contract by June 2006, 1 year prior to the end of the first 5-year contract term. The Coast Guard chose to employ a "system of systems" acquisition strategy that would replace its aging Deepwater assets with a single, integrated package of new or modernized assets. ICGS acts as the system integrator to develop and deliver an improved integrated system of ships, aircraft, unmanned air vehicles, command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR), and supporting logistics. Background (cont’d) ICGS is responsible for designing, constructing, deploying, supporting, and integrating Deepwater assets. The Coast Guard maintains responsibility for oversight and overall management of the program. The Coast Guard uses several management tools to track progress in the program, such as monthly status reports, Earned Value Management System (EVMS), and an integrated master schedule. However, because data reliability with the integrated master schedule has been an area of concern for the Coast Guard, they are currently working with a private contractor and ICGS to address these concerns. Background (cont’d) GAO recently reported concerns with the Coast Guard’s initial management of the Deepwater program and the potential for escalating costs. Key components needed to manage the Deepwater program and oversee the system integrator’s performance have not been effectively implemented. Contract Management: Coast Guard’s Deepwater Program Needs Increased Attention to Management and Contractor Oversight, GAO-04-380 (Washington, D.C.: Mar. 9, 2004). The most significant challenge to the Coast Guard is keeping the Deepwater program on schedule and within planned budget estimates through a well-managed and adequately funded effort. The Coast Guard estimates that the project’s cost is now $2.2 billion more than the initial estimate. Coast Guard: Key Management and Budget Challenges for Fiscal Year 2005 and Beyond, GAO-04-636T (Washington, D.C.: Apr. 7, 2004). acquisition schedule is difficult to determine, because the Coast Guard does not maintain and update the acquisition schedule. The Coast Guard cannot readily and reliably present the integrated acquisition status of the Deepwater program. The Coast Guard’s reasons for not updating the schedule include: Updating more regularly is impractical and unnecessary because Deepwater experiences numerous program changes each year and keeping track of those changes would consume too much funding, time, and personnel. Monthly status reports, EVMS, and other management tools are adequate for tracking Deepwater’s acquisition. The Coast Guard intends to update the schedule prior to deciding whether to extend the first 5-year option to the contractor in 2007. Status of Acquisition Schedule (cont’d) Tracking the current integrated schedule on a major government investments or acquisitions similar to the Deepwater program is important because identifying potential risks in major acquisitions as early as possible is important so problems can be avoided or minimized. The ability to achieve scheduled events is a key indicator of risk. cost, schedule, and performance are fundamental to the Congress’s oversight of major acquisitions. By law, DOD’s major defense acquisition programs have to report cost, schedule, and performance updates to the Congress at least annually and whenever cost and schedule thresholds are breached. 10 U.S.C. Sections 2430, 2432, 2433, and 2435, on major defense acquisition programs. In practice, schedules on major defense acquisitions are continually monitored and reported to DOD management on a quarterly basis. DOD Practice: Interim Defense Acquisition Guidebook (October 2002). GAO best practices reports: Best Practices: Better Matching of Needs and Resources will Lead to Better Weapon System Outcomes, GAO- 01-288 (Mar. 8, 2001); Defense Acquisitions: DOD’s Revised Policy Emphasizes Best Practices, but More Controls are Needed, GAO 04- 53 (Nov. 10, 2003); and Defense Acquisitions: Assessments of Major Weapons Programs, GAO-04-248 (Mar. 31, 2004). They only only track the schedules of individual assets at the lowest, most detailed level and not at the integrated level. The integrated master schedule has data reliability problems. The monthly status reports do not translate the progress of individual assets into an overall Deepwater acquisition schedule. A February 2004 status report noted that because there was no accurate overall integrated schedule for the command and control design, the linkages with the development of other assets were largely unknown. schedule, our analysis showed that a number of key Deepwater assets would be delivered later than originally scheduled. Status of Acquisition Schedules for Selected Assets (cont’d) Part of the additional $168 million in funding allowed the Coast Guard to start work delayed from fiscal year 2003 or to start work originally scheduled for fiscal year 2004. Atlantic area Pacific area Greater antilles section, San Juan, P.R. 2004 will not fully return Deepwater to its original 2002 acquisition schedule. Reason 1: A cumulative shortfall of $39 million still exists. Reason 2: The additional amount did not fund all work planned for fiscal year 2004; some will be delayed to fiscal year 2005 or beyond. Type of asset or work delayed to fiscal year 2005 or beyond C4ISR Modification of 270 Class Cutter ships 10,13 CAMS CC-2 Low Rate of Initial Production COMMSTA CC-2 Low Rate of Initial Production (CSTA-01,02,03,04,05,06) Production and Deployment for Major Modification of 110/123 Class Patrol Cutter Lot 5 (follow ships 13-20) Coast Guard Air Station (CGAS) Production and Deployment Aircraft Repair and Supply Center (AR&SC) Production and Deployment Aircraft Training Center (ATC) Production and Deployment Aviation Technical Training Center (ATTC) Production and Deployment Production and Deployment of MPA Low rate of initial production (aircraft 7-9) Impact of Additional Funding (cont’d) Reason 3: Some assets are so far behind schedule that it is impossible to return them to their original schedule. Nine maritime patrol aircraft were originally planned for delivery by the end of 2005; current plans show 2 to be delivered by the end of 2006. Eighteen conversions of 110-foot patrol boats to 123 feet were originally planned for delivery by the end of 2005; current plans show 8 to be completed by the end of 2005. than funding. Greater than anticipated hull corrosion in the 110-foot patrol boats has delayed their conversion to 123 feet and delivery several months. Legacy cutters are scheduled to receive a C4ISR upgrade of higher speed International Maritime Satellite service. However, the availability of the higher speed service has been delayed several times from early 2003 to the Coast Guard’s current projection of June 2004. scheduled to begin for several years. In keeping with fiscal year 2004 appropriations conference committee directives for how the additional amount was to be spent, $20 million went to begin the design phase for the Offshore Patrol Cutter (OPC). The Coast Guard had planned to begin the design phase about 2010 for delivery of the first OPC in 2012; current estimate is that the acquisition schedule has been accelerated by several years. Incorporation of new homeland security requirements into the Deepwater mission needs statement is still under way. In May 2004, the DHS Joint Requirements Council conditionally accepted it and directed the Coast Guard to develop new total ownership cost estimates for submission to and approval by the DHS Investment Review Board in October 2004. Coast Guard officials said the revision’s main impact will be an increase in number of assets. RAND concluded in an April 2004 study that the Coast Guard probably needs twice as many cutters and 50 percent more aircraft. In the interim, some requirements changes have been made to individual assets, mainly the National Security Cutter. Operating requirement for chemical-biological-radiological-nuclear defense capabilities was expanded to enable the cutter to operate in a contaminated environment, not just pass through it. Size of flight deck enlarged to accommodate Navy, Army, and Customs and Border Protection Agency models of the H-60 helicopter. Shipboard sensitive compartmented information facility added for collection and use of intelligence. used for Deepwater program. $12.6 million in fiscal years 2002-03 was for testing/evaluating an intermediate gun system for the National Security Cutter (and possibly other cutters). $12.5 million in fiscal year 2004 was for combat systems suites for the National Security Cutter. The Navy did not transfer the $25.1 million to the Coast Guard but will transfer the resulting equipment. Through a 1987 agreement, the Navy provides to the Coast Guard all Navy-owned, military readiness equipment and associated support materials that the Navy deems necessary to enable the Coast Guard to carry out assigned missions while operating with the Navy. Upon declaration of war, or when the President directs, the Coast Guard operates as a service of the Navy and is subject to the orders of the Secretary of the Navy. not worth the time and cost involved. Absence of an up-to-date integrated acquisition schedule for Deepwater is a concern, because it is a symptom of the larger issues related to whether this complicated acquisition is being adequately managed. The recent disclosure by the Coast Guard that Deepwater costs have risen by an estimated $2.2 billion points to the need for a clear understanding of what is being acquired, when it is being acquired, and at what cost. Maintaining a current integrated schedule for a DOD acquisition of such scope is a fundamental and necessary practice. Evolving mission requirements and the need to evaluate contractor performance for contract renewal heighten need for timely and accurate information so the Coast Guard and Congress can base decisions on accurate information. We recommend the Secretary of Homeland Security direct the Commandant of the Coast Guard to update the original 2002 Deepwater acquisition schedule in time to support the fiscal year 2006 Deepwater budget submission to the Department of Homeland Security and Congress and at least once a year thereafter to support each budget submission. The updated schedule should include the current status of asset acquisition phases (such as concept technology and design, system development and demonstration, and fabrication); interim phase milestones (such as preliminary and critical design reviews, installation, and testing); and the critical paths linking the delivery of individual components to particular assets.

In 2002, the Coast Guard began its $17 billion, 20-year Integrated Deepwater System acquisition program to replace or modernize its cutters, aircraft, and communications equipment for missions generally beyond 50 miles from shore. During fiscal years 2002-03, Deepwater received about $125 million less than the Coast Guard had planned. In fiscal year 2004, Congress appropriated $668 million, $168 million more than the President's request. GAO has raised concern recently about the Coast Guard's initial management of Deepwater and the potential for escalating costs. GAO was asked to review the status of the program against the initial acquisition schedule and determine the impact of the additional $168 million in fiscal year 2004 funding on this schedule. The degree to which the Deepwater program is on track with its original 2002 integrated acquisition schedule is difficult to determine because the Coast Guard has not updated the schedule. Coast Guard officials said they have not updated it because of the numerous changes Deepwater experiences every year and the cost, personnel, and time involved. However, in similar acquisitions--those of the Department of Defense (DOD)--cost, schedule, and performance updates are fundamental to congressional oversight. DOD is required to update the schedule at least annually and whenever cost and schedule thresholds are breached. In practice, DOD continually monitors and reports schedules for management on a quarterly basis. Updating the acquisition schedule--including phases such as design and fabrication, interim phase milestones, and critical paths linking assets-- on a more timely basis is imperative so that annual Coast Guard budget submissions can allow Congress to base decisions on accurate information. GAO used available data to develop the current acquisition status for a number of selected Deepwater assets and found that they have experienced delays and are at risk of being delivered later than anticipated. The additional $168 million in fiscal year 2004, while allowing the Coast Guard to conduct a number of Deepwater projects that had been delayed or would not have been funded in fiscal year 2004, will not fully return the program to its original 2002 acquisition schedule. Reasons include: all work originally planned for fiscal year 2004 was not funded and some will have to be delayed to fiscal year 2005; delivery of some assets has fallen so far behind schedule that ensuring their original delivery dates is impossible; and nonfunding reasons have caused delays, such as greater than expected hull corrosion of patrol boats delaying length extension upgrades.

You are an expert at summarizing long articles. Proceed to summarize the following text: FOIA establishes a legal right of access to government information on the basis of the principles of openness and accountability in government. Before FOIA’s enactment in 1966, an individual seeking access to federal records faced the burden of establishing a “need to know” before being granted the right to examine a federal record. FOIA established a “right to know” standard, under which an organization or person could receive access to information held by a federal agency without demonstrating a need or reason. The “right to know” standard shifted the burden of proof from the individual to a government agency and required the agency to provide proper justification when denying a request for access to a record. Any person, defined broadly to include attorneys filing on behalf of an individual, corporations, and organizations, can file a FOIA request. For example, an attorney can request labor-related workers’ compensation files on behalf of his or her client, and a commercial requester, such as a data broker that files a request on behalf of another person, may request a copy of a government contract. In response, an agency is required to provide the relevant record(s) in any readily producible form or format specified by the requester unless the record falls within a permitted exemption. (Appendix II describes the nine specific exemptions that can be applied to withhold, for example, classified, confidential commercial, privileged, privacy, and several types of law enforcement information.) The act also requires agencies to publish a regulation that informs the public about their FOIA process. The regulation is to include, among other things, provisions for expediting requests under certain circumstances. Over the past two decades, various amendments have been enacted and guidance issued to help improve agencies’ processing of FOIA requests. The 1996 e-FOIA amendments, among other things, sought to strengthen the requirement that federal agencies respond to a request in a timely manner and reduce their backlogged requests. In this regard, the amendments made a number of procedural changes, including providing a requester with an opportunity to limit the scope of the request so that it can be processed more quickly and requiring agencies to determine within 20 working days (an increase from the previously established time frame of 10 days) whether a request would be fulfilled. The e-FOIA amendments also authorized agencies to multi-track requests—that is, to process simple and complex requests concurrently on separate tracks to facilitate responding to a relatively simple request more quickly. In addition, the amendments encouraged online, public access to government information by requiring agencies to make specific types of records available in electronic form. In a later effort to reduce agencies’ backlogged FOIA requests, the President issued Executive Order 13392 in December 2005, which set forth a directive for citizen-centered and results-oriented FOIA. In particular, the order directed agencies to provide a requester with courteous and appropriate service and ways to learn about the FOIA process, the status of a request, and the public availability of other agency records. The order also instructed agencies to process requests efficiently, achieve measurable process improvements (including a reduction in the backlog of overdue requests), and reform programs that were not producing the appropriate results. Further, the order directed each agency to designate a senior official as the Chief FOIA Officer. This official is responsible for ensuring agency- wide compliance with the act by monitoring implementation throughout the agency; recommending changes in policies, practices, staffing, and funding; and reviewing and reporting on the agency’s performance in implementing FOIA to agency heads and to the Department of Justice. (These are referred to as Chief FOIA Officer reports.) The Department of Justice, which has overall responsibility for overseeing federal FOIA activities, issued guidance in April 2006 to assist federal agencies in implementing the executive order’s requirements for reviews and improvement plans. The guidance suggested several potential areas for agencies to consider when conducting a review, such as automated tracking of requests, automated processing and receipt of requests, electronic responses to requests, forms of communication with requesters, and systems for handling referrals to other agencies. The OPEN Government Act, which was enacted in 2007, also amended FOIA in several ways. For example, it placed the 2005 executive order’s requirement for agencies to have Chief FOIA Officers in law. It also required agencies to include additional statistics on timeliness in their annual reports. In addition, the act called for agencies to establish a system to track the status of a request. Further, in January 2009, the President issued two memoranda, Transparency and Open Government and Freedom of Information Act, both of which focused on increasing the amount of information made public by the government. In particular, the latter memorandum directed agencies to (1) adopt a presumption in favor of disclosure in all FOIA decisions, (2) take affirmative steps to make information public, and (3) use modern technology to do so. This echoed Congress’s finding, in passing the OPEN Government Act, that FOIA established a “strong presumption in favor of disclosure.” In September 2013, the Department of Justice issued guidance to assist federal agencies in implementing the memoranda and the OPEN Government Act that included procedures for agencies to follow when responding to FOIA requests. Specifically, the guidance discussed how requests are processed—from the point of determining whether an entity in receipt of a request is subject to FOIA, to responding to the review of an agency’s decision regarding a request on an administrative appeal. The guidance also includes procedures on the expedited processing of FOIA requests. Agencies, including DOL, are generally required to respond to a FOIA request within 20 working days. A request may be received in writing or by electronic means. Once received, the request is processed through multiple phases, which include assigning a tracking number, searching for responsive records, processing records, and releasing records. Also, as relevant, agencies respond to administrative appeals and lawsuits filed as a result of their actions and decisions in addressing the FOIA requests. Figure 1 provides a simplified overview of the FOIA process, from the receipt of a request through responding to a lawsuit. As indicated above, during the intake phase of a typical agency FOIA process, a request is to be logged into the agency’s FOIA system and a tracking number assigned. The request is then to be reviewed by FOIA staff to determine its scope and level of complexity. The agency then typically sends a letter or e-mail to the requester acknowledging receipt of the request, with a unique tracking number that the requester can use to check the status of the request, as well as notifying the requester of estimated fees, if any. Next, FOIA staff begin the search to retrieve the responsive records by routing the request to the appropriate program office(s).This step may include searching and reviewing paper and electronic records from multiple locations and program offices. Agency staff then process the responsive records, which includes determining whether a portion or all of any record should be withheld based on statutory exemptions. If a portion or all of any record is the responsibility of another agency, FOIA staff may consult with the other agency or may send (“refer”) the document(s) to that other agency for processing. After processing and redaction, a request is reviewed for errors and to ensure quality. The documents are then released to the requester, either electronically or by mail. FOIA also provides requesters with the right to file an administrative appeal if they disagree with the agency’s decision. After an agency renders a decision and the requester files an administrative appeal, the agency has 20 working days to respond to the requester regarding the appeal. Further, FOIA allows requesters to challenge an agency’s final decision in federal court through a lawsuit. Specifically, if any agency fails to comply with the statutory time limits, including responding to requests within 20 working days, a requester has the right to consider the request denied and sue the agency to compel disclosure. A requester should generally exhaust his or her administrative remedies, such as filing an administrative appeal, before filing a lawsuit. In 2007, FOIA was amended to allow both requesters and agencies to contact the Office of Government Information Services, within the National Archives and Records Administration, to help resolve a dispute at any point in the FOIA process, including after filing an administrative appeal. Mediation also can be used as an alternative to litigation. Established in 1913, DOL has primary responsibility for overseeing the nation’s job training programs and for enforcing a variety of federal labor laws. The department’s mission is to foster, promote, and develop the welfare of wage earners, job seekers, and retirees of the United States; improve working conditions; advance opportunities for profitable employment; and assure work-related benefits and rights. The department administers its various mission responsibilities, including the processing of FOIA requests, through its 23 component offices. These components vary in mission and the types of records that they maintain. Table 1 provides details on each component’s mission and types of records maintained. DOL experienced an increase in the number of FOIA requests received every year from fiscal year 2010 through 2013, a decrease in the number of requests received from fiscal year 2013 through 2014, and an increase in fiscal year 2015. Specifically, the department reported receiving 17,398 requests in fiscal year 2010, and it reported receiving 18,755 requests in fiscal year 2013—a 7 percent increase. In fiscal year 2014, the department reported receiving 16,106 FOIA requests—a 14 percent decrease from fiscal year 2013. However, in fiscal year 2015, the reported number of requests received increased again, to 16,792. Further, the department processed an increased number of requests from fiscal years 2010 through 2012. It then processed a decreased number of requests during fiscal years 2013 and 2014, and an increased number of requests again in fiscal year 2015. Specifically, the department reported processing 17,625 requests in fiscal year 2010, and it reported processing 19,224 requests in fiscal year 2012—an 8 percent increase. While the department processed slightly fewer requests (19,175) in fiscal year 2013, it reported processing 16,715 FOIA requests in fiscal year 2014—a 13 percent decrease compared with fiscal year 2012. However, in fiscal year 2015, the reported number of requests processed increased to 17,104. These numbers of requests received and processed, by the department from fiscal year 2010 through fiscal year 2015 are summarized in table 2. Responsibilities for managing and processing FOIA requests are handled by DOL’s 23 component offices. Within one of these components (the Office of the Solicitor), the Office of Information Services (OIS) serves as the department’s central FOIA office and has agency-wide responsibility for managing the program, to include developing and issuing guidance to implement FOIA initiatives, providing training, and preparing required annual reports. However, DOL has not updated its regulation that is intended to inform the public of the department’s FOIA operations. The component offices manage their own processing and tracking of FOIA requests, relying on an automated system and a process for prioritizing their responses to requests, while appeals and lawsuits are centrally handled. However, while the department’s automated FOIA tracking system meets most statutory requirements, key recommended capabilities to enhance processing have not been implemented. In addition, while the components had provided timely responses to many of the FOIA requests, an estimated 24 percent of the requests were not responded to within the statutory time frame and most components had not documented the rationale for these delays in the automated FOIA tracking system or notified requesters of the delayed responses. Further, most FOIA appeals had not been responded to within the statutory time frame of 20 working days. OIS was established within the Office of the Solicitor in fiscal year 2010, and the Solicitor serves as the Chief FOIA Officer. OIS is responsible for administering the department’s FOIA program, to include coordinating and overseeing the components’ operations, providing training, and preparing the required annual reports on the department’s FOIA performance. In addition, this office has responsibility for processing certain types of requests and assisting in the coordination of requests involving multiple components. In carrying out its duties, the office develops and disseminates guidance on processing requests and implementing elements of the act; it also is responsible for developing the department’s FOIA regulation (discussed in more detail later in the report). For example, in October 2010, the office issued guidance to FOIA disclosure officers and coordinators addressing oversight; roles and responsibilities; and applying exemptions, fees, and fee waivers. In addition, in June 2013, it issued a bulletin to FOIA coordinators regarding steps for addressing requesters’ inquiries about requests and discussing the status of requests. A month later, in July 2013, the office issued a bulletin discussing time limits associated with processing requests, including guidance for time limit extensions during unusual circumstances. Further, in August 2013, OIS issued best practices guidance that provides direction to the department’s staff in responding to requests. The guidance outlines the nine stages of processing a request, as defined by the department, including processing administrative appeals and judicial reviews of litigation filed by requesters. (Appendix III provides additional details on the stages of the department’s process for handling FOIA requests.) Beyond developing and issuing guidance, OIS performs a number of oversight and coordination functions: Holds regular meetings with components. The office holds quarterly meetings with components to discuss their processing of FOIA requests, including plans to reduce backlogs, upcoming training, and best practices. For example, in a January 2015, quarterly meeting with all components’ FOIA coordinators, OIS discussed its plans to conduct administrative reviews covering various areas, such as timeliness and backlog reduction, rules associated with granting and denying requests, and multi-tracking requests; it also discussed the components’ FOIA staffing needs. Prepares and Tracks Processing Metrics. The office also uses data within the department’s FOIA tracking system—the Secretary’s Information Management System for FOIA (SIMS-FOIA)—to provide a quarterly report to departmental leadership and the Department of Justice on the number of requests received, processed, and backlogged, among other reporting requirements. (SIMS-FOIA is discussed in greater detail later in this report.) Conducts reviews to assess components’ actions. OIS reviews components’ FOIA programs to assess their policies, procedures, and compliance with the act. For example, in fiscal year 2015, the office reviewed 14 of 22 components in areas such as FOIA exemptions, timeliness and backlog reduction, agency website and electronic reading rooms, and staffing resources for processing requests. OIS officials stated that they plan to complete reviews of the remaining 8 components by September 2016. The officials added that they assess the information gathered during these reviews to identify areas where the components could benefit from additional training and guidance. Provides training to employees. The department, through OIS, hosts a yearly training conference for employees with FOIA responsibilities. This conference addresses topics such as processing requests, responsibilities for searching for requests, applying exemptions, and assessing search fees. In addition, in February 2012, February and April 2013, and April 2014, the office held a series of targeted training sessions that addressed topics such as FOIA best practices in customer service, and applying specific exemptions. Routes requests to components. OIS routes to the appropriate component(s) those requests sent to DOL via its department-wide e- mail address or that it receives when a requester is unsure which DOL component maintains records that are responsive to a request. The office also addresses those requests sent to the attention of the Solicitor/Chief FOIA Officer. In addition, it coordinates responses to requests that involve multiple components. FOIA requires federal agencies to publish regulations that govern and help inform the public of their FOIA operations. These regulations are to provide guidance on the procedures to be followed in making a request and on specific matters such as fees and expedited processing of requests. Toward this end, in May 2006, DOL, through the Office of the Solicitor, issued a regulation describing steps that individuals are required to follow in making requests, such as submitting a written request directly to the component that maintains the record. The regulations also explained the department’s processing of such requests, including charging fees for the requested records. However, since the issuance of this regulation in 2006, amendments to FOIA and related guidance have led to changes in the department’s processes that are not reflected in the regulation. These changes pertain to the OPEN Government Act of 2007 requirements that federal agencies have a FOIA Public Liaison, who is responsible for assisting in resolving disputes between the requester and the agency. Further, this act required federal agencies to establish a system to provide individualized tracking numbers for requests that will take longer than 10 days to process and establish telephone or Internet service to allow requesters to track the status of their requests. In addition, the President’s FOIA memorandum on transparency and open government and the Attorney General’s FOIA guidelines of 2009 required that agencies take specific actions to ensure that the government is more transparent, participatory, and collaborative. Specifically, agencies are required to rapidly disclose information; increase opportunities for the public to participate in policymaking; and use innovative tools, methods, and systems to cooperate among themselves and across all levels of government. The department has taken actions consistent with these requirements. Specifically, in 2006, DOL implemented its SIMS-FOIA system to track and process requests. Further, the department implemented its FOIA public portal, which links to SIMS-FOIA and allows requesters to track the status of their requests through an Internet service using assigned request tracking numbers. The department also designated a FOIA Public Liaison in December 2007. Additionally, in response to the President’s FOIA memorandum and the Attorney General’s FOIA guidelines of 2009, the department in December 2011 directed all components to ensure transparency when responding to requests by not only disclosing information that the act requires to be disclosed, but also by making discretionary disclosures of information that will not result in foreseeable harm to an interest protected under FOIA. Nevertheless, while it has taken these actions, DOL has not revised its FOIA regulation to inform the public of the role of its public liaison, the department FOIA tracking system, and the availability of the FOIA public portal for tracking the status of requests. In discussing this matter, officials in the Office of the Solicitor stated that updating the regulation is on the department’s regulatory agenda and that, as of March 2016, a draft of the regulation was being circulated for internal review. However, these officials said they had not established a time frame for when the regulation would be finalized. Until the department finalizes an updated regulation reflecting changes in how it processes requests, it will lack an important mechanism for facilitating effective interaction with the public on the handling of FOIA requests. The processing of requests is decentralized among the department’s 23 components, with each component separately administering its own program. In this regard, each component has its own FOIA coordinator and full- and/or part-time staff assigned to process requests; is responsible for its FOIA library; and directly enters information in the department’s FOIA tracking system regarding the processing of its own requests. Similar to the process used across federal government, once a request has been received and assigned to the appropriate component, the component carries out the processing, tracking, and reporting on the request. Most components do so using the department’s central FOIA tracking system. However, the components vary in aspects of their operations. For example, a number of the components are further decentralized, in which requests are assigned to and processed within multiple national, regional, and/or directorate offices (subcomponents) that make up the component. Specifically, once a request is received in a decentralized office, the FOIA processor located in the appropriate subcomponent office is responsible for responding to the request and populating the required information in the department’s central tracking system. Other components are centralized, in which the processing of requests occurs within that one office and does not have to be assigned to a subcomponent office. Components also vary significantly in the number of requests received. For example, in fiscal year 2015, the Occupational Safety and Health Administration received 9,123 requests, while the Office of the Chief Financial Officer received 3 requests. Further, the components rely on varying numbers of full-time employees, as well as part-time and contractor employees, to manage and process the requests. For example, the Employment and Training Administration reported that it had 8 full-time employees and 9 part-time employees in fiscal year 2015. On the other hand, the Employee Benefits Security Administration reported it had no full-time employees and 3 part-time employees in the same year. Collectively, for fiscal year 2015, the 23 components reported having 40 full-time and about 154 full-time or part-time employees assigned to process FOIA requests. Table 3 summarizes the components processing structure, requests received in fiscal year 2015, and the number of employees that manage and process the requests. While requests are separately handled by the components, within the Office of the Solicitor two offices—the Counsel for FOIA Appeals, Federal Records Act, and Paperwork Reduction Act and the Counsel for FOIA and Information Law —individually handle FOIA appeals and FOIA lawsuits. The Counsel for FOIA Appeals, Federal Records Act, and Paperwork Reduction Act is responsible for addressing administrative appeals when requesters disagree with the outcomes of their requests. To assist with tracking the appeals it receives, the office uses an automated system called the Matter Management System. Further, the Counsel for FOIA and Information Law is responsible for providing legal advice on processing requests and defending FOIA litigation. Various FOIA amendments and guidance call for agencies, such as DOL, to use automated systems to improve the processing and management of requests. In particular, the OPEN Government Act of 2007 amended FOIA to require that federal agencies establish a system to provide individualized tracking numbers for requests that will take longer than 10 days to process and establish telephone or Internet service to allow requesters to track the status of their requests. Further, the President’s January 2009 Freedom of Information Act memo instructed agencies to use modern technology to inform citizens about what is known and done by their government. In addition, FOIA processing systems, like all automated information technology systems, are to comply with the requirements of Section 508 of the Rehabilitation Act (as amended). This act requires federal agencies to make their electronic information accessible to people with disabilities. In accordance with the OPEN Government Act, DOL has implemented SIMS-FOIA to assist the department in tracking the requests received and processed. The system assigns unique tracking numbers for each request received, and tracks and measures the timeliness of the requests. Further, staff who process requests are able to include in the system the date the request was received by the first component that may be responsible for processing the request and the date the request was routed to and received by the appropriate component responsible for processing the request. Based on this information, the system then calculates the date by which the response is due to the requester, which is 20 working days from the date the request was received by the office responsible for its processing. In responding to our questionnaire, 22 of 23 components reported using SIMS-FOIA and provided documentation to demonstrate their use of the system to track requests. Due to its independent oversight role within the department, DOL’s Office of Inspector General stated that it does not use this system to track its requests. According to its FOIA Officer, the office has instead created a separate system that is similar to SIMS-FOIA—the Office of Inspector General FOIA Tracking System—to track its requests. Further, in accordance with the act, DOL implemented its FOIA public portal that links to SIMS-FOIA and allows requesters to track the status of their requests through an Internet service using assigned request tracking numbers. Specifically, requesters can access the public portal via the DOL website (http://www.dol.gov/foia) to obtain the status of their requests. The information provided by the portal includes dates on which the agency received the requests and estimated dates on which the agency expects to complete action on the requests. Nevertheless, while the department has taken these actions, it has not ensured that SIMS-FOIA and the online portal are compliant with requirements of Section 508 of the Rehabilitation Act. According to DOL officials in OIS, during a test performed by the department’s Office of Public Affairs, the online portal was determined to have accessibility issues. Specifically, the portal could not be easily accessed by those who were blind or had impaired vision. In addition, the 508 compliance tester in the department’s Office of the Chief Information Officer found that SIMS-FOIA was not accessible to vision impaired employees who need to use the system. With regard to this finding, the Office of the Chief Information Officer determined that, because the system is only used internally by DOL employees, it would fulfill the requirements of Section 508 by providing reasonable accommodations, such as large screen magnifiers and verbal description tools, to those affected employees needing access to the information contained in SIMS-FOIA. According to the Office of the Chief Information Officer, accommodations would be made on a case-by-case basis to address the employee’s specific needs. Further, OIS officials told us that the department is working to make the online portal and SIMS-FOIA compliant with the requirements of Section 508. However, OIS officials could not say by what date compliance with the requirements is expected to be achieved. Having systems that are compliant with Section 508 of the Rehabilitation Act (as amended) is essential to ensure that the department’s electronic information is accessible to all individuals, including those with disabilities. Beyond the requirements provided in law and guidance to develop automated systems to track FOIA requests, three federal agencies have collectively identified capabilities for systems that they consider to be best practices for FOIA processing. Specifically, in conjunction with the Department of Commerce and the Environmental Protection Agency, the National Archives and Records Administration’s Office of Government Information Services identified the following 12 capabilities of an automated system that it considers recommended best practices for FOIA processing: using a single, component-wide system for tracking requests; accepting the request online, either through e-mail or online request multi-tracking requests electronically; routing requests to the responsible office electronically; storing and routing responsive records to the appropriate office electronically; redacting responsive records with appropriate exemptions applied electronically; calculating and recording processing fees electronically; allowing supervisors to review the case file to approve redactions and fee calculations for processing electronically; generating system correspondence, such as an e-mail or letter, with a generating periodic reporting statistics, such as annual report and quarterly backlog data, used to develop reports; and storing and routing correspondence, such as letters or e-mails between agencies and requesters. As of March 2016, DOL had implemented 7 of the 12 recommended best practices for SIMS-FOIA and the FOIA public portal. Specifically, the department had implemented the capabilities of a single tracking system, as well as capabilities for accepting requests through e-mail; multi- tracking requests; routing the request to the office responsible for processing the request; storing and routing correspondence with a requester; and generating periodic report statistics, such as the fiscal year FOIA annual report and quarterly report, that identify requests received, processed, and backlogged. In addition, as mentioned earlier, the department uses a separate FOIA appeals tracking system—the Matter Management System—to track appeals electronically. However, the department had not implemented 4 other recommended capabilities, and had partially implemented 1 capability. Specifically, the department’s automated FOIA tracking system lacked capabilities to store and route responsive records electronically, redact responsive records electronically, and review the case file to approve redactions and fee calculations electronically. Further, the department had not implemented the capability to generate correspondence to a requester. In addition, SIMS-FOIA partially included the recommended capability to calculate and record processing fees electronically. Specifically, the system could record fees electronically, but it could not calculate fees electronically. Figure 2 illustrates the extent to which DOL had implemented recommended capabilities to enhance FOIA processing. In discussing this matter, the OIS director and FOIA officials in the component offices stated that, since the current system generally meets statutory requirements, the department has not yet made improvements to the system to reflect the recommended capabilities. The officials said that they are aware of current system limitations and have begun researching various technologies to incorporate the remaining capabilities. Nevertheless, the officials said that, due to competing interests and resource needs, the department has made a decision to continue using SIMS-FOIA without these capabilities in the meantime. The officials did not provide a time frame for when the capabilities would be implemented. By implementing the additional recommended capabilities, the department has the opportunity to enhance its FOIA processing and, thus, improve the efficiency with which it can respond to information requests. The FOIA statute allows agencies to establish multi-track processing of requests for records based on the amount of work or time (or both) involved in processing requests. Toward this end, DOL’s FOIA regulation, supported by the department’s Best Practices Processing Guide, provides for prioritizing FOIA requests into three processing tracks: simple, complex, and expedited. According to the regulation and guide, although requests are generally required to be handled on a first-in, first-out basis, a component may use two or more processing tracks by distinguishing between simple and more complex requests, based on the amount of work and/or time needed to process the requests. This is intended to allow the component to use its discretion to process simple, more manageable requests quickly, while taking more time to process larger, more complex requests that involve a voluminous amount of records and/or multiple components. Also, according to the regulation and the guide, the component is to determine whether a request should be given expedited treatment and placed in an expedited track ahead of others already pending in the processing queue, whenever it determines that one of the following conditions is met: There is an imminent threat to the life or physical safety of an individual. There is an urgent need to inform the public about an actual or alleged government activity and the requester is someone primarily engaged in the dissemination of information. Failure to disclose the requested records expeditiously will result in substantial loss of due process rights. The records sought relate to matters of widespread news interest that involve possible questions about the government’s integrity. Further, the regulation and guide state that the requester can submit a request for expedited processing at the time of the initial request or at any later time during the processing of the request. The component is to grant the request for expedited processing when the requester explains in detail the basis for the need to expedite the request and demonstrates a compelling need based on the criteria described above. Upon receiving a request for expedited processing, the component is responsible for deciding whether the request is to be expedited and for notifying the requester of the final decision within 10 calendar days. The guide states that, when a request is submitted, the component’s FOIA staff must identify the processing track to which it will be assigned (i.e., simple, complex, or expedited). According to OIS officials, the component FOIA processors assess whether requests are simple or complex based on their experience in handling requests and familiarity with requests that are submitted routinely. Further, according to the guide, FOIA processors assess whether requests are to be given expedited treatment whenever they determine that requests demonstrate a compelling need, such as when they pertain to an imminent threat to the life or physical safety of an individual. All of the components had taken steps that followed the regulation and best practices guidance to prioritize the selected fiscal year 2014 FOIA requests. That is, as the components’ FOIA processors logged in the requests, they assigned them to one of the three processing tracks. With the exception of the Office of the Inspector General, the components used SIMS-FOIA to designate the processing track for the requests. The OIG used its Office of Inspector General FOIA Tracking System to designate the processing track for requests. In addition, 7 of the 23 components provided documentation describing additional component-specific actions that they had taken to help with prioritizing the requests. For example: The Veterans’ Employment and Training Service developed a standard operating procedure that includes steps for multi-track processing. Specifically, this component places its simple requests in its fastest (non-expedited) track, and places its complex requests in its slowest track. The Wage and Hour Division provided its subcomponents with guidance issued in September 2015 that includes criteria for selecting a processing track in SIMS-FOIA. Specifically, according to this guidance, a request will be designated as complex when it requires redactions, involves two or more offices or programs to provide records, includes the review of 100 or more pages, or requires a search and review of over 10 hours, among other things. A request is designated as simple when it requires no redactions; involves 1 office or program; requires a review of 99 pages or less and fewer than 9.5 hours of searching; and when responsive records can be easily located on DOL’s FOIA website. Further, the guidance states that all expedited requests must be approved by the component. The Mine Safety and Health Administration developed standard operating procedures in March 2012 that include instructions for its subcomponents to follow when tracking requests in SIMS-FOIA and requiring its field offices to notify its headquarters office prior to denying an expedited FOIA request. Of the 16,792 requests that the department reported receiving in fiscal year 2015, the components prioritized and processed 7,203 simple requests (about 42 percent of the total requests processed), 9,785 complex requests (about 57 percent), and 108 expedited requests (less than 1 percent). As previously discussed, FOIA requires agencies to make a determination on whether to comply with a request generally within 20 working days of receiving the request and to immediately notify the requester of their determination. Toward this end, agencies are required to route misdirected requests to the internal component or office responsible for processing them within 10 working days of receipt. DOL’s Best Practices guide also recommends that components notify the requester when the need to consult with another component will delay a timely response to the initial FOIA request. SIMS-FOIA provides optional fields allowing components to record the fact that they sent the requester an acknowledgment or other interim response, or add other comments or explanations that caused a delay. Of the 14,745 requests processed by the department between October 1, 2013, and September 30, 2014, components successfully routed an estimated 92 percent of requests to the appropriate component offices within the 10-day time frame, as required by FOIA. However, an estimated 8 percent of requests were not routed to the appropriate offices within 10 days. Further, the components processed an estimated 76 percent of the requests within the statutory time frame of 20 working days. Table 4 shows the overall estimate of timeliness in responding to the population of 14,745 FOIA requests for the department in fiscal year 2014, and appendix IV provides further details on the department’s timeliness in processing FOIA requests from our sample of 258 requests. The department did not respond to the requester within the 20-day time frame for the remaining estimated 24 percent of requests processed, as reflected in the following examples: Although the Office of Information Services routed 2 out of 3 selected requests to the appropriate component (the Office of Assistant Secretary for Policy) within 10 days, one request was initially assigned to the wrong component (the Employment and Training Administration). Once the Office of Assistant Secretary for Policy received the request, it took 315 days to process the request and provide the records to the requester. The Office of Congressional and Intergovernmental Affairs responded to FOIA requesters within the required 20 days for 3 of 10 selected requests. For one request, the component took 154 days (about 5 months) to provide the requester with a response. Specifically, the request was received by the original office and was routed within 10 days, as required by law, to the office responsible for processing the request. However, it took the office that was responsible for processing the request 154 days to provide the response to the requester. The Office of the Secretary responded to FOIA requesters within the required 20 days for 3 out of 10 selected requests. In one instance, the component that was responsible for processing the request took 67 days, or over 2 months, to respond to the requester. Specifically, the department received the request in May 2014 and it was forwarded to the Office of the Secretary on the same day. However, because of the complex nature of the request, the Office of the Secretary had to coordinate with 6 other components, resulting in a delayed response to the requester. For the estimated 8 percent of requests that were not sent to the appropriate office within 10 days and the estimated 24 percent for which there were not timely responses to the requesters, the components did not document the rationales for the delays in SIMS-FOIA or notify the requesters of the delays. Agency officials attributed the delays to multiple components and subcomponents processing various parts of a request, as well as the time required to search for, review, and redact the exempted information from large volumes of records. In addition, DOL’s FOIA Public Liaison explained that SIMS-FOIA only identifies the tracking numbers for the 10 oldest requests, and if the case does not fall within the 10 oldest requests, then the FOIA staff may not be able to find and provide a rationale for the delay. In addition, the liaison noted that there is no DOL requirement for staff to document the rationale for the delays in SIMS-FOIA and to notify requesters regarding delayed responses. However, the system allows the user the option to record the rationale. Without documenting the rationale for the delays and notifying FOIA requesters regarding delayed responses, however, the department lacks the means to ensure that requesters are kept abreast of the status of their FOIA requests. According to DOL’s FOIA regulation, after an agency responds to a request, the requester has the right to file an administrative appeal within 90 days if she or he disagrees with the agency’s decision. Agencies are then required to respond to the requester with a decision regarding the administrative appeal within 20 working days. According to DOL’s 2015 FOIA Annual Report, in fiscal year 2015, the department received 404 appeals and processed 297. In addition, the department reported that it had not responded to appeals within the statutory time frame of 20 working days, thus contributing to 405 backlogged appeals at the department. DOL officials in the office of the Counsel for FOIA Appeals, Federal Records Act, and Paperwork Reduction Act—the office responsible for processing administrative appeals—noted that the high number of unprocessed appeals was due to a substantial increase in the number of incoming FOIA appeals received and a decrease in the number of staff available to process the appeals. Specifically, the number of attorneys available to process FOIA appeals decreased from 3 attorneys to 1 from 2012 through June 2015, while the number of backlogged appeals increased from 139 to 405 within the same period of time. In its technical comments on a draft of this report, DOL stated that it had taken various actions to reduce backlogged appeals. Specifically, it stated that DOL staff from other agency components had been detailed to assist with processing appeals. Further, similar appeals were grouped together to provide a response and staff communicated with requesters about the scope of their appeals or their continued interest in records. In addition, FOIA appeals were assigned to new attorneys in a specialized honors program, and the department hired an additional attorney to address the appeals. Continuing to take such steps to reduce the number of backlogged appeals will be important to help ensure that the department is able to meet its statutory obligation to respond to appeals within 20 working days. Furthermore, by continuing to address its appeals backlog, the department may reduce the likelihood that lawsuits will be filed due to requesters not receiving responses to their administrative appeals (such as discussed later in this report). From January 2005 through December 2014, 68 FOIA-related lawsuits were filed against DOL, primarily as a result of the department either failing to respond to requests or because it withheld certain requested information based on exemptions. Court decisions on these lawsuits were mixed—with rulings being made in favor of the department, both for the department and the requester, and in favor of the requester. In addition, some lawsuits were settled with agreement to release information and/or to award attorney’s fees and court costs to the requester. Among these settlements, courts dismissed the majority of the lawsuits based on terms agreed to by the department and the requester. While Department of Justice guidance issued in July 2010 encourages agencies to notify requesters of available mediation services as an alternative to pursuing litigation, DOL had not taken steps to inform requesters of such services. Doing so could help prevent requesters and the department from being involved in costly litigation and improve the efficiency of FOIA-processing activities. As previously mentioned, FOIA allows a requester to challenge an agency’s final decision in federal court through a lawsuit or to treat an agency’s failure to respond within the statutory time frames as a denial of the request, in order to file a lawsuit. In addition, the act states that the court may assess against the government reasonable attorney’s fees and other litigation costs incurred in a FOIA lawsuit if the requester has obtained relief through either (1) a judicial order, or an enforceable written agreement or consent decree; or (2) a voluntary or unilateral change in position by the agency, if the complainant’s claim is not insubstantial. The 68 lawsuits were brought against DOL because it either did not provide a timely response to a FOIA request, or because the requester disagreed with DOL’s response, usually as a result of the department having withheld records. Of these lawsuits, the court ruled in favor of the department in 18 cases, and jointly in favor of both the department and the requester in 1 case. In addition, among 47 lawsuits, the requesters received relief either as a result of (1) the courts rendering decisions in favor of the requesters (3 lawsuits) or (2) the department and the requesters establishing settlement agreements that awarded attorney’s fees and other costs to the requesters or resulted in the department potentially releasing additional information (44 lawsuits). Two lawsuits were undecided as of April 2016. Table 5 summarizes the outcomes of the 68 lawsuits, and the discussion that follows presents examples of the lawsuits filed and the decisions rendered. Of the 18 lawsuits decided in favor of DOL, 7 were filed because the department did not respond to the initial FOIA request or administrative appeal. The other 11 were due to requesters disagreeing with DOL’s decision not to release information, or the requesters asking for more information than was originally released. In these cases, the department may have applied certain exemptions to withhold documents (see appendix II for the nine specific categories that exempt an agency from disclosing information).The following examples describe these lawsuits: One lawsuit was filed because a requester had asked for records related to being terminated by his employer for refusing to work under alleged unsafe and illegal conditions that violated the Federal Mine Safety and Health Act of 1977. However, the Mine Safety and Health Administration withheld information based on the exemptions related to interagency or intra-agency memorandums that are not available by law to a party other than an agency in litigation with that agency, for law enforcement purposes related to unwarranted invasion of personal privacy, and disclosing the identity of a confidential source. In October 2004, the requester submitted an administrative appeal in response to the decision. Five months after DOL’s acknowledgement of the administrative appeal, the requester had not received a response and thus filed a lawsuit in March 2005. In deciding in favor of DOL, the court upheld the department’s use of the exemptions to withhold information. As the basis for another lawsuit, a request was initially submitted for a Mine Safety and Health Administration investigation report. The department released only a portion of the requested records. In February 2009, the requester filed an administrative appeal. In November 2009, DOL released additional information and withheld information citing the law enforcement privacy and interagency and intra-agency memorandums or letters exemptions. The requester disagreed with the department’s final decision to withhold information and filed a lawsuit in July 2010. The court upheld the department’s decision. One lawsuit involved eight requesters seeking information related to the functionality of an Office of Workers’ Compensation Program computer program that is used to ensure consistent rotation among physicians by specific zip codes. The Office of Workers’ Compensation Program withheld information based on an exemption regarding confidential commercial information and the exemption related to an unwarranted invasion of personal privacy. All eight requesters filed separate administrative appeals from December 2009 through November 2012, to which the department did not respond. As a result, the eight requesters filed a joint lawsuit in July 2013.The court decided in favor of the department’s decision to not disclose the information due to the exemptions cited. In April 2009, records were requested related to the activities and communications between the Secretary and Deputy Secretary of Labor and various labor organizations. In late April 2009, DOL acknowledged receipt of the FOIA request, but decided that it would not provide information. In late September 2009, the requester filed an administrative appeal. Over a month later, in early November, DOL confirmed receipt of the administrative appeal but, again, did not provide information. By late November 2009, the requester had not received any information or requests for a time extension from the department and filed a legal complaint. The court decided in favor of the department, finding that it had properly withheld information on the basis of several exemptions. In Favor of DOL and the Requester One lawsuit—filed because the department withheld certain information and did not respond to the administrative appeal—was ruled both in favor of DOL and in favor of the requester. As a result, additional information was released to the requester. Specifically, in November 2007, a requester asked the Occupational Safety and Health Administration to provide accident investigation information related to a fatal accident. The Occupational Safety and Health Administration responded to the initial request by providing over 100 pages of documentation, but it withheld other documentation, applying the personnel and medical information exemption. In February 2008, the requester filed an administrative appeal. By February 2009, over a year later, DOL had not responded to the administrative appeal and the requester filed a lawsuit. In March 2010, the court decided in part for the department and in part for the requester. DOL was required to disclose portions of witness statements that were previously redacted; however, the court determined that the department could apply an exemption to additional records to withhold specific law enforcement information. In Favor of the Requester For 3 lawsuits, the requesters received relief as a result of the courts rendering decisions in their favor. In March 2005, records were requested from the Occupational Safety and Health Administration regarding the 2003 “Lost Work Day Illness and Injury Rates” for all worksites that had the Standard Industrial Classification code of 80. In prior years, the Occupational Safety and Health Administration had provided these records to requesters for previous reporting periods. However, the Occupational Safety and Health Administration denied this request, stating that releasing the information would interfere with law enforcement proceedings. In May 2005, the requester submitted an administrative appeal. However, by October 2005, the requester had not received a response to the administrative appeal and filed a lawsuit. The court decided in favor of the requester. However, details on the specific relief that the department provided to the requester in response to this ruling were not contained in available court documentation, and DOL officials could not provide such details. DOL appealed the decision, but the court dismissed its appeal. In June 2005, the Occupational Safety and Health Administration received a request for records related to the possible exposure of inspectors and employees to unhealthy/hazardous levels of beryllium. The department denied the request and in August 2005 the requester submitted an administrative appeal. The requester also submitted a second FOIA request for records related to quantifying the airborne and surface concentrations of chemical substances in workplaces where the Occupational Safety and Health Administration’s inspectors obtain samples. After 3 months (by November 2005), the requester had not received a response to the administrative appeal and filed a lawsuit. The court decided in favor of the requester. DOL appealed the decision but the court dismissed the appeal and, according to a FOIA Counsel official, the department then released the information to the requester. A request was submitted to the Mine Safety and Health Administration in September 2007 for records regarding the August 2007 Crandall Canyon Mine collapse that resulted in the death of nine miners and rescuers. In October 2007, the requester offered to accept a partial response to the request as a temporary compromise while awaiting additional responsive documentation. After 3 months, the Mine Safety and Health Administration released more documentation, but withheld certain other documents, citing several exemptions. In May 2008, the requester submitted an administrative appeal in response to the Mine Safety and Health Administration’s use of the exemption for interagency or intra-agency memorandums, and an additional exemption for law enforcement proceedings. In June 2008, a month after the administrative appeal was submitted, DOL acknowledged the appeal, but did not respond by making a determination, as required by FOIA. In November 2008, 6 months after submitting the administrative appeal, the requester still had not received a response and filed a lawsuit. The court decided in favor of the requester and ordered DOL to conduct an additional search for all non-exempt information. The department complied by disclosing additional information. The department and the requester later agreed to dismiss the lawsuit and waive any right to fees. Forty-four lawsuits resulted in settlement agreements between DOL and the requesters. These included 5 lawsuits in which the department agreed to pay certain amounts of the requesters’ attorney’s fees and other costs, and 2 lawsuits in which the department agreed to release additional information to the requesters. For 37 other lawsuits, information on the specific nature and outcomes of the settlements was not available from either DOL’s FOIA official or the related court documentation. For 5 lawsuits that involved settlements, the department agreed to pay to the requesters approximately $97,475 in attorney’s fees, expenses, and costs arising from the lawsuits. These lawsuits are summarized below. A lawsuit was filed as a result of the Wage and Hour Division not responding to an initial FOIA request sent to the department in July 2010. The initial request was submitted for records related to complaints made by undocumented workers under the Wage and Hour Division’s “We Can Help” Program. After 2 months (by September 2010), DOL had not responded to the request and the requester filed a lawsuit. DOL and the requester entered into a settlement agreement resulting in the department agreeing to pay $350 for attorney’s fees and costs arising from the lawsuit. A lawsuit was filed after a requester had, in July 2010, sent 2 requests for information related to the Occupational Safety and Health Administration’s review of its whistleblower protection programs. DOL denied one request due to the exemption to withhold interagency or intra-agency memorandums or letters. In addition, the department did not respond to the second request. In August 2010, the requester submitted two administrative appeals to compel a response. After 2 months, the department had not responded to the administrative appeals and the requester filed a lawsuit in October 2010. DOL and the requester entered into a settlement agreement that dismissed the lawsuit and, according to a FOIA Counsel official, resulted in the department releasing additional responsive records (6,000 pages in full or redacted). In addition, the department agreed to pay the requester $8,250 for attorney’s fees, expenses, and costs arising from the lawsuit. As the basis for another lawsuit, a FOIA requester had sought information from the department’s Office of Labor-Management Standards in December 2009 that related to a union’s trusteeship. Initially, in March 2010, the Office of Labor-Management Standards informed the requester by e-mail that it had compiled 8,500 pages of responsive documents. However, after corresponding with the office until July 2010, the requester filed an administrative appeal letter due to not receiving any information. Subsequently, 10 months after the initial FOIA request (in October 2010), the requester filed a lawsuit as a result of not having received a response to the administrative appeal, any responsive documentation, or an explanation for the delay in providing the documentation. According to a DOL FOIA Counsel official, the department subsequently processed the request and the requester entered into a settlement agreement with DOL resulting in the lawsuit being dismissed, and with the department paying $7,500 for the requester’s attorney fees, expenses, and costs arising from the lawsuit. In February 2013, a FOIA request was submitted for the Wage and Hour Division’s guidance documents regarding “hot goods objections” investigative files. DOL denied the request, citing the exemption related to information for law enforcement purposes. In April 2013, the requester submitted an administrative appeal regarding the previous decision. A month after submitting the administrative appeal, the requester had not received a response from the department and filed a lawsuit in May 2013. The department and the requester then entered into a settlement agreement, resulting in the lawsuit being dismissed and with the department paying $30,000 for attorney’s fees, expenses, and costs arising from the lawsuit. In a lawsuit filed against the department’s Employment and Training Administration in March 2013, the requester had not received any documents after a year of correspondence with DOL. From March 2013 through August 2013, the department provided 217 responsive records in full to the requester, redacted 121 records, and withheld in full 151 records. The court decided in favor of the requester and, according to a FOIA Counsel official, ordered the department to conduct an additional search for responsive records. Nevertheless, the official stated that the requester and the department subsequently reached a settlement agreement, in which the department provided about 900 responsive records and agreed to pay the requester $51,375 for attorney’s fees, expenses, and costs. In addition to the above, 2 lawsuits were settled without the award of attorney’s fees and other costs, but with the department agreeing to release additional information to the requesters. The following summarizes these lawsuits. A lawsuit was filed as a result of a request that was submitted to the Occupational Safety and Health Administration in August 2011 related to a wrongful death lawsuit involving the requester. The Occupational Safety and Health Administration initially provided some information, but withheld other information based on the law enforcement exemption. Subsequently, in November 2011, the requester appealed the decision. In December 2011, DOL responded to the administrative appeal and upheld the Occupational Safety and Health Administration’s decision to withhold information. The requester disagreed with DOL’s response and filed a lawsuit in September 2012. DOL released additional information after the lawsuit was filed. The requester acknowledged receiving the information provided by DOL after the lawsuit was filed and agreed to settle and dismiss the lawsuit. In another case, the requester asked the department’s Office of the Solicitor for records related to a trip taken by the Secretary of Labor, including information on funding, internal memoranda and communications, and travel and security costs. Nine months after the request, the requester had not received any response from DOL and filed a lawsuit in March 2013. DOL provided information to the requester after the lawsuit was filed. In September 2013, after reviewing DOL’s documentation, the requester agreed with the court’s decision to settle and dismiss the case. The court dismissed the case in January 2014. As previously noted, details on the results of the 37 other lawsuits were lacking. In particular, the department’s Counsel for FOIA and Information Law could not provide details on what, if any, information and/or other relief were provided as part of the settlements. Further, the available court documentation did not include information on whether or not information was released to the requester; rather, the available documentation simply noted that the cases were dismissed. As of April 2016, courts had not rendered decisions on 2 of the 68 lawsuits. A lawsuit was filed pertaining to an expedited request that was submitted to the department’s Office of the Assistant Secretary for Administration and Management in July 2013 for records related to the use of alias e-mail addresses for DOL political appointees and a request to search personal e-mails of senior DOL officials for evidence of the use of personal e-mail to conduct official business. After 2 months, the requester had not received any response from the department and filed a lawsuit in September 2013. However, as of April 2016, the case was still pending. Lastly, a lawsuit was filed as a result of a FOIA request that was submitted in December 2013 related to the requester’s Federal Mine Safety and Health Act anti-retaliation complaint investigation file. In January 2014, the department sent an acknowledgement letter stating that, due to “unusual circumstances surrounding the records” being sought, it would take about 90 working days to fulfill the request and, therefore, the statutory time limits for processing the request could not be met. According to officials from the Mine Safety and Health Administration, the requester was provided the opportunity to modify the scope of the request so that it could be processed within the statutory time limits, but did not respond to this offer. By April 2014 (4 months after the request was submitted), the requester had not received any information and filed a legal complaint. In May 2014, DOL provided certain responsive information, but withheld other records due to several exemptions. In December 2014, pursuant to a change in the Mine Safety and Health Administration’s FOIA policy, the department sent additional responsive information after reviewing the earlier response and determining that additional information were releasable. In July 2015, the court asked for the investigation file related to the requester’s Mine Safety and Health Administration complaint, and as of April 2016 the case was still pending. The OPEN Government Act of 2007 established the Office of Government Information Services within the National Archives and Records Administration to oversee and assist agencies in implementing FOIA. Among its responsibilities, the office offers mediation services to resolve disputes between requesters and federal agencies as an alternative to litigation. Office of Government Information Services was required to offer mediation services to resolve disputes between FOIA requesters and agencies. According to Department of Justice guidance issued in July 2010, agencies should include in their final agency responses to requesters a standard paragraph notifying the requesters of the mediation services and providing contact information for the Office of Government Information Services. The guidance states that this notification should be provided at the conclusion of the administrative process within the agency (i.e., as part of the agency’s final response on the administrative appeal). This is intended to allow requesters to first exhaust their administrative remedies within the agency. The guidance also states that agencies should provide requesters with notification of their right to seek judicial review. Since the issuance of the guidance in July 2010, none of the 12 FOIA lawsuits that we reviewed involving administrative appeals had corresponding response letters that included language notifying requesters of the Office of Government Information Services’ mediation services. Moreover, the department had not issued guidance to its components on including such language in the letters. Thus, requesters may have been unaware of the mediation services offered by the office as an alternative to deciding to litigate their FOIA case. Officials representing the department’s Counsel for FOIA Appeals acknowledged that steps had not been taken to ensure that the language would be included in response letters. They stated that the Counsel for FOIA Appeals planned to consult with the Department of Justice’s Office of Information Policy on how to incorporate the language and on how the department should develop procedures for working with the Office of Government Information Services to mediate disputes with FOIA requesters. However, they did not identify a time frame for doing so. Until it incorporates notification of the Office of Government Information Services’ mediation services in final response letters, DOL may be missing opportunities to resolve FOIA disputes through mediation and, thereby, reduce the lawsuits filed. Accordingly, the department may miss the opportunity to save time and money associated with its FOIA operations. DOL has implemented a process to manage, prioritize, and respond to its FOIA requests. However, opportunities exist to improve its process. Specifically, because it has not updated its FOIA regulation to reflect recent changes to its process, the department may be hindering the public’s use of that process. Also, while the department uses a system to track its FOIA requests and a portal to allow requesters to track the status of requests online, the system and portal lack certain required and recommended capabilities that could enhance the management and processing of requests. Absent capabilities consistent with Section 508 of the Rehabilitation Act (as amended), the department is not implementing the federal requirement to make its electronic information accessible to people with disabilities. In addition, by implementing recommended capabilities, the department could be better positioned to ensure the efficiency of its FOIA processing efforts. Further, although the department responded to the majority of its fiscal year 2014 FOIA requests within the time frame mandated by law, it has not consistently documented the reasons for delays in its automated FOIA tracking system or notified requesters about them. A majority of lawsuits brought against the department from January 2005 through December 2014 either resulted from the department failing to respond to requests or because it withheld certain information pertaining to requests. By ensuring that requesters are made aware of mediation services offered by the National Archives and Records Administration’s Office of Government Information Services as an alternative to litigation, DOL may be able to avoid future lawsuits, thus saving resources. To improve DOL’s management of FOIA requests, we recommend that the Secretary of Labor direct the Chief FOIA Officer to take the following five actions: Establish a time frame for finalizing and then issue an updated FOIA regulation. Establish a time frame for implementing, and take actions to implement, section 508 requirements in the department’s FOIA system and online portal. Establish a time frame for implementing, and take actions to fully implement, recommended best practice capabilities for enhanced processing of requests in the department’s FOIA system and online portal. Require components to document in SIMS-FOIA the rationales for delays in responding to FOIA requests, and to notify requesters of the delayed responses when processing requests. Establish a time frame for consulting with the Department of Justice’s Office of Information Policy on including language in DOL’s response letters to administrative appeals notifying requesters of the National Archives and Records Administration’s Office of Government Information Services’ mediation services as an alternative to litigation, and then ensure that the department includes the language in the letters. We received written comments on a draft of this report from DOL and the National Archives and Records Administration. In DOL’s comments, signed by the Chief FOIA Officer (and reprinted in appendix V), the department concurred with all five recommendations and agreed that it can improve the management of its FOIA program. The department identified various actions that it had taken or planned to address the recommendations. For example, concerning our recommendation to update its FOIA regulation, the department stated that it has drafted a Notice of Proposed Rulemaking to update the regulation and expects to publish the final regulation by the end of 2016. In addition, relevant to our recommendation, the department stated that it is taking actions to review and modify the text and formatting of its public FOIA portal to comply with the provisions of Section 508 of the Rehabilitation Act, and expects to have changes in place by September 2016. With regard to its automated FOIA tracking system, the department stated that the Office of the Assistant Secretary for Administration and Management determined that it can fulfill the requirements of Section 508 by providing individualized accommodations to any DOL FOIA staff with vision or other accommodation needs who require access to the system. For example, the department noted that large screen magnifiers and verbal description tools can be provided to staff that require such accommodations. The department added that it would continue to ensure that Section 508 compliance is included as a necessary element in planning for any future SIMS-FOIA replacement or successor system. Further, with regard to implementing recommended best practices, the department stated that it continues to monitor proposed FOIA legislation and Department of Justice guidance so that it can assess the feasibility and business need for investment in technology changes. The department said that it will ensure that the recommended best practice capabilities for enhanced FOIA processing are considered as a part of its planning for any future SIMS-FOIA replacement or successor system. Regarding our recommendation to document the rationale for delays in responding to FOIA requests, the department stated that its Office of Information Services plans to issue implementing guidance to address this matter. The Office of Information Services also is to provide follow-up training on the guidance after it is finalized and disseminated, a step which it expects to have completed by the end of September 2016. Lastly, in response to our recommendation on notifying requesters of the mediation services offered by the Office of Government Information Services, the department stated that it consulted with the Department of Justice Office of Information Policy on March 7, 2016 and, as of March 31, 2016, had begun including language in its final appeal decisions informing requesters of the mediation services. If the department follows through to ensure effective implementation of its actions on our five recommendations, it should be better positioned to improve and successfully carry out the management of its FOIA program. Beyond DOL, in comments signed by the Archivist of the United States, the National Archives and Records Administration expressed appreciation for our review and for our recognizing the importance of DOL including notification of the Office of Government Information Services’ mediation services in its final appeal letters. The National Archives and Records Administration’s comments are reprinted in appendix VI. In addition to the aforementioned written comments, we received technical comments via e-mail from the Director of the Office of Information Services at DOL, and the Audit Liaisons from the Department of Justice and the National Archives and Records Administration. We have incorporated these comments, as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of Labor, 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) 512-6304 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VII. Our objectives were to determine (1) how the Department of Labor (DOL) and its components manage and process Freedom of Information Act (FOIA) requests, including how they prioritize requests, and the extent that responses to requests have been timely; and (2) how many lawsuits DOL has been subject to arising from FOIA requests, and the results of those lawsuits. To address the study objectives, we collected and analyzed published statistics from the department’s fiscal year 2014 and fiscal year 2015 FOIA annual reports, and other documentation from the department’s central FOIA office, Office of Information Services, such as the October 2010 Desk Reference Guide and August 2013 Best Practices Guide. To determine the responsibilities of the central FOIA office and the components in managing and processing requests, we reviewed organization charts; the department’s policies and procedures; and information discussed in the FOIA annual reports, the DOL Chief FOIA Officer reports, and other agency documentation. We also conducted interviews with responsible officials in the Office of the Solicitor and the department’s 23 component offices. To facilitate our understanding of how the central FOIA office and the components manage, prioritize, and process FOIA requests, we developed and administered a questionnaire to the 23 components in June 2015. We received responses from all of the components. To ensure that our questions were clear and logical and that respondents could answer the questions without undue burden, we provided the draft questionnaire to the department’s Office of Information Services and obtained and incorporated the office’s comments on the questionnaire in advance of sending it to the 23 components. The practical difficulties of conducting any questionnaire may introduce errors, commonly referred to as non-sampling errors. For example, difficulties in how a particular question is interpreted, in the sources of information available to respondents, or in how the data were entered into a database or were analyzed can introduce unwanted variability into the results. With this questionnaire, we took a number of steps to minimize these errors. For example, our questionnaire was developed in collaboration with a GAO methodologist. The results of our questionnaire were summarized to describe component efforts to manage, prioritize, and process FOIA requests. We also reviewed criteria used by the central office and components to prioritize requests, and assessed current procedures and practices against the criteria. Further, we reviewed available statistics on FOIA processing timeliness. The scope of our work focused on the department’s central tracking system and public portal, but did not include examining other systems, such as those used by the Inspector General and for separate FOIA appeals tracking. To determine to what extent the responses to FOIA requests have been timely, DOL provided a list of 14,745 requests that had been received in the department as of October 1, 2013, and that had been fully processed by September 30, 2014. Of that total, we randomly selected a representative sample of 258 requests. In order to make the random selection, we first sorted the data we obtained based on component, process track, and whether the request was delayed or on time. We grouped the requests by their individual process track. For example, each closed request has a process track of simple, complex, or expedited. To ensure that all components were included in the sample, we divided the 23 components in the sample frame into two strata: components with 10 or more requests (stratum 1) and components with fewer than 10 requests (stratum 2). We selected all cases per component in stratum 2. We chose 96 requests from stratum 1 and allocated those 96 requests according to the number of requests. We also wanted to ensure a minimum sample of 10 requests per component in stratum 1. This resulted in a total sample of 258 requests, as reflected in table 6. This methodology was used to yield a pre-determined precision level on population estimates while minimizing the sample size or the cost. In addition, it allowed us to measure whether the 258 requests were processed in a timely manner. Because we followed a random selection of the sample, we are able to make projections to the population. The results of our sample are generalizable to the population of FOIA requests processed by the department as of September 30, 2014. All percentage estimates from our sample have margins of error at the 95 percent confidence level of plus or minus 15 percentage points or less, unless otherwise noted. To estimate the population percentage of requests that were responded to within 20 days, the sample data are weighted to make them representative of the population. The weights are developed at the stratum level. Our random sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval of plus or minus 15 percentage points or less, unless otherwise noted. This is the interval that would contain the actual population value for 95 percent of the samples that we could have drawn. To assess the reliability of the data we received, we supplemented our analysis with interviews of FOIA officials in the department’s Office of the Solicitor and Office of Information Services, as well as component officials, regarding their responsibilities and management practices. These officials included the DOL FOIA Public Liaison, the Director of the Office of Information Services, and the Director of the Office of the Solicitor. We also electronically tested the data and found them to be sufficiently reliable for purposes of our reporting objectives. To determine the number of delayed requests, we compared the date of receipt, date assigned to agency, FOIA start date, and response date field of each resolved request in the Secretary’s Information Management System for FOIA (SIMS-FOIA). To determine whether the request was forwarded to the appropriate office for processing within the statutory time frame of 10 working days, we reviewed the “date assigned to agency” field in SIMS-FOIA against the “date of receipt in DOL” field. To determine whether the department responded to the requester within 20 working days, we reviewed the “date assigned – FOIA start date” field and compared it to the latest “response date” field. In addition, we reviewed other available documentation, including SIMS-FOIA snapshots and all documentation associated with each of the 258 resolved requests. We also reviewed data from SIMS-FOIA to identify any documentation of delays in processing the requests, reasons for the delays, and any actions taken by the department to notify requesters of delays. To determine the number of FOIA lawsuits filed against the department, we reviewed relevant information that spanned portions of the prior and current administrations (January 2005 through December 2014). We obtained information on the lawsuits from DOL and the Department of Justice, and through the Public Access to Court Electronic Records (PACER) system. Specifically, we reviewed DOL documentation that discussed its FOIA litigation, settlements, and legal decisions made from January 2005 through December 2014. In addition, we reviewed Department of Justice documentation that included a listing of DOL’s FOIA litigation cases, attorney costs and fees assessed by the courts, and court decisions made from January 2005 through December 2014. We reviewed and analyzed the documentation to confirm that all lawsuits were FOIA-related and included the department or a component as a defendant. We also reviewed the documentation to determine the reason the lawsuit was brought to litigation and the resulting court decision. Further, we interviewed agency officials from the Department of Justice’s Civil Division and Office of Information Policy, as well as from DOL’s Management and Administrative Legal Services Division, to discuss their processes regarding litigating FOIA cases and the results of the cases. In selected cases, DOL did not have complete information associated with the lawsuit, such as the decision, complaint, and/or settlement documentation. We conducted this performance audit from February 2015 to June 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The Freedom of Information Act (FOIA) prescribes nine specific categories of information that are exempt from disclosure, which are described in table 7. In August 2013, the Department of Labor’s Office of the Information Services (OIS) issued guidance that is intended to assist the department’s staff in responding to FOIA requests. The guidance outlines the nine stages of processing a request received by the department, including the processing of administrative appeals and judicial reviews of lawsuits filed by requesters, as depicted in figure 3 below. The nine stages that components are to take are as described: Receive and route a request. A FOIA request can be submitted to the department by a member of the public via postal mail, e-mail, or fax. If OIS receives a request, its staff are to log the request into the Secretary’s Information Management System for FOIA (SIMS-FOIA) and route the request to the appropriate DOL component office, or retain the request if it pertains to the Office of the Solicitor. When the appropriate component receives the request in SIMS-FOIA, the clock for processing the request (i.e., 20 working days) starts. If the request is misrouted, it is to be returned to OIS for reassignment to the appropriate component. Once assigned to the appropriate component, the FOIA processor receiving the request is to send an acknowledgement letter with a unique tracking number to the requester. Evaluate the request. The FOIA processor is to obtain from the requester a description of the records sought and determine if there is enough information to locate the responsive records. The processor is then to confirm in writing (or by e-mail) any narrowing in scope of the request or alternative time frames (i.e., beyond the 20 working days due to unusual circumstances) for processing the requests. Prioritize requests and time limit. When processing a request, components are to use one of three processing tracks (simple, complex, or expedited) and are to identify in SIMS-FOIA which track is being used to process the request. The decision is to be made based on the amount of work and/or the amount of time needed to process the request. Conduct a reasonable search. The FOIA processor is to conduct a search for responsive records. To do so, the processor can consult with subject matter experts to identify the type of responsive records that exist and the location of the records. Components are to maintain documentation concerning the search methodology, including the offices where the records were searched, the individual(s) that conducted the search, and what search terms were used. Review, segregate, and release non-exempt information. The FOIA processor is to review the responsive records, and determine whether a portion or all of any record should be withheld based on a statutory exemption. If a portion or all of any record is the responsibility of another agency or component, FOIA processor can consult with the other agency or component or send the responsive records to that other agency or component for processing. Assess fees. The component is to assess the fees that will be charged by the type of requester that is making the request. For example, if the requester is a member of the news media, then he/she may request a fee waiver. Further, the types of fees charged depend on time spent to search for responsive records, document the review of records, and the copies of the records. Respond to the requester. When responding to the requester, the FOIA processor is to make a determination to release a response in full, to apply an exemption and withhold information protected under an exemption and release certain parts of the response, or fully deny the request. A response must be in writing and signed by a FOIA disclosure officer. Response letters must include language regarding the identification of responsive records; the page count of records processed; the amount of information or pages withheld, if applicable; the identification of any exemptions asserted; any procedural denials that apply; and the requester’s right to file an administrative appeal. Process administrative appeal. A requester has the right to administratively appeal any adverse determination a component makes concerning a request. The Office of the Solicitor, which serves as the designated appeals official, is to notify the requester in writing when the appeal is received, and review the component’s actions taken in response to the FOIA request to determine whether corrective steps are necessary. The Office of the Solicitor is to then issue a final appeal determination and notify the requester of the right to seek judicial review. Conduct judicial review of processing. FOIA provides requesters with the right to challenge an agency’s final decision in federal court. Components have the burden of proof and must demonstrate to the court all actions taken in response to a request, or that appeal determinations are appropriate and consistent with the statute and the department’s FOIA regulations. Components are to provide the department’s FOIA Counsel with the case file, including the responsive record, any exemptions applied, and a response letter, as well as an appeal determination, if applicable. The FOIA case file must be preserved and processors must be prepared to justify their actions in the event of litigation. Using our sample of 258 Freedom of Information Act requests, we reviewed the Department of Labor’s timeliness in processing the requests. Specifically, for each of the department’s 23 components, table 8 shows the number of requests in our sample of each type (simple, complex, or expedited); the number of days it took for those requests to be routed to the correct office; and the number of days it took for the components to respond to the requests. In addition to the contact named above, key contributors to this report were Anjalique Lawrence (Assistant Director), Freda Paintsil (Analyst in Charge), Christopher Businsky, Quintin Dorsey, Rebecca Eyler, Andrea Harvey, Ashfaq Huda, Kendrick Johnson, Lee McCracken, Dae Park, David Plocher, Umesh Thakkar, Walter Vance, and Robert Williams, Jr.

FOIA requires federal agencies to provide the public with access to government information in accordance with principles of openness and accountability and generally requires agencies to respond to requests for information within 20 working days. When an agency does not respond or a requester disagrees with the outcomes of his or her request, the requester can appeal a decision or file a lawsuit against the agency. Like other agencies, DOL responds to thousands of FOIA requests each year. In fiscal year 2015, the department received approximately 16,800 requests. GAO was asked to review DOL's FOIA processing. GAO's objectives were to determine (1) how the department and its components manage and process FOIA requests, including how they prioritize requests, and the extent that responses to requests have been timely; and (2) how many lawsuits DOL has been subjected to arising from FOIA requests, and the results of those lawsuits. To do so, GAO reviewed DOL reports, policies, guidance, and other documentation; analyzed a random sample of FOIA requests processed by the department in fiscal year 2014; reviewed FOIA-related legal records; and interviewed officials. Responsibilities for managing and processing Freedom of Information Act (FOIA) requests are handled by the Department of Labor's (DOL) 23 component offices. Within one of these components, the Office of Information Services (OIS) functions as the department's central FOIA office and has agency-wide responsibility for managing the program; however, the department has not updated its FOIA regulation to reflect changes in its process made in response to more recent amendments to the law and new implementing guidance. DOL uses an information technology (IT) system to manage and track requests, but it has not implemented key required and recommended capabilities for enhancing FOIA processing, such as capabilities to accommodate individuals with disabilities or electronic redaction. Implementing the required and recommended capabilities could improve the efficiency of the department's FOIA processing. DOL and its components have implemented a process for prioritizing FOIA requests, allowing for expedited processing in certain cases, and in fiscal year 2014 the department processed an estimated 76 percent of requests that GAO reviewed within 20 working days. For the estimated 24 percent of cases that were not timely, officials attributed these delays, in part, to the involvement of multiple components in a single request or the time required to process large volumes of requested records. However, the department did not document the rationales for delays in its FOIA tracking system or notify requesters of them. Further, the department had not responded to administrative appeals within the statutory time frame of 20 working days, but is taking steps to reduce the backlog of appeals. From January 2005 through December 2014, 68 FOIA-related lawsuits were brought against DOL. Of these lawsuits, the court ruled in favor of the department in 18 cases, jointly in favor of both the department and the requester in 1 case, and in favor of the requesters in 3 cases. In 44 of the remaining lawsuits, the department and the requesters established settlement agreements that awarded attorney's fees and other costs to the requesters or resulted in the department potentially releasing additional information. A decision on 2 lawsuits was undecided as of April 2016 (see figure). Although recommended by Department of Justice guidance, the department did not notify requesters of mediation services offered by the Office of Government Information Services as an alternative to litigation. By doing so, DOL may be able to avoid future lawsuits, thus saving resources and ensuring that requesters are kept informed about the department's FOIA process. GAO is recommending, among other things, that DOL establish a time frame to finalize and issue its updated FOIA regulation and take actions to implement required and recommended system capabilities. In written comments on a draft of the report, the department agreed with the recommendations.

You are an expert at summarizing long articles. Proceed to summarize the following text: The Federal Procurement Data System – Next Generation (FPDS-NG) uses more than 300 codes, organized in 23 categories, to describe the services purchased by federal agencies. Among these categories—which capture services ranging from utilities and housekeeping services to medical services—are professional and management support services. Examples of service categories and codes are listed in table 1. For almost 20 years, OMB procurement policy has indicated that agencies should provide a greater degree of scrutiny when contracting for professional and management support services, which include acquisition support, program evaluation, and other services that can affect the government’s decision-making authority. Without proper management and oversight, such services risk inappropriately influencing the government’s control over and accountability for decisions that may be supported by contractors’ work. Thus, the policy directs agencies to ensure that they maintain sufficient government expertise to manage the contracted work. The FAR also addresses the greater need for management oversight associated with contractors providing services that have the potential to influence the authority, accountability, and responsibilities of government employees. Contractors are prohibited from performing inherently governmental functions, such as determining agency policy, directing federal employees, and approving contractual documents, which require such discretion in applying government authority or value judgments in making decisions that they can only be performed by government employees. The FAR also identifies services that can approach being inherently governmental, based on the nature of the function or the manner in which the work is performed or administered. Contractors can provide services that closely support inherently governmental functions, but agencies must provide greater scrutiny and enhanced management oversight to ensure that the contractors’ work does not limit the authority, accountability, and responsibilities of government employees. The FAR includes an illustrative list of 19 services that closely support inherently governmental functions, many of which—such as supporting policy development and providing legal advice—are captured in FPDS-NG codes in the professional and management support services category. See appendix II for examples of inherently governmental and closely supporting inherently governmental functions outlined in the FAR. Figure 1 illustrates how the risk of contractors influencing government decision making is increased as professional and management support services move closer toward supporting inherently governmental functions. Long-standing FAR and OMB guidance addresses the need for enhanced oversight, but in prior work we found that DOD and DHS officials were often unaware of this policy. The guidance states that having a sufficient number of trained and experienced government employees is necessary when contracting for professional and management support services, but does not describe how agencies should provide enhanced management oversight for such contracts. Federal civilian agencies have increasingly relied on contractors to provide professional and management support services—such as program management and evaluation, engineering and technical services, and acquisition support—with a growth rate of obligations in this category that is more than twice the growth rate of all other service contract obligations over a 5-year period. From fiscal year 2005 through fiscal year 2010, civilian agency obligations for professional and management support service contracts increased $9.9 billion dollars, or 44 percent, to $32 billion (adjusted for inflation to 2010 dollars). (See fig. 2.) This was more than double the 19 percent increase experienced by all other service contracts, which increased from $87.8 billion to $104 billion in inflation-adjusted dollars during the same time period. The five agencies selected for review—DHS, USAID, DOT, HUD, and NSF—obligated a larger percentage of their fiscal year 2010 service contract dollars on professional and management support services compared to all civilian agencies, including the five reviewed. (See table 2.) For the five agencies we reviewed, the activities contractors provided through agencies’ professional and management support service contracts often appeared to closely support the performance of inherently governmental functions. Use of these services can result in the loss of government accountability and control if proper oversight is not provided. Of the 230 professional and management support service contract statements of work (SOW) we reviewed from the five agencies, at least 120 contracts—or more than half—requested services that the FAR identifies as closely supporting inherently governmental functions, including services related to budget preparation, reorganization and planning activities, evaluation of another contractor’s performance, and acquisition support. For example, a DOT contract requested support for acquisition functions, including the creation of independent government cost estimates and analysis and recommendations related to new acquisitions. In another contract, HUD requested that contractors assist management and staff in developing a new strategic plan for the agency. The SOW called for contractors to work with stakeholders inside and outside the agency by conducting interviews, documentation reviews and surveys to understand the agency’s current operational environment and associated challenges, risks, and opportunities. Tasks also included assisting in the identification of agency priorities and transformation initiatives. The remaining SOWs we reviewed included services that did not closely support inherently governmental functions, such as a contract for records management and processing at DHS. A significant portion of the growth in civilian agency contracts for professional and management support services was driven by an increase in obligations for contracts coded in FPDS-NG as Other Professional Services. This category accounted for $3.4 billion of the $9.9 billion increase in contract obligations for professional and management support services from fiscal year 2005 to fiscal year 2010. Overall, 5 of the 56 codes for professional and management support services accounted for 70 percent of civilian agency obligations for these services in fiscal year 2010, representing over $22 billion in overall obligations. (See fig. 3.) Of the 230 contract SOWs we reviewed, 171 contracts were in the top five codes and covered a wide range of services. For example: Other Professional Services. SOWs requested support including risk management and analysis, records management, assistance to a foreign government, physical and administrative security, budget and program management support, financial and information technology audits, strategic planning, program administration, acquisition support, project management, technical assistance and training, workforce analysis, and website development and content management. Engineering and Technical Services. SOWs requested services including architectural planning and construction, testing and evaluation of radar and weather systems, ship inspection services, and information technology systems support. Technical Assistance. SOWs requested services including support to foreign governments, such as support for security and governance in Nepal and local government capacity building in unstable areas of Afghanistan, as well as contracts to update information technology systems and manuals and provide technical and administrative support to meet information technology security requirements. Program Management/Support Services. SOWs requested services including support to evaluate internal controls, manage audit compliance and the tracking of audit recommendations, and provide project management oversight to ensure grantee compliance in administering federally funded programs. Other Management Support Services. SOWs requested services including technical and program expertise related to technologies’ compliance with federal laws and guidelines; support to develop a program management plan for project monitoring and oversight; information systems, hardware, and software support; technical expertise to improve data collection and program evaluation; and loan servicing activities including payment collection, risk management, and customer service. We conducted a more in-depth review of 12 contracts or task orders for professional and management support services. On the basis of our review, at least 9 of the 12 contracts or task orders involved services that closely support inherently governmental functions, including acquisition support, reorganization and planning support, and support for policy development. The selected contracts or task orders originated from 2005 through 2009 and included a mix of both long-standing and new contract requirements. For example, the DOT project management oversight contracts at the Federal Transit Administration include services that have been performed by contractors for more than 20 years. Contracting and program officials identified several reasons why their agencies chose to award contracts for these professional and management support services. Six of the 12 contracts or task orders were issued or expanded in response to new requirements or workload increases, such as the watch officer positions created to provide surge capacity at DHS’ Transportation Security Administration, an expanded Sudan mission support contract at USAID, and short-term need for procurement office support at HUD. The 12 case-study contracts and task orders are described in table 3. Agency officials noted that the temporary nature of some work or the need for surge capacities made contracting preferable to using federal employees because of the flexibility it offers, such as the ability to increase or decrease scope in response to program needs. Often, agency officials pointed to constraints on the use of federal employees such as limitations for hiring federal staff or budget restrictions as a factor that led to contracting for services. For example, NSF provides support to two interagency offices established by memorandums of understanding, which program officials told us have the effect of limiting the number of government personnel who can work in the offices, so the majority of the work is performed by contractors. Similarly, a senior Federal Transit Administration official said that while Congress has authorized a portion of annual program funds to be used for oversight services, the administration is constrained from using these funds to hire federal employees for this purpose. In another case, officials from HUD’s Government National Mortgage Association said that the agency increasingly used contractors for data analysis related to mortgage- backed securities, in part because their hiring authority had not increased in several years, so they did not have enough government staff to meet their increased workload. Agency officials generally did not consider the risks of acquiring professional and management support services before awarding the 12 contracts we reviewed. In some cases, however, officials later became concerned and took steps to mitigate potential risks that contractors might perform inherently governmental functions, or that government employees might lack sufficient expertise to oversee the contractors’ work. Four of the five agencies did not have guidance to help identify risks prior to award and ensure enhanced oversight is provided when services closely support inherently governmental functions. For the contracts we reviewed, few of the contracting or program officials said they considered whether the services they were contracting for closely supported inherently governmental functions or took steps to address the related risks before award. In almost all of the cases, officials explained that they conducted reviews, as required by the FAR, to determine if the services requested included inherently governmental functions, but none stated that these review processes specifically determined whether services might closely support inherently governmental functions and thus require enhanced management oversight. The FAR guidance requiring enhanced management oversight when contracting for services that closely support inherently governmental functions is located in a different part of the FAR than that on inherently governmental functions, and agencies did not seem to link the two FAR sections, as none of the officials identified services that closely support inherently governmental functions as triggering a need for increased oversight. During the performance period of the contract, contracting and program officials said they relied on routine oversight procedures, such as assigning COTRs, reviewing contractors’ work products, and reviewing contractor invoices and status reports. In cases where officials did have additional oversight measures in place, they did not link their actions to concerns associated with risks from acquiring professional and management support services. For example, the Federal Transit Administration program office at DOT had developed standard oversight procedures to address the contractors’ roles and responsibilities for overseeing grant recipients, including their responsibilities for conducting assessments of the grantees and providing recommendations to the agency. While the procedures acknowledge the government’s decision- making role, they are an application of long-standing guidance that officials said was created to ensure that each project meets its goals, rather than additional oversight to address the risk of contractors supporting inherently governmental functions. For other contracts, contracting or program officials became concerned during the course of contract performance that contractors were at risk of performing inherently governmental functions, or that government personnel might lack the expertise needed to oversee contractors’ work, and took various steps to help mitigate those risks. In these cases, we found that concerns were generally raised by officials who were new to a program office or contracting officials who had assumed responsibilities for an existing contract. For example: A senior official in DOT’s Office of Airline Information became concerned about the lack of government employee expertise to oversee information technology functions that had been developed and exclusively operated by contractors for several years. The office is planning to convert some of the contractor duties to federal employee positions, but efforts to hire new employees have not been completed because of budget constraints and competing priorities within the Research and Innovative Technology Administration. The contracting officer and COTR in USAID’s Sudan Mission had concerns about interaction among federal employees and contractor staff in a newly established mission office, fearing that security and logistic challenges had left the government overly reliant on contractors’ expertise. To prevent the performance of inherently governmental work by contractors and to ensure appropriate oversight and capacity among the federal employee workforce, they developed a mission order nearly 3 years after the contract was awarded that outlined the government’s responsibilities and provided training for all personnel in the mission office. In the two NSF contracts we reviewed, contracting and program officials developed policy and procedure manuals after the contracts were awarded to outline the responsibilities and workflow among contractor and federal staff. Officials said that because each of these offices is staffed primarily by contractors, with only one or two federal employees, these technical documents primarily serve a business continuity function. However, officials also said they help to ensure that contractors will not accidentally perform or be tasked with inherently governmental work. In two of the DHS contracts we reviewed, officials identified risks associated with some of the activities performed by contractors and are now requiring the work to be performed by government employees. According to a senior procurement official with Citizenship and Immigration Services, the component has reduced the number of contractors supporting the contract from 90 to approximately 22, primarily by insourcing work—moving it from contractor to government performance—such as acquisition and budget support. The contract positions that remain are largely administrative specialist positions that officials determined do not support inherently governmental functions. Likewise, the Transportation Security Administration insourced 12 contracted watch officer support positions, which involve collecting information and monitoring domestic events that affect air passenger security, and program officials said they plan to insource the remaining call center positions in the near future. According to agency officials, at least 6 of the 12 contracts we reviewed have been recently recompeted or will be in the coming year. Officials identified various changes to the contracts going forward, but only a few indicated that the changes were due to concerns with contractors providing professional and management support services. For example, USAID’s policy office is changing some of the types of work performed by contractors in that office, but officials indicated that these changes are determined by how contract support can most effectively help the office function, not by consideration of risk or reliance on contractors. Similarly, HUD’s Office of the Chief Procurement Officer ended its use of contractors when it received additional funding for federal employees, though program officials did not express any concerns about the type of work done by those contractors. DOT’s Office of Airline Information is rolling its current contract into a larger, administrationwide contract vehicle for the sake of potential cost savings, not to address its concerns about the type of work being performed. Although the DHS Office of Intelligence and Analysis contract we reviewed expired, officials said that the succeeding contract, which is classified, contains similar types of services. Agencies use a variety of tools to guide procurement practices prior to contract award and during contract performance, including agency- specific FAR supplements, acquisition manuals, and COTR handbooks, and some of the materials we reviewed mention professional and management support services. The FAR requires agencies to provide enhanced management oversight for contracts that closely support inherently governmental functions, and federal internal control standards require assessments of risks. However, four of the five agencies reviewed did not have processes, through guidance or other means, to help identify risks or ensure greater scrutiny and enhanced management oversight when contractors provide expertise or perform services that closely support inherently governmental work. In 2007, we recommended that DHS assess the risk of selected contractor services as part of the acquisition planning process and modify existing acquisition guidance to address when to use and how to oversee those services in accordance with federal acquisition policy. DHS did not have guidance when two of the three contracts we reviewed were awarded, but it subsequently established a review process for all professional and management support service contracts over $1 million to identify related risks, including services that closely support inherently governmental functions.awarded or option years are exercised. According to an official from one of the three DHS components we reviewed, this process helped contracting officials pay closer attention to oversight capacities of government staff, such as whether there were a sufficient number of employees available. USAID’s institutional support contracts can include program support functions similar to professional and management support services. USAID defines institutional support contractor as a non-personal-services contractor, funded by USAID to support agency operations or to augment the agency’s direct hire and personal services staff, or both. Personnel employed by an Institutional Support Contractor may be seated within USAID space, space rented by or on behalf of the agency, or in the Institutional Support Contractor’s space. Institutional Support Contractors may be funded by either program or operating expense. While the majority of these individuals provide administrative and information technology support to the agency, some personnel employed by non- personal-services contractors in headquarters provide program-related support. performance. However, the guidance does not have a process for providing enhanced management oversight for services that closely support inherently governmental functions. Through several efforts that address agencies’ multisector workforce of federal employees and contractor personnel, OMB addresses professional and management support service risks, including recent guidance that establishes agency management responsibilities for services that closely support inherently governmental functions. The five agencies we reviewed have responded to these efforts to varying degrees, but only DHS has taken steps to incorporate all of these efforts. In recent initiatives, OMB may have missed opportunities to address risks associated with two specific codes for professional and management support services. OMB has initiated a number of interrelated efforts that address agencies’ use of service contractors, including contractors for professional and management support services, in the context of maintaining a balanced workforce with the appropriate mix of federal employees and contractors. Primarily in response to congressional requirements, since 2009 OMB has developed guidance and facilitated efforts to improve how agencies manage their multisector workforce, which includes addressing the risks that overreliance on contractors can pose to government control and accountability. Through these efforts, Congress and OMB have emphasized the need to examine contracted functions where agencies risk becoming overreliant on contractors, such as professional and management support service contracts. By focusing on the role that both government and contractor employees have in performing work that supports agency missions, these efforts emphasize the need to consider how contracted functions fit into agency goals and priorities as part of strategic planning processes. The resulting multisector workforce efforts seek to broaden decisions about the use of contractors from primarily a procurement office function, or a series of individual, program-office-level decisions, to a shared agency responsibility that requires the involvement of human capital, budget, and program, as well as procurement offices. Recent efforts that address professional and management support services are described in table 4. OMB established criteria to help agencies respond to the statutory requirement to develop a process for reviewing service contractor activities to consider if contractor performance is appropriate, referred to as insourcing guidance. OMB’s guidance identifies professional services as an area of risk, thus requiring increased agency monitoring. In 2009, OMB also required agencies to conduct multisector workforce planning pilots in one office or unit to gain experience with determining optimal workforce balance and submit summary reports on their workforce analysis. More recently, in 2010, OMB issued guidance to help agencies conduct inventories of their fiscal year 2010 service contracts and an analysis of the inventory, which provides a more detailed list of professional and management support service codes, including program management support and intelligence services that require increased attention from agencies. OMB stated that it will issue additional guidance to agencies for the preparation of the fiscal year 2011 inventories, taking into consideration experiences with the development and use of the initial fiscal year 2010 inventories effort. The recent OMB OFPP Policy Letter 11-01 seeks to broaden agencies’ focus to include critical functions, which can pose a risk if not carefully monitored. Similar to the risks associated with contractors performing work that closely supports inherently governmental functions, OMB states that relying on contractors for critical functions can affect the government’s control of mission and operations, unless the government maintains sufficient in-house capability to manage and oversee the contractors’ work. The policy letter requires agencies to develop and maintain internal procedures to address the requirements of the guidance, but does not state when the procedures should be implemented. According to a senior OMB official, these pieces of guidance, working together, are intended to build the different capacities agencies need to examine their use of contractors and balance their workforce. For example, the insourcing guidance helps agencies develop the procedures needed to determine the appropriate use of public and private labor resources. The workforce analysis pilots were intended, in part, to help agencies build relationships among key stakeholders, furthering the collaboration needed to implement strategic approaches. Similarly, the contract inventories and analysis are ongoing efforts to collect and share the information stakeholders need to understand their areas of greatest risk. The official also said that the policy letter ties all of these efforts together and provides agencies with instructions regarding their responsibilities to address risks associated with contractors performing services that closely support inherently governmental functions or are considered critical functions. The five agencies we reviewed have participated in many of OMB’s efforts related to the multisector workforce, but only DHS has taken steps to incorporate guidance to examine its use of contractors and balance its workforce. The four remaining agencies we reviewed—DOT, HUD, NSF, and USAID—are increasingly responding to the various segments of OMB’s guidance by participating in the multisector workforce pilots and developing an inventory of service contracts, but have not fully implemented insourcing guidance that could provide greater scrutiny of professional and management support service contracts. Through the multisector workforce pilots, all five agencies we reviewed conducted a limited workforce analysis to gain an understanding of the steps needed to achieve a balanced workforce and submitted reports on the pilots to OMB in April 2010. While OMB initially stated that a summary of agency best practices would result from the pilot efforts, agencies have not yet received feedback from OMB on their reports and results have not been made public. The agencies we reviewed also completed their initial service contract inventory, which is an annual requirement of all of the civilian agencies subject to the FAIR Act of 1998 to understand how contractors are being used and to help identify contracted functions that may require workforce rebalancing due to overreliance on contractors. An additional analysis of this inventory is due at the end of 2011. OMB is planning to provide updated guidance to the agencies for the fiscal year 2011 inventory analysis, but it had not been issued as of November 2011. As of August 2011, three agencies—DOT, HUD, and NSF—had not yet developed the insourcing guidance that was due in 2009 for considering whether government or contractor employees are best suited for certain functions, particularly professional support services and services that closely support inherently governmental functions or are similar to work already performed by federal employees. USAID has developed insourcing guidance, but is implementing it incrementally through its operating units with the assistance of a workforce planning contractor. According to USAID officials, the process has been piloted in two offices to date. In its most recent guidance, OMB’s OFPP Policy Letter 11-01 reiterates a statutory requirement that agencies must give special consideration to using federal employees to perform work that closely supports inherently governmental functions. DHS developed insourcing guidance in 2009, and later expanded its efforts by introducing a strategy that provides a more comprehensive review process to help program offices balance their use of contracted and government personnel. The Balanced Workforce Strategy includes a decision-making tool intended to help program offices and the department assess various risks associated with service contracts, including whether the service supports a critical agency function. Using the tool, DHS program offices are systematically reviewing all of their existing service contracts to determine, among other factors, whether the services requested closely support inherently governmental functions, their degree of criticality, and the appropriate number of government personnel needed to maintain workforce balance. According to DHS officials, the review is being conducted in segments and contracts considered to be at higher-risk—including professional and management support service contracts—were prioritized for the initial reviews. The Balanced Workforce Strategy leverages the efforts of DHS reviews, including the Quadrennial Homeland Security Review and Bottom-Up Review completed in 2010. According to DHS officials, it is also in response to congressional concerns about their use of contracted services and our 2007 report on their use of professional and management support services. However, DHS is also developing the strategy to meet the various statutory and OMB requirements associated with the multisector workforce, such as developing insourcing guidelines as required in statute and identifying critical functions, as was outlined in OMB’s OFPP Policy Letter 11-01. At the time of our review, DHS officials said the strategy was moving forward, but they considered the guidance to be a draft because it had been based on OMB’s notice of proposed policy letter, and they were anticipating the final policy letter might require changes to the DHS strategy. Two recent OMB efforts have highlighted a group of service codes for increased attention as agencies address their use of service contracts, but do not contain two codes—Other Professional Services and Other Management Support Services—that accounted for a significant amount of dollars obligated by civilian agencies on professional and management support service contracts in fiscal year 2010 and may contain risks to the government’s control of mission and operations. At a White House forum in July 2011, OMB announced an effort to achieve cost savings by reducing agencies’ spending on management support service contracts by 15 percent by the end of fiscal year 2012. OMB later identified 12 service codes to define management support service functions, but did not include these two codes, which together comprised 30 percent of dollars obligated on professional and management support service contracts in fiscal year 2010. The two codes were also not included in a similar list of service codes provided in OMB’s November 2010 guidance for conducting service contract inventories and analysis. In the guidance, OMB states that agencies should give priority consideration to reviewing contracts for professional and management support services and provides the list to illustrate codes that should be considered in agencies’ analysis.heightened management attention due to concerns of their increased risk According to OMB, these codes were identified for to the government’s control of mission and operations. See appendix IV for a complete list of the service codes identified in both initiatives. While OMB took steps to provide agencies with guidance on codes for certain services that may have increased risks, our analysis of 230 contract SOWs, which included 83 contracts categorized as Other Professional Services or Other Management Support Services, showed that contracts in these codes include some of the same functions identified in the inventory guidance as requiring heightened management attention. (See table 5.) For example, requests for acquisition support were included in contracts in the two codes at all five of the agencies we reviewed. Additionally, because contracts in these codes can include a wide range of functions, they may include multiple activities that potentially support inherently governmental functions. For example, a DHS contract coded Other Professional Services requested services ranging from supporting program development and implementation, policy, workforce analysis, statistical and financial analysis, and economic analysis, to technical writing, web maintenance, mail and file operations, training, and information technology support for various programs. According to a senior OMB official, OMB kept its list of inventory service codes concise to help agencies focus their attentions on a manageable number of services. However, by omitting these codes from receiving priority attention in agencies’ inventory analysis, particularly considering that many of the services requested under these codes may closely support inherently governmental functions, agencies may not conduct a full analysis of risks related to loss of control and operations. While the services specified in the inventory analysis list are intended to be illustrative, the significant amount of obligations spent in the two excluded codes also warrants attention, particularly for efforts aimed at reducing spending for such services. Long-standing OMB and FAR guidance has established the need for federal agencies to consider risks associated with contractors providing professional and management support services, particularly with services that closely support inherently governmental functions. However, the five agencies we reviewed generally did not consider these risks prior to contract award. Additionally, only one of the five agencies had developed guidance or practices over time to improve management of these risks. Recent OMB efforts associated with the multisector workforce look to increase agency focus on services acquired, not necessarily to reduce the number of contractors, but to ensure agencies have sufficient knowledge of the activities performed by contractors. The efforts particularly focus on whether the government may be overly reliant on contractors for certain functions and whether such reliance presents risks to government control and accountability for decision making. OMB’s most recent policy guidance, OFPP Policy Letter 11-01, requires agencies to develop procedures to address these issues. Such procedures are an important step toward improved agency consideration of risks. However, OMB has not established a deadline for when agencies need to complete these procedures, which, if established, may help better focus agency efforts to address risks. In the context of better managing the multisector workforce, there are further opportunities to enhance the results of OMB’s efforts. Agencies are required to conduct inventory analyses to help them understand the extent to which contractors support their work. Under current OMB inventory guidance, agencies have been asked to focus on a detailed list of professional and management support service codes, but not two codes that account for one-third of fiscal year 2010 obligations under this services category. According to our analysis, these codes contain the same risks to mission and operation that OMB is intending to address. The same two codes are also not cited in OMB’s more recent effort to reduce agency spending for management support service contracts. To address these issues, we are making two recommendations to the Director of OMB. To better focus agencies’ efforts to manage the risks related to professional and management support service contracts we recommend that the Director of OMB, through the Office of Federal Procurement Policy establish a near-term deadline for agencies to develop internal procedures required by OFPP Policy Letter 11-01, including for services that closely support inherently governmental functions. To ensure that the risks of professional and management support service contracts are more fully considered and addressed, we recommend that the Director of OMB, through the Office of Federal Procurement Policy include contracts coded in the Federal Procurement Data System – Next Generation (FPDS-NG) as Other Professional Services and Other Management Support Services in the cost savings initiative for management support services and planned service contract inventory guidance to agencies for conducting analysis of special interest functions. We provided a draft of this report to OMB, DHS, DOT, HUD, USAID, and NSF for review and comment. DHS provided a written response stating that it is committed to ensuring risks related to professional and management support service contracts are mitigated (see app. V) and technical comments that were incorporated into the report as appropriate. DOT, HUD, and NSF also provided technical comments that were incorporated into the report as appropriate. USAID responded that it did not have comments. OMB’s Office of Federal Procurement Policy (OFPP) provided comments by e-mail on this report. OFPP generally agreed with our findings and recommendations, but provided technical comments on our recommendations. For our first recommendation, OFPP commented that the OFPP Policy Letter 11-01 addresses multiple management responsibilities related to professional and management support service contracts and it would likely establish agency time frames for agencies to develop the required internal procedures more broadly, not just for services that closely support inherently governmental functions. In recognition of the interrelatedness of the critical functions that may be performed by contractors, including those that closely support inherently governmental functions, we modified the recommendation to reflect the broader scope of OMB’s policy letter. For our second recommendation, OFPP commented that it would consider addressing contracts coded in FPDS-NG as Other Professional Services and Other Management Support Services in the planned service contract inventory guidance to agencies, but expressed concerns with including these contracts under its current cost savings initiative for management support services contracts. OFPP noted that the initiative is focused on this fiscal year’s spending and that changing the baseline several months into the fiscal year would create confusion at the agencies. OFPP stated that it viewed having clear and consistent baselines as consistent with our recommendations on OMB’s fiscal year 2010 contracts savings initiative and that it could consider expanding the list of codes for a future service contract cost savings initiative. As our analysis has shown, Other Professional Services and Other Management Support Services accounted for a significant amount of dollars obligated by civilian agencies on professional and management support services contracts in fiscal year 2010 and may contain risks to the government’s control of mission operations. Including them in the planned service contract inventory guidance to civilian agencies will be a good step in expanding the agencies’ focus on the use of contractors. In recognition that agencies may have already started to respond to the cost savings initiative for this fiscal year, we modified the recommendation to provide OMB some flexibility for including these codes under the cost savings initiative in the subsequent years. 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 and the Director of OMB, the Secretaries of DHS, DOT, and HUD, and the Administrators of USAID and NSF. 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 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. Other staff making key contributions to this report are listed in appendix VI. To conduct this work, we analyzed contract data from the Federal Procurement Data System – Next Generation (FPDS-NG) and selected and reviewed 230 contract statements of work (SOW) for professional and management support services, from which we selected 12 contracts and task orders for more in-depth case-study reviews. To assess the reliability of FPDS-NG data fields used in our analysis, we confirmed through the SOWs that selected contracts and task orders were correctly categorized as professional and management support services. We determined that the data were sufficiently reliable for overall trend analysis of these services. We also reviewed agency and governmentwide guidance and spoke with agency and Office of Management and Budget (OMB) officials. To determine the extent to which civilian agencies contract for professional and management services, we compiled information from FPDS-NG on procurement spending at civilian agencies for fiscal years 2005 through 2010. For the purposes of this report, contracts described as professional and management support services are contracts categorized as “Professional, Administrative and Management Support Services” in the Federal Procurement Data System Product and Service Codes Manual. To gain greater insight into the types of activities included in contracts under these codes, we judgmentally selected five civilian agencies, the Departments of Homeland Security (DHS), Transportation (DOT), and Housing and Urban Development (HUD), the U.S. Agency for International Development (USAID), and the National Science Foundation (NSF), based in part on their obligations for professional and management support services in fiscal year 2009 as a proportion of overall service obligations, as well as to represent varying agency missions and amounts of service contract obligations. Using the same criteria, we selected three components each at DHS and DOT, as these two agencies had FPDS-NG data available at these levels. The DHS components are the Office of the Secretary, the Transportation Security Administration, and U.S. Citizenship and Immigration Services. At DOT, we selected the Office of the Secretary of Transportation, the Federal Aviation Administration, and the Federal Transit Administration. From these agencies, we reviewed FPDS-NG data on obligations in fiscal year 2009, which at the time was the most recent full year data available, to select professional and management support service contracts and task orders for further review. To focus our analysis, we obtained FPDS- NG data on contract obligations from 20 specific service codes for professional and management services, which included codes identified in prior GAO work and services listed in OMB’s inventories guidance as requiring heightened management attention. We also included service codes that were frequently used by the five agencies and that might relate to specific agency missions. See table 6 for a list of service codes considered. From the contract obligations included under the selected codes, we judgmentally selected a nongeneralizable sample of 235 contracts and task orders to cover a range of services and obligation amounts. We also included contracts and task orders with descriptions, when available, that indicated the requested services closely supported inherently governmental functions or could be considered functions close to agencies’ missions. We requested 50 contract and task order SOWs each from DHS, DOT, USAID, and HUD. We requested 35 SOWs from NSF, which had a smaller number of contracts and task orders from which to select in these codes. Of the 235 contracts and task orders requested across the five agencies, five SOWs were either not available from the agencies during the course of our audit work or not sufficiently detailed for our review purposes. We reviewed the SOWs from the 230 contracts and task orders provided and compared the services requested to the descriptions of services that closely support the performance of inherently governmental functions that are available in federal acquisition guidance. After conducting an initial SOW review for all of the categories describing services that closely support inherently governmental functions, we judgmentally identified 10 of the categories for more detailed review, including 4 categories that we addressed collectively as acquisition support. (See table 7.) These categories were primarily selected because their descriptions available in federal acquisition regulations allowed for a more definitive determination of services supporting inherently governmental functions, based on the descriptions available in the SOWs. To determine if agency officials consider and mitigate risks associated with using contracts for selected professional and management support services, we reviewed available agency guidance and conducted a detailed review of 12 contracts or task orders as case studies. From the 230 SOWs reviewed, we judgmentally selected the 12 contracts or task orders to provide a range of obligation amounts and service codes, and to include cases in which the services requested might closely support inherently governmental functions, or represent contracting activity that might be typical or indicative of types of work contracted by that agency. We selected three contracts or task orders each from DHS and DOT, one from each of the selected components, and two contracts or task orders from each of the three remaining agencies. For each case study, we reviewed contract documentation, including available acquisition plans, oversight plans, and records, and interviewed contracting and program officials about the decision to use contractors and contractor oversight, including any processes and guidance used and the extent to which they considered potential risks. To review agency guidance and practices, we interviewed agency officials, including procurement, management, and human capital offices, to help identify available guidance. We requested and reviewed agency-level guidance documents, including FAR supplements and acquisition manuals, to identify guidance that addresses risks associated with professional and management support services contracting. We also requested and reviewed available guidance from the component organizations we reviewed in DHS and DOT. To assess agency responses to OMB efforts to address professional and management support services, we met with officials from the Office of Federal Procurement Policy and reviewed statutes and OMB documents, memos and policy letters that address the multisector workforce, as well as contracting for professional and management support services. We interviewed agency procurement and human capital officials about actions taken to respond to OMB’s efforts and reviewed available documentation. The Federal Acquisition Regulation (FAR) section 7.503 provides examples of inherently governmental functions and services or actions that are not inherently governmental but may approach being inherently governmental functions based on the nature of the function, the manner in which the contractor performs the contract, or the manner in which the government administers contractor performance. These examples are listed in tables 8 and 9, respectively. Additionally, FAR section 37.114 requires agencies to provide special management attention to contracts for services that require the contractor to provide advice, opinions, recommendations, ideas, reports, analyses, or other work products, as they have the potential for influencing the authority, accountability, and responsibilities of government officials. It directs agencies to take steps to ensure these contracts do not result in performance of inherently governmental functions by the contractor and that government officials properly exercise their authority. Table 10 lists the steps agencies must take. Executive departments and agencies are responsible for collecting and reporting data to the Federal Procurement Data System – Next Generation (FPDS-NG). Contracting officers must submit data to FPDS- NG, including selecting a product or service code from the product service code field to describe the items or services requested by the contract. If more than one code is applicable, officials must report the code that describes the predominance of dollars obligated for the contract. Table 11 lists the codes for Professional and Management Support Services as defined in the Federal Procurement Data System Product and Service Codes Manual, both the August 1998 edition that was in effect at the time of our review and the August 2011 edition that became effective October 1, 2011. In November 2010, the Office of Management and Budget (OMB) issued an Office of Federal Procurement Policy (OFPP) memo with guidance to help agencies conduct a required service contract inventory for fiscal year 2010. According to the guidance, the insight obtained from conducting the inventories is especially important for contracts whose performance may involve critical functions or functions closely associated with inherently governmental functions, as may be the case, for example, with contracts for various professional, administrative and management services falling within “Code R” of the Federal Procurement Data System Product and Services Codes Manual. The guidance further states that agencies should conduct an analysis of their inventories, giving priority consideration to functions that require increased management attention due to heightened risk of workforce imbalance. It provided an illustrative list of functions and their service code identified by OMB for heightened management consideration, based on concerns of increased risk of losing control of mission and operations as identified through a review of reports issued in recent years. In July 2011, OMB announced a cost savings initiative focused on agency contracts for management support services. Agencies were directed to reduce their spending on such services by 15 percent by the end of fiscal year 2012. In November 2011, OMB issued guidance identifying 12 service codes that describe management support services. Table 12 shows the list of service codes from both initiatives. In addition to the contact named above, Katherine Trimble, Assistant Director; Jennifer Dougherty; Jacques Arsenault; Robert Campbell; Kristin Van Wychen; Sarah Viranda; Laura Greifner; Julia Kennon; Sylvia Schatz; and Kenneth Patton made key contributions to this report.

In fiscal year 2010, civilian agencies obligated $136 billion on service contracts, including obligations for professional and management support services such as program evaluation and acquisition support. Many of these services increase the risk that contractors may inappropriately influence the government's authority, control, and accountability for inherently governmental decisions. GAO was asked to (1) determine the extent to which civilian agencies use professional and management support service contracts and the types of activities acquired, (2) determine if agencies consider and mitigate risks associated with contractors providing these services, and (3) assess agencies' response to recent Office of Management and Budget (OMB) efforts related to acquiring these services. GAO analyzed Federal Procurement Data System - Next Generation (FPDS-NG) data and selected a nongeneralizable sample of 230 statements of work and 12 case studies from five agencies with one-third of obligations for these services in fiscal year 2010. GAO also reviewed agency and governmentwide guidance and met with agency and OMB officials. From fiscal years 2005 through 2010, civilian agency obligations on contracts for professional and management support services increased 44 percent, from $22 billion to $32 billion (in 2010 dollars), more than twice the rate of increase for other services. For the five agencies GAO reviewed—the Departments of Homeland Security, Transportation, and Housing and Urban Development, the United States Agency for International Development, and the National Science Foundation—more than half of the 230 statements of work for professional and management support service contracts requested services that closely support the performance of inherently governmental functions. Using these services can inappropriately influence government decisionmaking if proper oversight is not provided. The five agencies generally did not consider and mitigate risks of acquiring professional and management support services prior to awarding the 12 contracts GAO reviewed. The Federal Acquisition Regulation requires agencies to provide enhanced management oversight for contracts that closely support inherently governmental functions. For the 12 contracts, few of the officials said they considered whether contracted services included such functions. In some cases, officials said they later became concerned that contractors might perform inherently governmental functions or that government employees lacked expertise to oversee contracted work, and took steps to mitigate risks. Guidance from four of the five agencies did not include processes to identify risks or ensure enhanced management oversight when contractors perform such services. Recent congressional and OMB guidance has emphasized the need for agencies to examine their use of service contracts and the related risks. The five agencies have participated in these efforts, including service contract inventories and multisector workforce pilots, to varying degrees, but only DHS has taken steps to incorporate related OMB efforts into processes that examine their use of professional and management support services. A September 2011 OMB policy letter requires agencies to develop procedures to improve their management of risks when contracting for these services, but does not include an implementation deadline. Further, two OMB efforts have focused on selected professional and management support service codes from FPDS-NG that require increased agency attention, but the efforts exclude two related codes that accounted for significant obligations and that may similarly contain risks. GAO recommends that OMB establish a deadline for its recent requirement that agencies develop procedures for services, including those that closely support inherently governmental functions, and include two FPDS-NG codes in guidance for agencies' use of service contracts and in the cost savings initiative for management support services. OMB generally agreed with the recommendations.

You are an expert at summarizing long articles. Proceed to summarize the following text: In fiscal year 1996, the Forest Service reported that, for the first time, the expenses associated with preparing and administering timber sales exceeded the receipts generated by the sale of the timber. This loss heightened the interest in the financial status and spending practices of the Forest Service. After we reported that indirect expenditures had nearly doubled in 5 years, legislation was introduced in the House of Representatives (H.R. 4149) to improve the fiscal accountability of the Forest Service through an improved financial accounting system. This legislation would first limit, and then eliminate, all indirect costs that could be charged to the funds. In addition, H.R. 4193, the appropriations bill for the Department of the Interior and related agencies for fiscal year 1999, contains provisions that would limit indirect costs to 25 percent of total costs for the Salvage Sale Fund and eliminate them entirely for the K-V Fund. The Forest Service separates indirect costs into three main categories: line management, common services, and program support (see fig. 1). Within each of these categories, its accounting system further divides such costs into two subcategories, differentiated on the basis of whether the cost can readily be identified with a specific project or function. For example, personnel support provided to the timber program can be readily identified with a single program, while a management position providing leadership for many programs (e.g., a forest supervisor) cannot. Costs that can be readily identified with a project or program are called “benefiting function” costs; costs that cannot be so identified are called “general administration” costs. Line management: Covers costs related to line officers and their identified staff. Line officers include district rangers, forest supervisors, regional foresters, and specifically named positions. Costs that can be assigned include salary, travel, training, vehicle-use, and secretarial support costs. Common services: Covers nonpersonnel costs associated with providing space and a working environment for employees. It includes such costs as those for rent, utilities, communications, radio, office and computer equipment, mail and postage, office supplies, and forms. Program support: Covers costs to coordinate, manage, and execute business activities, community involvement, and common service activities. It includes such costs as those for salaries, travel, and vehicle use for employees involved with coordinating and managing program support. The Forest Service derives its funding from two main sources—congressional appropriations and trust and permanent funds such as the five we reviewed. Both sources of funding are used to pay for relevant indirect costs, but the funding mechanisms operate somewhat differently for each source. When indirect costs are charged to appropriations, benefiting function costs are charged to the appropriations made specifically for a program, while general administration costs are charged to a separate budget line item that covers general administration costs for all programs. When indirect costs are charged to a trust or permanent fund, both the general administration and benefiting function costs are paid for by the fund. Since 1995, Forest Service’s guidance has called for offices to separate the accounting of these costs into the two subcategories of general administration and benefiting function, although doing so is not mandatory. The Forest Service identified four main factors that have contributed to the increase in indirect expenditures. However, year-to-year and office-to-office differences in the accounting system hamper any effort to determine the effect of any of these factors. Neither we nor Forest Service officials can isolate the effect of these factors from the effects of inconsistencies in the way the accounting system was implemented. According to the Forest Service, the four factors contributing most to indirect cost increases during the 5-year review period were the implementation of the emergency salvage timber sale program, employee buyouts, the late assignment of costs, and a new computer system. In July 1995, the Congress established the emergency salvage timber sale program, commonly called the salvage rider. It was intended to increase the amount of salvage timber offered and sold by instituting an expedited sale process. As a result, regions with a large need for salvage sales (among the regions we reviewed, the Pacific Southwest and Pacific Northwest regions) experienced a sharp increase in both direct and indirect expenditures to the Salvage Sale Fund. The rider ended on December 31, 1996, but indirect expenditures continued to increase in two of the four regions we reviewed through fiscal year 1997. A regional official attributed this continued increase to the time lag between when the direct “on-the-ground” work ended and when the work necessary to administer and close the contracts and finish other administrative tasks was completed. The Federal Workforce Restructuring Act of 1994 (Pub.L. 103-226) authorized executive agencies, including the Forest Service, to conduct a buyout of employees who met certain criteria and wanted to leave the agency. A buyout incentive payment of up to $25,000 per employee was to be paid from appropriations or funds available to pay the employee. The act also required agencies to pay the Office of Personnel Management: (1) for fiscal years 1994 and 1995, 9 percent of the basic pay for each employee that left and (2) for fiscal years 1995 through 1998, $80 for each remaining permanent employee (termed a “head tax”). Consequently, Forest Service regions with large staffs in positions classified as indirect have experienced increases in indirect expenditures. For example, for the 5 years we reviewed, the Pacific Northwest Region had more employees—some of them in indirect positions—than any other region and accounted for almost half of the $2.5 million charged to the funds since fiscal year 1994 for the head tax in the offices we reviewed. Similarly, indirect expenditures for the Salvage Sale Fund at the Washington Office increased almost $1.1 million between fiscal year 1994 and 1995. Of this amount, the Forest Service’s accounting records show that $211,423 was the result of the head tax. For fiscal year 1995, Forest Service officials stated that the National Finance Center requested that the agency account centrally for the head tax because the Center’s computer system could not appropriately account for it. As a result, the Washington Office funded the entire $2.6 million assessed to the agency in that year, which included the $211,423 indirect cost charged to the Salvage Sale Fund. The Pacific Southwest Region experienced an increase in indirect expenditures charged to the K-V, Brush Disposal and Salvage Sale funds in fiscal year 1997. According to regional office officials, this increase occurred because the Washington Office billed the region for about $5 million in charges for rent, telephones, and unemployment and disability payments that the region had incurred in fiscal years 1992, 1993, and 1994. The region had not expected to be billed for these costs at such a late date, so it had dismissed the associated obligations for those years. Other offices were also affected by this late assignment of costs. The regions and most funds experienced a rise in expenditures in fiscal years 1995, 1996, and 1997 due to a modernization of the Forest Service’s computer system. Agency officials stated that the software license fee contract associated with this modernization is funded centrally through the Washington Office. For the funds reviewed, this license fee increased the Washington Office’s indirect expenditures by $762,000 in fiscal year 1996 and $885,000 in fiscal year 1997. Regions are assessed for their share of the hardware and related technical support costs. Between fiscal years 1993 and 1997, charges for computer related indirect expenditures to the Salvage Sale Fund in the Pacific Northwest Region, for example, increased from $22,000 to $556,000. Although Forest Service officials could broadly quantify the rise in indirect expenditures associated with the four major factors just discussed, they could not separate what increases were specifically attributable to these factors from those caused by inconsistencies in the way indirect costs are recorded. During the 5-year review period, definitions of indirect costs changed, and offices often decided how, when, and whether to implement guidance issued by the Washington Office. Changing definitions and inconsistent implementation of accounting system guidance created data that were not comparable from year to year or office to office. In order to determine why costs increased, it is necessary to have data that are comparable from year to year. However, over our 5-year review period, the instructions explaining how to account for indirect costs changed several times. For example, agency officials stated that prior to fiscal year 1994, there was no central and specific policy on how rent, utilities, and communications costs were to be charged. While the majority of the cost for rent charged to the funds was classified as a direct cost, some offices classified rent as an indirect cost, and still others classified it as both. The Forest Service recognized that a better system was needed to track indirect costs. Towards this end, the Forest Service established the common services category for rent, utilities, and communications costs in that fiscal year. However, the impact of this new account cannot be clearly measured. For example, in fiscal year 1993, rent charged to the Salvage Sale Fund in the Southwestern Region included $12,000 classified as direct and $1,000 classified as indirect. In fiscal year 1994, the Salvage Sale Fund had no rent classified as direct and $23,000 classified as indirect. Although rent costs charged to this fund nearly doubled, it is unclear how much of this change was attributable to an actual increase in rent and how much was attributable to the use of the new common services account. Other changes were brought about by policy decisions. For example, in fiscal year 1993, indirect expenditures as a percentage of total expenditures were less than 1 percent for the Reforestation Trust Fund. After determining that not all regions were assessing this fund for general administration costs, the Washington Office directed that the fund be assessed starting in fiscal year 1994. After the Washington Office’s request, national indirect expenditures for this fund jumped to 13 percent of its total expenditures in fiscal year 1994. However, a Washington Office official stated that the Office inadvertently excluded this fund from its own general administration assessments until fiscal year 1996. Again, we cannot determine the extent to which the increase reflects a cost increase or simply the assessment of the fund for general administration costs. Even when provided with direction from the Washington Office, individual offices will often determine how, when, and whether to implement various aspects of the current accounting system for recording indirect expenditures. This independence adversely impacted the Forest Service’s ability to provide us with the specific amounts associated with the reasons given for cost increases. For example, although instructed to start assessing the Reforestation Trust Fund for general administration costs starting in fiscal year 1994, the Rocky Mountain and Southwestern regions did not start doing so until fiscal year 1995. Such choices produce inconsistencies that affect the comparability of data and the ability to isolate specific reasons for expenditure increases. To similar effect, individual offices make many of the decisions regarding how to assess and allocate indirect costs to the funds and whether to classify certain costs as direct or indirect, as these examples show: The Pacific Southwestern Region lets its forests decide how to allocate unemployment costs, according to an official there. Some forests consider these costs direct, and others consider them indirect. As a result, the expenditures reported by the region contain amounts that are classified differently from forest to forest. In the Rocky Mountain Region, almost no indirect expenditures are charged to the Cooperative Work—Other Fund because, according to a regional official, some managers are reluctant to burden the fund’s contributors—such as commercial users of forest roads—with indirect costs. The regional supplement to the Forest Service Manual supports this decision by saying that “Contributors do not need to be assessed for overhead charges if the contributors are unwilling to accept them.” Since fiscal year 1995, the Rocky Mountain Region has classified rent charged to the Brush Disposal Fund entirely as an indirect cost, whereas the Southwestern Region has classified rent charged to the same fund both as a direct and an indirect cost. In the Pacific Southwest Region, an official stated that expenses for timber resource clerks in some forests are classified as a direct cost to the funds but in other forests are classified as an indirect cost. At the Washington Office, officials told us that the majority of the increase in the indirect expenditures to the Salvage Sale Fund in fiscal years 1996 and 1997 occurred to charge the correct amount and to compensate for what were determined to be underassessments for general administration during fiscal years 1993-95. Although the Forest Service can trace some of the increases in indirect costs to the four major factors discussed above, changing definitions and inconsistent implementation of policies hamper the agency’s efforts to explain all the increases. For example, in the Pacific Southwest Region, four indirect expenditure categories in the Salvage Sale Fund increased $2.5 million from fiscal year 1995 to 1996. Financial records show that indirect automated data processing (ADP) expenditures rose $221,000; rent by $103,000; salaries by $251,000; and materials, supplies, and other services by $1.9 million. While the increase in ADP expenditures might be explained by the additional expenditures associated with the modernization of the computer system, regional officials cannot specifically isolate the amount that rent or salaries rose because of factors such as the salvage sale rider from increases that may have resulted from policy changes. The explanation of why the region had such a sharp increase in materials, supplies, and other services illustrates another reason why indirect cost increases are so difficult to isolate. Agency officials explained that this increase occurred because it was the Salvage Sale Fund’s turn to pay for the “pooled” general administration assessment for the Forest Service’s contract with the National Finance Center. Forest Service regions often “pool” the assessment to simplify budgeting procedures. For example, instead of assessing each fund individually for its share of costs from the National Finance Center, each fund places its allotted share for general administration into a pool, with the entire cost then being shown as charged against one fund instead of five. In this case, it was the Salvage Sale Fund’s year to bear the pooled amount for the National Finance Center. While pooling may simplify budgeting procedures, it has hindered efforts to isolate and explain individual cost increases. Overall, the Forest Service reduced its permanent staff by 14 percent during the 5-year period of our review, and individual offices implemented additional measures designed to reduce costs. Most of these efforts have been aimed at reducing costs generally and have not been targeted specifically at indirect expenditures. The congressional appropriations committees also reduced the budget line item for general administration during the period, but one way the Forest Service responded to the decrease was by reclassifying some general administration activities as benefiting function activities. The regions actively participated in the Forest Service’s national downsizing effort. In the four regions we reviewed, the downsizing resulted in staff reductions ranging from 8 to 23 percent. However, during the 5-year period, indirect salary expenditures charged to the five funds dropped appreciably only in the Rocky Mountain Region. They decreased slightly in the Pacific Southwest and Pacific Northwest regions and rose slightly in the Southwestern Region. The Washington Office also saw an increase. Because of the combined effect of the other factors already discussed, we cannot isolate the extent of the impact that downsizing had on indirect expenditures charged to these funds. Regions and forests also pursued other measures designed to reduce both direct and indirect costs. These included closing offices, consolidating offices, and centralizing administrative functions. During our 5-year review period, a total of five district offices were closed in the four regions we visited. Estimates of cumulative savings from these five closures totaled about $1.6 million, but the savings were not identified as direct or indirect costs. Regional officials stated that closing offices is a very effective way to reduce costs, but they consider it a time-consuming and complicated process. A Washington Office official noted that for fiscal years 1996 and 1997, provisions in the appropriations law prohibited the agency from closing offices without specific congressional approval. He also stated that even before being submitted to the Congress for approval, the proposed closures must first be approved by the Washington Office. The whole approval process can take 2 years or more to complete. Compared with office closures, office consolidations and the centralization of certain administrative functions were more commonly used in an effort to reduce total costs. While the Washington Office must approve office consolidations, the process is less complicated than the one for closures. In fiscal year 1998, the Washington Office has approved 15 ranger district consolidations involving 31 district offices in the regions we reviewed. During our 5-year review period, examples of specific consolidations and efforts to centralize administrative functions included these: For the Black Hills National Forest, we were told that three district ranger positions were eliminated when six districts were consolidated. The remaining three district rangers oversee the six offices. According to a regional official, in fiscal year 1996 the Southwestern Region received approval to consolidate two districts in one forest. Both offices would remain open, and they would share a district ranger. According to a Rocky Mountain Regional official, in fiscal year 1996 the region organized its forests into three administrative zones. By combining 16 units into three zones and thereby centralizing such administrative processing functions as contracting and procurement, the region was able to reduce administrative costs. According to a regional official, in fiscal year 1994 the Pacific Southwest Region instituted its “Excellence in Administrative Organization” project in an effort to control indirect costs. The region was divided into five provinces, and certain types of administrative operations, such as accounting, budgeting, and contracting, were centralized. In the Southwestern Region, as a result of consolidation, we were told that three forests share a contracting officer and personnel staff. Also, the region no longer has its own aircraft safety officer; it now shares one with the Rocky Mountain Region. The Senate and House appropriations committees, in their committee and conference reports, recommended a specified amount each year for the general administration budget line item within the National Forest System appropriation. This budget line item applies only for general administration activities associated with appropriations and cannot be used to fund general administration activities applicable to the trust and permanent funds. Between fiscal year 1993 and fiscal year 1997, the committees reduced the recommended amount for general administration costs by about 14 percent. However, this reduction did not result in a corresponding decrease in indirect costs. One way that the Forest Service has been able to comply with the reduction was by reclassifying costs previously considered general administration costs to other indirect cost categories. In doing so, the agency also implemented recommendations made by the National Forest System General Administration Task Force in a 1992 report that was provided to the appropriations committees, and the Forest Service described the reclassifications in the explanatory notes of its budget. Reclassifications included these: In fiscal year 1993, for each forest supervisor’s office, the expenses for the forest supervisor, deputies, and their secretarial support were classified as general administration costs. By 1995, only the costs for the forest supervisor and one secretary could be charged as general administration. The other positions were reclassified and are now charged to other indirect cost categories. In fiscal year 1993, up to five district ranger positions were included in general administration. In fiscal year 1997, all such district support could not be included in general administration and was reclassified. The general administration budget line item cannot be used to fund general administration activities in the permanent and trust funds; therefore, the Forest Service has developed a method of assessing the funds for such charges. The method used results in a percentage reflecting the portion of the budget that general administration represents. If the general administration budget line item is 12 percent of the total budget to which it applies, then the Forest Service limits the general administration costs that may be assessed to the funds to 12 percent of each fund’s annual program level. Amounts that can be charged for other indirect cost categories are limited by budget constraints. We were told by agency officials that, in practice, many forests have chosen not to separately identify general administration costs from other indirect costs charged to the funds. Agency officials stated that forest officials found the distinction confusing and unnecessary because all the costs charged to a fund are paid for by that fund. In an effort to reduce overall costs, the Forest Service has closed and consolidated offices, downsized, and centralized certain administrative functions. However, these measures were not enough to keep indirect expenditures from almost doubling in 5 years. Because individual offices will often decide how to account for indirect costs, the accounting system will not yield the data necessary to measure the savings in indirect costs resulting from these actions. This condition is made worse by definitional and other shifts that allow costs simply to be reclassified. Only after consistent and reliable indirect cost data are produced can trends and comparisons be studied and informed decisions made. An essential first step for the Forest Service in controlling indirect costs is to know clearly what these costs are from year to year and office to office. A starting point for this effort involves establishing clear definitions for indirect costs and applying them consistently over time. In this regard, the Forest Service can be helped by a recent addition to the federal financial accounting standards. In July 1995, the Financial Accounting Standards Advisory Board, the group that recommends accounting principles for the federal government, released Statement of Federal Financial Accounting Standard (SFFAS) No. 4, Managerial Cost Accounting Concepts and Standards for the Federal Government. Effective for federal agencies starting with fiscal year 1998, this standard is “aimed at providing reliable and timely information on the full cost of federal programs, their activities, and outputs.” Although the Forest Service was required to use the principles set forth in SFFAS No. 4 on October 1, 1997, we were told by a Washington Office official that the agency currently has a team discussing the possibility of applying the principles to its existing accounting system. Properly implementing this standard will go a long way towards providing cost data upon which informed decisions about reducing costs can be based. Of necessity, this endeavor will mean some changes in the way the Forest Service classifies costs as direct or indirect, as the following examples show. Unemployment and Disability Costs. About 59 percent of the total unemployment and disability costs charged to the five funds we reviewed were indirect, totaling more than $16 million over the 5 years. If an employee normally charges his or her time directly, then we believe that SFFAS No. 4 requires that associated unemployment or disability costs should also be charged directly. Because 76 percent of all salary costs charged to the funds during the past 5 years were classified as direct, proper implementation of SFFAS No. 4 should result in a substantial lowering of the unemployment and disability costs classified as indirect. ADP Costs. In the regions we reviewed, 71 percent of the ADP costs charged to the five funds were classified as indirect—a total of almost $10 million in 5 years. Again, under SFFAS No. 4, we believe such costs would be classified as direct to the degree that the employees associated with the ADP costs normally charge their time that way. As with the assignment of unemployment and disability costs, we would expect ADP costs to mirror those of salaries and to be classified as direct whenever people to whom they are assigned charge their time directly. Classifying these types of costs as indirect overstates indirect costs overall and understates direct costs. Just as important as clarifying how costs should be classified, however, is ensuring that Forest Service offices apply these classifications consistently. If individual offices continue to vary in their decisions about how, when, and whether to implement accounting policies and definitions, the data produced will continue to have limited validity, and the Forest Service will have little reliable information upon which to judge whether indirect costs are truly rising or falling, let alone why. Because centralization represents such a change in the Forest Service’s approach of giving great latitude to local offices, oversight by Forest Service headquarters and regional officials will be crucial to this effort. Over the 5-year period we reviewed, the Forest Service took many actions to reduce costs, but indirect expenditures charged to the five funds reviewed increased nonetheless. Thus far, congressional attempts to affect indirect costs (through appropriations committees’ reducing the budget line item recommended for general administration) also appear to provide little assurance that such costs will actually be reduced. Instead, such costs have often been redefined into other indirect cost categories. However, incorporating the principles set forth in the Statement of Federal Financial Accounting Standard No. 4 would go a long way towards producing cost data that are consistent and reliable. But even the best guidance will not produce consistent and reliable data if it is not uniformly implemented by all offices. Solving these accounting system problems is an essential first step in controlling indirect expenditures. Once these problems are solved and indirect costs from year to year and office to office are clearly known, there is the opportunity for informed decisions about indirect costs and how to reduce them. At that point, approaches could include requiring the Forest Service to reduce indirect costs by a set amount and to report on what it has done or plans to do to achieve that reduction. To ensure that consistent and reliable cost data are available upon which to base management decisions and monitor trends, we recommend that the Secretary of Agriculture direct the Chief of the Forest Service to take the following actions: Incorporate the Statement of Federal Financial Accounting Standards No. 4 into the Forest Service’s cost accounting system. Ensure that all offices consistently implement guidance with respect to accounting for indirect costs and hold the offices accountable by following up to make sure that the standards are being consistently used. We provided a draft of this report to the Forest Service for review and comment. The Forest Service’s letter commenting on the report (see app. IV) states that the agency concurs with our recommendations and that it is committed to developing definitions of indirect costs to be applied on a national basis. As we arranged with your offices, unless you publicly announce its contents earlier, we plan no further distributions of this report until 30 days from the date of this letter. At that time, we will send copies to the Secretary of Agriculture, the Chief of the Forest Service, and other interested parties. We will also make copies available to others upon request. Major contributors to this report are listed in appendix V. If you or your staff have any questions or wish to discuss this material further, please call me at (206) 287-4810. A permanent appropriation that uses deposits from timber purchasers to dispose of brush and other debris resulting from timber harvesting. It was authorized by the Act of August 11, 1916, ch. 313, 39 Stat. 446, as amended. (16 U.S.C. 490) A trust fund that uses deposits from “cooperators”—commercial users of the forest road system—for the construction, reconstruction, and maintenance of roads, trails, and other improvements. It was authorized beginning with the Act of June 30, 1914, ch. 131, 38 Stat. 415, as amended. (16 U.S.C. 498) A trust fund that uses deposits made by timber purchasers to reforest timber sale areas. In addition to planting, these deposits may also be used for eliminating unwanted vegetation on lands cut over by the purchasers and for protecting and improving the future productivity of the renewable resources on forest land in the sale areas, including sale area improvement operations, maintenance, construction, reforestation, and wildlife habitat management. The fund was authorized by the Act of June 9, 1930, ch. 416, 46 Stat. 527, as amended. (16 U.S.C. 576-576b) A trust fund that uses tariffs on imports of solid wood products to prevent a backlog in reforestation and timber stand improvement work. It was authorized by sec. 303 of the Recreational Boating Safety and Facilities Improvement Act of 1980, Pub.L. 96-451, 94 Stat. 1983, as amended. (16 U.S.C. 1606a) A permanent appropriation that uses receipts generated by the sale of salvage timber to prepare and administer future salvage sales. It was authorized by section 14(h) of the National Forest Management Act of 1976, Pub.L. 94-588, 90 Stat. 2949. (16 U.S.C. 472a (h)) Given the heightened interest in the financial status and spending habits of the Forest Service, you asked us to provide data on indirect expenditures charged to five Forest Service funds. We agreed to provide this information in two phases. In phase one, we provided information on the amount of indirect expenditures charged to these five funds between fiscal years 1993 and 1997. This second phase has the three objectives of identifying (1) the reasons why indirect costs rose, (2) actions taken by the Forest Service and others to control these expenditures, and (3) other actions that may help the Forest Service control such expenditures in the future. As agreed, we concentrated our detailed review on four regions and the Washington Office. Because the five funds are mainly timber-related, we chose the Pacific Southwest and Pacific Northwest regions because they have large timber programs. We chose the Rocky Mountain Region because it had lower indirect expenditures than any other region. We selected the Southwestern Region because it is similar in size to the Rocky Mountain Region yet had much higher indirect costs. We selected the Washington Office because its indirect costs fluctuated widely and increased significantly in some funds. Table II.1 provides each region’s location and the geographic area it covers. To obtain information on why indirect costs increased and what had been done to control them, we interviewed knowledgeable officials at each location visited. In addition, we reviewed pertinent files, financial records, studies, reports and manuals and asked follow-up questions as dictated by the document reviews. After gathering information on what had caused costs to rise and fluctuate, we reviewed various financial standards, laws, legislation, studies, and manuals to determine how the costs might be controlled in the future. We also interviewed Forest Service officials to obtain their suggestions. Because of an ongoing lawsuit involving indirect expenditures charged to the Cooperative Work—Knutson-Vandenberg Fund, you agreed that we should not include this fund in our analysis of why indirect expenditures increased. We conducted our review from May through August 1998 in accordance with generally accepted government auditing standards. Doreen S. Feldman Alysa Stiefel The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO provided information on overhead costs for the Forest Service's Brush Disposal Fund, Salvage Sale Fund, Reforestation Trust Fund, Cooperative Work--Other Fund, and Cooperative Work--Knutson-Vandenberg Fund, focusing on: (1) the reasons why indirect costs rose; (2) actions taken by the Forest Service and others to control these costs; and (3) other actions that may help the Forest Service control these costs in the future. GAO noted that: (1) inconsistencies in the Forest Service's accounting system make it difficult to ascertain specifically why indirect costs rose for these five funds during fiscal years 1993-97; (2) according to the Forest Service, indirect costs rose for four main reasons: the implementation of a congressionally established program to increase the amount of salvage timber offered for sale, additional costs associated with downsizing, the allocation of costs incurred in previous years but not charged against the funds at the time, and computer modernization; (3) however, during this same time period, the Forest Service was changing its policies about how to account for indirect costs, and individual regions and forests were implementing these policies in markedly different ways; (4) as a result, the accounting system produced information that was not consistent from year to year or location to location; (5) neither GAO nor the Forest Service is able to say how much indirect costs increased as a result of the factors the Forest Service cites and how much they changed because of these accounting inconsistencies; (6) to control costs, the Forest Service took a number of actions, most of which were aimed at reducing costs generally and not targeted specifically at indirect costs; (7) in particular, the agency reduced its permanent staff by 14 percent, and individual regions used a variety of other measures, including closing some district offices, consolidating others, and centralizing certain administrative functions, such as contracting and procurement; (8) for their part, congressional appropriation committees reduced the budget line item for some indirect costs; (9) one way the Forest Service responded to the reductions was to reclassify some indirect costs to other accounts; (10) an essential step for controlling indirect costs is establishing clear definitions for them and applying the definitions consistently over time and across locations; (11) if implemented properly, a new accounting standard released by the Financial Accounting Standards Advisory Board, which recommends accounting principles for the federal government, will go a long way towards providing consistent and reliable data on the Forest Service's indirect costs; and (12) once the problems with the Forest Service's accounting system are solved and the agency's indirect costs are clearly known, there is the opportunity for informed decisions to be made on how to control them.

You are an expert at summarizing long articles. Proceed to summarize the following text: An IGP is a study or survey undertaken to identify noncompliance with the tax laws. IGPs can be proposed at any level—district, regional, or national—within IRS but are generally initiated at one or more of IRS’ 33 district offices. IRS staff propose IGPs on the basis of past audits or studies that have shown noncompliance for selected taxpayer populations, such as those in a particular occupation, industry, geographic area, or economic activity, or those claiming a particular tax exemption, deduction, or credit. During an IGP, IRS staff usually audit a limited number of taxpayers within the selected population. For IGP audits, IRS staff are to select tax returns after reviewing information available within IRS and from non-IRS sources such as banks, licensing and trade organizations, or other third parties. IRS believes that IGPs help IRS staff to select potentially noncompliant tax returns for audit that would not otherwise be identified as having audit potential. In this vein, IGPs have served as 1 of over 30 sources that IRS’ Examination Division uses to identify returns with audit potential. In recent years, IGPs have accounted for less than 5 percent of the total number of returns selected for audit. In addition to using IGPs to identify noncompliance and take enforcement action, IRS also intended to use them to determine the reasons for noncompliance and recommend ways to reduce it. However, IRS has historically used IGPs as tools for enforcing tax laws rather than as research tools for collecting data about compliance within taxpayer populations. Our past work has discussed some of the problems with attempts to research noncompliance and related solutions through IGPs.For example, we raised concerns about whether IGPs (1) focused on taxpayer populations with significant compliance shortfalls and (2) collected statistically valid data that could be generalized to a larger population. As for IRS’ management of IGPs, we pointed to the benefits of enhanced coordination across IGPs in order to avoid unnecessary duplication and to make fuller use of IGP results. In recent years, IRS has been going through a transition involving its framework for doing compliance research, including the use of IGPs as research tools. Under its 1997 compliance initiative proposal (CIP), IRS is attempting to link IGPs to a larger research framework and better manage IGPs to make them more useful for doing compliance research. In fact, IRS intends to refer to IGPs as “compliance initiatives.” Recognizing these changes, IRS Examination officials continue to view IGPs as essential enforcement tools and sources for data on specific types of noncompliance. The revised framework also includes IRS’ recent efforts to develop a more comprehensive and statistically valid approach to compliance research. Under this approach, IRS has created new research methods and tools as well as research units in each district to do compliance research and to oversee compliance efforts, such as IGPs. IRS hopes that this approach will produce valid research data to better identify significant noncompliance and the reasons for it, as well as to better test ways to reduce the noncompliance. IRS Examination staff can run IGPs in IRS’ National Office, its 33 district offices, and its 10 service centers. Table 1 shows the reported number of IGPs for IRS nationwide and for the Georgia District. Because most IGPs start in one fiscal year and close in a later year, the total number of individual IGPs is smaller than the sum of IGPs for the 3 fiscal years. For the Georgia District, the total number of individual IGPs reported was 76, but the sum of the IGPs shown as open in the 3 fiscal years in table 1 was 128. For fiscal years 1994 through 1996, IRS provided information on 76 IGPs that were open at some time during these years in the Georgia District. Over half of these IGPs (44) focused on four types of taxpayers: (1) businesses that potentially underreported income or overreported expense deductions; (2) businesses that potentially did not properly report or pay taxes, such as excise taxes on fuel, chemicals, or heavy vehicle use; (3) individual taxpayers who potentially claimed an improper exemption for dependents, a filing status (e.g., head of household), or earned income credit; and (4) businesses and individual taxpayers who potentially did not file required tax returns. The remaining 32 IGPs dealt with a wide range of suspected noncompliance involving topics such as the misclassification of employees as independent contractors, income from wagering, income from timber sales, and taxable events for individual partners or shareholders. We tracked the duration and audit results of Georgia IGPs that had closed at the time we did our work. Of the 76 IGPs, 41 were closed as of June 1997. The length of time that these 41 IGPs had remained open varied from 5 months to several years; more specifically, 23 of the 41 IGPs lasted 2 or more years. The audit results for the 41 IGPs also varied widely. These results included the number of returns audited, the additional taxes and penalties recommended, and the percent of audited returns that recommended no tax changes. For example: The number of returns audited ranged from 0 to 516 but usually involved fewer than 50. Of the 41 closed projects, 32 involved audits, and 9 involved no audits. Of the 32 projects involving audits, 23 were closed after auditing fewer than 50 returns each. The additional recommended tax plus penalty amounts per IGP ranged from $0 (in the 9 IGPs closed without any audits) to $269 million; of the 32 IGPs with audits, 11 recommended total additional tax amounts that exceeded $500,000, and 7 recommended total amounts exceeding $1 million. Of the 32 IGPs with audits, 3 closed with a no-change rate that exceeded 50 percent, meaning that over half of the audited tax returns in these 3 projects were deemed compliant and that the audits recommended no tax changes. Across all 32 IGPs, this no-change rate ranged from 0 percent to 60 percent, and the median no-change rate was about 20 percent. Appendix I to this letter provides specific details on IGPs in Georgia during fiscal years 1994-1996. Tables I.1 and I.2 provide brief descriptions of projects that were not yet closed as well as of those that were closed as of June 1997. Table I.3 reports the audit results of projects that were closed as of June 1997. For years, IRS has had various controls and procedures in using IGPs as audit selection tools, including the approval and review of proposed projects, independence in the selection of returns, and limits on the duration of the audit phase. These controls and procedures are designed to guard against any improprieties and misuse of IGPs, as well as to better ensure productive use of audit resources. We did not test whether and how well these controls and procedures have worked. The following describes what these IGP controls and procedures have included. IRS requires that IGPs be authorized by a district director or higher level management official for a specified length of time. According to IRS officials, the process generally starts out informally when an IRS employee, usually a revenue agent, discovers an area of potential noncompliance. The revenue agent discusses the issue with a manager and IGP coordinator (who is to oversee and track all IGPs). If these parties agree about the potential for noncompliance, an Information Gathering Project Authorization (Form 6545) is prepared and forwarded, along with supporting documents, through various organizational levels for review and approval. IRS officials also review IGP proposals to ensure that the project conforms with Internal Revenue Manual requirements on IGPs. Among other things, the officials are to look at the (1) purpose and objective of the project; (2) data (such as compliance measures) that support the need for the project; (3) description of the data needed to do the project, including why and how the data will be used; and (4) time frames and resources necessary to complete the project. In addition, officials are to ensure that the project does not duplicate other IGPs and that the potential noncompliance, which is the focus of the project, can meet or exceed the noncompliance that would otherwise be identified through audits initiated under DIF criteria. If approved at each level, the proposal continues to move up the chain of command. At a district office, this chain of command generally includes the group manager of the revenue agent proposing the IGP; branch chief for that audit group manager; the chief of the Examination Division, who is responsible for all Examination activity in the district; and the district director, who is responsible for ultimate approval of the IGP as well as various other types of IRS activities within the district. In addition, other district Examination staff play a role in reviewing and approving IGPs. After the branch chief’s review, the IGP coordinator and the chief of the Planning and Special Programs office (who is to oversee and track various types of Examination programs) have a role in coordinating any further review and approval. Once approved by the chief of the Examination Division, proposed projects are to be routed through the chief of the District Office of Research and Analysis, who is either to concur or not concur. The District Disclosure Office also reviews each IGP request. Following this, the district director reviews the proposal. If the director approves, work on the project can begin. Approved IGPs normally include an information gathering phase and an audit phase. During the information gathering phase, the project coordinator and/or project team—usually two or more agents developing the IGP—collect and analyze information on a particular type of taxpayer, such as child care providers. Techniques and sources for collecting information may include interviews with third parties as well as reviews of internal and external data related to the IGP. By analyzing the information, the project coordinator is to identify whether the apparent noncompliance is significant enough to warrant audits and, if so, which types of tax returns have audit potential and should be audited. In a 1994 report, we raised two concerns about the selection of returns to be audited under IGPs. We found that the controls and procedures (1) were not adequate to prevent Examination staff from selectively targeting individual taxpayers for audit, and (2) did not require a separation of duties between staff who identified the types of returns to audit and staff who selected the specific returns for audit. In July 1995, IRS issued new guidance to address these two concerns about IGP controls and procedures. Under this new guidance, the project coordinator is to work with the IGP coordinator to identify returns to be audited according to set criteria, such as the type of tax return, filing status, dollar threshold, and compliance issue being reviewed. The IGP coordinator is responsible for ordering the returns for audit under the project that meet these criteria. When the returns are received, the IGP coordinator (who is located in Planning and Special Programs) is responsible for getting them manually reviewed to check audit potential using the criteria selected by the project coordinator. Returns with audit potential are assigned for audit according to such criteria as the location of the taxpayer, grade levels of the agents, and their knowledge about the issues that are the focus of the IGP. The duration of the audit phase for an IGP depends on whether (1) the project team continues to find tax returns that fit into the defined category of taxpayers, and (2) the auditors find sufficient levels of noncompliance on the audited returns. More specifically, the IGP audits should find more noncompliance than that uncovered in audits routinely selected by IRS using the computer-generated score produced under DIF. Because of these controls, some IGPs terminate after a small number of returns are audited, compared to the number ordered and assigned. Upon termination of the IGP, IRS requires that a termination report be submitted to the IGP coordinator to document audit and other results. In 1997, IRS began implementing additional processes under CIP that cover all compliance initiatives, including IGPs. IRS intends for these processes to introduce more rigor so that the results from IGPs and other projects can be used for research purposes. CIP guidelines require substantially more documentation for proposed compliance projects than previously required. The proposals must identify the methodology to be used and the extent to which the project will improve compliance within the district. A district planning council is to submit the required documentation to the district director together with its recommendation to approve or disapprove the proposed project. Upon completion of an approved project, the results are to be reported to the planning council, which will make a recommendation to the district director to either continue, expand, or terminate the project, or to transform it into a fuller research project at the local or national level. To accomplish each objective, we interviewed responsible officials at IRS’ National Office, the Atlanta District Office, and the Southeast Regional Office and collected data relevant to IRS’ use of IGPs to detect noncompliance with the tax laws. To identify the number of IGPs open both nationwide and in Georgia in fiscal years 1994 through 1996, we reviewed available records from IRS’ National Office and Georgia District. We did not verify the accuracy of IRS’ data on the total number of IGPs conducted nationwide. IRS’ National Office could not locate data on the total number of IGPs nationwide during fiscal year 1994. According to officials, IRS began a total restructuring in fiscal year 1994 that reduced the number of district offices from 63 to 33 and shifted the responsibility for maintaining IGP records. Officials also told us that IRS has no requirement to retain records on the number of IGPs. To describe the IGPs in the Georgia District and their results, we collected and reviewed all available IGP authorization and termination reports for fiscal years 1994 through 1996. In addition, we reviewed Examination Division data for individual project results, such as the number of returns audited, total taxes recommended per audit hour and per audited return, additional taxes recommended plus penalty amounts, and the percentage of tax returns for which the audit recommended no tax change. We focused our efforts on all IGPs that were open at any time during fiscal years 1994 through 1996. To describe the controls and procedures for IGPs, we collected and reviewed relevant IRS documents and manuals as well as interviewed responsible IRS officials in the National Office and the Georgia District. These controls and procedures included those established for the approval of proposed IGPs, the independent selection of tax returns to be audited, and the duration of the audit phase in an IGP. We did not test how well these controls and procedures for IGPs worked. Further, we collected documentation and did interviews with the responsible IRS officials on the new processes being implemented during 1997 under the CIP guidelines. We conducted our review from June to September 1997 in accordance with generally accepted government auditing standards. In a letter dated December 12, 1997, IRS’ Acting Chief Compliance Officer commented on a draft of this report (see app. II). He said the report fairly presented the information and he elaborated on information dealing with IRS’ controls over IGP and the new CIP. As we arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this letter until 30 days from its date of issue. We will then send copies to the Commissioner of Internal Revenue and Members of the Georgia congressional delegation. We also will make copies available to others upon request. Major contributors to this report are listed in appendix III. Please contact me on (202) 512-9110 if you or your staff have any questions about the report. Table I.1: Profile of Georgia District IGPs Open During Fiscal Years 1994-1996 and Not Yet Closed as of June 1997 To identify auto dealerships that are diverting rebates from insurance and warranty contracts sold to customers. The project also focuses on (1) overstating inventory (cost-of-goods-sold) and other expenses due to an error in utilizing the LIFO (last-in-first-out) inventory method and (2) underreporting issues stemming from related finance companies and producer owned insurance companies. To increase contractor and subcontractor compliance with (1) income tax filing and reporting requirements and (2) 1099 filing requirements. This project also focuses on the issue of contractors building homes and transferring them to themselves for less than fair market value, resulting in a significant dividend. To determine whether the entities who receive income from selling scrap products (paper, metal, glass, etc.) to companies dealing in recycling are reporting the income. To determine if taxpayers are properly reflecting land condemnation awards (in which real estate is acquired under the condemnation) on their tax returns. To identify personal service corporations that do not use the required 34-percent tax rate and to adjust their tax computation accordingly. To (1) gain knowledge of a very large growth industry, (2) identify the areas of noncompliance with the tax laws, and (3) develop techniques and procedures to deal with the noncompliance in the industry. Potential issues include excessive management compensation and changes in accounting methods resulting in large adjustments. To identify individuals who may be using improper filing statuses, claiming exemptions they are not entitled to, and erroneously receiving Earned Income Credit (EIC). The project focuses on those individuals making child support payments and filing incorrect tax returns in an attempt to receive an income tax refund. To determine (1) the level of compliance in reporting EIC, and (2) whether taxpayers who filed as single or heads of household and claimed EIC are actually entitled to the credit. To identify those individual shareholders who claim losses stemming from an 1120-S corporation on their return, when the corporation either has not filed the Form 2553 (Request for 1120-S status) or has been denied 1120-S status. The project also focuses on taxpayers’ returns where the 1120-S election was approved for a subsequent year, but the loss was taken in the current year, for which the 1120-S status was not granted. To identify those individuals engaged in gambling activities and to determine their compliance with the tax laws. To determine whether individuals who own tax return preparation businesses are filing their own individual income tax returns. This project also focuses on preparers who have claimed losses from their tax return preparation businesses. To identify individuals who fail to report income from drug-trafficking activities. A potential issue is that substantial amounts of money and assets are connected with drug-trafficking activities and that individuals involved do not report their income. To develop cases on taxpayers who have not filed tax returns for at least 1 year. The project focuses on those taxpayers identified by the Criminal Investigation Branch of the Atlanta Service Center. (continued) To determine the degree of compliance of Georgia taxpayers with the reporting and paying of heavy vehicle use tax. To determine which taxpayer is actually entitled to the head of household filing status and the related tax exemptions when the same mailing address is duplicated by several taxpayers all claiming the same filing status and exemptions. To identify nurses or respiratory therapists who work as subcontractors through placement agencies. A potential issue is that a number of these nurses and therapists do not file tax returns or claim erroneous expenses. To identify potential areas of abuse and noncompliance by taxpayers filing at the Atlanta Service Center. The project focuses on individuals who may be taking excessive deductions on their income tax returns. To determine the extent of compliance in tip reporting by employees and employers of large food and beverage establishments. To identify individuals and corporations in the vehicle towing industry that are substantially underreporting gross receipts. The project focuses on three different types of towing services in which taxpayers are known to be the most noncompliant: (1) contract wrecker services for the government, ( 2) private impounding services for the government and private property owners, and (3) private towing services for individuals and businesses. To gain knowledge of the restaurant industry, identify areas of noncompliance with the tax laws, and develop techniques and procedures to properly audit the industry. To determine the extent to which taxpayers are claiming allowable fuel excise tax credits on form 4136 and whether individuals are filing correct income tax returns and complying with the fuel excise tax laws. To determine whether corporate used auto dealers are properly reporting the income and finance charges (from financed sales) on the accrual basis and properly accounting for their ending inventory. To identify employers who utilize a VEBA to pay employee fringe benefits in a manner that results in significant tax deductions. These deductions are not in compliance with tax laws. To determine whether (1) technical issues present in the Coordinated Examination Program (CEP) returns are present in the returns of health care providers not included in the CEP, and (2) fraudulent physician compensation issues are present in the returns filed by exempt, for-profit providers. To determine whether taxpayers who are (1) paying alimony are properly deducting it and (2) receiving alimony are properly reporting the income as required by tax laws. To determine whether plumbing, heating, and air conditioning contractors and subcontractors are correctly reporting income and using the proper method of accounting. A potential issue is that this industry widely operates on a cash basis and uses inventory as a significant income-producing factor. To (1) determine the level of compliance by taxpayers in filing Form 8300 and (2) identify fraud where the nonfiling of form 8300 is deliberate. Tax law requires all cash payments received in a trade or business in excess of $10,000 to be reported on a form 8300. To identify truckers who have claimed excessive deductions for repairs and maintenance on their Schedule C. The goal is to have truckers deduct only necessary repairs paid in the tax year and to depreciate any capital expenditures. (continued) To determine whether individuals in the automotive industry are filing correct income tax returns and complying with the tax laws. The project focuses on those who appear to be filing questionable returns because they report (1) less than $25,000 in gross receipts on their Schedule C and (2) insufficient income over multiple years to support the expenses. To increase compliance with tax law requirements for subchapter K partnerships (distributions and transfers of interest) in the construction and real estate industry. To identify those adult entertainment clubs that classify their dancers as independent contractors, instead of as employees, and have set up a payment arrangement that avoids any type of form 1099 or W-2 reporting requirements. The project also focuses on tax compliance, nonfiler, and underreporting issues. To determine the level of compliance in reporting excise tax on chemicals and whether individuals are filing correct income tax returns and complying with the tax laws. To determine whether 1120-S shareholders are receiving salary in the form of distributions, instead of wages, to avoid the payment of Social Security and Medicare taxes and the withholding of income tax. To determine whether land owners who cut or sell timber are accurately reporting timber sales, using form T, filing form 1099, and computing basis. (Form T is the form used for lump-sum contract sales and retained pay-as-you-cut interest contracts.) To identify Schedule C filers who underreport their net Schedule C income to qualify for EIC and receive an income tax refund. Potential issues include questionable situations involving Schedule Cs and EIC. In these cases, the taxpayer underreports business income and overreports business expenses to get the maximum amount of EIC and therefore generate a refund. To promote compliance in the bail bond industry and determine whether bondsmen were correctly reporting income from deferrals and cooperative arrangements. Potential issues included whether some bond companies deferred income on monies received from clients whose bonds were bound over to state court. Also, bondsmen often cooperated with bondsmen in other cities in writing bonds for their clients but underreported income received under the cooperative agreement. To determine whether automobile dealers overstated their inventory (cost of goods sold) due to an error in the inventory method utilized. To determine whether corporate employees who embezzled funds reported the income. To conduct a follow-up review of the construction industry. A prior project was run in 1987 to determine the level of compliance in the construction industry with reporting and paying income taxes. (continued) To determine whether individuals who sold timber were reporting the income from such sales. Form 1099s were not required to be issued to payees by purchasers of timber. To determine the level of compliance in reporting correct income and expenses of taxpayers who constructed their personal residences at a cost of over $100,000. To determine whether child care providers were complying with tax laws. Potential issues include whether some providers cared for many more children than that allowed by the state, but only reported money earned from the “state allowed” number. Another issue was that the providers who qualified for food reimbursement from the state failed to report it on their tax return. To determine whether the industry was in compliance with the income reporting requirements of the tax law. To determine the degree of compliance in the industry, including whether companies assessed fines or penalties for environmental law violations deducted such penalties on their tax returns. To determine whether automobile customizing shop owners were complying with tax laws and filing income tax returns. The project also focused on individuals and customers who frequent these businesses and spend large amounts of cash on customizing their cars, vans, etc. To determine the degree to which the advertising industry was in compliance with the income reporting requirements under tax law. Issues included cash versus accrual method accounting and inventory costs associated with the production activities of an advertising agency. To identify those individuals who gambled at various casinos, purchased large amounts of chips in cash, and were either not filing or filing fraudulent income tax returns. To determine whether taxpayers were filing correct income tax returns and complying with the excise tax laws on chemicals. To determine whether taxpayers who had been referred for fraud penalties in prior years were complying with the tax laws. To determine whether the complexity of the Internal Revenue Code contributed to the level of noncompliance among business taxpayers who prepared their own tax returns. To determine whether nude dancers complied with tax laws and filed income tax returns. A potential issue identified from a televised news report was that many dancers reportedly earned $50,000 and up annually and never filed tax returns. To determine whether taxpayers who removed asbestos from properties they own were in compliance with tax law. A potential issue was that asbestos removal costs were deducted instead of capitalized. Tax law prohibits the deduction of costs associated with permanent improvements that increase the value of any property. Asbestos removal enhances market value. To increase compliance in filed tax returns and reported income from the sale of salvage automobiles by used car dealers and repair shops. (continued) To determine whether amounts that were reflected on mismatched information returns were reported by the taxpayer. To determine whether individuals in the accounting and legal professions were filing correct income tax returns and complying with the tax laws. To identify those laundromats that understated cash sales. Potential issues included whether the understatement was due to incomplete or fraudulent records of daily cash receipts. The project also focused on unreported income, nondeductible expenses, gains and losses in connection with the sale of laundromats, loans to and from shareholders, and unfilled income tax returns. To identify gentlemen farmers who failed to report income from the sale of livestock through stockyards. To determine whether taxpayers who were holders of bonds issued by a certain corporation were correctly reporting income. IRS found that some taxpayers included OID income as taxable interest income on their returns but then backed out the same income as an ordinary loss from unpaid accrued interest thus excluding the income. The taxpayers claimed that the corporation became insolvent and was incapable of paying the interest. To increase compliance among individuals who generated income by furnishing medical transportation to Medicaid patients. A potential issue was that these individuals substantially overstated their business expenses or claimed expenditures of a personal nature as business expenses. To increase compliance among individuals who failed to report or underreported income from the sale of crop quotas for peanuts, tobacco, and other products. The project also focused on those individuals who improperly treated crop quotas as depreciable or amortizable assets. Crop quotas that may be sold can be obtained from the Agricultural Stabilization and Conservation Service. To determine (1) the level of compliance in the water transportation industry and (2) whether these companies were bona fide companies, tax shelters, or hobby losses. To determine whether securities firms treated their salespersons as employees or as independent contractors. According to IRS, the Securities and Exchange Commission has a regulatory interest in assuring that all broker-dealers maintain the control and supervision required under the Securities and Exchange Act. The control required would indicate that the salesmen should be considered employees. To determine whether video stores were correctly following tax law requirements, which state that video cassettes should be depreciated using either the straight-line or income forecast method of depreciation. To identify taxpayers who were involved in the use of financial products (options, swaps, futures contracts, etc.) and determine whether proper characterization of gains or losses was made in accordance with tax laws. To determine whether taxpayers properly included their discharge of indebtedness in income. A potential issue was that taxpayers had mortgages secured by bonds issued by their counties. When the bonds were paid off early, the county notified the mortgage company and the remaining mortgage was forgiven. Tax laws require that taxpayers include this discharge of debt in income in the year the discharge occurs. (continued) To determine whether individuals who sold timber were reporting income from such sales. Form 1099s are not required to be issued to payees by purchasers of timber. To encourage all partnership entities that had ceased filing tax returns to file income tax returns and comply with the tax laws. To determine whether business owners were filing correct income tax returns and complying with the tax laws. The project focused on those business owners who filed applications with the state to sell lottery tickets but were refused permission to sell the tickets as a result of their failing to meet state criteria. To determine whether Georgia taxpayers were filing federal income tax returns. The project focused on three different segments of Georgia taxpayers who were potential federal nonfilers: (1) taxpayers who filed under the Georgia Amnesty program, (2) taxpayers who applied for licenses to sell lottery tickets, and (3) taxpayers identified with state sales tax information. To determine whether farmers who did business with farm credit associations, and who submitted crop checks as payment on their loan accounts, complied with the tax law requirements of reporting receipts as part of gross income. To determine whether taxpayers who received awards based on a discrimination complaint were including the correct amount in income. To determine the level of compliance in reporting the vaccine floor stock tax that was due 2/28/94. This was a one-time tax. To determine the degree to which the funeral home industry was in compliance with federal tax law requirements for funeral home income and information return (forms W-2 and 1099) reporting and proper matching of income with expenses. To identify noncompliance with the tax treatment of underground storage tank cleanup costs (capital versus current expenses). To ensure depreciation compliance by taxpayers who received private tax-exempt activity industrial development bonds. A potential issue was that taxpayers often used the other-method and life depreciation methods instead of the straight-line alternative and required-life depreciation methods that are required by tax law. To determine whether income (gains) from the conversion of debentures was reported in accordance with the tax law requirements. Original issue discount (OID) exclusions on bonds Employee versus independent contractor (registered representative) (continued) Note 1: All tax amounts are the taxes recommended in the audits and may include some penalties, if any. Note 2: As reflected by the zeros in the table above, IRS auditors may sometimes find during the information gathering phase of the IGP that initial data indicate a smaller/lesser compliance problem than originally expected or that data collected do not warrant further study of the taxpayer group. As a result, the IGP is terminated without any returns audited. Note 3: n/a = not applicable. IRS disclosure rules preclude us from revealing audit information when fewer than four taxpayers are involved. Michelle E. Bowsky, Evaluator-in-Charge H. Dean Perkins, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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Pursuant to a congressional request, GAO reviewed the Internal Revenue Services's (IRS) use of Information Gathering Projects (IGP), focusing on: (1) the number of IGPs nationwide and in IRS' Georgia District during fiscal years 1994 through 1996; (2) descriptions and results of IGPs in Georgia during fiscal years 1994 through 1996; and (3) controls and procedures IRS has in place for IGPs. GAO noted that: (1) IRS reported that it had about 1,000 IGPs open nationwide during both fiscal year (FY) 1995 and FY 1996; (2) data on the nationwide number of IGPs in FY 1994 were not readily available; (3) according to IRS officials, nationwide tracking records were discarded or lost during IRS' reorganization efforts, which involved consolidating 63 districts into 33 and shifting responsibility for IGP records; (4) of the 76 IGPs that were open in Georgia during fiscal years 1994 through 1996, over half focused on: (a) business taxpayers that potentially underreported their income or overreported expenses; (b) business taxpayers that potentially did not properly report or pay taxes, such as the excise tax on fuels; (c) individual taxpayers who potentially claimed an improper exemption, filing status, or earned income credit; and (d) business and individual taxpayers who potentially did not file required tax returns; (5) of these 76 Georgia IGPs, 41 had closed as of June 1997; (6) the duration of these closed audits varied from several months to several years; (7) the audit results, such as additional taxes recommended plus penalties, also varied, with the additional tax amounts ranging from $0 to $269 million; (8) for most of these IGPs, IRS audited relatively few tax returns; (9) IRS closed about three-quarters of these IGPs after auditing fewer than 50 returns, including 9 that closed without any audits being done; (10) for years, IRS has had several controls and procedures designed to limit the vulnerability of IGPs to misuse as an audit selection technique; (11) IRS has always required that proposed IGPs undergo review and approval processes at high levels within the Examination Division in each of the districts; (12) to oversee IGPs, IRS has a unit at each of its 33 district offices; (13) these units monitor how returns were selected for audit and whether the audit results justified continuance of the project; (14) further, IRS recently has started adding processes to enhance the contribution of IGPs to compliance research; (15) in 1997, IRS began implementing compliance initiative proposal processes; and (16) IRS is involving its Research Division in the processes for approving and overseeing IGPs in the hope of making IGPs more useful for research purposes.

You are an expert at summarizing long articles. Proceed to summarize the following text: The United States has a long tradition of providing benefits to those injured in military service, but the role of the federal government in providing for the health care needs of other veterans has evolved and expanded over time. In the nation’s early years, the federal role was limited to direct financial payments to veterans injured during combat; direct medical and hospital care was provided by the individual colonies, states, and communities. The Continental Congress, seeking to encourage enlistments during the Revolutionary War, provided federal compensation for veterans injured during the war and their dependents. Similarly, the first U.S. Congress passed a veterans’ compensation law. The federal role in veterans’ health care significantly expanded during and following the Civil War. During the war, the government operated temporary hospitals and domiciliaries in various parts of the country for disabled soldiers until they were physically able to return to their homes. Following the war, the number of disabled veterans unable to cope with the economic struggle of civilian life became so great that the government built a number of “homes” to provide domiciliary care. Incidental medical and hospital care was provided to residents for all diseases and injuries. The modern era of veterans’ benefits began with the onset of World War I. During World War I, a series of new veterans’ benefits was added: voluntary life insurance, allotments to take care of the family during military service, reeducation of those disabled, disability compensation, and medical and hospital care for those suffering from wounds or diseases incurred in the service. During World War I, Public Health Service (PHS) hospitals treated returning veterans, and, at the end of the war, several military hospitals were transferred to PHS to enable it to continue serving the growing veteran population. In 1921, those PHS hospitals primarily serving veterans were transferred to the then newly formed Veterans’ Bureau. During the 1920s, three federal agencies—the Veterans’ Bureau, the Bureau of Pensions in the Interior Department, and the National Home for Disabled Volunteer Soldiers—administered various benefits for veterans. With the establishment of the Veterans Administration in 1930, previously fragmented services for veterans were consolidated under one agency. The responsibilities and programs of the Veterans Administration grew significantly during the ensuing decades. For example, the VA health care system grew from 54 hospitals in 1930 to include 173 hospitals, more than 375 outpatient clinics, 130 nursing homes, and 39 domiciliaries in 1996; the World War II GI Bill is said to have affected the American way of life more than any other law since the Homestead Act almost a century before, and further educational assistance acts were passed for the benefit of veterans of the Korean conflict, the Vietnam era, the Persian Gulf War, and the current all-volunteer force; and in 1973, the Veterans Administration assumed responsibility for the National Cemetery System, and VA is now charged with the operation of all national cemeteries, except for Arlington National Cemetery. In 1989, the Department of Veterans Affairs was established as a cabinet-level agency. VA’s major benefits programs are divided among the Veterans Health Administration (VHA), headed by the Under Secretary for Health; the Veterans Benefits Administration, headed by the Under Secretary for Benefits, which administers compensation for service-connected disabilities, pensions for low-income war veterans, education loans, life insurance, and home loans; and the National Cemetery System, headed by a Director. Figure 1 shows the organizational structure of VA. In our testimony 2 years ago, we pointed out that VA lagged far behind the private sector in improving the efficiency of its health care system. Specifically, we said that the VA system lacked oversight procedures to effectively assess the operations of its medical systems to shift significant resources among medical centers to provide consistent access to VA care, information systems capable of effectively coordinating patient care among VA facilities, and a corporate culture that valued economy and efficiency. VA has made significant progress in improving the efficiency of its health care system. For example, it has consolidated management of nearby hospitals to reduce administrative costs, increased the use of ambulatory surgery, and reduced average lengths of stay. Under the leadership of the Under Secretary for Health, VA has a new emphasis on both economy and efficiency and customer service. Two years ago, we told you that VA’s central office lacked much of the systemwide information it needed to effectively (1) monitor the performance of its medical centers, (2) ensure that corrective actions are taken when problems are identified, and (3) identify and disseminate information on innovative programs. Since then, VA has established a new decentralized management structure and established performance measures to hold managers accountable for improving efficiency and ensuring the quality of services. VA reorganized its health care facilities into 22 VISNs. This reorganization contains several elements that hold promise for providing the management framework needed to realize the system’s full potential for efficiency improvements. First, VA plans to hold network directors accountable for VISNs’ performance by using, among other things, cost-effectiveness goals and measures that establish accountability for operating efficiently to contain or reduce costs. Second, the Under Secretary for Health (1) distributed criteria that could guide VISN directors in developing the types of efficiency initiatives capable of yielding large savings and (2) gave VISN and facility directors authority to realign medical centers to achieve efficiencies. Finally, VHA developed a new method for allocating funds to its VISNs with the intent of creating additional incentives to improve efficiency. Consistent with the requirements of GPRA, VHA established five basic goals for its health care system. These goals are to provide excellence in health care value, provide excellence in service as defined by customers, provide excellence in education and research, be an organization that is characterized by exceptional accountability, and be an employer of choice. Under each goal, VHA established objectives and performance measures for gauging progress toward meeting both the specific objectives and overall program goals. For example, VHA’s performance measures include goals to decrease the number of bed-days of care provided per 1,000 unique users by 20 percent from the 1996 level, increase the percentage of patients reporting their care as “very good to excellent” by 5 percent annually, enroll 80 percent of patients in primary care, and increase the number of medical care residents trained in primary care. Contracts with individual VISN directors reflect these goals and performance measures. In addition, each VISN has developed a business/strategic plan. The plans are generally organized around the five broad goals. Two years ago, we testified that VA could reduce inconsistencies in veterans’ access to care by better matching medical centers’ resources to the volume and demographic makeup of eligible veterans requesting services at each medical center. Although VA had developed a new resource allocation system, the Resource Planning and Management (RPM) system, we pointed out that the system had shifted few resources among medical centers and allocated resources on the basis of prior workload without any consideration of the incomes or service-connected status of veterans who make up that workload. VA plans to begin shifting resources among VISNs using the new system. The system is based on calculations of the cost per veteran-user in each VISN. VISNs that have the highest costs per veteran-user will lose funds, while VISNs with the lowest costs per veteran-user will get additional funds. Adjustments are included for the higher labor costs in some VISNs and for differences in the costs of medical education, research, equipment, and nonrecurring maintenance. We applaud VA’s efforts to develop a simple, straightforward method for allocating resources. However, we have the same basic concern about VERA that we had about RPM. That is, VA has not determined the “right” amount of dollars that need to be shifted to ensure equity of access. Our concern is based on the fact that VA has not adequately determined the reasons for differences between VISNs in costs per veteran-user. Without a better understanding of why the costs vary, VA cannot, with any certainty, determine the appropriate amount of resources to shift among VISNs. VA data can give starkly different pictures of the comparability of veterans’ access to VA care depending on the basis used for the comparison. For example, basing a comparison of equity of access on the percentage of the total veteran population in a VISN that is provided VA services would suggest that veterans in the Sunbelt generally have better access to VA care than do veterans from the Midwest and Northeast. Over 17 percent of veterans in VISN 18 (Phoenix) received VA services in fiscal year 1995, compared with about 8 percent of veterans in VISN 4 (Pittsburgh). Similarly, about 14 percent of veterans in VISN 9 (Nashville) received VA health care services in fiscal year 1995, compared with about 8 percent of those in VISN 11 (Ann Arbor). Such data could suggest the need to shift resources from VISNs where VA has a high market share of the veteran population to VISNs where VA has lower market shares. attempting to develop data on the demographics of the veteran population by VISN to better understand the basis for differing market shares. Other VA data suggest that VISNs in the Northeast and Midwest may receive more than their fair share of VA resources. For example, VISN 18 received $3,197 per veteran served in fiscal year 1996, compared with $4,829 per veteran served in VISN 4. Similarly, VISN 9 received $4,071, compared with $4,360 in VISN 11. Both VERA data and data from prior allocation models suggest that differences in efficiency are a major factor in the variation in spending per veteran-user. Veteran-users in VISN 3 (the Bronx) are hospitalized over three times as often as are veterans in VISN 18. In addition, VA found that VISNs that have higher costs per veteran-user also tend to have more doctors and nurses per patient, and provide more bed-days of care per patient than the VISNs with lower costs per veteran-user. sector providers rather than rely on VA for comprehensive care. For example, we found that only about half of the Medicare-eligible veterans using VA health care relied on VA for all of their care. As a result, VISNs serving higher percentages of Medicare-eligible and privately insured veterans could expect to have lower costs per veteran. Finally, differences in the extent of incidental use of VA services could affect cost per veteran-user. Incidental use could artificially decrease the VISN’s average cost of care for veterans who regularly use VA and overstate the VISN market share of the veteran population. VA also has not developed data showing that the VISNs with lower than average expenditures per veteran-user need additional funds. In other words, it has not determined how much an efficient and well-managed VISN should be spending on each veteran-user. VISNs’ draft business/strategic plans generally discuss how they will use the additional funds. Those plans have not, however, been reviewed and approved by central office. Some VISN plans indicate that the additional funds will be used to reduce waiting times or increase the number of staff per patient. Others, however, indicate that the funds will be used to attract additional users. Giving additional funds to a VISN with no strings attached appears to enable VISNs with the largest market shares of the veteran population to further expand their market share. This does not appear to be consistent with the efficient use of resources that was one of the objectives of Public Law 104-204. increases in waiting times, and changes in customer satisfaction. One way to develop a resource allocation system that would be consistent with the provisions of Public Law 104-204, easy to administer, and less subject to gaming would be to base the allocation on the veteran population in each VISN, with adjustments based on the numbers of veterans in each of the priority categories for enrollment in the VA health care system. To lessen the incentive for VISNs to target enrollment toward younger, healthier veterans with private insurance, separate rates could be established for various categories of veterans, on the basis of VA’s historical cost and utilization data. We are currently developing data to more fully explore this option. VA recognizes that VERA is not a perfect system and is continuing to explore options for improving its resource allocation methods. For example, VA, like GAO, is developing data to more fully explore the potential effects of population-based allocations. It plans, however, to go forward with allocations using VERA through fiscal year 1998 in order to provide needed financial incentives for certain VISNs to focus on efficiency improvements. Otherwise, allocations tied to historic budgets might delay needed efficiency improvements until another allocation method could be developed. Without accurate and complete cost and utilization data, VA managers cannot effectively decide when to contract for services rather than provide them directly, how to set prices for services it sells to other providers, or how to bill insurers for care provided to privately insured veterans. Accurate utilization data are also essential to help ensure quality and to prevent abuse. Since February 1994, VA has been phasing in at its facilities a new Decision Support System (DSS) that uses commercially available software to help provide managers data on patterns of care and patient outcomes as well as their resource and cost implications. While DSS has the potential to significantly improve VA’s ability to manage its health care operations, the ultimate usefulness of the system will depend not on the software but on the completeness and accuracy of the data going into the system. If DSS is not able to provide reliable information, VA facilities and VISNs will either continue to make decisions on the basis of unreliable information or spend valuable time and resources developing their own data systems. Two years ago, we recommended that VA identify data that are needed to support decision-making and ensure that these data are complete, accurate, consistent, and reconciled monthly. VA plans to begin implementing DSS at the final group of VA facilities this month. VA still, however, has not adequately focused on improving the completeness and reliability of data entered into the feeder systems. It has, however, started to reconcile DSS data on a monthly basis. Although the draft business/strategic plans developed by the 22 VISNs generally discuss goals and timetables for implementing DSS throughout the network, they identify no plans for improving the completeness and accuracy of the data feeding into DSS. In our testimony 2 years ago, we focused on four major challenges facing VA because of a rapidly changing health care marketplace. Specifically, VA was faced with unequal access to health care services because of complex VA eligibility requirements, limited outpatient facilities, and uneven distribution of resources; a continuing decline in the number of hospital patients that threatened the economic viability of its hospitals; unmet needs, including the acute care needs of uninsured veterans not living close to a VA hospital, and the needs of special care populations such as those who are blind, paralyzed, or suffering from post traumatic stress disorder; and the growing long-term care needs of an aging veteran population. Significant progress has been made in addressing the first challenge—improving veterans’ access to VA outpatient care. The remaining challenges, however, remain largely unchanged. In fact, VA’s progress in improving the efficiency of its hospitals has accelerated the decline in hospital workload, heightening the need to address the future of VA hospitals. In addition, VA’s plans to attract new users focus primarily on attracting insured and higher-income veterans with other health care options rather than on addressing the unmet needs of veterans with service-connected conditions and low-income veterans. The first major challenge facing VA health care 2 years ago was the uneven access to health care caused by complex VA eligibility requirements, limited outpatient facilities, and uneven distribution of resources. We noted at the time that veterans’ ability to obtain needed health care services from VA frequently depended on where they lived and the VA facility that served them. During the past 2 years, much progress has been made in improving veterans’ access to care. Eligibility for VA health care was expanded, eliminating the hard-to-administer “obviate the need for hospitalization” provision that limited most veterans’ access to routine outpatient care. All veterans are now eligible for comprehensive inpatient and outpatient care subject to the availability of resources. VA established community-based outpatient clinics (CBOC) to improve veterans’ access to outpatient care. Until 1995, VA required its hospitals to meet rigid criteria to establish outpatient clinics apart from the hospitals. These criteria included a minimum number of veterans to be served in a clinic and a minimum distance that clinics had to be from the VA hospitals. In encouraging its hospitals to consider establishing CBOCs, previously known as “access points,” VA eliminated many of its restrictions concerning the workload and location of proposed clinics. In addition, VA policy now encourages hospitals to provide care not only in VA-operated facilities, but also by contracting with other providers. Although only 12 CBOCs were operational by September 1996, plans had been developed to establish hundreds of additional clinics. VA’s contracting authority was revised to make it easier for VA to buy services from private providers and to sell services to the private sector. Previously, VA’s authority was restricted primarily to purchasing services from and selling services to other government health care facilities and VA’s medical school affiliates. Using its expanded contracting authority, VA is moving quickly to establish additional CBOCs. The second major challenge facing VA health care 2 years ago was the declining use of VA hospitals. Between 1969 and 1994, the average daily workload in VA hospitals declined by about 56 percent. VA reduced its operating beds by about 50 percent, closing or converting to other uses about 50,000 hospital beds. VA now finds itself increasingly a victim of its own success and faced with what to do with so much unused inpatient infrastructure. As VA’s efforts to increase the efficiency of its health care system gained momentum during the past 2 years, the decline in VA hospital use accelerated. Between fiscal years 1994 and 1996, the average daily workload in VA hospitals dropped over 20 percent (from 39,953 patients in 1994 to 31,679 in 1996). Operating beds dropped from 53,093 in 1994 to 45,798 in 1996. Hospital use in the VA system varies dramatically. Last year, we reported that the Northern California Health Care System, a part of VISN 21, was supporting the hospital care needs of its users with about 2 beds per 1,000 users. Some VISNs, however, have over 20 hospital beds per 1,000 veteran-users. As a result, further significant declines in operating beds are likely as the variation in hospital use is reduced. For example, VISN 5 (Baltimore) estimates that its acute hospital beds will have decreased by 58 percent by fiscal year 2002 (from 1,087 in fiscal year 1995 to 460 in 2002). Recent VA actions to establish preadmission reviews for all scheduled hospital admissions and continuing stay reviews for those admitted—actions we have advocated for over 10 years—should further reduce hospital use. VA may not realize the full potential from these reviews, however, unless physicians’ incentives to minimize inappropriate inpatient care are increased. VISN 5 (Baltimore), for example, uses its reviews primarily for data collection, evaluation, and monitoring. The program does not act as a gatekeeper, and inpatient care is not denied on the basis of results of the preadmission reviews. Reviews at the VISN 5 hospitals in Martinsburg, West Virginia, and Washington, D.C., show that over 50 percent of patients admitted since the program was initiated did not need acute hospital care. As workload continues to decline at VA hospitals, VA’s investment in its hospital infrastructure increasingly detracts from its ability to shift resources to other needs, such as expanding access for veterans living long distances from VA facilities. The third major challenge that faced VA health care 2 years ago was identifying and addressing the unmet health care needs of veterans. With the growth of public and private health benefits programs, more than 9 out of 10 veterans now have alternate health insurance coverage. Still, about 2.6 million veterans had neither public nor private health insurance in 1990 to help pay for needed health care services. Without a demonstrated ability to pay for care, individuals’ access to health care is restricted, increasing their vulnerability to the consequences of poor health. Lacking insurance, people often postpone obtaining care until their conditions become more serious and require more costly medical services. Most veterans who lack insurance coverage, however, are able to obtain needed hospital care through public programs and VA. Still, VA’s 1992 National Survey of Veterans estimated that about 159,000 veterans were unable to get needed hospital care in 1992 and about 288,000 were unable to obtain needed outpatient services. By far the most common reason veterans cited for not obtaining needed care was that they could not afford to pay for it. While the cost of care may have prevented veterans from obtaining care from private sector hospitals, it appears to be an unlikely reason for not seeking care from VA. All veterans are currently eligible for hospital care, and about 9 to 11 million are eligible for free care. Other veterans are required to make only nominal copayments. Many of the problems veterans face in obtaining health care services appear to relate to distance from a VA facility. For example, our analysis of 1992 National Survey of Veterans data estimates that fewer than half of the 159,000 veterans who did not obtain needed hospital care lived within 25 miles of a VA hospital. By comparison, we estimate that over 90 percent lived within 25 miles of a private sector hospital. Of the estimated 288,000 veterans unable to obtain needed outpatient care during 1992, almost 70 percent lived within 5 miles of a non-VA doctor’s office or outpatient facility. As was the case with veterans unable to obtain needed hospital care, those unable to obtain needed outpatient care generally indicated that they could not afford to obtain needed care from private providers. Only 13 percent of the veterans unable to obtain needed outpatient services reported that they lived within 5 miles of a VA facility, where they could generally have received free care. Veterans’ needs for specialized services cannot always be met through other public or private sector programs. Frequently, such services are either unavailable in the private sector, or are not extensively covered under other public and private insurance. Space and resource limits in VA specialized treatment programs can result in unmet needs, as in the following cases. Specialized VA post-traumatic stress disorder programs are operating at or beyond capacity, and waiting lists exist, particularly for inpatient treatment. Although private insurance generally includes mental health benefits, private sector providers generally lack the expertise in treating war-related stress that exists in the VA system. Inadequate numbers of beds are available in the VA system to care for homeless veterans. For example, VA had only 11 beds available in the San Francisco area to meet the needs of an estimated 2,000 to 3,000 homeless veterans. Public and private insurance do not provide extensive coverage of long-term psychiatric care. Veterans needing such services must either rely on state programs or the VA system to meet their needs. VA is a national leader both in research on and treatment and rehabilitation of people with spinal cord injuries. Similarly, it is a leader in programs to treat and rehabilitate the blind. Although such services are available in the private sector, the costs of such services can be catastrophic. Legislation enacted last year that expanded VA’s ability to contract with private sector facilities and providers gives VA an opportunity to better meet the health care needs of low-income veterans and those with service-connected conditions who previously were unable to obtain needed care because VA facilities were geographically inaccessible. Two years ago, we suggested that the VA health care system retarget resources used to provide care for higher-income veterans with nonservice-connected conditions toward lower-income veterans and those with service-connected conditions whose health care needs were not being met. VA, however, through its current legislative proposals, appears to be focusing its marketing efforts on attracting higher-income veterans with other health care options rather than using its expanded contracting authority to target its available resources toward meeting the needs of service-connected and uninsured veterans who lack other health care options. Data from VA’s Income Eligibility Verification System show that about 15 percent of the veterans using VA facilities who have no service-connected disabilities have incomes of $20,000 or more. VA could use the resources spent to provide services to such higher-income nonservice-connected veterans to strengthen its ability to fulfill its safety net mission. For example, the resources could be used to expand outreach to medically underserved populations, such as homeless expand programs that address special care needs; or contract for hospital and other service for lower-income, uninsured veterans who do not live near VA facilities. Our review of the draft strategic plans developed by the 22 VISNs, however, found little mention of plans to conduct outreach to veterans with limited health care options or special care needs. Nor did these plans specifically address expanding services for low-income uninsured veterans. The establishment of additional community-based outpatient clinics will address the unmet needs of some uninsured veterans. Most of the resources spent on CBOCs, however, will likely be spent on veterans who have other health care options. This reduces the resources available to provide services to uninsured veterans. The legislative proposals contained in VA’s fiscal year 1998 budget request would target veterans with other health care options. VA claims that it will be able to cut its per-user costs by 30 percent only if it is given funds to expand the number of veterans it serves by 20 percent and allowed to keep all of the funds it recovers from private health insurance and Medicare. The new users VA anticipates attracting either have private health insurance or are higher-income Medicare beneficiaries. The proposal to allow VA to keep all medical care cost recoveries could create strong financial incentives for VA to market its services to veterans who have no service-connected disabilities as well as private insurance. Similarly, VA is seeking authority to bill and retain recoveries from Medicare for services provided to higher-income Medicare-eligible veterans. Like recoveries from private health insurance, such Medicare subvention would create incentives for VA to market services to higher-income veterans with both Medicare and Medigap coverage rather than to lower-income Medicare-eligible veterans. VA’s proposals create the potential for its receiving duplicate payments for services provided to privately insured and Medicare-eligible veterans. In other words, unless changes are made in how VA develops its budget request, it would receive both an appropriation to cover its costs of providing services to privately insured and higher-income Medicare-eligible veterans and payments from insurers and Medicare to cover those same costs. Although the 22 VISNs’ draft strategic plans discuss efforts to increase market share and attract new users, few plans contain any mention of targeting marketing efforts to veterans potentially having the greatest need for VA services—veterans with service-connected disabilities and those with low incomes and no health insurance. As the nation’s large World War II and Korean War veteran populations age, their health care needs are increasingly shifting from acute hospital care toward nursing home and other long-term care services. But Medicare and most private health insurance cover only short-term, post-acute nursing home and home health care. Although private long-term care insurance is a growing market, the high cost of policies places such coverage out of reach of many veterans. As a result, most veterans must pay for long-term nursing home and home care services out of pocket until they spend down most of their income and assets and qualify for Medicaid assistance. After qualifying for Medicaid, they are required to apply almost all of their income toward the cost of their care. About a third of veterans are 65 years old or older, with the fastest growing group of veterans being those 85 years old or older. This older group raises particular concerns because the need for nursing home and other long-term care services increases with the age of the beneficiary population. Over 50 percent of those over 85 years of age are in need of nursing home care, compared with about 13 percent of those 65 to 69 years old. VA, like other federal agencies, could be unable to issue compensation and pension checks at the beginning of the year 2000 unless it is able to reprogram its computers to recognize the next century; veterans frequently wait over 2 years for resolution of disability compensation and pension claims; and hundreds of millions of dollars in overpayments of compensation and pension benefits are made because VBA does not focus on prevention. VA’s disability program is required by law to compensate veterans for the average loss in earning capacity in civilian occupations that results from injuries or conditions incurred or aggravated during military service. These injuries or conditions are referred to as “service-connected” disabilities. Veterans with such disabilities are entitled to monthly cash benefits under this program even if they are working and regardless of the amount they earn. In fiscal year 1995, VA paid about $11.3 billion to approximately 2.2 million veterans who were on VA’s disability rolls at that time. Over the past 50 years, the number of veterans on the disability rolls has remained fairly constant. The amount of compensation veterans with service-connected conditions receive is based on the “percentage evaluation,” commonly called the disability rating, that VA assigns to these conditions. VA uses its “Schedule for Rating Disabilities” to determine which rating to assign to a veteran’s particular condition. VA is required by law to readjust the schedule periodically on the basis of “experience.” Since the 1945 version of the schedule was developed, questions have been raised on a number of occasions about the basis for these disability ratings and whether they reflect veterans’ current loss in earning capacity. Although the ratings in the schedule have not changed substantially since 1945, dramatic changes have occurred in the labor market and in society. VA has done little since 1945 to help ensure that disability ratings correspond to disabled veterans’ average loss in earning capacity. Basing disability ratings at least in part on judgments of loss in functional capacity would help to ensure that veterans are compensated to an extent commensurate with their economic losses and that compensation funds are distributed equitably. VA, like other federal agencies, faces serious problems with its computer systems that will occur in the year 2000. This year, we added the “year 2000 computer problem” to our list of “high-risk” federal management areas. Unless agency computers are reprogrammed, the year 2000 will be interpreted as 1900. This could create a major problem for VA, beginning in January 2000, with its monthly processing of over 3 million disability compensation and pension checks, totaling about $1.5 billion, to veterans and their survivors. Unless the “year 2000” problem is corrected, VA’s computer system for processing these checks will either produce inaccurate checks, or produce no checks at all. VA would then have to process the checks manually, causing severe delays to veterans and survivors in receiving their benefits. VA needs to move quickly to (1) inventory its mission-critical systems; (2) develop conversion strategies and plans; and (3) dedicate sufficient resources to conversion, and adequate testing, of computer systems before January 1, 2000. We recently published draft guidance for agencies to use in planning, managing, and evaluating their efforts to deal with this problem. We are currently reviewing VBA’s efforts to deal with the “year 2000” problem and plan to report to the Chairman, Subcommittee on Oversight and Investigations, House Committee on Veterans’ Affairs, this spring. Slow claims processing and poor service to customers have long been recognized as critical concerns for VA. As early as 1990, VA began encouraging regional offices to develop and implement improvements in their claims processing systems; but instead of decreasing, processing times and backlogs increased. At the end of fiscal year 1994, almost 500,000 claims were waiting for a VA decision. About 65,000 of these claims were initial disability compensation claims. On average, veterans waited over 7 months for their initial disability claims to be decided; if veterans appealed these decisions, they could wait well over 2 years for a final decision. evaluation plans to allow it to judge the relative merit of its various initiatives. Without such information, VA will not have a sound basis for determining what additional changes, if any, should be made and for guiding future improvement efforts. In addition, VA did not have a formal mechanism to disseminate information about the content and effectiveness of various regional office initiatives to allow other regional offices to learn from the experiences. VA is proposing a redesign of its claims processing system that would incorporate several initiatives. VA has conducted a business process reengineering effort on its compensation and pension claims processing system. VA has also established claims processing goals that include completing original compensation claims within 53 days by eliminating unnecessary tasks, reducing the number of hand-offs involved in the process, making information technology changes, and providing additional training for rating specialists. However, it is unclear at this time how successful these initiatives will be, how they will be evaluated, and how regional offices’ experiences will be shared. VBA officials told us that the claims backlog has been reduced from 500,000 to about 326,000 as a result of VBA’s actions. Despite its responsibility to ensure accurate benefit payments, VA continues to overpay veterans and their survivors hundreds of millions of dollars in compensation and pension benefits each year. For example, at the end of 1996, VA’s outstanding overpayments exceeded $500 million. VA has the capability to prevent millions of dollars in overpayments but has not done so because it has not focused on prevention. For example, we reported in April 1995 that VA did not use available information, such as when beneficiaries will become eligible for Social Security benefits, to prevent related overpayments from occurring. Furthermore, VA did not systematically collect, analyze, and use information on the specific causes of overpayments that would help it target preventive efforts. causes of overpayments nor developed strategies for targeting additional preventive efforts. The Congress, through recent legislation, established a framework to help federal agencies (1) improve their ability to address long-standing management challenges and (2) meet the need for accurate and reliable information for executive branch and congressional decision-making. This framework includes GPRA, which is designed to improve federal agencies’ performance by requiring them to focus on their missions and goals, and on the results they provide to their customers—for veterans and their families; the CFO Act of 1990, as amended by the Government Management Reform Act, designed to improve the timeliness, reliability, usefulness, and consistency of financial information in federal agencies; and the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act of 1996, which are intended to improve agencies’ ability to use information technology to support their missions and improve performance. VA has begun to implement these acts, which can help it (1) develop fully integrated information about its mission and strategic priorities, (2) develop and maintain performance data to evaluate achievement of its goals, (3) develop accurate and audited financial information about the costs of achieving VA’s results-oriented mission, and (4) improve the relationship of information technology to the achievement of performance goals. GPRA requires that agencies consult with the Congress and other stakeholders to clearly define their missions. It also requires that they establish long-term strategic goals, as well as annual goals linked to them. They must then measure their performance against the goals they have set and report publicly on how well they are doing. In addition to ongoing performance monitoring, agencies are expected to identify performance gaps in their programs, and to use information obtained from these analyses to improve the programs. Under GPRA, VA and other federal agencies must complete strategic plans by September 30, 1997. While VA has not yet completed its GPRA strategic plan, its fiscal year 1998 budget submission to the Congress includes some of the elements of the GPRA planning process. The budget submissions for both of VA’s largest components—VHA and VBA—included strategic planning documents. Both the VHA and VBA plans included overall mission statements; identification of customers and stakeholders; program goals and objectives; and performance measures related to the goals and objectives. VHA’s strategic plan, as stated in its fiscal year 1998 budget submission, is based on five goals developed in March 1996 by the Under Secretary for Health. VHA then attached objectives and performance measures to each goal. For the first goal—“Provide Excellence in Healthcare Value”—VHA stated three objectives: (1) deliver the best health care outcomes at the lowest cost to the largest number of eligible veterans, (2) change VHA from a hospital-based to an ambulatory-based system, and (3) establish primary care as the central focus of patient treatment. To measure progress toward achieving VHA’s goals, it proposed eight performance measures. For the second objective, for example, VHA plans to increase the percentage of appropriate surgical and invasive diagnostic procedures performed on an ambulatory basis from 52 percent in fiscal year 1996 to 65 percent in fiscal year 1998. VBA’s strategic planning process began in July 1995, with definitions of its mission, goals, and core performance measures. As stated in the fiscal year 1998 budget submission, VBA’s mission is to “provide benefits and services to veterans and their families in a responsive, timely and compassionate manner in recognition of their service to the nation.” To accomplish this mission, VBA has set out four goals: (1) improve responsiveness to customer needs and expectations, (2) improve service delivery and benefit claims processing, (3) ensure the best value for the available taxpayers’ dollar, and (4) ensure a satisfying and rewarding work environment. The plan is then broken down by VBA’s major program areas. For example, the Compensation and Pension program area has performance indicators to measure progress in meeting VBA’s goal of improving service delivery and benefit claims processing by reducing the processing time for original compensation and pension claims from 144 days in fiscal year 1996 to 53 days in fiscal year 2002 and raising the accuracy rate for original compensation claims from 90 percent in fiscal year 1996 to 97 percent in fiscal year 2002. We are currently reviewing VA and other agencies’ initial implementation of GPRA. As required under the legislation, we will report by June 1, 1997, on GPRA implementation and the prospects for governmentwide compliance. We would be happy to assist the Congress in reviewing draft and final VA submissions under GPRA, including strategic plans, performance plans, performance reports, evaluations, and related VA performance information. The CFO Act was designed to remedy decades of serious neglect in federal financial management and accountability by establishing a financial management leadership structure and requirements for long-range planning, audited financial statements, and strengthened accountability reporting. The act created CFO positions and a financial management structure at each of the major agencies. The CFO Act, as expanded in 1994, requires VA, as well as other major agencies, to prepare annual financial statements, beginning with those for fiscal year 1996. VA has established a sound financial management structure; in addition to the Assistant Secretary for Management, who serves as CFO, VHA and VBA each has a CFO. Also, VHA plans to have a CFO position in each of its 22 VISNs. VA met the requirement to prepare, and have audited, annual financial statements beginning with those for fiscal year 1986. VA’s response to the CFO Act has led to a number of financial management improvements, including the installation of VA’s Financial Management System, which gives VA, for the first time, an integrated financial management system; improvements in reporting of receivables and property management, due to the implementation of the financial management system, that resulted in the first issuance by a VA Inspector General of an unqualified opinion on VA’s Statement of Financial Position on September 30, 1996; and the consolidation of debt collection activities at VBA’s Debt Management Center in St. Paul, Minnesota, to take full advantage of debt management tools. The Inspector General’s audit of VA’s fiscal year 1996 financial statement disclosed six internal control weaknesses that expose VA to significant financial risks: errors in accounting for property, plant, and equipment, which could result in a future qualification of opinion if not corrected; errors by medical facilities in recording estimated amounts of unbilled services and in estimating uncollectible amounts; failure to cancel approximately $69 million in open obligations that should have been cancelled before the end of the fiscal year—funds that could have been reprogrammed and used for other valid needs if they had been identified before the appropriations expired; an outdated data processing system for VA’s life insurance programs that has the potential to adversely affect the complete and accurate processing of insurance transactions and the integrity of the financial information generated by the system; insufficient VA management emphasis on, and oversight of, VA data processing facilities to ensure that data processing systems are protected from unauthorized access and modification of data; and lack of an integrated financial accounting system for VA’s Housing Credit Assistance Program which, when coupled with the complexities of accounting requirements under credit reform, increases the risk of financial reporting error. information management in general, and the acquisition and use of information technology in particular. VA has made efforts to improve its information management systems, including the appointment of the Assistant Secretary for Management as VA’s Chief Information Officer. The Clinger-Cohen Act requires, however, that information resources management be the primary function of an agency’s chief information officer. This is not the case in VA, because the Assistant Secretary for Management is not only VA’s Chief Information Officer, but is also responsible for its Offices of Financial Management, Budget and Acquisition, and Materiel Management. The Office of Management and Budget (OMB) has questioned whether information management is the “primary function” of the Assistant Secretary for Management, and whether VA is in compliance with the Clinger-Cohen Act. In August 1996, OMB asked VA to reevaluate the placement of its chief information officer function and report within a year on how it will come into compliance with the Clinger-Cohen requirement. VBA’s information technology efforts have yielded some improvements in its hardware and software capabilities. However, our reviews of information management in VBA have identified problems that need to be addressed. One is the need for VBA to develop credible strategic business and information resources management plans. VBA has undertaken several initiatives to improve claims processing efficiency and reduce its large backlog of unprocessed claims. But it has done so without an overall business strategy clearly setting forth how it would achieve its goals. Instead, VBA has used stopgap measures to deal with its claims processing problems. While these measures have improved processing times and reduced the claims backlog, VA needs to find other solutions. technology-related projects. It also needs to develop a process to rank and prioritize information technology investments as a consolidated portfolio. A third challenge for VBA is to improve its software development capability. Once agencies have identified their top priority information technology projects, they must be able to determine whether the project should be developed in-house or contracted out. Our review of VBA’s software development capabilities found that, on a scale of software development maturity, VBA was in the “least mature” category. Thus, VBA cannot reliably develop and maintain high-quality software within existing cost and schedule constraints. This, in turn, places VBA’s information technology modernization efforts at significant risk. We made several recommendations to address this issue. These recommendations and VA’s responses follow: Obtain expert advice on developing high-quality software. VBA is working with the Air Force, under an interagency agreement, to implement this recommendation. Develop a plan to achieve a higher level of software development maturity. VBA has developed such a plan and has taken other actions to improve software development maturity. Require that future software development contracts specify that services be obtained from contractors with at least a level 2 (on a scale of 1 to 5, with 5 being the highest level) rating. According to VBA, it plans to award a general software contract with a provision regarding the necessary software development skills. We periodically report to the Congress on options for reducing the budget deficit. Our latest report, issued March 14, 1997, identified a series of potential changes in veterans’ benefits and VA programs that could contribute many billions of dollars toward deficit reduction over the next 5 years. Some of the options involve management improvements that could be achieved by the agency. Others, however, would require fundamental policy changes in veterans’ benefits, including changes in entitlement programs. During 1996, VA paid approximately $1.7 billion in disability compensation payments to veterans with diseases neither caused nor aggravated by military service. In 1996, the Congressional Budget Office (CBO) reported that about 230,000 veterans were receiving about $1.1 billion annually in VA compensation for these diseases. Other countries we contacted do not compensate veterans under such circumstances. If disability compensation payments to veterans with nonservice-connected, disease-related disabilities were eliminated in future cases, 5-year savings could, CBO estimated, exceed $400 million. In fiscal year 1994, VA spent more than $1 billion in educational assistance benefits to more than 450,000 beneficiaries. In addition, it spent over $12 million on contracts with state approving agencies to assess whether schools and training programs offer education of sufficient quality for veterans to receive VA education assistance benefits when attending them. An estimated $10.5 million of the $12 million paid to state approving agencies was spent to conduct assessments that overlapped assessments performed by the Department of Education. CBO estimated that at least $50 million could be saved over the next 5 years if the Congress directed VA to discontinue contracting with state approving agencies to review and approve educational programs at schools that have already been reviewed and certified by Education. State veterans’ homes recover as much as 50 percent of the costs of operating their facilities through charges to veterans receiving services. Similarly, Oregon recovers about 14 percent of the costs of nursing home care provided under its Medicaid program through estate recoveries. In fiscal year 1990, VA recovered less than one-tenth of 1 percent of its costs for providing nursing home care through beneficiary copayments. Potential recoveries appear to be greater within the VA system than under Medicaid. Home ownership is significantly higher among VA hospital users than among Medicaid recipients, and veterans living in VA nursing homes generally contribute less toward the cost of their care than do Medicaid recipients, allowing veterans to build larger estates. billions of dollars could be saved through the increased revenues. For example, if VA recovered 25 percent of its costs of providing nursing home care through a combination of cost sharing and estate recoveries, it would save about $3.4 billion over the next 5 years. VA hospitals too often admit patients whose care could be more efficiently provided in alternative settings, such as outpatient clinics or nursing homes. Our studies and those of VA researchers and the VA Inspector General have found that over 40 percent of VA hospital admissions and days of care were not medically necessary. Private health insurers generally require their policyholders (or their physicians) to obtain authorization from them or their agent prior to admission to a hospital. Failure to obtain such preadmission certification can result in denial of insurance coverage or a reduction in payment. We have recommended that VA establish an independent preadmission certification program. Although VA, in September 1996, required its VISNs to establish a preadmission review program, the review programs are run by the hospitals rather than by external reviewers and do not provide any direct financial incentive for facilities to adhere to the decisions of their reviewers. While the preadmission reviews are likely to have some effect on inappropriate admissions, they may not be effective unless coupled with a financial penalty for noncompliance with review findings. CBO estimated that if VA were to establish precertification procedures similar to those used by private health insurers which, result in a 40-percent reduction in admissions and days of care, VA’s medical care spending could be reduced by $8.4 billion over 5 years. Historically, VA has submitted a budget request for hundreds of millions of dollars in major health care construction projects. The requests have typically included construction or renovation of one or more hospitals. such risk by creating additional uncertainty. In addition, we believe that analyzing alternatives to major construction projects is entirely consistent with VA’s suggested realignment criteria. Delaying funding for major construction projects until the alternatives can be fully analyzed may result in more prudent and economical use of already scarce federal resources. The potential savings of delaying funding for VA hospital construction are uncertain in the absence of an assessment of VA’s needs based on its own realignment criteria. CBO estimates that if the Congress did not approve funding of any major construction projects until after VA has completed its realignment, savings totaling more than $1.2 billion could be achieved over 5 years. VA’s fiscal year 1998 budget submission and its recent decision not to pursue construction of a new VA hospital in East Central Florida are consistent with this option. VA is seeking only $48 million for major medical construction for fiscal year 1998. Although VA took over 50,000 hospital beds out of service between 1970 and 1995, it did not close any hospitals on the basis of declining utilization. With the declining veteran population, new technologies, and VA’s efforts to improve the efficiency of its health care system, significant further declines in demand for VA hospital care are likely. While closing wards saves some money by reducing staffing costs, the cost per patient treated rises because the fixed costs of facility operation are distributed among fewer patients. At some point, closing a hospital and providing care either through another VA hospital or through contracts with community hospitals may become less costly than simply taking beds out of service. Potential savings from hospital closures are difficult to estimate because of uncertainties about which facilities would be closed, the increased costs that would be incurred in providing care through other VA hospitals or contracts with community hospitals, and the disposition of the closed facilities. the system does not need to expend the level of resources that VA has previously estimated to meet the health care needs of veterans. These resources are overstated because VA did not adequately consider the declining demand for VA hospital care in estimating its resource needs and because eligibility for VA care has been reformed—which, according to VA, will allow it to divert 20 percent of its hospital admissions to less costly outpatient settings. Second, VA could reduce its operating costs by billions of dollars over the next 5 years by completing a wide range of efficiency actions. VA recognizes that it can reduce its costs per user by 30 percent over the next 5 years but plans to use the savings to expand its market share by 20 percent. We recently recommended that VA provide the Congress information on the savings achieved through improved efficiency in support of its budget request. We noted that providing the Congress with information on factors, such as inflation and creation of new programs, which increase resource needs, without providing information on changes that could reduce or offset those needs leaves the Congress with little basis for determining appropriate funding levels. VA, however, has been unwilling to provide such information to the Congress. One way for the Congress to respond to VA’s unwillingness to provide information on savings from improved efficiency would be to limit the VA medical care appropriation at the fiscal year 1997 level for the next 5 years. CBO estimates that this would result in almost $9 billion in savings. Recently enacted legislation expands eligibility for VA health benefits to make all veterans eligible for comprehensive inpatient and outpatient services, subject to the availability of resources. The legislation also requires VA to establish a system of enrollment for VA health care benefits and establishes enrollment priorities to be applied, within appropriated resources. The lowest priority for enrollment is veterans with no service-connected disabilities and high enough incomes to place them in the discretionary care category. enrollment system. If the Congress funded the VA health care system to cover only the expected enrollment of veterans in higher priority enrollment categories, such as veterans with service-connected disabilities and veterans without the means to obtain public or private insurance to meet their basic health care needs, CBO estimates that $1.7 billion in budget authority, adjusted for inflation, could be saved over 5 years. VA pharmacies dispense to veterans over 2,000 types of medications and medical supplies that are available over-the-counter (OTC) through local retail outlets. Such products were dispensed more than 15 million times in 1995 at an estimated cost of $165 million. The most frequently dispensed items include aspirin, dietary supplements, and alcohol prep pads. Unlike VA, other public and private health programs cover few, if any, OTC products for their beneficiaries. Our assessment of VA’s operating practices suggests several ways that budget savings could be achieved. First, VA could more narrowly define when to provide OTC products, reducing the number of OTC products available to veterans on an outpatient basis. Second, VA could collect copayments for all OTC products. CBO estimated that these steps could save over $350 million over the next 5 years. Legislation initially enacted in 1990 gave VA access to Internal Revenue Service tax data and Social Security Administration earnings records to help VA verify incomes reported by beneficiaries. Since then, millions of dollars in savings have been achieved in VA’s health and pension programs as a result of VA’s income verification program. Authority for the program will, however, expire on September 30, 1998. Extending the authority could generate over $115 million in savings between fiscal years 1999 and 2002. differences with respect to its compliance with the Paperwork Reduction Act and the Clinger-Cohen Act. VA’s progress in strengthening its management should help it address the multiple challenges facing its health and benefits programs. Under the leadership of the Under Secretary for Health, the VA health care system has made significant progress during the past 2 years in improving both its efficiency and its image. In addition, actions to expand eligibility, make it easier for VA to buy services from and sell services to the private sector, improve access, and reduce waiting times place VA in a better position to compete with private sector providers for declining numbers of veterans. VA and the Congress, however, are faced with difficult choices. Should VA hospitals be opened to veterans’ dependents or other nonveterans as a way of increasing efficiency and preserving the system? What effect would such decisions have on private sector hospitals? To what extent should the government attempt to capture market share from private sector providers? Should the government subsidize its facilities in order to capture market share? Should some of VA’s acute care hospitals be closed, converted to other uses, transferred to states or local communities, or sold to developers? Should VA remain primarily a direct provider of veterans’ health care or become a virtual health care system in which it contracts with private sector providers rather than operating its own facilities? To what extent should the VA system address the unmet needs of uninsured veterans and those with service-connected disabilities? Decisions regarding these and other questions will have far-reaching effects on veterans, taxpayers, veterans facilities and the VA employees working in them, and private providers. Because of the historic inefficiency of the VA system, the changes currently taking place provide many opportunities for the VA health care system to contribute toward deficit reduction while still improving services to current users. Limiting the system to current users, however, could facilitate declines in hospital use and lead ultimately to closure of VA hospitals. exceedingly difficult. VA will have to attract an ever-increasing proportion of the veteran population if it is to keep its acute care hospitals open. VA’s fiscal year 1998 budget submission outlines its strategy for preserving its hospitals: it wants to increase its users by 20 percent in order to make more efficient use of existing VA facilities. The new users VA is targeting generally have other health care options available to them. The cost of maintaining VA’s direct delivery infrastructure limits VA’s ability to ensure similarly situated veterans equal access to VA health care. VA’s interest in providing services to veterans in the discretionary care category at VA hospitals and outpatient clinics is likely to limit its ability to provide services to low-income and service-connected veterans through the use of contract care. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions that you or Members of the Subcommittee might have. For more information on this testimony, call Jim Linz, Assistant Director, at (202) 512-7110. Greg Whitney also contributed to this statement. VA Health Care: Improving Veterans’ Access Poses Financial and Mission-Related Challenges (GAO/HEHS-97-7, Oct. 25, 1996). VA Health Care: Opportunities for Service Delivery Efficiencies Within Existing Resources (GAO/HEHS-96-121, July 25, 1996). VA Health Care: Challenges for the Future (GAO/T-HEHS-96-172, June 27, 1996). Veterans’ Health Care: Facilities’ Resource Allocations Could Be More Equitable (GAO/HEHS-96-48, Feb. 7, 1996). Vocational Rehabilitation: VA Continues to Place Few Disabled Veterans in Jobs (GAO/HEHS-96-155, Sept. 3, 1996). Veterans’ Benefits: Effective Interaction Needed Within VA to Address Appeals Backlog (GAO/HEHS-95-190, Sept. 27, 1995). Veterans’ Benefits: VA Can Prevent Millions in Compensation and Pension Overpayments (GAO/HEHS-95-88, Apr. 28, 1995). Veterans’ Benefits: Better Assessments Needed to Guide Claims Processing Improvements (GAO/HEHS-95-25, Jan. 13, 1995). Managing for Results: Using GPRA to Assist Congressional and Executive Branch Decisionmaking (GAO/T-GGD-97-43, Feb. 12, 1997). 1997 High-Risk Series: Information Management and Technology (GAO/HR-97-9, Feb. 1997). Information Technology Management: Agencies Can Improve Performance, Reduce Costs, and Minimize Risks (GAO/AIMD-96-64, Sept. 30, 1996). Executive Guide: Effectively Implementing the Government Performance and Results Act (GAO/GGD-96-118, June 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. 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 some of the major challenges facing the Department of Veterans Affairs (VA) and some of the options for deficit reduction through changes in VA benefits and programs. GAO noted that: (1) significant improvements have occurred in the efficiency of the VA health care system; (2) VA's new management and Veterans Integrated Service Network (VISN) structure clearly values efficiency and customer service; (3) in addition, legislation was enacted: (a) expanding eligibility for VA health care; (b) making it easier for VA to contract for and sell services to the private sector; and (c) requiring VA to develop a plan for more equitably allocating resources to its VISNs; (4) these decisions bring with them both solutions to old problems and significant new challenges, such as developing an enrollment process consistent with the priorities established under the eligibility reform legislation and determining when to buy services from the private sector rather than provide them in VA facilities; (5) the Veterans Benefits Administration also faces major challenges; for example: (a) the disability rating schedule has not been updated for over 45 years; (b) VA faces the prospect of late or inaccurate compensation and pension payments to millions of veterans if it is unable to resolve the "year 2000" computer problem; (c) veterans often wait over 2 years for resolution of compensation and pension claims by the time the appeals process has been completed; and (d) VA could avoid millions of dollars in overpayments of compensation and pension benefits by strengthening its ability to prevent such payments; (6) recent legislation, including the Government Performance and Results Act, the Chief Financial Officers (CFO) Act, and the Paperwork Reduction Act, provides a basis for addressing long-standing management challenges; (7) VA has begun to use the legislation to improve its mission performance and results, its financial reporting, and its information resources management; (8) for example, VA included strategic plans for its health and benefits programs in its fiscal year 1998 budget submission, and it has been preparing audited financial statements since 1986, well in advance of the requirements imposed by the CFO Act; (9) multiple options exist for supporting deficit reduction through changes in VA benefits and programs; (10) although some of the changes could be achieved through administrative action, others would require legislation; and (11) the options include: (a) redefining compensation benefits to eliminate compensation for diseases that are not related to military service; (b) imposing higher cost sharing for nursing home and other long-term care services; (c) limiting enrollment in the VA health care system; and (d) closing underused hospitals.

You are an expert at summarizing long articles. Proceed to summarize the following text: As of the end of February 2005, an estimated 827,277 servicemembers had been deployed in support of OIF. Deployed servicemembers, such as those in OIF, are potentially subject to occupational and environmental hazards that can include exposure to harmful levels of environmental contaminants such as industrial toxic chemicals, chemical and biological warfare agents, and radiological and nuclear contaminants. Harmful levels include high-level exposures that result in immediate health effects. Health hazards may also include low-level exposures that could result in delayed or long-term health effects. Occupational and environmental health hazards may include such things as contamination from the past use of a site, from battle damage, from stored stockpiles, from military use of hazardous materials, or from other sources. As a result of numerous investigations that found inadequate data on deployment occupational and environmental exposure to identify the potential causes of unexplained illnesses among veterans who served in the 1991 Persian Gulf War, the federal government increased efforts to identify potential occupational and environmental hazards during deployments. In 1997, a Presidential Review Directive called for a report by the National Science and Technology Council to establish an interagency plan to improve the federal response to the health needs of veterans and their families related to the adverse effects of deployment. The Council published a report that set a goal for the federal government to develop the capability to collect and assess data associated with anticipated exposure during deployments. Additionally, the report called for the maintenance of the capability to identify and link exposure and health data by Social Security number and unit identification code. Also in 1997, Public Law 105-85 included a provision recommending that DOD ensure the deployment of specialized units to theaters of operations to detect and monitor chemical, biological, and similar hazards. The Presidential Review Directive and the public law led to a number of DOD instructions, directives, and memoranda that have guided the collection and reporting of deployment OEHS data. DHSD makes recommendations for DOD-wide policies on OEHS data collection and reporting during deployments to the Office of the Assistant Secretary of Defense for Health Affairs. DHSD is assisted by the Joint Environmental Surveillance Working Group, established in 1997, which serves as a coordinating body to develop and make recommendations for DOD-wide OEHS policy. The working group includes representatives from the Army, Navy, and Air Force OEHS health surveillance centers, the Joint Staff, other DOD entities, and VA. Each service has a health surveillance center—the CHPPM, the Navy Environmental Health Center, and the Air Force Institute for Operational Health—that provides training, technical guidance and assistance, analytical support, and support for preventive medicine units in the theater in order to carry out deployment OEHS activities in accordance with DOD policy. In addition, these centers have developed and adapted military exposure guidelines for deployment using existing national standards for human health exposure limits and technical monitoring procedures (e.g., standards developed by the U.S. Environmental Protection Agency and the National Institute for Occupational Safety and Health) and have worked with other agencies to develop new guidelines when none existed. (See fig. 1.) DOD policies and military service guidelines require that the preventive medicine units of each military service be responsible for collecting and reporting deployment OEHS data. Deployment OEHS data are generally categorized into three types of reports: baseline, routine, or incident- driven. Baseline reports generally include site surveys and assessments of occupational and environmental hazards prior to deployment of servicemembers and initial environmental health site assessments once servicemembers are deployed. Routine reports record the results of regular monitoring of air, water, and soil, and of monitoring for known or possible hazards identified in the baseline assessment. Incident-driven reports document exposure or outbreak investigations. There are no DOD-wide requirements on the specific number or type of OEHS reports that must be created for each deployment location because reports generated for each location reflect the specific occupational and environmental circumstances unique to that location. CHPPM officials said that reports generally reflect deployment OEHS activities that are limited to established sites such as base camps or forward operating bases; an exception is an investigation during an incident outside these locations. Constraints to conducting OEHS outside of bases include risks to servicemembers encountered in combat and limits on the portability of OEHS equipment. In addition, DHSD officials said that preventive medicine units might not be aware of every potential health hazard and therefore might be unable to conduct appropriate OEHS activities. According to DOD policy, various entities must submit their completed OEHS reports to CHPPM during a deployment. The deployed military services have preventive medicine units that submit OEHS reports to their command surgeons, who review all reports and ensure that they are sent to a centralized archive that is maintained by CHPPM. Alternatively, preventive medicine units can be authorized to submit OEHS reports directly to CHPPM for archiving. (See fig. 2.) According to DOD policy, baseline and routine reports should be submitted within 30 days of report completion. Initial incident-driven reports should be submitted within 7 days of an incident or outbreak. Interim and final reports for an incident should be submitted within 7 days of report completion. In addition, the preventive medicine units are required to provide quarterly lists of all completed deployment OEHS reports to the command surgeons. The command surgeons review these lists, merge them, and send CHPPM a quarterly consolidated list of all the deployment OEHS reports it should have received. To assess the completeness of its centralized OEHS archive, CHPPM develops a quarterly summary report that identifies the number of baseline, routine, and incident-driven reports that have been submitted for all bases in a command. This report also summarizes the status of OEHS report submissions by comparing the reports CHPPM receives with the quarterly consolidated lists from the command surgeons that list each of the OEHS reports that have been completed. For OIF, CHPPM is required to provide a quarterly summary report to the commander of U.S. Central Command on the deployed military services’ compliance with deployment OEHS reporting requirements. During deployments, military commanders can use deployment OEHS reports completed and maintained by preventive medicine units to identify occupational and environmental health hazards and to help guide their risk management decision making. Commanders use an operational risk management process to estimate health risks based on both the severity of the risks to servicemembers and the likelihood of encountering the specific hazard. Commanders balance the risk to servicemembers of encountering occupational and environmental health hazards while deployed, even following mitigation efforts, against the need to accomplish specific mission requirements. The operational risk management process, which varies slightly across the services, includes risk assessment, including hazard identification, to describe and measure the potential hazards at a location; risk control and mitigation activities intended to reduce potential exposures; and risk communication efforts to make servicemembers aware of possible exposures, any risks to health that they may pose, the countermeasures to be employed to mitigate exposure or disease outcome, and any necessary medical measures or follow-up required during or after the deployment. Along with health encounter and servicemember location data, archived deployment OEHS reports are needed by researchers to conduct epidemiologic studies on the long-term health issues of deployed servicemembers. These data are needed, for example, by VA, which in 2002 expanded the scope of its health research to include research on the potential long-term health effects on servicemembers in hazardous military deployments. In a letter to the Secretary of Defense in 2003, VA said it was important for DOD to collect adequate health and exposure data from deployed servicemembers to ensure VA’s ability to provide veterans’ health care and disability compensation. VA noted in the letter that much of the controversy over the health problems of veterans who fought in the 1991 Persian Gulf War could have been avoided had more extensive surveillance data been collected. VA asked in the letter that it be allowed access to any unclassified data collected during deployments on the possible exposure of servicemembers to environmental hazards of all kinds. The deployed military services generally have collected and reported OEHS data for OIF, as required by DOD policy. However, the deployed military services have used different OEHS data collection standards and practices, because each service has its own authority to implement broad DOD policies. To increase data collection uniformity, the Joint Environmental Surveillance Working Group has made some progress in devising cross-service standards and practices for some OEHS activities. In addition, the deployed military services have not submitted all of the OEHS reports they have completed for OIF to CHPPM’s centralized archive, as required by DOD policy. However, CHPPM officials said that they could not measure the magnitude of noncompliance because they have not received all of the required quarterly consolidated lists of OEHS reports that have been completed. To improve OEHS reporting compliance, DOD officials said they were revising an existing policy to add additional and more specific OEHS requirements. OEHS data collection standards and practices have varied among the military services because each service has its own authority to implement broad DOD policies, and the services have taken somewhat different approaches. For example, although one water monitoring standard has been adopted by all military services, the services have different standards for both air and soil monitoring. As a result, for similar OEHS events, preventive medicine units may collect and report different types of data. Each military service’s OEHS practices for implementing data collection standards also have differed because of varying levels of training and expertise among the service’s preventive medicine units. For example, CHPPM officials said that Air Force and Navy preventive medicine units had more specialized personnel with a narrower focus on specific OEHS activities than Army preventive medicine units, which included more generalist personnel who conducted a broader range of OEHS activities. Air Force preventive medicine units generally have included a flight surgeon, a public health officer, and bioenvironmental engineers. Navy preventive medicine units generally have included a preventive medicine physician, an industrial hygienist, a microbiologist, and an entomologist. In contrast, Army preventive medicine unit personnel generally have consisted of environmental science officers and technicians. DOD officials also said other issues could contribute to differences in data collected during OIF. DHSD officials said that variation in OEHS data collection practices could occur as a result of resource limitations during a deployment. For example, some preventive medicine units may not be fully staffed at some bases. A Navy official also said that OEHS data collection can vary as different commanders set guidelines for implementing OEHS activities in the deployment theater. To increase the uniformity of OEHS standards and practices for deployments, the military services have made some progress—particularly in the last 2 years—through their collaboration as members of the Joint Environmental Surveillance Working Group. For example, the working group has developed a uniform standard, which has been adopted by all the military services, for conducting environmental health site assessments, which are a type of baseline OEHS report. These assessments have been used in OIF to evaluate potential environmental exposures that could have an impact on the health of deployed servicemembers and determine the types of routine OEHS monitoring that should be conducted. Also, within the working group, three subgroups— laboratory, field water, and equipment—have been formed to foster the exchange of information among the military services in developing uniform joint OEHS standards and practices for deployments. For example, DHSD officials said the equipment subgroup has been working collaboratively to determine the best OEHS instruments to use for a particular type of location in a deployment. The deployed military services have not submitted all the OEHS reports that the preventive medicine units completed during OIF to CHPPM for archiving, according to CHPPM officials. Since January 2004, CHPPM has compiled four summary reports that included data on the number of OEHS reports submitted to CHPPM’s archive for OIF. However, these summary reports have not provided information on the magnitude of noncompliance with report submission requirements because CHPPM has not received all consolidated lists of completed OEHS reports that should be submitted quarterly. These consolidated lists were intended to provide a key inventory of all OEHS reports that had been completed during OIF. Because there are no requirements on the specific number or type of OEHS reports that must be created for each base, the quarterly consolidated lists are CHPPM’s only means of assessing compliance with OEHS report submission requirements. Our analysis of data supporting the four summary reports found that, overall, 239 of the 277 bases had at least one OEHS baseline (139) or routine (211) report submitted to CHPPM’s centralized archive through December 2004. DOD officials suggested several obstacles that may have hindered OEHS reporting compliance during OIF. For example, CHPPM officials said there are other, higher priority operational demands that commanders must address during a deployment. In addition, CHPPM officials said that some of the deployed military services’ preventive medicine units might not understand the types of OEHS reports to be submitted or might view them as an additional paperwork burden. CHPPM and other DOD officials added that some preventive medicine units might have limited access to communication equipment to send reports to CHPPM for archiving. CHPPM officials also said that while they had the sole archiving responsibility, CHPPM did not have the authority to enforce OEHS reporting compliance for OIF—this authority rests with the Joint Staff and the commander in charge of the deployment. DOD has several efforts under way to improve OEHS reporting compliance. CHPPM officials said they have increased communication with deployed preventive medicine units and have facilitated coordination among each service’s preventive medicine units prior to deployment. CHPPM has also conducted additional OEHS training for some preventive medicine units prior to deployment, including both refresher courses and information about potential hazards specific to the locations where the units were being deployed. In addition, DHSD officials said they were revising an existing policy to add additional and more specific OEHS requirements. However, at the time of our review, a draft of the revision had not been released, and therefore specific details about the revision were not available. DOD has made progress in using OEHS reports to address immediate health risks during OIF, but limitations remain in employing these reports to address both immediate and long-term health issues. During OIF, OEHS reports have been used as part of operational risk management activities intended to assess, mitigate, and communicate to servicemembers any potential hazards at a location. There have been no systematic efforts by DOD or the military services to establish a system to monitor the implementation of OEHS risk management activities, although DHSD officials said they considered the relatively low rates of disease and nonbattle injury in OIF an indication of OEHS effectiveness. In addition, DOD’s centralized archive of OEHS reports for OIF is limited in its ability to provide information on the potential long-term health effects related to occupational and environmental exposures for several reasons, including limited access to most OEHS reports because of their security classification, incomplete data on servicemembers’ deployment locations, and the lack of a comprehensive federal research plan incorporating the use of archived OEHS reports. To identify and reduce the risk of immediate health hazards in OIF, all of the military services have used preventive medicine units’ OEHS data and reports in an operational risk management process. A DOD official said that while DOD had begun to implement risk management to address occupational and environmental hazards in other recent deployments, OIF was the first major deployment to apply this process throughout the deployed military services’ day-to-day activities, beginning at the start of the operation. The operational risk management process includes risk assessments of deployment locations, risk mitigation activities to limit potential exposures, and risk communication to servicemembers and commanders about potential hazards. Risk Assessments. Preventive medicine units from each of the services have generally used OEHS information and reports to develop risk assessments that characterized known or potential hazards when new bases were opened in OIF. CHPPM’s formal risk assessments have also been summarized or updated to include the findings of baseline and routine OEHS monitoring conducted while bases are occupied by servicemembers, CHPPM officials said. During deployments, commanders have used risk assessments to balance the identified risk of occupational and environmental health hazards, and other operational risks, with mission requirements. Generally, OEHS risk assessments for OIF have involved analysis of the results of air, water, or soil monitoring. CHPPM officials said that most risk assessments that they have received characterized locations in OIF as having a low risk of posing health hazards to servicemembers. Risk Control and Mitigation. Using risk assessment findings, preventive medicine units have recommended risk control and mitigation activities to commanders that were intended to reduce potential exposures at specific locations. For OIF, risk control and mitigation recommendations at bases have included such actions as modifying work schedules, requiring individuals to wear protective equipment, and increasing sampling to assess any changes and improve confidence in the accuracy of the risk estimate. Risk Communication. Risk assessment findings have also been used in risk communication efforts, such as providing access to information on a Web site or conducting health briefings to make servicemembers aware of occupational and environmental health risks during a deployment and the recommended efforts to control or mitigate those risks, including the need for medical follow-up. Many of the risk assessments for OIF we reviewed recommended that health risks be communicated to servicemembers. While risk management activities have become more widespread in OIF compared with previous deployments, DOD officials have not conducted systematic monitoring of deployed military services’ efforts to conduct OEHS risk management activities. As of March 2005, neither DOD nor the military services had established a system to examine whether required risk assessments had been conducted, or to record and track resulting recommendations for risk mitigation or risk communication activities. In the absence of a systematic monitoring process, CHPPM officials said they conducted ad hoc reviews of implementation of risk management recommendations for sites where continued, widespread OEHS monitoring has occurred, such as at Port Shuaiba, Kuwait, a deepwater port where a large number of servicemembers have been stationed, or other locations with elevated risks. DHSD officials said they have initiated planning for a comprehensive quality assurance program for deployment health that would address OEHS risk management, but the program was still under development. DHSD and military service officials said that developing a monitoring system for risk management activities would face several challenges. In response to recommendations for risk mitigation and risk communication activities, commanders may have issued written orders and guidance that were not always stored in a centralized, permanent database that could be used to track risk management activities. Additionally, DHSD officials told us that risk management decisions have sometimes been recorded in commanders’ personal journals or diaries, rather than issued as orders that could be stored in a centralized, permanent database. In lieu of a monitoring system, DHSD officials said that DOD considers the rates of disease and nonbattle injury in OIF as a general measure or indicator of OEHS effectiveness. As of January 2005, OIF had a 4 percent total disease and nonbattle injury rate—in other words, an average of 4 percent of servicemembers deployed in support of OIF had been seen by medical units for an injury or illness in any given week. This rate is the lowest DOD has ever documented for a major deployment, according to DHSD officials. For example, the total disease and nonbattle injury rate for the 1991 Gulf War was about 6.5 percent, and the total rate for Operation Enduring Freedom in Central Asia has been about 5 percent. However, while this indicator provides general information on servicemembers’ health status, it is not directly linked to specific OEHS activities and therefore is not a clear measure of their effectiveness. Access to archived OEHS reports by VA, medical professionals, and interested researchers has been limited by the security classification of most OEHS reports. Typically, OEHS reports are classified if the specific location where monitoring activities occur is identified. VA officials said they would like to have access to OEHS reports in order to ensure appropriate postwar health care and disability compensation for veterans, and to assist in future research studies. However, VA officials said that, because of these security concerns, they did not expect access to OEHS reports to improve until OIF has ended. Although access to OEHS reports has been restricted, VA officials said they have tried to anticipate likely occupational and environmental health concerns for OIF based on experience from the 1991 Persian Gulf War and on CHPPM’s research on the medical or environmental health conditions that exist or might develop in the region. Using this information, VA has developed study guides for physicians on such topics as health effects from radiation and traumatic brain injury and also has written letters for OIF veterans about these issues. DOD has begun reviewing classification policies for OEHS reports, as required by the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005. A DHSD official said that DOD’s newly created Joint Medical Readiness Oversight Committee is expected to review ways to reduce or limit the classification of data, including data that are potentially useful for monitoring and assessing the health of servicemembers who have been exposed to occupational or environmental hazards during deployments. Linking OEHS reports from the archive to individual servicemembers will be difficult because DOD’s centralized tracking database for recording servicemembers’ deployment locations currently does not contain complete or comparable data. In May 1997, we reported that the ability to track the movement of individual servicemembers within the theater is important for accurately identifying exposures of servicemembers to health hazards. However, the Defense Manpower Data Center’s centralized database has continued to experience problems in obtaining complete, comparable data from the services on the location of servicemembers during deployments, as required by DOD policies. Data center officials said the military services had not reported location data for all servicemembers for OIF. As of October 2004, the Army, Air Force, and Marine Corps each had submitted location data for approximately 80 percent of their deployed servicemembers, and the Navy had submitted location data for about 60 percent of its deployed servicemembers. Additionally, the specificity of location data has varied by service. For example, the Marine Corps has provided location of servicemembers only by country, whereas each of the other military services has provided more detailed location information for some of their servicemembers, such as base camp name or grid coordinate locations. Furthermore, the military services did not begin providing detailed location data until OIF had been ongoing for several months. DHSD officials said they have been revising an existing policy to provide additional requirements for location data that are collected by the military services, such as a daily location record with grid coordinates or latitude and longitude coordinates for all servicemembers. Though the revised policy has not been published, as of May 2005 the Army and the Marine Corps had implemented a new joint location database in support of OIF that addresses these revisions. During OIF, some efforts have been made to include information about specific incidents of potential and actual exposure to occupational or environmental health hazards in the medical records of servicemembers who may have been affected. According to DOD officials, preventive medicine units have been investigating incidents involving potential exposure during the deployment. For a given incident, a narrative summary of events and the results of any medical procedures generally were included in affected servicemembers’ medical records. Additionally, rosters were generally developed of servicemembers directly affected and of servicemembers who did not have any acute symptoms but were in the vicinity of the incident. For example, in investigating an incident involving a chemical agent used in an improvised explosive device, CHPPM officials said that two soldiers who were directly involved were treated at a medical clinic, and their treatment and the exposure were recorded in their medical records. Although 31 servicemembers who were providing security in the area were asymptomatic, doctors were documenting this potential exposure in their medical records. In addition, the military services have taken some steps to include summaries of potential exposures to occupational and environmental health hazards in the medical records of servicemembers deployed to specific locations. The Air Force has created summaries of these hazards at deployed air bases and has required that these be placed in the medical records of all Air Force servicemembers stationed at these bases. (See app. I for an example.) However, Air Force officials said no follow-up activities have been conducted specifically to determine whether all Air Force servicemembers have had the summaries placed in their medical records. Similarly, the Army and Navy jointly created a summary of potential exposure for the medical records of servicemembers stationed at Port Shuaiba, the deepwater port used for bringing in heavy equipment in support of OIF where a large number of servicemembers have been permanently or temporarily stationed. Since December 2004, port officials have made efforts to make the summary available to servicemembers stationed at Port Shuaiba so that these servicemembers can include the summary in their medical records. However, there has been no effort to retroactively include the summary in the medical records of servicemembers stationed at the port prior to that time. According to DOD and VA officials, no federal research plan that includes the use of archived OEHS reports has been developed to evaluate the long- term health of servicemembers deployed in support of OIF, including the effects of potential exposure to occupational or environmental hazards. In February 1998 we noted that the federal government lacked a proactive strategy to conduct research into Gulf War veterans’ health problems and suggested that delays in planning complicated researchers’ tasks by limiting opportunities to collect critical data. However, the Deployment Health Working Group, a federal interagency body responsible for coordinating research on all hazardous deployments, recently began discussions on the first steps needed to develop a research plan for OIF. At its January 2005 meeting, the working group tasked its research subcommittee to develop a complete list of research projects currently under way that may be related to OIF. VA officials noted that because OIF is ongoing, the working group would have to determine how to address a study population that changes as the number of servicemembers deployed in support of OIF changes. Although no coordinated federal research plan has been developed, other separate federal research studies are underway that may follow the health of OIF servicemembers. For example, in 2000 VA and DOD collaborated to develop the Millennium Cohort study, a 21-year longitudinal study evaluating the health of both deployed and nondeployed military personnel throughout their military careers and after leaving military service. According to the principal investigator, the Millennium Cohort study was designed to examine the health effects of specific deployments if enough servicemembers in that deployment enrolled in the study. However, the principal investigator said that as of February 2005 researchers had not identified how many servicemembers deployed in support of OIF had enrolled in the study. In another effort, a VA researcher has received funding to study mortality rates among OIF servicemembers. According to the researcher, if occupational and environmental data are available, the study will include the evaluation of mortality outcomes in relation to potential exposure for OIF servicemembers. As we stated in our report, DOD’s efforts to collect and report OEHS data could be strengthened. Currently, OEHS data that the deployed military services have collected during OIF may not always be comparable because of variations among the services’ data collection standards and practices. Additionally, the deployed military services’ uncertain compliance with OEHS report submission requirements casts doubt on the completeness of CHPPM’s OEHS archive. These data shortcomings, combined with incomplete data in DOD’s centralized tracking database of servicemembers’ deployment locations, limit CHPPM’s ability to respond to requests for OEHS information about possible exposure to occupational and environmental health hazards of those who are serving or have served in OIF. DOD officials have said they are revising an existing policy on OEHS data collection and reporting to add additional and more specific OEHS requirements. However, unless the military services take measures to direct those responsible for OEHS activities to proactively implement the new requirements, the services’ efforts to collect and report OEHS data may not improve. Consequently, we recommended that the Secretary of Defense ensure that cross-service guidance is created to implement DOD’s policy, once that policy has been revised, to improve the collection and reporting of OEHS data during deployments and the linking of OEHS reports to servicemembers. DOD responded that cross-service implementation guidance for the revised policy on deployment OEHS would be developed by the Joint Staff. While DOD’s risk management efforts during OIF represent a positive step in helping to mitigate potential environmental and occupational risks of deployment, the lack of systematic monitoring of the deployed military services’ implementation activities prevents full knowledge of their effectiveness. Therefore, we recommended that the military services jointly establish and implement procedures to evaluate the effectiveness of risk management efforts. DOD partially concurred with our recommendation and stated that it has procedures in place to evaluate OEHS risk management through a jointly established and implemented lessons learned process. However, in further discussions, DOD officials told us that they were not aware of any lessons learned reports related to OEHS risk management for OIF. Furthermore, although OEHS reports alone are not sufficient to identify the causes of potential long-term health effects in deployed servicemembers, they are an integral component of research to evaluate the long-term health of deployed servicemembers. However, efforts by a joint DOD and VA working group to develop a federal research plan for OIF that would include examining the effects of potential exposure to occupational and environmental health hazards have just begun, despite similarities in deployment location to the 1991 Persian Gulf War. As a result, we recommended that DOD and VA work together to develop a federal research plan to follow the health of servicemembers deployed in support of OIF that would include the use of archived OEHS reports. DOD partially concurred with our recommendation, and VA concurred. The difference in VA and DOD’s responses to this recommendation illustrates a disconnect between each agency’s understanding of whether and how such a federal research plan should be established. Therefore, continued collaboration between the agencies to formulate a mutually agreeable process for proactively creating a federal research plan would be beneficial in facilitating both agencies’ ability to anticipate and understand the potential long-term health effects related to OIF deployment versus taking a more reactive stance in waiting to see what types of health problems may surface. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any question you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact Marcia Crosse at (202) 512-7119 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. In addition to the contacts named above, Bonnie Anderson, Assistant Director, Karen Doran, Beth Morrison, John Oh, Danielle Organek, and Roseanne Price also made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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.

Following the 1991 Persian Gulf War, research and investigations into the causes of servicemembers' unexplained illnesses were hampered by a lack of servicemember health and deployment data, including inadequate occupational and environmental exposure data. In 1997, the Department of Defense (DOD) developed a militarywide health surveillance framework that includes occupational and environmental health surveillance (OEHS)--the regular collection and reporting of occupational and environmental health hazard data by the military services. This testimony is based on GAO's report, entitled Defense Health Care: Improvements Needed in Occupational and Environmental Health Surveillance during Deployment to Address Immediate and Long-term Heath Issues (GAO-05-632). The testimony presents findings about how the deployed military services have implemented DOD's policies for collecting and reporting OEHS data for Operation Iraqi Freedom (OIF) and the efforts under way to use OEHS reports to address both immediate and long-term health issues of servicemembers deployed in support of OIF. Although OEHS data generally have been collected and reported for OIF, as required by DOD policy, the deployed military services have used different data collection methods and have not submitted all of the OEHS reports that have been completed. Data collection methods for air and soil surveillance have varied across the services, for example, although they have been using the same monitoring standard for water surveillance. For some OEHS activities, a cross-service working group has been developing standards and practices to increase uniformity of data collection among the services. In addition, while the deployed military services have been conducting OEHS activities, they have not submitted all of the OEHS reports that have been completed during OIF. Moreover, DOD officials could not identify the reports they had not received to determine the extent of noncompliance. DOD has made progress in using OEHS reports to address immediate health risks during OIF, but limitations remain in employing these reports to address both immediate and long-term health issues. OEHS reports have been used consistently during OIF as part of operational risk management activities intended to identify and address immediate health risks and to make servicemembers aware of the risks of potential exposures. While these efforts may help in reducing health risks, DOD has not systematically evaluated their implementation during OIF. DOD's centralized archive of OEHS reports for OIF has several limitations for addressing potential long-term health effects related to occupational and environmental exposures. First, access to the centralized archive has been limited due to the security classification of most OEHS reports. Second, it will be difficult to link most OEHS reports to individual servicemembers' records because not all data on servicemembers' deployment locations have been submitted to DOD's centralized tracking database. To address problems with linking OEHS reports to individual servicemembers, the deployed military services have tried to include OEHS monitoring summaries in the medical records of some servicemembers for either specific incidents of potential exposure or for specific locations within OIF. Additionally, according to DOD and Veterans Affairs (VA) officials, no federal research plan has been developed to evaluate the long-term health of servicemembers deployed in support of OIF, including the effects of potential exposures to occupational or environmental hazards. GAO's report made several recommendations, including that the Secretary of Defense improve deployment OEHS data collection and reporting and evaluate OEHS risk management activities and that the Secretaries of Defense and Veterans Affairs jointly develop a federal research plan to address long-term health effects of OIF deployment. DOD plans to take steps to meet the intent of our first recommendation and partially concurred with the other recommendations. VA concurred with our recommendation for a joint federal research plan.

You are an expert at summarizing long articles. Proceed to summarize the following text: AMC, located at Scott Air Force Base, Illinois, is responsible for providing strategic airlift, including air refueling, special air missions, and aeromedical evacuation. As part of that mission, AMC is responsible for tasking 67 C-5 aircraft: 35 stationed at Travis Air Force Base in California and 32 stationed at Dover Air Force Base in Delaware. Unlike other Air Force aircraft, the C-5 is rarely deployed for more than 30 days, since it is primarily used to move cargo from the United States to locations worldwide. As a result, C-5 aircrews are deployed away from home for several weeks and then return to their home station. Other Air Force aircraft, such as the KC-10, can carry cargo but are primarily used to refuel other aircraft and can be deployed to locations around the world for extended periods of time. Since September 11, 2001, C-5 aircrews have been deployed for periods of time less than 30-days, generally ranging from 7 to 24 days. Known for its ability to carry oversized and heavy loads, the C-5 can transport a wide variety of cargo, including helicopters and Abrams M1A1 Tanks to destinations worldwide. Recently, the C-5’s have been used for a variety of missions, including: support of presidential travel, contracted movement of materials by other government organizations, training missions, and support of operations Enduring and Iraqi Freedom. In addition, the C-5 can also transport about 70 passengers. The aircrew for a C-5 is comprised of two pilots, a flight engineer, and two loadmasters. At Travis Air Force Base there are 439 active duty and 383 reserve aircrew members. At Dover Air Force Base there are 650 active duty and 344 reserve aircrew members. Within the Office of the Secretary of Defense (OSD), the Under Secretary of Defense (Personnel and Readiness) is responsible for DOD personnel policy, including oversight of military compensation. The Under Secretary of Defense (Personnel and Readiness) leads the Unified Legislation and Budgeting process, established in 1994 to develop and review personnel compensation proposals. As part of this process, the Under Secretary of Defense (Personnel and Readiness) chairs biannual meetings, attended by the principal voting members from the Office of the Under Secretary of Defense (Personnel and Readiness), including the Principle Deputy Under Secretary of Defense (Personnel and Readiness), the Assistant Secretary of Defense (Reserve Affairs), the Assistant Secretary of Defense (Health Affairs), the Office of the Under Secretary of Defense (Comptroller), the Joint Staff, and the services’ Assistant Secretaries for Manpower and Reserve Affairs. In 1963, Congress established the $30-per-month family separation allowance to help offset the additional expenses incurred by the dependents of servicemembers who are away from their permanent duty station for more than 30 consecutive days. According to statements made by members of Congress during consideration of the legislation establishing the family separation allowance, additional expenses could stem from costs associated with home repairs, automobile maintenance, and childcare that could not be performed by the deployed servicemember. Over the years, the eligibility requirements for the family separation allowance have changed. For example, while the family separation allowance was initially authorized for enlisted members in pay grades E-5 and above as well as to enlisted members in pay grade E-4 with 4 years of service, today the family separation allowance is authorized for servicemembers in all pay grades at a flat rate of $250 per month. Servicemembers must apply for the family separation allowance, certifying their eligibility to receive the allowance. The rationale for establishing the 30-day threshold is unknown. However, DOD officials noted that servicemembers deployed for more than 30 days do not have the same opportunities to minimize household expenses as those who are deployed for less than 30 days. For example, servicemembers who are able to return to their permanent duty locations may perform home repairs and do not have to pay someone to do these tasks for them. The 1963 family separation allowance legislation was divided into two subsections, one associated with overseas duty and one associated with any travel away from the servicemembers home station. The first subsection was intended to compensate servicemembers who were permanently stationed overseas and were not authorized to bring dependents. The second subsection was intended to compensate servicemembers for added expenses associated with their absence from their dependents and permanent duty station for extended periods of time regardless of whether the members were deployed domestically or overseas. Originally, this aspect of family separation compensation was also to be based on the allowance for living quarters. At that time, members would receive one-third the allowance for living quarters or a flat rate of $30 per month, whichever amount was larger. In July of 1963, the Senate heard testimony from DOD officials who generally agreed with the proposed legislation, but raised concerns about using the allowance for living quarters as a baseline. Their concerns were related to the complexity of determining the payments and the inequities associated with tying payment to rank. Ultimately, DOD proposed and the Congress accepted a flat rate of $30 per month for eligible personnel. DOD has not identified frequent short-term deployments less than 30-days as a family separation allowance issue. No proposals seeking modifications to the family separation allowance because of frequent short-term deployments have been provided to DOD for consideration as part of DOD’s Unified Legislation and Budgeting process, which reviews personnel compensation proposals. Since 1994, a few proposals have been made seeking changes to allowance amounts and eligibility requirements. None of the proposals sought to change the 30-day eligibility threshold. Further, our discussions with OSD, service, and reserve officials did not reveal any concerns related to frequent short-term deployments and the family separation allowance. To analyze concerns that might be raised by those experiencing frequent short-term deployments, we conducted group discussions with Air Force strategic C-5 airlift aircrews at Travis Air Force Base, which we identified as an example of servicemembers who generally deploy for periods less than 30 days. We did not identify any specific concerns regarding compensation received as a result of short-term deployments. We found that the C-5 aircrews were generally more concerned about the high pace of operations and associated unpredictability of their schedules, due to the negative impact on their quality of life, than about qualifying for the family separation allowance. DOD has proposed few changes to the amount of the family separation allowance and no proposals have been submitted to alter the 30-day eligibility threshold. Our review of proposals submitted through DOD’s Unified Legislation and Budgeting process revealed that DOD has considered one proposal to change the amount of the monthly family separation allowance since 1994. In 1997, an increase in the family separation allowance from $75 to $120 was proposed. This provision was not approved by DOD. Since 1994, three modifications to the eligibility criteria have also been proposed. In 1994, a proposal was made to allow payment of the family separation allowance for members embarked on board a ship or on temporary duty for 30 consecutive days, whose family members were authorized to accompany the member but voluntarily chose not to do so. The proposal was endorsed by DOD and accepted by Congress. In 2001, DOD considered but ultimately rejected a similar proposal that would have applied to all members who elect to serve an unaccompanied tour of duty. The third proposal sought to modify the use of family separation allowance for joint military couples (i.e. one military member married to another military member). According to a DOD official, while this proposal was not endorsed by DOD, Congress ultimately passed legislation that clarified the use of family separation allowance for joint military couples. The family separation allowance is now payable to joint military couples, provided the members were residing together immediately before being separated by reason of their military orders. Although both may qualify for the allowance, only one monthly allowance may be paid to a joint military couple during a given month. If both members were to receive orders requiring departure on the same day, then payment would be made to the senior member. Overall, C-5 aircrew members and aircrew leadership with whom we met noted that the unpredictability of missions was having more of an adverse impact on crewmembers’ quality of life than the compensation they receive as a result of their deployments. For example, several aircrew members at Travis Air Force Base indicated that over the past two years, they have been called up on very short advance notice, as little as 12 hours, and sent on missions lasting several weeks, making it difficult to conduct personal business or make plans with their families. According to the aircrew members and both officer and enlisted leadership with whom we met, the unpredictability of their missions is expected to continue for the foreseeable future due to the global war on terrorism. Officials informed us that the average number of days by month that aircrew members have been deployed has increased since September 11, 2001, with periods of higher activity, or surges. For example, as shown in figure 1, the average number of days in September 2001 that AMC C-5 co-pilots were deployed was 9. Since then, the average number of days by month that C-5 co-pilots were deployed has fluctuated between 12 and 19. Prior to September 2001, available data shows a low monthly average of 5 days in January 2001. While the average number of days deployed has fluctuated, aircrew members expressed concern about the intermittent suspension of pre- and post-mission crew rest periods that have coincided with increased operations. Generally, these periods have been intended to ensure that aircrew members have enough rest prior to flying another mission. However, aircrew members noted that crew rest periods also allow them to perform other assigned duties and spend time with their families. During our discussion-group meetings, aircrew members indicated that the rest period after a mission had been reduced from as much as 4 days to as little as 12 hours due to operational needs. In addition to basic compensation, DOD has several special pays and allowances available to further compensate servicemembers deployed for less than 30 days. Servicemembers who are deployed domestically or overseas for less than 30 days may be eligible to receive regular per diem. The per diem amount varies depending upon location. Servicemembers also may be eligible to receive other pays and allowances, such as hazardous duty pay, mission-oriented hardship duty pay, and combat-zone tax exclusions. However, DOD has not implemented one special allowance designed, in part, to compensate those frequently deployed for short periods. Congress supported DOD’s legislative proposal to authorize a monthly high-deployment allowance with passage of the National Defense Authorization Act for Fiscal Year 2004. This provision allows the services to compensate their members for lengthy deployments as well as frequent shorter deployments. However, DOD has not set a timetable for establishing criteria to implement this allowance. In addition to basic military pay, servicemembers who are deployed for less than 30 days may also be eligible to receive regular per diem, other special pays and allowances, and tax exclusions (see table 1). When servicemembers are performing temporary duty away from their permanent duty station, they are entitled to per diem, which provides reimbursement for meals, incidental expenses, and lodging. To be eligible for per diem, servicemembers must perform temporary duty for more than 12 hours at a location to receive any of the per diem rate for that location. The per diem rates are established by: the General Services Administration, the State Department, and DOD’s Per Diem, Travel, and Transportation Allowance Committee. The rates range from $86 to $284 per day within the continental United States and from $20 to $533 per day when outside the continental United States, depending on whether government meals and lodging are provided. Aircrews can earn various per diem rates during the course of their travel. For example, a typical two-week mission for Travis C-5 aircrew members would take them to Dover Air Force Base, then to Moron, Spain, and then to Baghdad, Iraq. At each of these locations, the aircrews can spend a night allowing them to accrue applicable per diem rates for that location. According to the Air Force, per diem rates for a typical C-5 mission are as follows: $157 for Dover Air Force Base; $235 for Moron, Spain; and $154 for Baghdad, Iraq. In some cases, aircrews may receive a standard $3.50 per day for incidental expenses, when they are at locations where the government can provide meals and lodging. This is the standard per diem rate used to compensate servicemembers traveling outside of the continental United States when the government can provide lodging and meals. Hostile Fire and Imminent Danger Pay are pays that provide additional compensation for duty performed in designated areas where the servicemembers are subject to hostile fire or imminent danger. Both pays are derived from the same statue and cannot be collected simultaneously. Servicemembers are entitled to hostile fire pay, an event-based pay, if they are (1) subjected to hostile fire or explosion of hostile mines; (2) on duty in an area close to a hostile fire incident and in danger of being exposed to the same dangers actually experienced by other servicemembers subjected to hostile fire or explosion of hostile mines; or (3) killed, injured, or wounded by hostile fire, explosion of a hostile mine, or any other hostile action. Imminent danger pay is a threat based pay intended to compensate servicemembers in specifically designated locations, which pose a threat of physical harm or imminent danger due to civil insurrection, civil war, terrorism, or wartime conditions. To be eligible for this pay in a month, servicemembers must have served some time, one day or less, in one of the designated zones during the month. The authorized amount for hostile fire and imminent danger pay is $150 per month, although the fiscal year 2003 Emergency Wartime Supplemental Appropriations Act temporarily increased the amount to $225 per month. If Congress takes no further action, the rate will revert to $150 per month in January 2005. Mission-oriented hardship duty pay compensates military personnel for duties designated by the Secretary of Defense as hardship duty due to the arduousness of the mission. Mission-oriented hardship duty pay is payable at a monthly rate up to $300, without prorating or reduction, when the member performs the specified mission during any part of the month. DOD has established that this pay be paid at a flat monthly rate of $150 per month. Active and Reserve component members who qualify, at any time during the month, receive the full monthly mission-oriented hardship duty pay, regardless of the period of time on active duty or the number of days they receive basic pay during the month. This pay is currently only available to servicemembers assigned to, on temporary duty with, or otherwise under the Defense Prisoner of War/Missing Personnel Office, the Joint Task Force-Full Accounting, or Central Identification Lab-Hawaii. Hardship duty includes missions such as locating and recovering the remains of U.S. servicemembers from remote, isolated areas including, but not limited to, areas in Laos, Cambodia, Vietnam, and North Korea. The combat-zone tax exclusion provides exclusion from federal income tax, as well as income tax in many states, to servicemembers serving in a presidentially designated combat zone or in a statutorily established hazardous duty area for any period of time. For example, although the C-5 aircrews at Travis and Dover Air Force Bases do not serve in a designated combat zone for an extended period of time, many of the missions that they fly may be within areas designated for combat-zone tax exclusion eligibility. Enlisted personnel and warrant officers may exclude all military compensation earned in the month in which they perform active military service in a combat-zone or qualified hazardous duty area for active military service from federal income tax. For commissioned officers, compensation is free of federal income tax up to the maximum amount of enlisted basic pay plus any imminent danger pay received. DOD has not established criteria defining what constitutes frequent deployments, nor has it determined eligibility requirements in order to implement the high deployment allowance. DOD sought significant modifications to high deployment compensation through a legislative proposal to the National Defense Authorization Act for Fiscal Year 2004. Congress had established a high deployment per diem as part of the National Defense Authorization Act for Fiscal Year 2000. Pursuant to statutorily granted authority, on October 8, 2001, DOD waived application of the high deployment compensation in light of the ongoing military response to the terrorist attacks on September 11, 2001. After implementing the waiver authority, DOD sought legislative changes to the high deployment compensation in an effort to better manage deployments. DOD’s proposal sought, among other things, to: (1) change high- deployment compensation from a per diem rate to a monthly allowance, (2) reduce the dollar amount paid so that it was more in line with other special pays (e.g. hostile fire pay), and (3) allow DOD to recognize lengthy deployments as well as frequent deployments. The National Defense Authorization Act for Fiscal Year 2004 reflects many of DOD’s proposed changes. The act changed the $100 per diem payment into an allowance not to exceed $1,000 per month. To help compensate those servicemembers who are frequently deployed, the act established a cumulative 2-year eligibility threshold not to exceed 401 days. Also, the act provided the Secretary of Defense with the authority to prescribe a cumulative threshold lower than 401 days. Depending upon where the Secretary of Defense establishes the cumulative threshold, servicemembers, such as the C-5 aircrews, serving multiple short-term deployments may be compensated through the high deployment allowance. Once a servicemembers’ deployments exceed the established cumulative day threshold for the number of days deployed, the member is to be paid a monthly allowance not to exceed $1,000 per month at the beginning of the following month. From that point forward, the servicemember will continue to qualify for the allowance as long as the total number of days deployed during the previous 2-year period exceeds the cumulative threshold established by the Secretary of Defense. The high deployment allowance is in addition to per diem and any other special pays and allowances for which the servicemember might qualify. Moreover, the servicemember does not have to apply for the allowance, as the act mandated that DOD track and monitor days deployed and make payment accordingly. Finally, DOD may exclude specified duty assignments from eligibility for the high deployment allowance (e.g., sports teams or senior officers). According to DOD officials, this provision also provides additional flexibility in targeting the allowance to selected occupational specialties, by allowing DOD to exclude all occupations except those that it wishes to target for additional compensation because of retention concerns. The Senate report accompanying the bill that amended the high deployment provision encouraged DOD to promptly implement these changes. However, DOD officials told us that a timetable for establishing the criteria necessary to implement the high deployment allowance has not been set. Although we could not ascertain exactly why DOD had not taken action to implement the high deployment allowance, OSD officials informed us that the services had difficulty reaching agreement on what constitutes a deployment for purposes of the high deployment payment. The family separation allowance is directed at enlisted servicemembers and officers whose dependents incur extra expenses when the servicemember is deployed for more than 30 consecutive days. We found no reason to question the eligibility requirements that have been established for DOD’s family separation allowance. We believe that no basis exists to change the 30-day threshold, as a problem has not been identified with the family separation allowance. Further, servicemembers who deploy for less than 30 days may be eligible to receive additional forms of compensation resulting from their deployment, such as per diem, other special pays and allowances, and tax exclusions. Since the terrorists’ attacks on September 11, 2001, some servicemembers have experienced more short-term deployments. Given the long-term nature of the global war on terrorism, this increase in the frequency of short-term deployments is expected to continue for the foreseeable future. DOD will need to assure adequate compensation for servicemembers using all available special pays and allowances in addition to basic pay. While the aircrews with whom we met did not express specific concerns about compensation, they, like other servicemembers, are concerned about quality-of-life issues. The high deployment allowance could help to address such issues for servicemembers, while helping to mitigate DOD’s possible long-term retention concerns. Also, unlike the family separation allowance, the high deployment allowance could be used to compensate servicemembers regardless of whether or not they have dependents. Although the Senate report accompanying the bill that amended the high deployment provision encouraged DOD to promptly implement these changes, the Secretary of Defense has not taken action to implement the high deployment allowance. We recommend that the Secretary of Defense direct the Deputy Undersecretary of Defense (Personnel and Readiness), in concert with the Service Secretaries and the Commandant of the Marine Corps, to take the following three actions set a timetable for establishing criteria to implement the high deployment define, as part of the criteria, what constitutes frequent short-term deployments within the context of the cumulative day requirement as stated in the high deployment allowance legislation; and determine, as part of the criteria, eligibility requirements targeting the high deployment allowance to selected occupational specialties. In written comments on a draft of this report, DOD partially concurred with our recommendations that it set a timetable for establishing criteria to implement the high deployment allowance and what the criteria should include. While DOD agreed that servicemembers should be recognized with additional pay for excessive deployments, it stated that DOD has not implemented the high deployment allowance because it views the high deployment allowance as a peacetime authority. Further, DOD stated that since we are in a wartime posture, it is more difficult to control the pace of deployments than during peacetime. DOD’s response noted that it has elected to exercise the waiver given to it by Congress to suspend the entitlement for reasons of national security. DOD also noted that it has encouraged the use of other flexible pay authorities to compensate servicemembers who are away from home for inordinate periods. Finally, DOD stated that it would reassess the use of the high deployment allowance at some point in the future. We do not believe that the nation’s current wartime situation prevents DOD from taking our recommended actions. The first recommended action being to set a timetable for establishing criteria to implement the high deployment allowance. We did recognize in our report that pursuant to statutorily granted authority, on October 8, 2001, DOD waived application of the high deployment allowance in light of the ongoing military response to the terrorist attacks on September 11, 2001. However, since then, DOD sought modifications through a legislative proposal to the National Defense Authorization Act for Fiscal Year 2004 for more flexibilities to manage the high deployment compensation better. These additional flexibilities include providing DOD with the opportunity to tailor the allowance to meet current or expected needs. Since the purpose of special pays and allowances is primarily to help retain more servicemembers, the high deployment allowance could be used as another compensation tool to help retain servicemembers during a time of war. As our report clearly states, given the expectations for a long-term commitment to the war on terrorism, developing the criteria for implementing the high deployment allowance would provide DOD with an additional option for compensating those military personnel who are frequently deployed for short periods of time. Regarding DOD’s use of other flexible pay authorities to compensate servicemembers who are away from home for inordinate periods, the examples DOD cites for lengthy or protracted deployments in Iraq, Afghanistan, and Korea are not applicable to those servicemembers deployed for less than 30 days, the focus of this review. Finally, the vagueness of when and how the high deployment allowance will be implemented runs contrary to the congressional direction, which encouraged DOD to promptly implement the new high deployment allowance authority. Based on DOD’s response, it is not clear when DOD intends to develop criteria to implement the high deployment allowance. We recommended that DOD set a timetable for establishing criteria to implement the high deployment allowance, not that DOD implement the allowance immediately. We believe that this recommendation is warranted, since establishing the criteria will make it possible for DOD to implement the high deployment allowance quickly, whenever it is deemed appropriate and necessary. DOD’s comments are reprinted in their entirety in appendix I. DOD also provided technical comments, which we have incorporated as appropriate. To assess the rationale for family separation allowance eligibility requirements, including the rationale for the 30-day threshold, we reviewed the legislative history concerning the family separation allowance and analyzed DOD policies implementing this pay. We also interviewed officials in the offices of the Under Secretary of Defense (Personnel and Readiness); the Secretaries of the Army, Navy, and Air Force; the Commandant of the Marine Corps; the Air National Guard; and the Air Force Reserve. To determine the extent to which DOD had identified frequent short-term deployments as a family separation allowance issue, we reviewed proposals submitted through DOD’s Unified Legislation and Budgeting process. We met with compensation representatives from the Office of the Under Secretary of Defense (Personnel and Readiness) and each of the services. We interviewed officials with the Defense Manpower Data Center and the Defense Finance and Accounting Service. We sought to use DOD’s database for tracking and monitoring deployments to determine the extent of servicemembers experiencing frequent deployments lasting less than 30 days. We were not able to use the database for the purposes of our report to discern the number of deployments by location lasting less than 30 days, since more than 40 percent of the data for location was not included in the database. In addition, the database did not contain information related to some types of non-deployment activities (e.g. training), which we deemed important to our review. We focused our study on the Air Force since the fiscal year 2003 Secretary of Defense Annual Report to the President and Congress showed that the Air force was the only service whose members were deployed less than 30 days on average in fiscal year 2002. Further, through discussions with Air Force officials we identified strategic aircrews managed by the AMC as examples of those who would most likely be experiencing short-term deployments. We visited AMC, where we met with officials from personnel, operations, finance, and the tactical airlift command center. To understand the views of one group of short-term deployers, we visited Travis Air Force Base in California where we met with officer and enlisted leadership for the C-5 and KC-10 aircraft. We held discussion groups with 12 officers and 12 enlisted aircrew members from both aircraft, for a total of 48 aircrew members. We visited Dover Air Force Base in Delaware where we met with C-5 officer and enlisted leadership. We also met with officials representing personnel, operations, and finance offices at both Travis and Dover Air Force Bases. We assessed the reliability of AMC C-5 copilot deployment data, as well as data contained in the fiscal year 2003 Secretary of Defense Annual Report to the President and Congress. GAO’s assessment consisted of (1) reviewing existing information about the data and the systems that produced them, (2) examining the electronic data for completeness, and (3) interviewing agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for the purposes of this report. To assess what special pays and allowances are available, in addition to basic compensation, to further compensate servicemembers deployed for less than 30 days, we identified special pays and allowances that do not have a time eligibility factor through the DOD’s Military Compensation Background Papers, legislative research, and discussions with OSD officials. We reviewed the legislative history regarding recent legislative changes to special pays and allowances and how DOD has implemented these changes. We are sending copies of this report to the Secretary of Defense; the Under Secretary of Defense (Personnel and Readiness); the Secretaries of the Army, the Air Force, and the Navy; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. We will also make copies available to appropriate congressional committees and to other interested parties on request. In addition, the report will be available at no charge at the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please call me at (202) 512-5559 or Brenda S. Farrell at (202) 512-3604. Major contributors to this report were Aaron M. Adams, Kurt A. Burgeson, Ann M. Dubois, Kenya R. Jones, and Ronald La Due Lake. 1. The purpose of our congressionally directed review was to assess the special pays and allowances available to DOD that could be used to compensate servicemembers who are frequently deployed for less than 30 days. Consequently, our scope did not include an assessment of compensation for servicemembers serving lengthy, or protracted, deployments of 30 days or more. We found that DOD has available and is using several special pays and allowances, in addition to basic compensation, to further compensate servicemembers deployed for less than 30 days. However, we also found that DOD has one special allowance, the high deployment allowance, that is not available to provide further compensation to servicemembers who frequently deploy for less than 30 days and that DOD has not set a timetable to establish criteria to implement the allowance. During our review, we could not ascertain exactly why DOD had not taken action to develop criteria for implementing the high deployment allowance. During several discussions, OSD officials stated that the services had difficulty reaching agreement on what constitutes a deployment for the purposes of the high deployment payment. DOD’s response to our draft report noted that it has elected to exercise the waiver given to it by Congress to suspend the high deployment allowance for reasons of national security. We recognized this waiver in our report. We also noted that after DOD waived application of the high deployment payment on October 8, 2001, DOD sought legislative modifications of the high deployment payment that would give it more flexibilities to better manage this type of compensation. Congress granted DOD these flexibilities and encouraged DOD to promptly implement these changes. As noted in our report, given the expectations for a long-term commitment to the war on terrorism, developing the criteria for implementing the new high deployment allowance would provide DOD with an additional option for compensating those military personnel who are frequently deployed for short periods of time. Also, the high deployment allowance, unlike the family separation allowance, could be used to compensate servicemembers regardless of whether or not they have dependents and thus would reach more servicemembers. Military Personnel: Active Duty Compensation and Its Tax Treatment. GAO-04-721R. Washington, D.C.: May 7, 2004. Military Personnel: Observations Related to Reserve Compensation, Selective Reenlistment Bonuses, and Mail Delivery to Deployed Troops. GAO-04-582T. Washington, D.C.: March 24, 2004. Military Personnel: Bankruptcy Filings among Active Duty Service Members. GAO-04-465R. Washington, D.C.: February 27, 2004. Military Pay: Army National Guard Personnel Mobilized to Active Duty Experienced Significant Pay Problems. GAO-04-89. Washington, D.C.: November 13, 2003. Military Personnel: DOD Needs More Effective Controls to Better Assess the Progress of the Selective Reenlistment Bonus Program. GAO-04-86. Washington, D.C.: November 13, 2003. Military Personnel: DFAS Has Not Met All Information Technology Requirements for Its New Pay System. GAO-04-149R. Washington, D.C.: October 20, 2003. Military Personnel: DOD Needs More Data to Address Financial and Health Care Issues Affecting Reservists. GAO-03-1004. Washington, D.C.: September 10, 2003. Military Personnel: DOD Needs to Assess Certain Factors in Determining Whether Hazardous Duty Pay Is Warranted for Duty in the Polar Regions. GAO-03-554. Washington, D.C.: April 29, 2003. Military Personnel: Preliminary Observations Related to Income, Benefits, and Employer Support for Reservists During Mobilizations. GAO-03-573T. Washington, D.C.: March 19, 2003. Military Personnel: Oversight Process Needed to Help Maintain Momentum of DOD’s Strategic Human Capital Planning. GAO-03-237. Washington, D.C.: December 5, 2002. Military Personnel: Management and Oversight of Selective Reenlistment Bonus Program Needs Improvement. GAO-03-149. Washington, D.C.: November 25, 2002. Military Personnel: Active Duty Benefits Reflect Changing Demographics, but Opportunities Exist to Improve. GAO-02-935. Washington, D.C.: September 18, 2002. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. 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The fiscal year 2004 National Defense Authorization Act directed GAO to assess the special pays and allowances for servicemembers who are frequently deployed for less than 30 days, and to specifically review the family separation allowance. GAO's objectives were to assess (1) the rationale for the family separation allowance eligibility requirements, including the required duration of more than 30 consecutive days away from a member's duty station; (2) the extent to which DOD has identified short-term deployments as a family separation allowance issue; and (3) what special pays and allowances, in addition to basic military compensation, are available to compensate members deployed for less than 30 days. In 1963, Congress established the family separation allowance to help offset the additional expenses that may be incurred by the dependents of servicemembers who are away from their permanent duty station for more than 30 consecutive days. Additional expenses may include the costs associated with home repairs, automobile maintenance, and childcare that could have been performed by the deployed servicemember. Over the years, the eligibility requirements for the family separation allowance have changed. Today, the family separation allowance is authorized for officers and enlisted in all pay grades at a flat rate. The rationale for establishing the 30-day threshold is unknown. DOD has not identified frequent short-term deployments as a family separation allowance issue. No proposals seeking modifications to the family separation allowance because of frequent short-term deployments have been provided to DOD for consideration as part of DOD's Unified Legislation and Budgeting process, which reviews personnel pay proposals. Further, DOD officials were not aware of any specific concerns that have been raised by frequently deployed servicemembers about their eligibility to receive the family separation allowance. Based on group discussions with Air Force strategic airlift aircrews, who were identified as examples of those most likely to be experiencing short-term deployments, we did not identify any specific concerns regarding the lack of family separation allowance compensation associated with short-term deployments. Rather, many aircrew members indicated the high pace of operations and associated unpredictability of their schedules was a greater concern due to the negative impact on their quality of life. In addition to basic military compensation, DOD has several special pays and allowances to further compensate servicemembers deployed for short periods. Servicemembers who are deployed for less than 30 days may be eligible to receive regular per diem. The per diem amount varies depending upon location. For example, these rates range from $86 to $284 per day within the United States and from $20 to $533 per day when outside the United States. However, DOD has not implemented the high deployment allowance designed, in part, to compensate those frequently deployed for shorter periods. Congress supported DOD's legislative proposal to authorize a monthly high deployment allowance. This allowance permits the services to compensate members for lengthy as well as frequent shorter deployments. The most recent amendment to this provision provides DOD with the authority to adjust a cumulative day threshold to help compensate servicemembers experiencing frequent short deployments. DOD has flexibility to exclude all occupations except those that it wishes to target for additional pay. However, DOD has not established criteria to implement this allowance, nor has DOD set a timetable for establishing such criteria.

You are an expert at summarizing long articles. Proceed to summarize the following text: The Cassini Program, sponsored by NASA, the European Space Agency, and the Italian Space Agency, began in fiscal year 1990. NASA’s Jet Propulsion Laboratory (JPL), which is operated under contract by the California Institute of Technology, manages the Cassini Program. The spacecraft is expected to arrive at Saturn in July 2004 and begin a 4-year period of scientific observations to obtain detailed information about the composition and behavior of Saturn and its atmosphere, magnetic field, rings, and moons. Power for the Cassini spacecraft is generated by three radioisotope thermoelectric generators (RTG) that convert heat from the natural radioactive decay of plutonium dioxide into electricity. The spacecraft also uses 117 radioisotope heater units to provide heat for spacecraft components. The spacecraft carries 72 pounds of radioactive plutonium dioxide in the RTGs and 0.7 pounds in the heater units. The Department of Energy (DOE) provided the RTGs and their plutonium dioxide fuel, and the Department of Defense (DOD) provided the Titan IV/Centaur rocket to launch the spacecraft. According to NASA and JPL officials, most deep space missions beyond Mars, including the Cassini mission, must use RTGs to generate electrical power. The only proven non-nuclear source of electrical power for spacecraft are photovoltaic cells, also called solar arrays. However, as distance from the sun increases, the energy available from sunlight decreases exponentially. Thus, existing solar arrays cannot produce sufficient electricity beyond Mars’ orbit to operate most spacecraft and their payloads. Before launching a spacecraft carrying radioactive materials, regulations implementing federal environmental laws require the sponsoring agency, in this instance NASA, to assess and mitigate the potential risks and effects of an accidental release of radioactive materials during the mission. As part of any such assessments, participating agencies perform safety analyses in accordance with administrative procedures. To obtain the necessary presidential approval to launch space missions carrying large amounts of radioactive material, such as Cassini, NASA is also required to convene an interagency review of the nuclear safety risks posed by the mission. RTGs have been used on 25 space missions, including Cassini, according to NASA and JPL officials. Three of these missions failed due to problems unrelated to the RTGs. Appendix I describes those missions and the disposition of the nuclear fuel on board each spacecraft. The processes used by NASA to assess the safety and environmental risks associated with the Cassini mission reflected the extensive analysis and evaluation requirements established in federal laws, regulations, and executive branch policies. For example, DOE designed and tested the RTGs to withstand likely accidents while preventing or minimizing the release of the RTG’s plutonium dioxide fuel, and a DOE administrative order required the agency to estimate the safety risks associated with the RTGs used for the Cassini mission. Also, federal regulations implementing the National Environmental Policy Act of 1969 required NASA to assess the environmental and public health impacts of potential accidents during the Cassini mission that could cause plutonium dioxide to be released from the spacecraft’s RTGs or heater units. In addition, a directive issued by the Executive Office of the President requires an ad hoc interagency Nuclear Safety Review Panel. This panel is supported by technical experts from NASA, other federal agencies, national laboratories, and academia to review the nuclear safety analyses prepared for the Cassini mission. After completion of the interagency review process, NASA requested and was given nuclear launch safety approval by the Office of Science and Technology Policy, within the Office of the President, to launch the Cassini spacecraft. In addition to the risks associated with a launch accident, there is also a small chance that the Cassini spacecraft could release nuclear material either during an accidental reentry into Earth’s atmosphere when the spacecraft passes by Earth in August 1999 or during the interplanetary journey to Saturn. Potential reentry accidents were also addressed during the Cassini safety, environmental impact, and launch review processes. DOE originally developed the RTGs used on the Cassini spacecraft for NASA’s previous Galileo and Ulysses missions. Figure 1 shows the 22-foot, 12,400-pound Cassini spacecraft and some of its major systems, including two of the spacecraft’s three RTGs. DOE designed and constructed the RTGs to prevent or minimize the release of plutonium dioxide fuel from the RTG fuel cells in the event of an accident. DOE performed physical and analytical testing of the RTG fuel cells known as general-purpose heat source units, to determine their performance and assess the risks of accidental fuel releases. Under an interagency agreement with NASA, DOE constructed the RTGs for the Cassini spacecraft and assessed the mission risks as required by a DOE administrative order. DOE’s final safety report on the Cassini mission, published in May 1997, documents the results of the test, evaluation, and risk assessment processes for the RTGs. The RTG fuel cells have protective casings composed of several layers of heat- and impact-resistant shielding and a strong, thin metal shell around the fuel pellets. According to NASA and DOE officials, the shielding will enable the fuel cells to survive likely types of launch or orbital reentry accidents and prevent or minimize the release of plutonium dioxide fuel. In addition to the shielding, the plutonium dioxide fuel itself is formed into ceramic pellets designed to resist reentry heat and breakage caused by an impact. If fuel is released from an impact-damaged fuel cell, the pellets are designed to break into large pieces to avoid inhalation of very small particles, which is the primary health risk posed by plutonium dioxide. Federal regulations implementing the National Environmental Policy Act of 1969 required NASA to prepare an environmental impact statement for the Cassini mission. To meet the requirements NASA conducted quantitative analyses of the types of accidents that could cause a release of plutonium dioxide from the RTGs and the possible health effects that could result from such releases. NASA also used DOE’s RTG safety analyses and Air Force safety analyses of the Titan IV/Centaur rocket, which launched the Cassini spacecraft. NASA published a final environmental impact statement for the Cassini mission in June 1995. In addition to the analyses of potential environmental impacts and health effects, the document included and responded to public comments on NASA’s analyses. NASA also published a final supplemental environmental impact statement for the Cassini mission in June 1997. According to NASA officials, NASA published the supplemental statement to keep the public informed of changes in the potential impacts of the Cassini mission based on analyses conducted subsequent to the publication of the final environmental impact statement. The supplemental statement used DOE’s updated RTG safety analyses to refine the estimates of risks for potential accidents and document a decline in the overall estimate of risk for the Cassini mission. The environmental impact assessment process for the Cassini mission ended formally in August 1997 when NASA issued a Record of Decision for the final supplemental environmental impact statement. However, if the circumstances of the Cassini mission change and affect the estimates of accident risks, NASA is required to reassess the risks and determine the need for any additional environmental impact documentation. Agencies planning to transport nuclear materials into space are required by a presidential directive to obtain approval from the Executive Office of the President before launch. To prepare for and support the approval decision, the directive requires that an ad hoc Interagency Nuclear Safety Review Panel review the lead agencies’ nuclear safety assessments. Because the Cassini spacecraft carries a substantial amount of plutonium, NASA convened a panel to review the mission’s nuclear safety analyses. NASA formed the Cassini Interagency Nuclear Safety Review Panel shortly after the program began in October 1989. The panel consisted of four coordinators from NASA, DOE, DOD, the Environmental Protection Agency, and a technical advisor from the Nuclear Regulatory Commission. The review panel, supported by approximately 50 technical experts from these and other government agencies and outside consultants, analyzed and evaluated NASA, JPL, and DOE nuclear safety analyses of the Cassini mission and performed its own analyses. The panel reported no significant differences between the results of its analyses and those done by NASA, JPL, and DOE. The Cassini launch approval process ended formally in October 1997 when the Office of Science and Technology Policy, within the Executive Office of the President, gave its nuclear launch safety approval for NASA to launch the Cassini spacecraft. NASA officials told us that, in deciding whether to approve the launch of the Cassini spacecraft, the Office of Science and Technology Policy reviewed the previous NASA, JPL, DOE, and review panel analyses and obtained the opinions of other experts. NASA, JPL, and DOE used physical testing and computer simulations of the RTGs under accident conditions to develop quantitative estimates of the accident probabilities and potential health risks posed by the Cassini mission. To put the Cassini risk estimates in context, NASA compares them with the risks posed by exposure to normal background radiation. In making this comparison, NASA estimates that, over a 50-year period, the average person’s risk of developing cancer from exposure to normal background radiation is on the order of 100,000 times greater than from the highest risk accident for the Cassini mission. For the launch portion of the Cassini mission, NASA estimated that the probability of an accident that would release plutonium dioxide was 1 in 1,490 during the early part of the launch and 1 in 476 during the later part of the launch and Earth orbit. The estimated health effect of either type of accident is that, over the succeeding 50-year period, less than one more person would die of cancer caused by radiation exposure than if there were no accident. Although the Titan IV/Centaur rocket is the United States’ most powerful launch vehicle, it does not have enough energy to propel the Cassini spacecraft on a direct route to Saturn. Therefore, the spacecraft will perform two swingby maneuvers at Venus in April 1998 and June 1999, one at Earth in August 1999, and one at Jupiter in December 2000. In performing the maneuvers, the spacecraft will use the planets’ gravity to increase its speed enough to reach Saturn. Figure 2 illustrates the Cassini spacecraft’s planned route to Saturn. NASA estimates that there is less than a one in one million chance that the spacecraft could accidentally reenter Earth’s atmosphere during the Earth swingby maneuver. To verify the estimated probability of an Earth swingby accident, NASA formed a panel of independent experts, which reported that the probability estimates were sound and reasonable. If such an accident were to occur, the estimated health effect is that, during the succeeding 50-year period, 120 more people would die of cancer than if there were no accident. If the spacecraft were to become unable to respond to guidance commands during its interplanetary journey, the spacecraft would drift in an orbit around the sun, from which it could reenter Earth’s atmosphere in the future. However, the probability that this accident would occur and release plutonium dioxide is estimated to be one in five million. The estimated health effect of this accident is the same as for an Earth swingby accident. Due to the spacecraft’s high speed, NASA and DOE projected that an accidental reentry during the Earth swingby maneuver would generate temperatures high enough to damage the RTGs and release some plutonium dioxide. As a safety measure, JPL designed the Earth swingby trajectory so that the spacecraft will miss Earth by a wide margin unless the spacecraft’s course is accidently altered. About 50 days before the swingby, Cassini mission controllers will begin making incremental changes to the spacecraft’s course, guiding it by Earth at a distance of 718.6 miles. According to NASA and JPL officials, the Cassini spacecraft and mission designs incorporate other precautions to minimize the possibility that an accident could cause the spacecraft to reenter during either the Earth swingby maneuver or the interplanetary portion of its journey to Saturn. NASA regulations require that, as part of the environmental analysis, alternative power sources be considered for missions planning to use nuclear power systems. JPL’s engineering study of alternative power sources for the Cassini mission concluded that RTGs were the only practical power source for the mission. The study stated that, because sunlight is so weak at Saturn, solar arrays able to generate sufficient electrical power would have been too large and heavy for the Titan IV/Centaur to launch. The studies also noted that, even if the large arrays could have been launched to Saturn on the Cassini spacecraft, they would have made the spacecraft very difficult to maneuver and increased the mission’s risk of failure due to the array’s uncertain reliability over the length of the 12-year mission. Figure 3 compares the relative sizes of solar arrays required to power the Cassini spacecraft at various distances from the sun, including Saturn. Since 1968, NASA, DOE, and DOD have together invested more than $180 million in solar array technology, according to a JPL estimate. The agencies are continuing to invest in improving both solar and nuclear spacecraft power generation systems. For example, in fiscal year 1998, NASA and DOD will invest $10 million for research and development of advanced solar array systems, and NASA will invest $10 million for research and development of advanced nuclear-fueled systems. NASA officials in charge of developing spacecraft solar array power systems said that the current level of funding is prudent, given the state of solar array technology, and that the current funding meets the needs of current agency research programs. The fiscal year 1998 budget of $10 million for solar array systems exceeds the estimated 30-year average annual funding level of $6 million (not adjusted for inflation). According to NASA and JPL officials, solar arrays offer the most promise for future non-nuclear-powered space missions. Two improvements to solar array systems that are currently being developed could extend the range of some solar array-powered spacecraft and science operations beyond the orbit of Mars. New types of solar cells and arrays under development will more efficiently convert sunlight into electricity. Current cells operate at 18 to 19 percent efficiency, and the most advanced cells under development are intended to achieve 22 to possibly 30 percent efficiency. Although the improvement in conversion efficiency will be relatively small, it could enable some spacecraft to use solar arrays to operate as far out as Jupiter’s orbit. Another improvement to solar arrays under development will add lenses or reflective surfaces to capture and concentrate more sunlight onto the arrays, enabling them to generate more electricity. NASA’s technology demonstration Deep Space-1 spacecraft, scheduled for launch in July 1998, will include this new technology. Over the long term, limitations inherent to solar array technology will preclude its use on many deep space missions. The primary limitation is the diminishing energy in sunlight as distance from the sun increases. No future solar arrays are expected to produce enough electricity to operate a spacecraft farther than Jupiter’s orbit. Another key limitation is that solar arrays cannot be used for missions requiring operations in extended periods of darkness, such as those on or under the surface of a planet or moon. Other limitations of solar arrays, including their vulnerability to damage from radiation and temperature extremes, make the cells unsuitable for missions that encounter such conditions. NASA and DOE are working on new nuclear-fueled generators for use on future space missions. NASA and DOE’s Advanced Radioisotope Power Source Program is intended to replace RTGs with an advanced nuclear-fueled generator that will more efficiently convert heat into electricity and require less plutonium dioxide fuel than existing RTGs. NASA and DOE plan to flight test a key component of the new generator on a space shuttle mission. The test system will use electrical power to provide heat during the test. If development of this new generator is successful, it will be used on future missions. NASA is currently studying eight future space missions between 2000 and 2015 that will likely use nuclear-fueled electrical generators. These missions are Europa Orbiter, Pluto Express, Solar Probe, Interstellar Probe, Europa Lander, Io Volcanic Observer, Titan Organic Explorer, and Neptune Orbiter. On the basis of historical experience, NASA and DOE officials said that about one-half of such missions typically obtain funding and are launched. In addition, several planned Mars missions would carry from 5 to 30 radioisotope heater units to keep spacecraft components warm. Each heater unit would contain about 0.1 ounces of plutonium dioxide. In accordance with NASA’s current operating philosophy, spacecraft for future space science missions will be much smaller than those used on current deep space missions. Future spacecraft with more efficient electrical systems and reduced demands for electrical power, when coupled with the advanced nuclear-fueled generators, will require significantly less plutonium dioxide fuel. For example, the new nuclear-fueled generator that NASA studied for use on the Pluto Express spacecraft is projected to need less than 10 pounds of plutonium dioxide compared with 72 pounds on the Cassini spacecraft. According to NASA and DOE officials, spacecraft carrying much smaller amounts of radioactive fuel will reduce human health risks because it is anticipated that less plutonium dioxide could potentially be released in the event of an accident. NASA and JPL officials also pointed out that planned future missions may not need to use Earth swingby trajectories. Depending on the launch vehicle used, the smaller spacecraft planned for future missions may be able to travel more direct routes to their destinations without the need to use Earth swingby maneuvers to increase their speed. In written comments on a draft of this report, NASA said that the report fairly represents NASA’s environmental and nuclear safety processes for the Cassini space mission (see app. II). In addition, NASA and DOE also provided technical and clarifying comments for this report, which we incorporated as appropriate. To obtain information about the processes used by NASA to assess the safety and environmental risks of the Cassini mission, NASA’s efforts and costs to develop non-nuclear power sources for deep space missions, and future space missions for which nuclear-fueled power sources will be used, we interviewed officials at NASA Headquarters in Washington, D.C.; JPL in Pasadena, California; and DOE’s Office of Nuclear Energy, Science, and Technology in Germantown, Maryland. We reviewed the primary U.S. legislation and regulations applicable to the use of nuclear materials in space and NASA, JPL, and DOE documents pertaining to the safety and environmental assessment processes that were used for the Cassini mission. We reviewed the Cassini Safety Evaluation Report prepared by the Cassini Interagency Nuclear Safety Review Panel. We also reviewed NASA and JPL documents on the development of improved non-nuclear and nuclear electrical power sources for spacecraft and studies for future nuclear-powered space missions. We did not attempt to verify NASA and DOE estimates of risks associated with the Cassini mission or the financial and other data provided by the agencies. We performed our work from September 1997 to February 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Director of the Office of Management and Budget, the Administrator of NASA, the Secretary of Energy, and appropriate congressional committees. We will also make copies available to other interested parties on request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report are Jerry Herley and Jeffery Webster. Since 1961 the United States has launched 25 spacecraft with radioisotope thermoelectric generators (RTG) on board. Three of the missions failed, and the spacecraft reentered Earth’s atmosphere. However, none of the failures were due to problems with the RTGs. In 1964, a TRANSIT 5BN-3 navigational satellite malfunctioned. Its single RTG, which contained 2.2 pounds of plutonium fuel, burned up during reentry into Earth’s atmosphere. This RTG was intended to burn up in the atmosphere in the event of a reentry. In 1968, a NIMBUS-B-1 weather satellite was destroyed after its launch vehicle malfunctioned. The plutonium fuel cells from the spacecraft’s two RTGs were recovered intact from the bottom of the Santa Barbara Channel near the California coast. According to National Aeronautics and Space Administration (NASA) and Department of Energy (DOE) officials, no radioactive fuel was released from the fuel cells, and the fuel was recycled and used on a subsequent space mission. Figure I.1 shows the intact fuel cells during the underwater recovery operation. In 1970, the Apollo 13 Moon mission was aborted due to mechanical failures while traveling to the moon. The spacecraft and its single RTG, upon return to Earth, were jettisoned into the Pacific Ocean, in or near the Tonga Trench. According to DOE officials, no release of radioactive fuel was detected. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the use of nuclear power systems for the Cassini spacecraft and other space missions, focusing on: (1) the processes the National Aeronautics and Space Administration (NASA) used to assess the safety and environmental risks associated with the Cassini mission; (2) NASA's efforts to consider the use of a non-nuclear power source for the Cassini mission; (3) the federal investment associated with the development of non-nuclear power sources for deep space missions; and (4) NASA's planned future nuclear-powered space missions. GAO noted that: (1) federal laws and regulations require analysis and evaluation of the safety risks and potential environmental impacts associated with launching nuclear materials into space; (2) as the primary sponsor of the Cassini mission, NASA conducted the required analyses with assistance from the Department of Energy (DOE) and the Department of Defense (DOD); (3) in addition, a presidential directive required that an ad hoc interagency panel review the Cassini mission safety analyses; (4) the directive also required that NASA obtain presidential approval to launch the spacecraft; (5) NASA convened the required interagency review panel and obtained launch approval from the Office of Science and Technology Policy, within the Office of the President; (6) while the evaluation and review processes can minimize the risks of launching radioactive materials into space, the risks themselves cannot be eliminated, according to NASA and Jet Propulsion Laboratory (JPL) officials; (7) as required by NASA regulations, JPL considered using solar arrays as an alternative power source for the Cassini mission; (8) engineering studies conducted by JPL concluded that the solar arrays were not feasible for the Cassini mission primarily because they would have been too large and heavy and had uncertain reliability; (9) during the past 30 years, NASA, DOE, and DOD have invested over $180 million in solar array technology, the primary non-nuclear power source; (10) in FY 1998, NASA and DOD will invest $10 million to improve solar array systems, and NASA will invest $10 million to improve nuclear-fueled systems; (11) according to NASA and JPL officials, advances in solar array technology may expand its use for some missions; however, there are no currently practical alternatives to using nuclear-fueled power generation systems for most missions beyond the orbit of Mars; (12) NASA is planning eight future deep space missions between 2000 and 2015 that will likely require nuclear-fueled power systems to generate electricity for the spacecraft; (13) none of these missions have been approved or funded, but typically about one-half of such planned missions are eventually funded and launched; (14) advances in nuclear-fueled systems and the use of smaller, more efficient spacecraft are expected to substantially reduce the amount of nuclear fuel carried on future deep space missions; and (15) thus, NASA and JPL officials believe these future missions may pose less of a health risk than current and prior missions that have launched radio isotope thermoelectric generators into space.

You are an expert at summarizing long articles. Proceed to summarize the following text: 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.

You are an expert at summarizing long articles. Proceed to summarize the following text: FHA was established in 1934 under the National Housing Act (P.L. 73-479) to broaden homeownership, shore up and protect lending institutions, and stimulate employment in the building industry. FHA insures private lenders against losses on mortgages that finance purchases of properties with one to four housing units. Many FHA-insured loans are made to low-income, minority, and first-time homebuyers. Generally, lenders require borrowers to purchase mortgage insurance when the value of the mortgage is large relative to the price of the house. FHA provides most of its single-family insurance through a program supported by the Mutual Mortgage Insurance Fund. The economic value of the Fund, which consists of the sum of existing capital resources plus the net present value of future cash flows, depends on the relative size of cash outflows and inflows over time. Cash flows out of the Fund from payments associated with claims on foreclosed properties, refunds of up-front premiums on mortgages that are prepaid, and administrative expenses for management of the program. To cover these outflows, FHA deposits cash inflows—up-front and annual insurance premiums from participating homebuyers and the net proceeds from the sale of foreclosed properties— into the Fund. If the Fund were to be exhausted, the U.S. Treasury would have to cover lenders’ claims and administrative costs directly. The Fund remained relatively healthy from its inception until the 1980s, when losses were substantial, primarily because of high foreclosure rates in regions experiencing economic stress, particularly the oil-producing states in the West South Central section of the United States. These losses prompted the reforms that were first enacted in November 1990 as part of the Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508). The reforms, designed to place the Fund on an actuarially sound basis, required the Secretary of HUD to, among other things, take steps to ensure that the Fund attained a capital ratio of 2 percent of the insurance-in-force by November 2000 and to maintain or exceed that ratio at all times thereafter. As a result of the 1990 housing reforms, the Fund must meet not only the minimum capital ratio requirement but also operational goals before the Secretary of HUD can take certain actions that might reduce the value of the Fund. These operational goals include meeting the mortgage credit needs of certain homebuyers while maintaining an adequate capital ratio, minimizing risk, and avoiding adverse selection. However, the legislation does not define what constitutes adequate capital or specify the economic conditions that the Fund should withstand. The 1990 reforms also required that an independent contractor conduct an annual actuarial review of the Fund. These reviews have shown that during the 1990s the estimated value of the Fund grew substantially. At the end of fiscal year 1995, the Fund attained an estimated economic value that slightly exceeded the amount required for a 2 percent capital ratio. Since that time, the estimated economic value of the Fund continued to grow and always exceeded the amount required for a 2 percent capital ratio. In the most recent actuarial review, Deloitte & Touche estimated the Fund’s economic value at about $18.5 billion at the end of fiscal year 2001. This represents about 3.75 percent of the Fund’s insurance-in-force. In February 2001 we reported that the Fund had an economic value of $15.8 billion at the end of fiscal year 1999. This estimate implied a capital ratio of 3.20 percent of the unamortized insurance-in-force. The relatively large economic value and high capital ratio reported for the Fund reflected the strong economic conditions that prevailed during most of the 1990s, the good economic performance that was expected for the future, and the increased insurance premiums put in place in 1990. In our February 2001 report we also reported that, given the economic value of the Fund and the state of the economy at the end of fiscal year 1999, a 2 percent capital ratio appeared sufficient to withstand moderately severe economic scenarios that could lead to worse-than-expected loan performance. These scenarios were based upon recent regional experiences and the national recession that occurred in 1981 and 1982. Specifically, we found that such conditions would not cause the economic value of the Fund at the end of fiscal year 1999 to decline by more than 2 percent of the Fund’s insurance-in-force. Although a 2 percent capital ratio also appeared sufficient to allow the Fund to withstand some more severe scenarios, we found that three of the most severe scenarios we tested would cause the economic value of the Fund to decline by more than 2 percent of the Fund’s insurance-in-force. These results suggest that the existing capital ratio was more than sufficient to protect the Fund from many worse-than-expected loan performance scenarios. However, we cautioned that factors not fully captured in our economic models could affect the Fund’s ability to withstand worse-than-expected experiences over time. These factors include recent changes in FHA’s insurance program and the conventional mortgage market that could affect the likelihood of poor loan performance and the ability of the Fund to withstand that performance. In deciding whether to approve a loan, lenders rely upon underwriting standards set by FHA or the private sector. FHA’s underwriting guidelines require lenders to establish that prospective borrowers have the ability and willingness to repay a mortgage. In order to establish a borrower’s willingness and ability to pay, these guidelines require lenders to evaluate four major elements: qualifying ratios and compensating factors; stability and adequacy of income; credit history; and funds to close. In recent years, private mortgage insurers and conventional lenders have begun to offer alternatives to borrowers who want to make small or no down payments. Private lenders have also begun to use automated underwriting as a means to better target low-risk borrowers for conventional mortgages. Automated underwriting relies on the statistical analysis of hundreds of thousands of mortgage loans that have been originated over the past decade to determine the key attributes of the borrower’s credit history, the property characteristics, and the terms of the mortgage note that affect loan performance. The results of this analysis are arrayed numerically in what is known as a “mortgage score.” A mortgage score is used as an indicator of the foreclosure or loss risk to the lender. During their early years, FHA loans insured from fiscal year 1995 through fiscal year 1998 have shown somewhat higher cumulative foreclosure rates than FHA loans insured from fiscal year 1990 through fiscal year 1994, but these rates are well below comparable rates for FHA loans insured in the 1980s. To better understand how foreclosure rates might vary, we compared the rates for different types of loans—fixed-rate and adjustable rate mortgages (ARMs)—locations of properties, and loan-to-value (LTV) ratios. For loans made in recent years, FHA has been experiencing particularly high foreclosure rates for ARMs and mortgages on properties located in California. One measure of the initial risk of a loan, its LTV, can partly explain the difference over time in foreclosure rates. That is, FHA insured relatively more loans with high LTVs later in the decade than it insured earlier in the decade. However, the same pattern of higher foreclosure rates in the later 1990s exists even after differences in LTV are taken into account. We compared the four-year cumulative foreclosure rates across books of business to measure the performance of FHA’s insured loans. As shown in figure 1, the 4-year cumulative foreclosure rate for FHA-insured loans was generally higher for loans originated later in the 1990s than for loans originated earlier in that decade. Through their fourth year, loans originated during fiscal years 1990 through 1994 had an average cumulative foreclosure rate of 2.23 percent, while loans originated during fiscal years 1995 through 1998 had an average cumulative foreclosure rate of 2.93 percent. Although the 4-year cumulative foreclosure rates for loans that FHA insured in the later part of the 1990s were higher than that for loans that FHA insured earlier in that decade, those rates were still well below the high levels experienced for loans that FHA insured in the early- to mid- 1980s, as shown in figure 2. The 4-year cumulative foreclosure rates for FHA loans originated between 1981 and 1985, a period of high interest and unemployment rates and low house price appreciation rates, ranged between 5 and 10 percent, while the rates for loans originated during the 1990s, when economic conditions were better, have consistently been below 3.5 percent. Since fiscal year 1993, FHA has experienced higher 4-year cumulative foreclosure rates for ARMs than it has for long-term (generally 30-year) fixed-rate mortgages, as shown in figure 3. In addition, between 1990 and 1994 the 4-year cumulative foreclosure rate for ARMs averaged 2.53 percent, as compared with a 3.90 percent average 4-year cumulative foreclosure rate for ARMs originated between 1995 and 1998. These higher foreclosures have occurred even though mortgage interest rates have been generally stable or declining during this period. In the early 1990s, when ARMs were performing better than fixed-rate mortgages, the performance of ARMs had relatively little impact on the overall performance of loans FHA insured because FHA insured relatively few ARMs. However, as shown in figure 4, later in the decade ARMs represented a greater share of the loans that FHA insured, so their performance became a more important factor affecting the overall performance of FHA loans. FHA is studying its ARM program and has contracted with a private consulting firm to examine the program’s design and performance. FHA insured a greater dollar value of loans in the 1990s in California than in any other state. Among the states in which FHA does the largest share of its business, 4-year cumulative foreclosure rates for both long-term, fixed- rate mortgages and ARMs were typically highest in California. California, which accounted for 15 percent of the dollar value of all single-family loans that FHA insured during the 1990s, had an average foreclosure rate of 6.41 percent for both fixed rate and ARMs. In comparison, the 4-year cumulative foreclosure rate for FHA loans insured during the 1990s outside of California averaged 1.97 percent. According to FHA, the poor performance of FHA loans originated in California was attributable to poor economic conditions that existed during the early- to mid-1990s, coupled with the practice of combining FHA’s interest-rate buy-down program with an ARM to qualify borrowers in California’s high-priced housing market. The five states with the greatest dollar value of long-term fixed-rate mortgages insured by FHA during the 1990s were California, Texas, Florida, New York, and Illinois. Loans insured in these states made up about one- third of FHA’s business for this loan type from fiscal year 1990 through fiscal year 1998, with California alone accounting for about 13 percent, as shown in figure 5. As a result, the performance of loans insured in California can significantly affect the overall performance of FHA’s portfolio of loans of this type. For long-term fixed-rate mortgages that FHA insured in California from fiscal year 1990 through fiscal year 1998, the 4-year cumulative foreclosure rates averaged about 5.6 percent. As shown in figure 6, Florida, Texas, and New York also had relatively high 4-year foreclosure rates during the early 1990s. And Florida experienced relatively high 4-year cumulative foreclosure rates again from 1995 through 1998. For states that were not among the five states with the greatest share of fixed-rate mortgages, the 4- year cumulative foreclosure rates for the same type of loan over the same period averaged less than 2 percent. The four states with the highest dollar value of ARMs insured by FHA during the 1990s were California, Illinois, Maryland, and Colorado. Loans insured in these states made up about 42 percent of FHA’s business for this loan type, with California alone accounting for about 21 percent, as shown in figure 7. As a result, the performance of ARMs insured in California can significantly affect the overall performance of FHA’s portfolio of loans of this type. As shown in figure 8, the 4-year cumulative foreclosure rates for ARMs that FHA insured in California were consistently higher than the rates for any of the other three states with the largest dollar volume of ARMs insured by FHA, as well as the average rate for the remaining 46 states and the District of Columbia combined. In fact, for ARMs that FHA insured in California in fiscal years 1995 and 1996, the 4-year cumulative foreclosure rate was about 10 percent, more than twice as high as the rate for any of the other three states with the highest dollar volume of loans or for the remaining 46 states and the District of Columbia combined. Although differences in the share of FHA-insured loans with high LTVs (above 95 percent) may be a factor accounting for part of the difference in cumulative foreclosure rates between more recent loans and loans insured earlier in the 1990s, the same pattern exists even when differences in LTV are taken into account. As shown in figure 9, the share of FHA-insured loans with LTVs of 95 percent or more was higher later in the 1990s. Generally, as shown in figure 10, higher LTV ratios, which measure borrowers’ initial equity in their homes, are associated with higher foreclosure rates. However, figure 10 also shows that the same general pattern over time for the 4-year cumulative foreclosure rates that was shown in figure 1 continues to exist even when the loans are divided into categories by LTV. Thus, differences in LTV alone cannot account for the observed differences in foreclosure rates. Finally, we also considered whether the differences in foreclosures rates could be explained by differences in prepayment rates. Higher prepayment rates might be associated with lower foreclosure rates: if a higher percentage of loans in a book of business are prepaid, then only a smaller share of the original book of business might be subject to foreclosure. However, we found that during the 1990s, prepayment rates showed the same pattern across the years as foreclosure rates and, if anything, were generally higher when foreclosure rates were higher, suggesting that less frequent prepayment was not a factor explaining higher foreclosure rates in the late 1990s. Although economic factors such as house-price-appreciation rates are key determinants of mortgage foreclosure, a number of program- and market- related changes occurring since 1995 could also affect the performance of recently insured FHA loans. Specifically, in 1995 FHA made a number of changes in its single-family insurance program that allow borrowers who otherwise might not have qualified for home loans to obtain FHA-insured loans. These changes also allow qualified borrowers to increase the amount of loan for which they can qualify. According to HUD, these underwriting changes were designed to expand homeownership opportunities by eliminating unnecessary barriers to potential homebuyers. The proportion of FHA purchase-mortgages made to first-time homebuyers increased from 65 percent in 1994 to 78 percent at the end of March 2002 and the proportion of FHA purchase-mortgages made to minority homebuyers increased from 25 percent to 42 percent. At the same time, there has been increased competition from private mortgage insurers offering mortgages with low down payments to borrowers identified as relatively low risk. The combination of changes in FHA’s program and the increased competition in the marketplace may partly explain the higher foreclosure rates of FHA loans originated since fiscal year 1995. FHA has since made changes that may reduce the likelihood of mortgage default, including requiring that, when qualifying an FHA borrower for an ARM, the lender use the ARM’s second year mortgage rate rather than the first-year rate. In addition, FHA has implemented a new loss-mitigation program. Because certain data that FHA collects on individual loans have not been collected for a sufficient number of years or in sufficient detail, we were unable to estimate the effect of changes in FHA’s program and competition from conventional lenders on FHA loan performance. FHA issued revised underwriting guidelines in fiscal year 1995 that, according to HUD, represented significant underwriting changes that would enhance the homebuying opportunities for a substantial number of American families. These underwriting changes made it easier for borrowers to qualify for loans and allowed borrowers to qualify for higher loan amounts. However, the changes may also have increased the likelihood of foreclosure. The loans approved with more liberal underwriting standards might, over time, perform worse relative to existing economic conditions than those approved with the previous standards. The revised standards decreased what is included as borrowers’ debts and expanded the definition of what can be included as borrowers’ effective income when lenders calculate qualifying ratios. In addition, the new underwriting standards expanded the list of compensating factors that could be considered in qualifying a borrower, and they relaxed the standards for evaluating a borrower’s credit history. The underwriting changes that FHA implemented in 1995 can decrease the amount of debt that lenders consider in calculating one of the qualifying ratios, the debt-to-income ratio, which is a measure of the borrower’s ability to pay debt obligations. This change results in some borrowers having a lower debt-to-income ratio than they would otherwise have, and it increases the mortgage amount for which these borrowers can qualify. For example, childcare expenses were considered a recurring monthly debt in the debt-to-income ratio prior to 1995, but FHA no longer requires that these expenses be considered when calculating the debt-to-income ratio. Another change affecting the debt-to-income ratio is that only debts extending 10 months or more are now included in the ratio; previously, FHA required all debts extending 6 months or more to be included. As a result of this change, borrowers can have short-term debts that might affect their ability to meet their mortgage payments, but these debts would not be included in the debt-to-income ratio. However, FHA does encourage lenders to consider all of a borrower’s obligations and the borrower’s ability to make mortgage payments immediately following closing. The 1995 changes not only decreased the amount of debt considered in the debt-to-income ratio; they also increased the amount of income consideredincreasing the number of borrowers considered able to meet a particular level of mortgage payments. When calculating a borrower’s effective income, lenders consider the anticipated amount of income and the likelihood of its continuance. Certain types of income that were previously considered too unstable to be counted toward effective income are now acceptable in qualifying a borrower. For example, FHA previously required income to be expected to continue for 5 years in order for it to be considered as effective income. Now income expected to continue for 3 years can be used in qualifying a borrower. Similarly, FHA now counts income from overtime and bonuses toward effective income, as long as this income is expected to continue. Before 1995, FHA required that such income be earned for 2 years before counting it toward effective income. If borrowers do not meet the qualifying ratio guidelines for a loan of a given size, lenders may still approve them for an FHA-insured mortgage of that size. FHA’s 1995 revised handbook on underwriting standards adds several possible compensating factors or circumstances that lenders may consider when determining whether a borrower is capable of handling the mortgage debt. For example, lenders may consider food stamps or other public benefits that a borrower receives as a compensating factor increasing the borrower’s ability to pay the mortgage. These types of benefits are not included as effective income, but FHA believes that receiving food stamps or other public benefits positively affects the borrower’s ability to pay the mortgage. Lenders may also consider as a compensating factor a borrower’s demonstrated history of being able to pay housing expenses equal to or greater than the proposed housing expense. In FHA’s revised handbook, the section on compensating factors now states, “If the borrower over the past 12 to 24 months has met his or her housing obligation as well as other debts, there should be little reason to doubt the borrower’s ability to continue to do so despite having ratios in excess of those prescribed.” In addition to changes affecting borrowers’ qualifying ratios, the 1995 underwriting changes affected how FHA lenders are supposed to evaluate credit history to determine a borrower’s willingness and ability to handle a mortgage. As with qualifying ratios and compensating factors, FHA relies on the lender’s judgment and interpretation to determine prospective borrowers’ creditworthiness. The 1995 underwriting changes affected FHA guidelines regarding unpaid federal liens as well as credit and credit reports. Specifically, before 1995, borrowers were ineligible for an FHA- insured mortgage if they were delinquent on any federal debt or had any federal liens, including taxes, placed on their property. Following the 1995 changes, borrowers may qualify for a loan even if federal tax liens remain unpaid. FHA guidelines stipulate that a borrower may be eligible as long as the lien holder subordinates the tax lien to the FHA-insured mortgage. If the borrower is in a payment plan to repay liens, lenders may also approve the mortgage if the borrower meets the qualifying ratios calculated with these payments. Finally, FHA expanded the options available to lenders to evaluate a borrower’s credit history. The previous guidance on developing credit histories mentions only rent and utilities as nontraditional sources of credit history. Lenders can now elect to use a nontraditional mortgage credit report developed by a credit reporting agency if no other credit history exists. Lenders may also develop a credit history by considering a borrower’s payment history for rental housing and utilities, insurance, childcare, school tuition, payments on credit accounts with local stores, or uninsured medical bills. In general, FHA advises lenders that an individual with no late housing or installment debt payments should be considered as having an acceptable credit history. Increased competition and recent changes in the conventional mortgage market could also have resulted in FHA’s insuring relatively more loans that carry greater risk. Homebuyers’ demand for FHA-insured loans depends, in part, on the alternatives available to them. In recent years, FHA’s competitors in the mortgage insurance market—private mortgage insurers and conventional mortgage lenders—have increasingly offered products that compete with FHA’s for those homebuyers who are borrowing more than 95 percent of the value of their home. In addition, automated underwriting systems and credit-scoring analytic software such as those introduced by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) in 1996 are believed to be able to more effectively distinguish low-risk loans for expedited processing. The improvement of conventional lenders’ ability to identify low-risk borrowers might increase the risk profile of FHA’s portfolio as lower-risk borrowers choose conventional financing with private mortgage insurance, which is often less expensive. In addition, by lowering the required down payment, conventional mortgage lenders and private mortgage insurers may have attracted some borrowers who might otherwise have insured their mortgages with FHA. If, by selectively offering these low down payment loans to better risk borrowers, conventional mortgage lenders and private mortgage insurers were able to attract FHA’s lower-risk borrowers, recent FHA loans with down payments of less than 5 percent may be more risky on average than they have been historically. FHA is taking some action to more effectively compete with the conventional market. For example, FHA is attempting to implement an automated underwriting system that could enhance the ability of lenders underwriting FHA-insured mortgages to distinguish better credit risks from poorer ones. Although this effort is likely to increase the speed with which lenders process FHA-insured loans, it may not improve the risk profile of FHA borrowers unless lenders can lower the price of insurance for better credit risks. Since 1996, FHA has revised and tightened some guidelines, specifically in underwriting ARMs, identifying sources of cash reserves and requiring more documentation from lenders. These steps should reduce the riskiness of loans that FHA insures. In a 1997 letter to lenders, FHA expressed concern about the quality of the underwriting of ARMs, particularly when a buy down is used, and reminded lenders that the first-year mortgage- interest rate must be used when qualifying the borrower (rather than the lower rate after the buy down). FHA also stipulated that lenders should consider a borrower’s ability to absorb increased payments after buy down periods. FHA also emphasized that lenders should rarely exceed FHA’s qualifying ratio guidelines in the case of ARMs. In 1998, seeing that borrowers were still experiencing trouble handling increased payments after the buy down period, FHA required borrowers to be qualified at the anticipated second-year interest rate, or the interest rate they would experience after the buy down expired, and it prohibited any form of temporary interest-rate buy down on ARMs. These changes will likely reduce the riskiness of ARMs in future books of business. FHA has also required stricter documentation from lenders on the use of compensating factors and gift letters in mortgage approvals. In a June 10, 1997, letter to lenders, FHA expressed concern about an increased number of loans with qualifying ratios above FHA’s guidelines for which the lender gave no indication of the compensating factors used to justify approval of the loans. FHA emphasized in this letter that lenders are required to clearly indicate which compensating factor justified the approval of a mortgage and to provide their rationale for approving mortgages above the qualifying ratios. Similarly, in an effort to ensure that any gift funds a borrower has come from a legitimate source, FHA has advised lenders of the specific information that gift letters should contain and the precise process for verifying the donor or source of the gift funds. In 2000, FHA also tightened its guidelines on what types of assets can be considered as cash reserves. Although cash reserves are not required, lenders use cash reserves to assess the riskiness of loans. FHA noticed that in some cases lenders considered questionable assets as cash reserves. For example, lenders were overvaluing assets or including assets such as 401(k)s or IRAs that were not easily converted into cash. As a result, FHA strengthened its policy and required lenders to judge the liquidity of a borrower’s assets when considering a borrower’s cash reserves. The new policy requires lenders, when considering an asset’s value, to account for any applicable taxes or withdrawal penalties that borrowers may incur in converting the asset to cash. In 1996 Congress passed legislation directing FHA to terminate its Single- Family Mortgage Assignment Program. FHA ceased accepting assignment applications for this program on April 26, 1996. The same legislation authorized FHA to implement a new program that included a range of loss mitigation tools designed to help borrowers either retain their home’s or to dispose of their property in ways that lessen the cost of foreclosure for both the borrowers and FHA. Specifically, the loss mitigation program provides a number of options for reducing losses, including special forbearance, loan modification, partial claim, pre-foreclosure sale, and deed-in-lieu-of-foreclosure (see table 1 for an explanation of these options). To encourage lenders to engage in loss mitigation, FHA offers incentive payments to lenders for completing each loss mitigation workout. In addition, lenders face a variety of financial penalties for failing to engage in loss mitigation. FHA’s loss mitigation program went into effect on November 12, 1996; however, use was initially fairly low, with only 6,764 loss mitigation cases realized in fiscal year 1997, as lenders began to implement the new approach. HUD experienced substantial growth in loss mitigation claims over the next 4 fiscal years, with total claims reaching 25,027 in fiscal year 1999 and 53,389 in fiscal year 2001. The three loss mitigation tools designed to allow borrowers to remain in their homesspecial forbearance, loan modification, and partial claimrealized the largest increase in use. In contrast, the use of deed-in-lieu-of- foreclosure and pre-foreclosure sale, options resulting in insurance claims against the Fund, declined. Existing FHA data are not adequate to assess the impact of both FHA program changes and the changes in the conventional mortgage market on FHA default rates. Adequately assessing the impact of those changes would require detailed data on information used during loan underwriting to qualify individual borrowers. Such data on qualifying ratios, use of compensating factors, credit scores, and sources and amount of income would allow FHA to assess how factors key to determining the quality of its underwriting have changed over time. In addition, these data could be used in a more comprehensive analysis of the relationship among FHA foreclosures and FHA program design, the housing market, and economic conditions. Some of the data required for that type of assessment and analysis are not collected by FHA, while other data elements have not been collected for a sufficient number of years to permit modeling the impact of underwriting changes on loan performance. Since 1993, FHA has collected data on items such as payment-to-income and debt-to-income ratios, monthly effective income, and total monthly debt payments. However, FHA has not collected more detailed information on individual components of income and debt, such as overtime, bonus income, alimony and childcare payments, or length of terms for installment debt. Nor does FHA collect information on the use by lenders of compensating factors in qualifying borrowers for FHA insurance. These data would be required, for example, to analyze the impact on loan performance of underwriting changes that FHA implemented in 1995. One of the most important measures of a borrower’s credit risk is the borrower’s credit score. Lenders began using credit scores to assess a borrower’s likelihood of default in the mid-1990s. In March 1998, FHA approved Freddie Mac’s automated underwriting system for use by lenders in making FHA-insured loans and began collecting data on borrower credit scores for those loans underwritten using the system. Similarly, in August 1999 FHA approved the use of Fannie Mae’s and PMI Mortgage Servicers’ automated underwriting systems, and it currently collects credit scores on loans underwritten using these systems. According to HUD officials, FHA plans to begin collecting credit score data on all FHA-insured loans underwritten through either automated underwriting systems or conventional methods. Finally, because of the newness of FHA’s loss mitigation program and the several years required for a loan delinquency to be completely resolved, it is difficult to measure the impact that loss mitigation activities will ultimately have on the performance of FHA loans. As recently as 2000, substantial revisions to the program were made that could improve the program’s effectiveness according to Abt Associates Inc. A recent audit of the program by HUD’s Office of Inspector General noted the large increase in usage of loss mitigation strategies and concluded that the program is reducing foreclosures and keeping families in their homes. The overall riskiness of FHA loans made in recent years appears to be greater than we had estimated in our February 2001 report on the Mutual Mortgage Insurance Fund, reducing to some extent the ability of the Fund to withstand worse-than-expected loan performance. Although more years of loan performance are necessary to make a definitive judgment, factors not accounted for in the models that we used for that report appear to be affecting the performance of loans insured after 1995 and causing the overall riskiness of FHA’s portfolio to be greater than we previously estimated. In that report we based our estimate of the economic value of the Fund (as of the end of fiscal year 1999), in part, on econometric models that we developed and used to forecast future foreclosures and prepayments for FHA-insured loans based on the historical experience of loans dating back to 1975. However, a large share of the loans in FHA’s portfolio at that time were originated in fiscal years 1998 and 1999, and therefore there was little direct evidence of how those loans would perform. As a result, at the time that we released that estimate we cautioned that recent changes in FHA’s insurance program and the conventional mortgage market, such as those discussed in the previous section, could be causing recent loans to perform differently, even under the same economic conditions, from earlier loans. To estimate the potential impact of these changes, we first used our previous model to develop estimates of the relationship between, on the one hand, the probability of foreclosure and prepayment and, on the other hand, key explanatory factors such as borrower equity and unemployment for loans insured between fiscal years 1975 and 1995. On the basis of these estimates and of the actual values beyond 1995 for key economic variables, such as interest and unemployment rates and the rate of house price appreciation, we forecasted the performance (both foreclosures and prepayments) of loans that FHA insured from fiscal year 1996 through fiscal year 2001. We then compared those forecasts with the actual experience of those loans. (See app. II for a full discussion of our methodology.) As is shown in figure 11, for each year’s book of business, we found that cumulative foreclosure rates through the end of fiscal year 2001 exceeded our forecasted levels. For example, for the book of business with the longest experience, loans insured in 1996, we forecasted that the cumulative foreclosure rate through the end of fiscal year 2001 would be 3.44 percent, but the actual foreclosure rate was 5.81 percent. These results suggest that some factors other than those accounted for in the model may be causing loans insured after 1995 to perform worse thanwould be expected based on the historical experience of older loans. The fact that cumulative foreclosures for recent FHA-insured loans have been greater than what would be anticipated from a model based on the performance of loans insured from fiscal year 1975 through fiscal year 1995 suggests that the caution we expressed in our 2001 report about the effect of recent changes in FHA’s insurance program and the conventional mortgage market on the ability of the Fund to withstand future economic downturns is still warranted. In particular, the performance of loans insured in fiscal years 1998 and 1999, which represented about one-third of FHA’s loan portfolio at the end of 1999, could be worse than what we previously forecasted. In turn, lower performance by these loans could affect the economic value of the Fund and its ability to withstand future economic downturns. To assess the extent of this effect, we would need to know the extent to which the performance of loans insured in fiscal years 1998 and 1999 has been and will be worse than what we forecasted in developing our previous estimate of the economic value of the Fund. Because loans insured in fiscal years 1998 and 1999 have not completely passed through the peak years for foreclosures, these loans’ foreclosures to date provide only a limited indication of their long-term performance. We do, however, have a better indication of the long-term performance of loans insured in fiscal years 1996 and 1997 because they are older loans with more years of experience. The experience of these loans suggests that changes that are not accounted for in our models are causing these books of business to have higher foreclosure rates than would be anticipated from a model based on the performance of earlier loans. If loans insured in fiscal years 1998 and 1999 are affected by changes that are not accounted for in our models in the same way that loans insured in fiscal years 1996 and 1997 appear to be affected, then the 1998 and 1999 loans will continue to have higher cumulative foreclosure rates than we estimated. Higher foreclosure rates, in turn, imply a lower economic value of the Fund, which is generally estimated as a baseline value under an expected set of economic conditions. With a lower baseline economic value of the Fund under expected economic conditions, the Fund would be less able to withstand adverse economic conditions. To better understand the reasons for the increased risk of recently originated FHA loans would require additional data on factors that might explain loan performance—including qualifying ratios and credit scores. Even if these historical data were available today, it is too soon to estimate with confidence the impact that recent changes will ultimately have on recently insured loans because many of these loans have not yet reached the peak years when foreclosures usually occur. Recently insured loans represent the majority of FHA’s portfolio. The impact of underwriting changes and changes in the conventional mortgage market on the riskiness of the portfolio is not fully understood. Understanding this risk will give a better basis for determining whether the Fund has an adequate capital ratio, and also whether program changes are in order to adjust that level of risk. We obtained written comments on a draft of this report from HUD officials. The written comments are presented in appendix IV. Generally HUD agreed with the report’s findings that the underwriting changes made in 1995 likely increased the riskiness of FHA loans insured after that year. HUD commented that fiscal year 1995 was the first year in which FHA exceeded the 2 percent capital ratio mandated by the National Affordable Housing Act of 1990. According to HUD, by making the 1995 underwriting changes FHA modestly increased the risk characteristics of FHA loans and, by doing so, allowed FHA to achieve its mission of increasing homeownership opportunities for underserved groups. HUD also provided information, which has been incorporated into the final report as appropriate, on the change in homeownership rates among underserved groups since 1994. As agreed with your offices, unless you publicly release its contents earlier, we plan no further distribution of this report until 30 days after its issuance date. At that time, we will send copies of this report to the Ranking Minority Member of the House Subcommittee on Housing and Community Opportunity and other interested members of Congress and congressional committees. We will also send copies to the HUD Secretary and 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 or Mathew J. Scire at (202) 512-6794, or Jay Cherlow at (202) 512-4918, if you or your staff have any questions concerning this report. Key contributors to this report were Jill Johnson, DuEwa Kamara, Mitch Rachlis, Mark Stover, and Pat Valentine. We initiated this review to determine (1) how the early performance of FHA loans originated in recent years has differed from loans originated in earlier years; (2) how changes in FHA’s program and the conventional mortgage market might explain recent loan performance; and (3) if there is evidence that factors affecting the performance of recent FHA loans may be causing the overall riskiness of FHA’s portfolio to be greater than what we previously estimated, and if so what effect this might have on the ability of the Fund to withstand future economic downturns. To address these objectives, we obtained and analyzed data on loans insured by FHA from 1990 through 1998 by year of origination; by loan type (fixed interest rates versus adjustable interest rates); by loan-to-value ratio; and by location of the property, for selected states that held the greatest share of FHA-insured loans. We compared the foreclosure rates for the first 4 years of these loans. We selected a 4-year cumulative foreclosure rate as a basis for comparing books of business because it best balanced the competing goals of having the greatest number of observations and the greatest number of years of foreclosure experience. We also interviewed HUD officials and reviewed HUD mortgagee letters, trade literature, and publicly available information on the conventional mortgage market. Finally, using the model that we developed for our prior report and basing it on the experience of FHA loans insured from fiscal years 1975 through 1995, we also compared the estimated and actual foreclosure rates through 2001 of loans insured from fiscal years 1996 through 2001. We worked closely with HUD officials and discussed the interpretation of HUD’s data. Although we did not independently verify the accuracy of the data, we did perform internal checks to determine (1) the extent to which the data fields were coded; and (2) the reasonableness of the values contained in the data fields. We checked the mean, median, mode, skewness, and high and low values for each of the variables used. We conducted our review in Washington, D.C., between July 2001 and June 2002 in accordance with generally accepted government auditing standards. For an earlier report, we built econometric and cash flow models to estimate the economic value of FHA’s Mutual Mortgage Insurance Fund (Fund) as of the end of fiscal year 1999. In that report, we acknowledged that factors not fully captured in our models could affect the future performance of loans in FHA’s portfolio and, therefore, the ability of the Fund to withstand worse-than-expected economic conditions. In particular, we suggested that these factors could include changes in FHA’s insurance program and the conventional insurance market. For our current report we sought to assess whether there is evidence that factors not captured in our previous model may be causing the overall riskiness of FHA’s portfolio to be greater than we previously estimated and, if so, would that have a substantial effect on the ability of the Fund to withstand future economic downturns. In this appendix, we describe how we conducted that assessment. Our basic approach was to (1) reestimate the econometric models built for our previous report using the same specifications as before and data on loans insured by FHA in all 50 states and the District of Columbia, but excluding U.S. territories, from 1975 through 1995 (in the previous report, we used data on loans originated through 1999); (2) use the estimated coefficients and actual values of our explanatory variables during the forecasted period to forecast foreclosures and prepayments through fiscal year 2001 for loans insured from fiscal year 1996 through fiscal year 2001; and (3) compare the forecasted and actual foreclosures and prepayments for these loans during that time. A finding that our foreclosure model fit the data well for loans insured from 1975 through 1995, but consistently underestimated foreclosure rates for post-1995 loans, would suggest that there had been a structural change in the post-1995 period not captured in our models that might cause the future performance of FHA-insured loans to be worse than we estimated for our previous report. Our econometric models used observations on loan years—that is, information on the characteristics and status of an insured loan during each year of its life—to estimate conditional foreclosure and prepayment probabilities. These probabilities were estimated using observed patterns of prepayments and foreclosures in a large set of FHA-insured loans. More specifically, our models used logistic equations to estimate the logarithm of the odds ratio, from which the probability of a loan’s payment (or a loan’s prepayment) in a given year could be calculated. These equations were expressed as a function of interest and unemployment rates, the borrower’s equity (computed using a house’s price and current and contract interest rates as well as a loan’s duration), the loan-to-value (LTV) ratio, the loan’s size, the geographic location of the house, and the number of years that the loan had been active. The results of the logistic regressions were used to estimate the probabilities of a loan being foreclosed or prepaid in each year. We prepared separate estimates for fixed-rate mortgages, adjustable rate mortgages (ARMs), and investor loans. The fixed-rate mortgages with terms of 25 years or more (long-term loans) were divided between those that were refinanced and those that were purchase money mortgages (mortgages associated with home purchase). Separate estimates were prepared for each group of long-term loans. Similarly, investor loans were divided between mortgages that were refinanced and the loans that were purchase money mortgages. We prepared separate estimates for each group of investor loans (refinanced and purchase money mortgages). A separate analysis was also prepared for loans with terms that were less than 25 years (short-term loans). A complete description of our models, the data that we used, and the results that we obtained is presented in detail in the following sections. In particular, this appendix describes (1) the sample data that we used; (2) our model specification and the independent variables in the regression models; and (3) the model results. For our analysis, we selected from FHA’s computerized files a 10 percent sample of records of mortgages insured by FHA from fiscal years 1975 through 1995 (1,046,916 loans). From the FHA records, we obtained information on the initial characteristics of each loan, such as the year of the loan’s origination and the state in which the loan originated; LTV ratio; loan amount; and contract interest rates. To describe macroeconomic conditions at the national and state levels, we obtained data at the national level on quarterly interest rates for 30-year fixed-rate mortgages on existing housing, and at the state level on annual civilian unemployment rates from DRI-WEFA. We also used state level data from DRI-WEFA on median house prices to compute house price appreciation rates by state. To adjust nominal loan amounts for inflation, we used data from the 2000 Economic Report of the President on the implicit price deflator for personal consumption expenditures. People buy houses for consumption and investment purposes. Normally, people do not plan to default on loans. However, conditions that lead to defaults do occur. Defaults may be triggered by a number of events, including unemployment, divorce, or death. These events are not likely to trigger defaults if the owner has positive equity in his or her home because the sale of the home with realization of a profit is preferable to the loss of the home through foreclosure. However, if the property is worth less than the mortgage, these events may trigger defaults. Prepayments of home mortgages can also occur. These may be triggered by events such as declining interest rates, which prompt refinancing, and rising house prices, which prompt homeowners to take out accumulated equity or sell the residence. Because FHA mortgages are assumable, the sale of a residence does not automatically trigger prepayment. For example, if interest rates have risen substantially since the time that the mortgage was originated, a new purchaser may prefer to assume the seller’s mortgage. We hypothesized that foreclosure behavior is influenced by, among other things, the (1) level of unemployment, (2) size of the loan, (3) value of the home, (4) current interest rates, (5) contract interest rates, (6) home equity, and (7) region of the country within which the home is located. We hypothesized that prepayment behavior is influenced by, among other things, the (1) difference between the interest rate specified in the mortgage contract and the mortgage rates generally prevailing in each subsequent year, (2) amount of accumulated equity, (3) size of the loan, and (4) region of the country in which the home is located. Our first regression model estimated conditional mortgage foreclosure probabilities as a function of a variety of explanatory variables. In this regression, the dependent variable is a 0/1 indicator of whether a given loan was foreclosed in a given year. The outstanding mortgage balance, expressed in inflation-adjusted dollars, weighted each loan-year observation. Our foreclosure rates were conditional on whether the loan survives an additional year. We estimated conditional foreclosures in a logistic regression equation. Logistic regression is commonly used when the variable to be estimated is the probability that an event, such as a loan’s foreclosure, will occur. We regressed the dependent variable (whose value is 1 if foreclosure occurs and 0 otherwise) on the explanatory variables previously listed. Our second regression model estimated conditional prepayment probabilities. The independent variables included a measure that is based on the relationship between the current mortgage interest rate and the contract rate, the primary determinant of a mortgage’s refinance activity. We further separated this variable between ratios above and below 1 to allow for the possibility of different marginal impacts in higher and lower ranges. The variables that we used to predict foreclosures and prepayments fall into two general categories: descriptions of states of the economy and characteristics of the loan. In choosing explanatory variables, we relied on the results of our own and others' previous efforts to model foreclosure and prepayment probabilities, and on implications drawn from economic principles. We allowed for many of the same variables to affect both foreclosure and prepayment. The single most important determinant of a loan's foreclosure is the borrower's equity in the property, which changes over time because (1) payments reduce the amount owed on the mortgage and (2) property values can increase or decrease. Equity is a measure of the current value of a property compared with the current value of the mortgage on that property. Previous research strongly indicates that borrowers with small amounts of equity, or even negative equity, are more likely than other borrowers to default. We computed the percentage of equity as 1 minus the ratio of the present value of the loan balance evaluated at the current mortgage interest rate, to the current estimated house price. For example, if the current estimated house price is $100,000, and the value of the mortgage at the current interest rate is $80,000, then equity is .2 (20 percent), or 1-(80/100). To measure current equity, we calculated the value of the mortgage as the present value of the remaining mortgage, evaluated at the current year’s fixed-rate mortgage interest rate. We calculated the current value of a property by multiplying the value of that property at the time of the loan's origination by the change in the state’s median nominal house price, adjusted for quality changes, between the year of origination and the current year. Because the effects on foreclosure of small changes in equity may differ depending on whether the level of equity is large or small, we used a pair of equity variables, LAGEQHIGH and LAGEQLOW, in our foreclosure regression. The effect of equity is lagged 1 year, as we are predicting the time of foreclosure, which usually occurs many months after a loan first defaults. We anticipated that higher levels of equity would be associated with an increased likelihood of prepayment. Borrowers with substantial equity in their homes may be more interested in prepaying their existing mortgages, and may take out larger ones to obtain cash for other purposes. Borrowers with little or no equity may be less likely to prepay because they may have to take money from other savings to pay off their loans and cover transaction costs. For the prepayment regression, we used a variable that measures book equity—the estimated property value less the amortized balance of the loan—instead of market equity. It is book value, not market value, that the borrower must pay to retire the debt. Additionally, the important effect of interest rate changes on prepayment is captured by two other equity variables, RELEQHI and RELEQLO, which are sensitive to the difference between a loan’s contract rate and the interest rate on 30-year mortgages available in the current year. These variables are described below. We included an additional set of variables in our regressions related to equity: the initial LTV ratio. We entered LTV as a series of dummy variables, depending on its size. Loans fit into eight discrete LTV categories. In some years, FHA measured LTV as the loan amount less mortgage insurance premium financed in the numerator of the ratio, and appraised value plus closing costs in the denominator. To reflect true economic LTV, we adjusted FHA's measure by removing closing costs from the denominator and including financed premiums in the numerator. A borrower's initial equity can be expressed as a function of LTV, so we anticipated that if LTV was an important predictor in an equation that also includes a variable measuring current equity, it would probably be positively related to the probability of foreclosure. One reason for including LTV is that it measures initial equity accurately. Our measures of current equity are less accurate because we do not have data on the actual rate of change in the mortgage loan balance or the actual rate of house price change for a specific house. Loans with higher LTVs are more likely to foreclose. We used the lowest LTV category as the omitted category. We expected LTV to have a positive sign in the foreclosure equations at higher levels of LTV. LTV in our foreclosure equations may capture the effects of income constraints. We were unable to include borrowers’ income or payment to income ratio directly because data on borrowers’ income were not available. However, it seems likely that borrowers with little or no down payment (high LTV) are more likely to be financially stretched in meeting their payments and, therefore, more likely to default. The anticipated relationship between LTV and the probability of prepayment is uncertain. For two equations—long-term refinanced loans and investor-refinanced loans—we used down payment information directly, rather than the series of LTV variables. We defined down payment to ensure that closing costs were included in the loan amount and excluded from the house price. We used the annual unemployment rates for each state for the period from fiscal years 1975 through 1995 to measure the relative condition of the economy in the state where a loan was made. We anticipated that foreclosures would be higher in years and states with higher unemployment rates, and that prepayments would be lower because property sales slow down during recessions. The actual variable we used in our regressions, LAGUNEMP, is defined as the logarithm of the preceding year's unemployment rate in that state. We included the logarithm of the interest rate on the mortgage as an explanatory variable in the foreclosure equation. We expected a higher interest rate to be associated with a higher probability of foreclosure because higher interest rates cause higher monthly payments. However, in explaining the likelihood of prepayment, our model uses information on the level of current mortgage rates relative to the contract rate on the borrower’s mortgage. A borrower’s incentive to prepay is high when the interest rate on a loan is greater than the rate at which money can currently be borrowed, and it diminishes as current interest rates increase. In our prepayment regression we defined two variables, RELEQHI and RELEQLO. RELEQHI is defined as the ratio of the market value of the mortgage to the book value of the mortgage, but is never smaller than 1. RELEQLO is also defined as the ratio of the market value of the mortgage to the book value, but is never larger than 1. When currently available mortgage rates are lower than the contract interest rate, market equity exceeds book equity because the present value of the remaining payments evaluated at the current rate exceeds the present value of the remaining payments evaluated at the contract rate. Thus, RELEQHI captures a borrower's incentive to refinance, and RELEQLO captures a new buyer's incentive to assume the seller's mortgage. We created two 0/1 variables, REFIN and REFIN2, that take on a value of 1 if a borrower had not taken advantage of a refinancing opportunity in the past, and 0 otherwise. We defined a refinancing opportunity as having occurred if the interest rate on fixed-rate mortgages in any previous year in which a loan was active was at least 200 basis points below the rate on the mortgage in any year through 1994, or 150 basis points below the rate on the mortgage in any year after 1994. REFIN takes a value of 1 if the borrower had passed up a refinancing opportunity at least once in the past. REFIN2 takes on a value of 1 if the borrower had passed up two or more refinancing opportunities in the past. Several reasons might explain why borrowers passed up apparently profitable refinancing opportunities. For example, if they had been unemployed or their property had fallen in value, they might have had difficulty obtaining refinancing. This reasoning suggests that REFIN and REFIN2 would be positively related to the probability of foreclosure; that is, a borrower unable to obtain refinancing previously because of poor financial status might be more likely to default. Similar reasoning suggests a negative relationship between REFIN and REFIN2 and the probability of prepayment; a borrower unable to obtain refinancing previously might also be unlikely to obtain refinancing currently. A negative relationship might also exist if a borrower's passing up one profitable refinancing opportunity reflected a lack of financial sophistication that, in turn, would be associated with passing up additional opportunities. However, a borrower who anticipated moving soon might pass up an apparently profitable refinancing opportunity to avoid the transaction costs associated with refinancing. In this case, there might be a positive relationship, with the probability of prepayment being higher if the borrower fulfilled his or her anticipation and moved, thereby prepaying the loan. Another explanatory variable is the volatility of interest rates, INTVOL, which is defined as the standard deviation of the monthly average of the Federal Home Loan Mortgage Corporation's series of 30-year, fixed-rate mortgages’ effective interest rates. We calculated the standard deviation over the previous 12 months. Financial theory predicts that borrowers are likely to refinance more slowly at times of volatile rates because there is a larger incentive to wait for a still lower interest rate. We also included the slope of the yield curve, YC, in our prepayment estimates, which we calculated as the difference between the 1- and 10- year Treasury rates of interest. We then subtracted 250 basis points from this difference and set differences that were less than 0 to 0. This variable measured the relative attractiveness of ARMs versus fixed-rate mortgages; the steeper the yield curve, the more attractive ARMs would be. When ARMs have low rates, borrowers with fixed-rate mortgages may be induced into refinancing into ARMs to lower their monthly payments. For ARMs, we did not use relative equity variables as we did with fixed-rate mortgages. Instead, we defined four variables, CHANGEPOS, CHANGENEG, CAPPEDPOS, and CAPPEDNEG to capture the relationship between current interest rates and the interest rate paid on each mortgage. CHANGEPOS measures how far the interest rate on the mortgage has increased since origination, with a minimum of 0, while CHANGENEG measures how far the rate has decreased, with a maximum of 0. CAPPEDPOS measures how much further the interest rate on the mortgage would rise if prevailing interest rates in the market did not change, while CAPPEDNEG measures how much further the mortgage's rate would fall if prevailing interest rates did not change. For example, if an ARM was originated at 7 percent and interest rates increased by 250 basis points 1 year later, CHANGEPOS would equal 100 because FHA's ARMs can increase by no more than 100 basis points in a year. CAPPEDPOS would equal 150 basis points, since the mortgage rate would eventually increase by another 150 basis points if market interest rates did not change, and CHANGENEG and CAPPEDNEG would equal 0. Because interest rates have generally trended downward since FHA introduced ARMs, there is very little experience with ARMs in an increasing interest rate environment. We created nine 0/1 variables to reflect the geographic distribution of FHA loans, and included them in both regressions. Location differences may capture the effects of differences in borrowers' incomes, underwriting standards by lenders, economic conditions not captured by the unemployment rate, or other factors that may affect foreclosure and prepayment rates. We assigned each loan to one of the nine Bureau of the Census (Census) divisions on the basis of the state in which the borrower resided. The Pacific division was the omitted category; that is, the regression coefficients show how each of the regions was different from the Pacific division. We also created a variable, JUDICIAL, to indicate states that allowed judicial foreclosure procedures in place of nonjudicial foreclosures. We anticipated that the probability of foreclosure would be lower where judicial foreclosure procedures were allowed because of the greater time and expense required for the lender to foreclose on a loan. To obtain an insight into the differential effect of relatively larger loans on mortgage foreclosures and prepayments, we assigned each loan to 1 of 10 loan-size categorical variables (LOAN1 to LOAN10). The omitted category in our regressions was that of loans between $80,000 and $90,000, and results on loan size are relative to those loans between $80,000 and $90,000. All dollar amounts are inflation adjusted and represent 1999 dollars. The number of units covered by a single mortgage was a key determinant in deciding which loans were more likely to be investor loans. Loans were noted as investor loans if the LTV ratio was between specific values, depending on the year of the loan or whether there were two or more units covered by the loan. Once a loan was identified as an investor loan, we separated the refinanced loans from the purchase-money mortgages and performed foreclosure and payoff analyses on each. For each of the investor equations, we used two dummy variables defined according to the number of units in the dwelling. LIVUNT2 has the value of 1 when a property has two dwelling units and a value of 0 otherwise. LIVUNT3 has a value of 1 when a property has three or more dwelling units and a value of 0 otherwise. The missing category in our regressions was investors with one unit. Our database covers only loans with no more than four units. To capture the time pattern of foreclosures and prepayments (given the effects of equity and the other explanatory variables), we defined seven variables on the basis of the number of years that had passed since the year of the loan's origination. We refer to these variables as YEAR1 to YEAR7 and set them equal to 1 during the corresponding policy year and 0 otherwise. Finally, for those loan type categories for which we did not estimate separate models for refinancing loans and nonrefinancing loans, we created a variable called REFINANCE DUMMY to indicate whether a loan was a refinancing loan. Table 2 summarizes the variables that we used to predict foreclosures and prepayments. Table 3 presents mean values for our predictor variables for each mortgage type for which we ran a separate regression. As previously described, we used logistic regressions to model loan foreclosures and prepayments as a function of a variety of predictor variables. We estimated separate regressions for fixed-rate purchase money mortgages (and refinanced loans) with terms over and under 25 years, ARMs, and investor loans. We used data on loan activity throughout the life of the loans for loans originated from fiscal years 1975 through 1995. The outstanding loan balance of the observation weighted the regressions. The logistic regressions estimated the probability of a loan being foreclosed or prepaid in each year. The standard errors of the regression coefficients are biased downward, because the errors in the regressions are not independent. The observations are on loan years, and the error terms are correlated because the same underlying loan can appear several times. However, we did not view this downward bias as a problem because our purpose was to forecast the dependent variables, not to test hypotheses concerning the effects of independent variables. In general, our results are consistent with the economic reasoning that underlies our models. Most important, the probability of foreclosure declines as equity increases, and the probability of prepayment increases as the current mortgage interest rate falls below the contract mortgage interest rate. As shown in tables 4 and 5, both of these effects occur in each regression model and are very strong. These tables present the estimated coefficients for all of the predictor variables for the foreclosure and prepayment equations. Table 4 shows our foreclosure regression results. As expected, the unemployment rate is positively related to the probability of foreclosure and negatively related to the probability of prepayment. Our results also indicate that generally the probability of foreclosure is higher when LTV and contract interest rate are higher. The overall quality of fit was satisfactory: Chi-square statistics were significant on all regressions at the 0.01-percent level. (X*B), where X refers to the mean value of the ith explanatory variable and B represents the estimated coefficient for the ith explanatory variable. percent to about 10.4 percent would also raise the conditional foreclosure probability by 17 percent (from about 0.6 percent to about 0.7 percent). Values of homeowners’ equity of 10 percent, 20 percent, 30 percent, and 40 percent result in conditional foreclosure probabilities of 0.7 percent, 0.5 percent, 0.3 percent, and 0.2 percent, respectively, illustrating the importance of increased equity in reducing the probability of foreclosure. Table 5 shows our prepayment regression results. The overall conditional prepayment probability for long-term, fixed-rate mortgages is estimated to be about 5.0 percent. This means that, in any particular year, about 5 percent of the loan dollars outstanding will prepay, on average. Prepayment probability is quite sensitive to the relationship between the contract interest rate and the currently available mortgage rate. We modeled this relationship using RELEQHI and RELEQLO. Holding other variables at their mean values, if the spread between mortgage rates available in each year and the contract interest rate widened by 1 percentage point, the conditional prepayment probability would increase by about 78.5 percent to about 8.9 percent. To test the validity of our models, we examined how well they predicted actual patterns of FHA's foreclosure and prepayment rates through fiscal year 1995. Using a sample of 10 percent of FHA's loans made from fiscal years 1975 through 1995, we found that our predicted rates closely resembled actual rates. To predict the probabilities of foreclosure and prepayment in the historical period, we combined the models’ coefficients with information on a loan's characteristics and information on economic conditions described by our predictor variables in each year from a loan's origination through fiscal year 1995. If our models predicted foreclosure or prepayment in any year, we determined the loan's balance during that year to indicate the dollar amount associated with the foreclosure or prepayment. We estimated cumulative foreclosure and prepayment rates by summing the predicted claim and prepayment dollar amounts for all loans originated in each of the fiscal years 1975 through 1995. We compared these predictions with the actual cumulative (through fiscal year 1995) foreclosure and prepayment rates for the loans in our sample. Figure 12 compares actual and predicted cumulative foreclosure rates, and figure 13 compares actual and predicted cumulative prepayment rates for long-term, fixed-rate, nonrefinanced mortgages. Foreclosure rates in the following tables are expressed as a percentage of loan amounts. Specifically, for tables 6 through 15 we compute all rates using the original loan amount of the foreclosed loans compared to the original loan amount of like loans insured by FHA for the corresponding year. For tables 16 we compute foreclosure rates using the unpaid balance of foreclosed loans as a percentage of the total value of mortgages originated. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. 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Federal Housing Administration (FHA) loans made in recent years have experienced somewhat higher foreclosure rates than loans made in earlier years. However, recent loans are performing much better than loans made in the 1980s. Although economic factors such as house price appreciation are key determinants of mortgage foreclosure, changes in underwriting requirements, as well as changes in the conventional mortgage market, may partly explain the higher foreclosure rates experienced in the 1990s. Factors not fully captured in the model GAO used may be affecting the performance of recent FHA loans and causing the overall risks of FHA's portfolio to be somewhat greater than previously estimated. Thus, the Mutual Mortgage Insurance Fund may be somewhat less able to withstand worse-than-expected loan performance resulting from adverse economic conditions.

You are an expert at summarizing long articles. Proceed to summarize the following text: Carryover balances consist of unobligated funds and uncosted obligations. Each fiscal year, NASA requests obligational authority from the Congress to meet the costs of running its programs. Once NASA receives this authority, it can obligate funds by placing orders or awarding contracts for goods and services that will require payment during the same fiscal year or in the future. Unobligated balances represent the portion of its authority that NASA has not obligated. Uncosted obligations represent the portion of its authority that NASA has obligated for goods and services but for which it has not yet incurred costs. Through the annual authorization and appropriations process, the Congress determines the purposes for which public funds may be used and sets the amounts and time period for which funds will be available. Funding provided for NASA’s Human Space Flight and Science, Aeronautics, and Technology programs is available for obligation over a 2-year period. Authority to obligate any remaining unobligated balances expires at the end of the 2-year period. Five years later, outstanding obligations are canceled and the expired account is closed. Some level of carryover balance is appropriate for government programs. In particular, NASA’s Human Space Flight and Science, Aeronautics, and Technology appropriations are available for obligation over a 2-year period. In such circumstances, some funds are expected to be obligated during the second year of availability. Funds must travel through a series of approvals at headquarters and the field centers before the money is actually put on contracts so that work can be performed. According to NASA officials, it can be difficult to obligate funds that are released late in the year. In addition, the award of contracts and grants may sometimes be delayed. Once contracts and grants are awarded, costs may not be incurred or reported for some time thereafter. Expenditures, especially final payments on contract or grant closeouts, will lag still further behind. Finally, costs and expenditures for a multiyear contract or grant will be paced throughout the life of the contract. For these reasons, all NASA programs have carryover balances. The unobligated balances expire at the end of their period of availability, and according to NASA officials, uncosted obligations carried over will eventually be expended to cover contract costs. Carryover balances at the end of fiscal year 1995 for Human Space Flight and Science, Aeronautics, and Technology programs totaled $3.6 billion. Of this amount, $2.7 billion was obligated but not costed and $0.9 billion was unobligated. Table 1 shows the carryover balances by program. The balance carried over from fiscal year 1995 plus the new budget authority in fiscal year 1996 provides a program’s total budget authority. The total budget authority less the planned costs results in the estimated balance at the end of fiscal year 1996. Table 2 starts with the carryover from fiscal year 1996 and ends with the balance that NASA estimates will carry over from fiscal year 1997 into 1998. The cost plans shown in the tables reflect the amount of costs estimated to be accrued during the fiscal year. The carryover balances will change if actual cost and budget amounts differ from projections. NASA program officials are in the process of updating their 1996 cost plan estimates. Officials in some programs now expect the actual costs to be less than planned, resulting in higher carryover balances at the end of 1996 than those shown in the tables. NASA often discusses and analyzes carryover balances in terms of equivalent months of a fiscal year’s budget authority that will be carried into the next fiscal year. For example, the Aeronautical Research and Technology carryover balance of $217.9 million at the end of fiscal year 1996 is equivalent to 3 months of the $877.3 million new budget authority, based on an average monthly rate of $73.1 million. Table 3 shows each program’s carryover in equivalent months of budget authority. The carryover balances at the end of fiscal year 1995 ranged from the equivalent of 1 month for the Space Shuttle to 16 months for Academic Programs. NASA officials gave several overall reasons for the large relative differences in carryover amounts. One major reason was that programs such as the Space Station and the Space Shuttle, which have fewer months of carryover, prepare budgets based on the amount of work estimated to be costed in a fiscal year. Other programs, such as MTPE and Space Science, have based their budgets on the phasing of obligations over a number of fiscal years. Another major reason given was that some programs fund a substantial number of grants, which are typically funded for a 12-month period regardless of what point in the fiscal year they are awarded. This practice, coupled with slow reporting and processing of grant costs, contributes to higher carryover balances. Science programs such as MTPE, Space Science, and Life and Microgravity Sciences and Applications, fund grants to a much greater extent than the Space Station and the Space Shuttle. NASA officials also said the size of contractors affects carryover balances, with larger contractors requiring less funding into next year than smaller contractors. NASA officials gave two major reasons for MTPE’s carryover balance at the end of fiscal year 1995. First, the MTPE program has undergone several major restructurings since its inception in 1991. During the periods when the content of the program was being changed, selected program activities were restrained until the new baseline program was established. Since several contract start dates were delayed, the carryover balance grew. MTPE officials emphasized that all work for which funding was provided would be performed in accordance with the approved baseline and that, in most cases, the new baseline included the same end dates for major missions and ground systems. Officials expect the balances to decrease as delayed work is accomplished. The second reason given for the large carryover balance at the end of fiscal year 1995 is the large number of grants funded in the MTPE program. As discussed earlier, the process for awarding grants and delays in reporting costs on grants contributes to carryover balances. Officials from the Aeronautical Research and Technology program attributed their relatively low level of carryover to aggressively managing carryover balances. Officials have studied their carryover balances in detail and have greatly reduced their levels. In 1989, the program had a carryover balance of 43 percent, equivalent to 5 months of funding. Program financial managers analyzed their carryover and determined that it could be reduced substantially. By 1992, the carryover balance was about 25 percent, or 3 months, of new budget authority, and it is estimated to remain at that level through fiscal year 1996. In fiscal year 1997, program managers hope to achieve a 15-percent, or 2-month, carryover level. Officials attributed their improved performance to thoroughly understanding their carryover balances, emphasizing work to be accomplished and costed in preparing budgets, and carefully tracking projects’ performance. They believe that some of their methods and systems for managing carryover balances could be applied to other NASA programs. Although carryover naturally occurs in the federal budget process, NASA officials became concerned that the balances were too high. NASA is taking actions to analyze and reduce these balances. NASA’s Chief Financial Officer directed a study that recommended changes to reduce carryover balances. NASA’s Comptroller will review justifications for carryover balances as part of the fiscal year 1998 budget development process. A NASA steering group was tasked by NASA’s Chief Financial Officer to review carryover balances as part of a study to address NASA’s increasing level of unliquidated budget authority. The study identified a number of reasons for the current balances, including NASA’s current method of obligations-based budgeting, reserves held for major programs, delays in awarding contractual instruments, late receipt of funding issued to the centers, and grant reporting delays. The study recommended a number of actions to reduce carryover balances through improved budgeting, procurement, and financial management practices, including implementing cost-based budgeting throughout the agency and establishing thresholds for carryover balances. According to the study, cost-based budgeting takes into account the estimated level of cost to be incurred in a given fiscal year as well as unused obligation authority from prior years when developing a budget. The organization then goes forward with its budget based on new obligation authority and a level of proposed funding that is integrally tied to the amount of work that can be done realistically over the course of the fiscal year. However, the study cautioned that a cost-based budgeting strategy should recognize that cost plans are rarely implemented without changes. Therefore, program managers should have the ability to deal with contingencies by having some financial reserves. The study recommended that NASA implement thresholds for the amount of funds to be carried over from one fiscal year to the next. NASA had about 4 months of carryover at the end of fiscal year 1995, according to the study. It recommended that NASA implement a threshold of 3 months for total carryover: 2 months of uncosted obligations for forward funding on contracts and 1 month of unobligated balance for reserves. The study noted that carryover balances should be reviewed over the next several years to determine if this threshold is realistic. NASA’s Chief Financial Officer said the next logical step is to analyze balances in individual programs in more depth. We agree that the appropriateness of the threshold should be examined over time and that further study is needed to more fully understand carryover balances in individual programs. We also believe that individual programs must be measured against an appropriate standard. One problem with looking at carryover balances in the aggregate is that programs substantially under the threshold in effect mask large carryover balances in other programs. For example, at the end of fiscal year 1996, the total amount of carryover in excess of 3 months for seven programs is estimated to be $1.05 billion. However, the carryover balance for the Space Shuttle and the Space Station programs in the same year is estimated to be $1.03 billion under the threshold, which almost completely offsets the excess amount. We compared the balances of individual Human Space Flight and Science, Aeronautics, and Technology programs to this 3-month threshold and found that at the end of fiscal year 1995, nine programs exceeded the threshold by a total of $1.3 billion. By the end of fiscal year 1997, only four programs are expected to significantly exceed the threshold by a total of $0.6 billion. Table 4 compares individual program carryover amounts with the 3-month threshold at the end of fiscal years 1995, 1996, and 1997. As mentioned earlier, the estimates are based on projected costs for fiscal year 1996 and projected budgets and costs for fiscal year 1997. If actual costs and budgets are different, the amount of carryover exceeding the threshold will change. The NASA Comptroller is planning to review carryover balances in each program. According to the Comptroller and program financial managers, carryover balances have always been considered a part of the budget formulation process, but factoring them into the process is difficult since budget submissions must be prepared well before the actual carryover balances are known. For example, NASA’s fiscal year 1997 budget request was prepared in the summer of 1995 and submitted to the Office of Management and Budget in the fall. At that point, NASA’s appropriations for fiscal year 1996 were not final and costs for 1996 could only be estimated. Estimates of budget authority, obligations, and accrued costs of program activities will be specifically scrutinized to ensure that the timing of the budget authority to accrued costs is consistent with minimal, carefully justified balances of uncosted budget authorities at fiscal year end. Carryover of uncosted balances in excess of eight weeks of cost into the next fiscal year will have to be specifically justified. The carryover referred to by the Comptroller is the equivalent of 8 weeks, or 15 percent, of the next fiscal year’s cost. For example, the fiscal year 1996 budget, factoring in carryover from the prior years, should include enough budget authority to cover all costs in 1996 plus 8 weeks of costs in fiscal year 1997. The Comptroller stressed that he was not attempting to set a threshold for the appropriate level of carryover, but instead was setting a criteria beyond which there should be a strong justification for carryover. The Comptroller also told us that although the guidance specifically addressed preparation of the fiscal year 1998 budget, he has asked programs to justify carryover balances in excess of 8 weeks starting with the end of fiscal year 1996. Table 5 compares program carryover balances at the end of fiscal years 1995, 1996, and 1997 to the 8-week criteria. NASA was not able to provide cost plan data for fiscal year 1998. To approximate the 1997 carryover balances in excess of 8 weeks, we used the fiscal year 1997 cost plan. If a program cost plan for 1998 is higher than 1997, the 8-week criteria would also be higher and the carryover in excess of 8 weeks would be lower. On the other hand, a lower cost plan in 1998 would result in a higher balance in excess of 8 weeks. As shown in table 5, significant amounts of carryover funding would have to be justified. In fiscal year 1995, $1.9 billion would have had to be justified. In fiscal years 1996 and 1997, the amounts requiring justification are estimated at $1.5 billion and $1 billion, respectively. We discussed a draft of this report with NASA officials and have incorporated their comments where appropriate. We reviewed carryover balances for programs in the Human Space Flight and Science, Aeronautics, and Technology appropriations as of September 30, 1995, and estimated balances as of September 30, 1996, and 1997. We relied on data from NASA’s financial management systems for our analyses and calculations and did not independently verify the accuracy of NASA’s data. We reviewed budget and cost plans and discussed carryover balances with NASA’s Chief Financial Officer; NASA’s Comptroller and his staff; and with financial management staff for the MTPE, Space Science, Space Station, Space Shuttle, and Aeronautics programs. We also reviewed NASA’s internal study of carryover balances and discussed the study with the NASA staff responsible for preparing it. We performed our work at NASA headquarters, the Goddard Space Flight Center, the Jet Propulsion Laboratory, the Johnson Space Center, and the Marshall Space Flight Center. We conducted our work between April 1996 and July 1996 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce this report’s contents earlier, we plan no further distribution of the report until 10 days after its issue date. We will then send copies to the Administrator of NASA; the Director, Office of Management and Budget; and other congressional committees responsible for NASA authorizations, appropriations, and general oversight. We will also provide copies to others on request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix I. Frank Degnan Vijay Barnabas James Beard Richard Eiserman Monica Kelly Thomas Mills The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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Pursuant to a congressional request, GAO reviewed the extent of carryover budget balances for the National Aeronautics and Space Administration's (NASA) Mission to Planet Earth (MTPE) program and other NASA programs. GAO found that: (1) carryover balances in NASA's Human Space Flight and Science, Aeronautics, and Technology programs totalled $3.6 billion by the end of fiscal year (FY) 1995; (2) individual programs carried over varying amounts, ranging from the equivalent of 1 month to 16 months of FY 1995 new budget authority; (3) MTPE carried $695 million, or more than 6 months, of budget authority into FY 1996; (4) Under NASA's current budget and cost plans, these balances will be reduced in FY 1996 and 1997, but the actual reductions depend on the extent NASA's projected costs match the actual costs incurred and the amount of new budget authority received for FY 1997; (5) NASA officials are concerned that the current amounts are too high and are taking actions to reduce these balances; (6) a recent NASA study of carryover balances determined that the equivalent of 3 months of budget authority should be carried into the next fiscal year and recommended actions to bring NASA programs within that threshold, and also noted that the threshold needs to be studied over time to determine if it is appropriate; (7) applying the initial 3-month threshold to estimated carryover balances at the end of FY 1996 shows that 7 of the 11 Human Space Flight and Science, Aeronautics, and Technology programs have a total carryover of $1.1 billion beyond the threshold; (8) NASA's Comptroller intends to carefully scrutinize carryover amounts as part of the FY 1998 budget development process, and formally requested program managers to justify carryover balances that exceed amounts necessary to fund program costs for 8 weeks of the next fiscal year; (9) the 8 weeks was not a threshold for the appropriate level of carryover, but rather a criterion for identifying balances for review; (10) at the end of FY 1996, nine programs would need to justify $1.5 billion beyond the Comptroller's 8-week criterion; and (11) the three programs with the largest estimated balances requiring justification are Space Science with $558 million, MTPE with $435 million, and Life and Microgravity Sciences and Applications with $257 million.

You are an expert at summarizing long articles. Proceed to summarize the following text: DOD’s personal property program is used by personal property shipping office staff to manage household goods moves for all military servicemembers and DOD civilians when they relocate. The military services pay shipment and storage-related costs from their military personnel accounts’ permanent change of station budgets and pay for loss and damage claims and personal property shipment office expenses from their operation and maintenance accounts. Servicemembers generally work with DOD transportation officials at personal property processing offices to coordinate their moves. These offices can either be service- specific offices or joint or consolidated property offices that assist servicemembers from more than one service. These offices provide servicemembers with local points of contact for counseling about their moves and processing paperwork related to shipments of their personal property. Prior to the reengineering efforts over the last 11 years, DOD’s personal property program had remained virtually unchanged for nearly 40 years. DOD’s personal property program involves a complex process of qualifying carriers, soliciting rates, distributing moves, evaluating moving companies’ performance, paying invoices, and settling claims. Among the program’s many challenges is ensuring that the moving industry provides adequate year-round capacity, especially during the summer peak moving season when most servicemembers, as well as the general public, schedule their moves. In an effort to test alternative approaches and address some of its challenges, DOD previously evaluated three pilot programs. From those three pilot programs, DOD submitted a report to Congress in 2002 with recommendations to improve the quality of household goods moves for servicemembers that were originally contained in a U.S. Transportation Command report. Those recommendations were as follows: Reengineer the liability and claims process by adopting commercial practices of minimum valuation, simplifying the filing of claims, and providing the servicemember with direct settlement for claims with the carrier. Change the acquisition process to implement performance-based service contracts (as opposed to the current practice of providing contracts to the lowest bidder). Implement information technology improvements, which could integrate functions across such areas as personnel, transportation, financial, and claims. To respond to these recommendations, DOD developed a new program called Families First to improve the quality of household goods moves for servicemembers, DOD civilian employees, and their families. Families First is a U.S. Transportation Command program that is executed by the Military Surface Deployment and Distribution Command, an Army service component command. Since 1989, DOD’s personal property system has used the Transportation Operational Personal Property Standard System, a legacy data management system known as TOPS, which includes 25 additional legacy systems that support it. The Surface Deployment and Distribution Command determined that it was not feasible to upgrade TOPS to support the goals of Families First for several reasons. TOPS is being phased out because the software is no longer fully supportable and does not meet DOD’s technology standards, including its security requirements. TOPS also did not support the Business Management Modernization Program, the program that preceded the Business Transformation Agency in overseeing DOD’s business transformation efforts. In addition to these technical considerations, TOPS also has poor reporting and data capabilities. However, DOD expects that TOPS will need to be functional for a large part of the Families First rollout, until DPS is fully operational. Under the current system, servicemembers are provided with basic claims coverage using depreciated value for losses or damages incurred during a move that allows liability at a rate of $1.25 times the weight of the goods being shipped. For example, if a shipment’s weight is 10,000 pounds, the maximum liability for the moving company is $12,500. Additional coverage options are available for the servicemember to purchase. Under the current program, a servicemember has two options. Under option one, the servicemember can purchase depreciated value coverage above what the government currently pays, and under option two, the servicemember can purchase full replacement value coverage. Under both options, the servicemember shares the cost with the government. For moves within the United States and overseas or stored shipments, servicemembers can obtain additional coverage from a commercial insurance company. Some private insurance companies and moving companies sell insurance to cover certain items of personal property during moves. Additionally, some homeowner policies may cover some items in shipment. See table 1 for coverage and cost comparisons for the current DOD personal property program versus what is planned under Families First. We have completed several assessments that evaluated DOD’s pilot programs and plans for implementing Families First. For example, in 2000, we reported that the U.S. Transportation Command needed to complete an evaluation plan for its pilot programs and take necessary actions to resolve outstanding cost issues. In 2003, we evaluated the methodology used to estimate the costs associated with Families First that the services would incur. The Families First program was initially expected to increase the services’ costs for DOD’s personal property program by 13 percent, but we questioned part of the methodology used to generate this estimate. Specifically, we recommended that DOD quantify the risks of implementing the Families First program within the 13 percent estimate. As part of this evaluation, we also assessed a separate estimate for the cost of upgrading the information technology system used for managing the shipment of household goods. We questioned DOD’s ability to implement the upgrades to the information technology system within its cost estimate. We found that the estimate to implement the information technology recommendation was slightly higher than the $4 million to $6 million estimate DOD reported to Congress. In 2005, DOD reevaluated its estimated 13 percent cost increase and quantified the risks of implementing Families First within the expected cost increase. We found at that time that DOD used a reasonable methodology to validate the estimated increase and quantify the risk. Congress has been concerned about problems in this program, especially that servicemembers may receive less than what it would cost them to replace or repair their household goods that are lost or damaged during shipment. On November 24, 2003, the fiscal year 2004 National Defense Authorization Act amended the U.S. Code to allow the Secretary of Defense to include a clause for full replacement value in DOD’s contracts with moving companies. The John Warner National Defense Authorization Act for Fiscal Year 2007 mandated that DOD provide full replacement value coverage by March 1, 2008, for servicemembers and DOD civilian employees. With full replacement value, a servicemember would receive enough funds to replace or repair a lost or damaged item at its present value. Additionally, the John Warner National Defense Authorization Act for Fiscal Year 2007 mandated that the Secretary of Defense shall submit to the congressional defense committees a report containing the certifications of the Secretary on the following matters with respect to the program of the Department of Defense known as Families First: (1) whether there is an alternative to the system under the program that would provide equal or greater capability at a lower cost; (2) whether the estimates on costs, and the anticipated schedule and performance parameters, for the program and system are reasonable; and (3) whether the management structure for the program is adequate to manage and control program costs. The mandate did not specify a date for DOD to provide this information. DOD has taken some initial steps to achieve the goals and benefits of the Families First program, but delays in developing a new information management system have put achieving the program’s goals and benefits at risk. DOD continues to experience delays and missed milestones in developing and implementing DPS, and the original estimated release date for DPS has now been pushed back for more than 2 years. To meet the statutory mandate, DOD has taken steps to provide servicemembers with the full replacement value coverage benefit because of the delays in implementing DPS. However, some servicemembers may not be covered by March 1, 2008, and there are other risks associated with this backup plan. Despite these challenges, Surface Deployment and Distribution Command officials told us that they expect all types of moves will have full replacement value by March 1, 2008. DOD continues to rely on the implementation of DPS to achieve other program goals such as improving the quality of service and claims processing. DOD has taken some initial steps to help achieve the goals and benefits of the Families First program. To improve the personal property program, DOD has established three goals for Families First: (1) improving the quality of service from moving companies by using a best-value approach that incorporates performance-based service contracts; (2) streamlining the claims process used for claiming losses or damages incurred during a move; and (3) developing an integrated information management system, known as DPS. DOD designed Families First so that achieving the first two goals of the program relies heavily on completion of the third goal of the program, DPS. DOD identified numerous benefits of the Families First program, including reduced storage costs and greater operational flexibility for moving companies. Two of the program benefits identified by DOD—full replacement value coverage and expanded counseling support through a Web-based information system—are intended to directly benefit servicemembers and promote quality service when moving their personal belongings. DOD developed a phased approach to implement Families First and has taken some steps to accomplish the first and second phases. The first phase, which began in March 2004, has two main parts: (1) electronic billing and payment systems and (2) a customer satisfaction survey. The electronic billing system, known as the Central Web Application, is a government Web-based system for reviewing and approving services online, as well as for pricing shipments. The electronic payment system, U.S. Bank’s PowerTrack, is an online payment and transaction tracking system. This system is expected to reduce the payment cycle for DOD’s personal property moves. While DOD and all services other than the Air Force have made some progress in implementing the electronic billing and payment systems, the Air Force is not processing its own bills and payments using these systems because it is reengineering its payment process and cannot currently support these systems. DOD is working to fully interface and integrate electronic billing and payment systems, respectively, with DPS but continues to experience operational problems, such as invoices being delayed or lost when being processed. In addition, as part of the first phase, DOD began data collection for a customer satisfaction survey, which is intended to support the Families First goal of improving moving company performance through evaluation of past performance. Under Families First, servicemembers are expected to fill out a customer satisfaction survey about their moves, the results of which will be combined with other data to generate an overall moving company quality score. The moving companies with the best scores will be awarded more shipments. This process contributes to the best-value distribution of shipments. Under DOD’s current household goods program, DOD awards shipments to the company that bids the lowest price for a move. To generate data for ranking moving companies when Families First is implemented, DOD has instituted an interim customer satisfaction survey under the current program. However, interim customer satisfaction survey response rates have been about 16 percent within the past year, which has resulted in less than one-third of moving companies’ scores being usable. To compensate for the low response rate, DOD has developed a methodology upon program implementation to make moving companies’ scores statistically valid so the scores can be used when allocating shipments. However, the moving companies are concerned about how the low survey response rate will affect how DOD awards business to them. In addition to developing the methodology to ensure that moving companies’ scores are statistically valid, DOD has taken several steps it says will increase the customer satisfaction survey response rate. For example, it has released a commercial to increase awareness about the survey and added information in its It’s Your Move pamphlet. It also included the customer satisfaction survey requirement in the Defense Transportation Regulation. DOD also expects that the survey response rate will improve once DOD implements DPS and servicemembers can file their surveys electronically within DPS. Both of these components—the electronic billing and payment systems and the customer satisfaction survey—are necessary to support Families First. The second phase of Families First includes the development and implementation of DPS, which DOD has been working on for more than 2 years. DOD plans to use DPS to implement many key improvements for the Families First program. For example, Families First implementation documents state that with DPS, DOD will be able to use best-value distribution when awarding performance-based service provide Web-based counseling to help servicemembers with their moves, use a commercial-based tariff for domestic moves rather than the antiquated government tariff currently being used, provide direct claims settlement with the transportation service provider, use a “rate reasonableness” strategy that will help DOD manage the costs of the moving program. DOD also plans to use DPS to provide the electronic customer satisfaction survey to servicemembers and to help DOD monitor the rates moving companies charge it for moving services. The third, and final, phase of the Families First program includes adding functionality to DPS so that it can handle more types of moves, including nontemporary storage (about 16 percent of all moves) and direct procurement moves (about 8 percent of all moves). DOD continues to face delays and missed milestones in developing and implementing DPS. DPS development and implementation has been pushed back for more than 2 years from the original estimated release date. DOD began DPS development in May 2004 and DPS was originally scheduled to be available by October 2005. In October 2005, the Surface Deployment and Distribution Command initiated a review of the program. DOD then entered into an 11-month strategic pause for further program review and software testing after it encountered significant software validation and systems problems, which resulted in the system not working. DOD subsequently developed two more implementation timelines, the first in October 2006 and the second in March 2007. See table 2 for a comparison of DPS implementation timelines. During the October 2005 internal review of DPS, DOD’s review group recommended improvements in areas such as management, the type of contract used for DPS, and the DPS development process. The strategic pause following this review ended in September 2006, but the next schedule for DPS implementation was not developed until after a new DPS program office was created in October 2006. This schedule incorporated a phased rollout approach for DPS. Under this schedule, DPS software acceptance testing was to occur in winter 2007, followed by increasing use of DPS through summer and fall 2007. DOD expected DPS to be fully operational in spring 2008. DPS program managers developed what they described as an aggressive implementation schedule for two reasons. First, they planned to use DPS to meet the mandate to provide full replacement value by March 1, 2008. Second, DPS implementation was needed because the legacy system used with the current personal property system is not fully supportable and does not meet DOD information technology security standards. Program and service officials said that the legacy system has problems interfacing with DOD’s networks. In addition, the legacy system’s hardware has been breaking down. Surface Deployment and Distribution Command officials said that the number of sites not functioning at any one time varies. To keep the legacy system working, the Surface Deployment and Distribution Command provided the services with legacy system “survival kits.” These kits included motherboards and other hardware components that are difficult to find and are no longer supported commercially. DOD estimates that these survival kits will keep the legacy systems viable for 4 to 5 years, but some service personal property officials have expressed concerns that the legacy systems might not last that long. DOD delayed the DPS implementation schedule again in February 2007, after stakeholders from the services and the moving industry participated in DPS software acceptance testing and found a significant number of problems with the software. This testing generated more than 1,400 problem reports, almost 200 of which were collectively expected to result in significant changes to the software. For example, for a shipment awarded to one moving company, DPS sent the work order for the shipment to a different moving company. Thus, the moving company that was awarded the shipment did not know the shipment was awarded to it. In addition, according to a U.S. Transportation Command official, some test reports indicated that business rules still needed to be clarified, such as whether moving companies will have one or two opportunities per year to file the rates they will charge DOD to move servicemembers’ household goods. In March 2007, because of the number of test problem reports and overall concern about DPS functionality, DPS program management officials significantly altered the timeline for rolling out DPS to address concerns expressed by military service and moving industry stakeholders regarding DPS functionality and its implementation schedule. Stakeholders were also concerned that the implementation schedule called for switching to DPS during the peak summer season, when both the services and industry would have to learn a new system while also moving shipments using the current system. The revised DPS implementation schedule calls for fixing the issues identified in the test problem reports, continued testing of DPS through the summer, and adding high-priority changes requested by the services. Program managers said that DPS should be available for some shipping offices to use by fall 2007 on a test basis, with all offices using DPS beginning in spring 2008 for all moves except those using nontemporary storage and the direct procurement method. Once DPS is functional for domestic and international household goods moves, program managers will begin developing the functionality for the third phase of Families First, which includes moves using nontemporary storage and the direct procurement method. Because of the delays implementing DPS, DOD has developed a backup plan to provide servicemembers with the full replacement value coverage benefit, but its plan to implement the other goals and benefit of Families First still relies on DPS. When the backup plan was published in December 2006, it called for the next version of the current program’s domestic tariff and international rate solicitation to include language that made it mandatory for moving companies to include full replacement value coverage in the rates submitted to DOD. Using this backup plan in the current program, the majority of shipments will receive full replacement value protection by March 1, 2008. The schedule for implementing the backup plan follows the current program’s winter 2007 rate filing schedules for the domestic intra- and interstate programs and the international programs. The Surface Deployment and Distribution Command plans to begin accepting rates under the backup plan beginning in May 2007, and the rates will be effective from October 1, 2007, through April 1, 2008. Risk factors associated with DOD’s backup plan challenge DOD’s ability to implement the plan. First, the backup plan relies on a legacy system that is no longer fully supportable. For example, the system still does not meet security standards. DOD estimates that the survival kits it has sent to the services can keep the legacy system running for 4 to 5 years. However, some service officials had concerns that the system would not last this long. Without the legacy system, staff at the personal property offices have to work manually to accomplish administrative tasks. Furthermore, some service officials expressed concern that providing full replacement value without DPS would give the moving industry an opportunity to increase prices with no control to limit the cost and may create some increase in workloads for the claims offices because of the lack of automation for claims filing. Moreover, most services expressed concern about the lack of guidance for implementing full replacement value under the current system instead of within DPS. Some service and Surface Deployment and Distribution Command officials expressed concerns about possible increases in their workload because of the magnitude of the procedural changes as they work to implement full replacement value without DPS. Another risk is that thousands of moves may not be covered before the March 1, 2008, deadline. DOD’s contracts for moves within a theater of operation, those using nontemporary storage, and those using the direct procurement method do not include full replacement value and may expire after the March 2008 mandate. DOD stated that it is initiating various levels of action to ensure full replacement value is implemented by March 2008. According to DOD, as these contracts expire, the new contract will include full replacement value. The Surface Deployment and Distribution Command directed that all eligible contracts be modified not later than March 2008. However, it is still uncertain whether all contracts in place on March 1, 2008, will cover full replacement value. According to DOD estimates, in fiscal year 2006, moves that included servicemembers transferring within a theater of operation accounted for about 7,800 personal property moves, or about 1 percent of the more than 680,000 shipments that occurred. DOD officials also stated that in fiscal year 2006 direct procurement method moves represented almost 8 percent of all moves. About 16 percent of moves included nontemporary storage. In a broader sense, DOD’s backup plan does not address the other goals or counseling benefit of Families First; it is designed only to allow DOD to meet its mandate to provide full replacement value coverage. DOD officials said that they did not have a requirement to produce a backup plan for the other goals or counseling benefit and they did not invest resources to do so. Instead, DOD continues to rely on DPS to achieve the goals and counseling benefit of Families First. The reason Surface Deployment and Distribution Command officials said they created a backup plan for full replacement value is because they were required by statute to implement it by March 1, 2008, whether DPS was ready or not. For example, the backup plan does not address how to provide streamlined claims or improved quality of service from moving companies without DPS, nor does it include a way to provide the other servicemember benefit of expanded Web counseling services to help servicemembers with their moves without DPS. Until DPS is operational, some service officials have said that DOD has at least one other option for providing expanded counseling services because the Navy has a program, known as SmartWebMove, which can be used by members from other services. However, this program is connected to the legacy system, and deterioration of the legacy system may limit the feasibility of this option. Despite these challenges, Surface Deployment and Distribution Command officials told us that they expect all types of moves will have full replacement value by March 1, 2008. According to these officials, this will include nontemporary storage and direct procurement method moves. DOD continues to rely on the implementation of DPS to achieve other program goals such as improving the quality of service and claims processing. The Families First program could increase costs to DOD by about $1.4 billion over current program costs through fiscal year 2011 for two main reasons: (1) DOD estimates the program will increase costs to the services by 13 percent and (2) DOD has significantly increased the cost estimate for a new information management system since our last assessment. DOD’s Families First program has not yet been implemented, so we could not assess the actual growth in costs of the program, although DOD continues to estimate that the Families First program will increase the cost to the services for their household goods budgets by an estimated 13 percent, or as much as $1.2 billion through fiscal year 2011. In addition, the DPS program office has significantly increased the estimated cost of DPS and maintaining the DPS program office, which it now expects to cost $180 million through fiscal year 2011. We could not assess the actual growth in costs of Families First because the program has not been implemented; however, DOD continues to estimate that the costs to the services of the Families First program will be 13 percent higher than costs under the current program. In fiscal year 2006, the services’ total household goods budget was about $1.8 billion, which would mean the services would have an increase of $240 million annually above the existing budget in order to move servicemembers’ household goods under Families First in 2007, if the program were fully implemented. DOD will incorporate a cost-control mechanism into DPS, similar to the one employed in the current program, in an attempt to keep the costs within the expected increase. However, until DPS is implemented the impact of the use of this mechanism on the Families First program will not be known. Based on DOD’s total household goods budget, Families First could cost DOD about $1.2 billion more than the current program over the next 5 years. DOD continues to inform the services that the Families First program, when fully implemented, will cost them an additional 13 percent over their existing household goods budgets, which is a subset of the services’ permanent change of station budgets. According to U.S. Transportation Command and some personal property officials, this cost increase is in part because of an expectation by DOD that moving companies will increase the rates they charge as a result of their additional responsibilities under the Families First business rules, such as providing full replacement value. The actual cost of Families First will not be known until moving companies file the rates they will charge DOD to move servicemembers, which is expected to take place in March 2008. DOD is relying on features built into DPS to ensure that the costs remain at or below the expected cost increase of 13 percent. DPS will incorporate a cost-control mechanism known as rate reasonableness, which will establish an acceptable range of rates for each combination of pickup and destination locations. The program delays in implementing Families First decrease the certainty of the cost estimate because the methodology is based on certain assumptions and data that may change with time. For example, the cost methodology used to estimate the 13 percent increase was adjusted to account for fewer small businesses participating DOD-wide than participated in the pilot programs. However, according to DOD officials, the percentage of small business participation in Families First will be similar to the current DOD participation rate of 70 percent, which is significantly larger than the 30 percent assumed in the 2002 cost estimate. DOD’s evaluation of the pilot programs demonstrated that small businesses were 14 to 74 percent more expensive per shipment compared to the current program. As a result, DOD may have underestimated the cost of having small businesses participate in Families First. DOD’s estimated costs for an integrated information management system, known as DPS, have significantly increased since our last assessment in 2003. The estimates for developing an information management system to support Families First have increased from $4 million to $6 million to $86.0 million, and the total cost is expected to be about $180 million through fiscal year 2011 once annual operating costs are added. In a 2002 report, DOD estimated that implementing the information technology improvements to enhance its data management capabilities for Families First would cost $4 million to $6 million. This estimate was based on expanding the use of an upgraded, Web-based version of the existing legacy system that was implemented on a small scale during one of DOD’s pilot programs. In our April 2003 review of that estimate, we questioned whether DOD would be able to implement its new personal property program, including the technology improvements, within the estimated range. In addition, we noted that although DOD had developed a plan of action for designing the new system, the plan did not include monitoring the costs and benefits during its implementation or the extent to which system changes were being achieved within an acceptable cost range, such as the $4 million to $6 million estimate. According to DOD officials and documents, in January 2004, DOD decided to implement the technology improvements to support Families First by developing an entirely new information management system, which came to be known as DPS. In a January 2004 report, the Surface Deployment and Distribution Command said that the legacy system evaluated under the previous cost estimate was expensive to operate and maintain and could not be modified to become compliant with DOD technology standards or to support the objectives of the Families First program. At that time, DOD estimated that DPS could be developed for about $16.5 million, with an average annual cost of about $4.6 million after the initial investment. This estimate assumed that DPS could be developed using commercial-off-the-shelf or government-off-the-shelf software to account for about 75 percent of the new system. The use of existing commercial and government software was expected to keep the cost of the system low, because using ready-made software reduces the need to develop original software. For example, the Navy developed a counseling program, known as SmartWebMove, which was originally planned to be incorporated into DPS as its counseling module so that DOD would not need to develop original software as part of DPS to provide this Families First benefit. However, the Navy’s counseling module was not incorporated into DPS. The Navy, however, is still using SmartWebMove while DPS is being developed. Since the 2004 estimate, the cost of DPS has continued to increase. As of February 2007, DOD reports that it spent $51.5 million developing DPS, which is significantly higher than any previous DOD estimate. This cost includes about $8.2 million for capital hardware, $24.9 million for capital software, and $18.5 million in operating costs. According to DOD Families First officials, after the DPS contract was awarded, software developers determined that DPS would require a much larger percentage of new software development than expected because of the unique needs of the DOD personal property stakeholders, which has caused the cost to rise significantly. In addition, the costs for developing, testing, and making DPS available for use now include the cost of the Joint Program Management Office for Household Goods Systems, which was established on October 1, 2006. The original estimates did not account for a separate program office to manage the development and operation of DPS, sustain the legacy system, or evaluate future options for DOD’s household goods program. Based on our analysis of program office budget planning documents from February 2007, the DPS program office estimated that the costs for maintaining a program office, sustaining the legacy system through retirement, developing and sustaining DPS, and implementing a future household goods program through fiscal year 2011will be $180 million if all of the requirements are funded. Additional delays in the schedule are likely to further increase the costs associated with the program. However, when the legacy system is no longer needed, DOD expects that it will not have to budget for this additional cost, which is about $21 million annually. Summary information on DPS cost estimates appears in table 3. DOD faces management challenges for the Families First program, and it has not employed comprehensive planning that incorporates many sound management principles and practices. Families First offices, including the DPS program office, continue to experience organizational challenges and staffing shortfalls. Moreover, Families First does not have stakeholders’ agreement on some elements of the program, such as business rules and essential DPS functions. Additionally, the Families First program faces uncertain funding. Sound management practices require employing comprehensive planning to manage program implementation. Comprehensive planning should include many things, such as integrated approaches to manage training and workforce redeployment issues; a qualified, trained, and well-led team to reengineer the program; stakeholder agreement about key elements of a program, including the program’s business rules and its priorities; and full cost information and funding resources. However, DOD’s planning for Families First has not incorporated some of these sound management practices. Instead, DOD has developed several nonintegrated plans to cover individual portions of the Families First program. For example, DOD has a draft transition plan for organizational changes and the DPS program office has a plan for DPS development. However, DOD does not have a comprehensive plan with timelines for implementing Families First that manages all of its efforts simultaneously. Without an integrated, comprehensive plan, the program’s implementation is at risk. The offices supporting Families First, including the program office now overseeing the development and implementation of DPS, are undergoing organizational changes and experiencing staffing shortfalls that affect DOD’s ability to support Families First at a critical time in its implementation. When the first phase of Families First implementation and DPS development began in 2004, the Surface Deployment and Distribution Command, which is under the U.S. Transportation Command, managed all elements of the program. In December 2005, almost 2 years after DPS development started, the Surface Deployment and Distribution Command established a DPS program management office based on a recommendation made by a DOD review group. The review group suggested that the Surface Deployment and Distribution Command establish a clear management structure for DPS because there was no single point of authority and there was no acquisition-certified program manager. On October 1, 2006, the U.S. Transportation Command transferred this office from the Surface Deployment and Distribution Command to the U.S. Transportation Command. The new office, named the Joint Program Management Office for Household Goods Systems, is under the leadership of the U.S. Transportation Command’s Program Executive Office for Distribution Services. The DPS program office and the program executive office are now led by officials with acquisition experience. The DPS program office has several tasks: mature the program office structure and processes; sustain the legacy system currently being used through the development of its replacement, DPS; quickly implement DPS in phases; and evaluate alternatives for the future of DOD household goods services, including options for outsourcing. Although DOD’s establishment of the DPS program office addresses some of the concerns about DPS program management raised in DOD’s review, the Joint Program Management Office for Household Goods Systems was not established until a few months prior to a critical phase of DPS development and continues to organize while also facing staffing challenges. The DPS program office had a draft organization chart as of March 2007, but filling staff positions has been complicated by a base realignment and closure move to Scott Air Force Base in Illinois from the office’s current location in Alexandria, Virginia. This move is scheduled to take place in the fourth quarter of fiscal year 2007. The program office’s draft transition plan transfers several positions from the Surface Deployment and Distribution Command to the DPS program office. However, this has created human capital challenges, as many of the staff are choosing to retire or leave rather than move. These workforce planning issues are significantly affecting the DPS program office. According to DPS program management officials, as of April 2007, only 1 of 27 civilians in the program office planned to transfer to Scott Air Force Base. Thus, while Families First and DPS are at a critical stage of development, both the Surface Deployment and Distribution Command and the DPS program office are losing many of their senior leaders who possess technical and program knowledge. The DPS program office is working to mitigate these human capital planning challenges by seeking authority to hire over current staffing limits, seeking temporary functional support from other Surface Deployment and Distribution Command and U.S. Transportation Command offices, and continuing to seek support from the services and industry as software testers. As of April 2007, hiring actions had been accelerated and some job announcements had been made. The program office is also using contractor support but is facing challenges with this as well. For example, in March 2007 several contractors were not able to complete tasks for the program office because of paperwork processing issues. In addition, in March 2007, the DPS program office asked each of the services to provide two or three full-time servicemembers to continue conducting DPS software testing at the Surface Deployment and Distribution Command headquarters in Alexandria, Virginia. While the services plan to provide some human capital support, current service plans indicate that they cannot provide the servicemember support DPS management officials originally sought because each service will need its staff during the busy, peak moving season that coincides with DPS testing. For example, the Navy is planning to provide five part-time testers at Navy bases. The Army is planning to provide five part-time testers at Army bases. The Marine Corps plans to provide one full-time person to test at program headquarters as well as one support staff member at its testing site at Camp Lejeune in North Carolina. The Air Force is also providing full-time support from its joint personal property shipping office in Colorado Springs, Colorado. Overall, it is not clear how successful these temporary mitigation efforts will be in providing staff with the skills these offices need to implement both DPS and Families First. However, DOD stated that its joint stakeholder advisory team of testers will be sufficient to fulfill the mission required by the DPS program office. Surface Deployment and Distribution Command officials, who will manage and provide oversight of the current DOD personal property program and implementation of the Families First program, said that they are also facing additional workload and workforce challenges as they administer the electronic billing and payment systems as well as the customer satisfaction survey. These officials are administering these processes without the automation they expect DPS will provide while also experiencing staff reductions and changes as a result of a base realignment and closure move. As of April 2007, the U.S. Transportation Command has made some progress to staff the DPS program office, but it is not clear how successful its measures will be. Until the U.S. Transportation Command is able to ensure that the DPS program office has adequate and capable human capital resources, it may be unable to successfully implement DPS. The John Warner National Defense Authorization Act for Fiscal Year 2007 mandated that the Secretary of Defense submit to the congressional defense committees a report containing the certifications of the Secretary on the following matters with respect to the program of the Department of Defense known as Families First: (1) whether there is an alternative to the system under the program that would provide equal or greater capability at a lower cost; (2) whether the estimates on costs, and the anticipated schedule and performance parameters, for the program and system are reasonable; and (3) whether the management structure for the program is adequate to manage and control program costs. When the U.S. Transportation Command established the DPS program office, it included an evaluation of materiel alternatives for the future of household goods services as part of the office’s mission. The mandate did not specify a date for DOD to provide this information to the congressional defense committees. The U.S. Transportation Command is responsible for leading, with the assistance of the DPS program office, the evaluation of alternatives. The DPS program office is responsible for evaluating how to implement the chosen alternative. It is unclear when the DPS program office will be able to evaluate materiel alternatives for the program because (1) U.S. Transportation Command officials told us they were focusing on developing and implementing DPS and (2) the DPS program office has not yet been resourced to evaluate the materiel alternatives. DOD does not have stakeholders’ agreement on some elements of Families First, which puts the implementation of the program at risk. DOD does not have stakeholders’ agreement in two interrelated areas: (1) business rules issues, including whether existing and proposed rules will actually enable accomplishment of a key program goal, and (2) the essential functions needed for DPS. Stakeholders, including the military services, have not all agreed to some elements of Families First business rules and have not taken action to implement all of the business rules because it is unclear to them if the rules are final. At the end of our audit work, the U.S. Transportation Command was still evaluating whether the business rules would have to be published again for comment by stakeholders. However, in commenting on a draft of this report in May 2007, DOD stated that the business rules are now considered final. Business rules help define how policies are to be implemented. DPS requirements and functions are derived from these business rules. For example, in late March 2007, several months into DPS testing, DOD was still evaluating a business rule as to whether moving companies should have the opportunity to file the rates they charge DOD to move servicemembers’ household goods once or twice per year. In the current program, rates are filed twice per year. Under Families First business rules, moving companies would file rates only once per year. In April 2007, DOD decided to continue with its Families First business rule where moving companies only file rates once per year. Within DOD, debate continues about whether Families First business rules will allow DOD to accomplish its goal of improving the quality of service from moving companies by using a best-value approach that incorporates performance-based service contracts. Some DOD officials (and industry representatives) question DOD’s proposed practice of allocating business to moving companies using a system where companies that receive less than the best performance score are still allocated business. For example, under Families First rules, moving companies will be ranked into four groups based on their performance scores. Those companies with the best scores will be placed into the first group and receive the most DOD business. However, DOD officials said that even those companies that are in the fourth group, with the lowest performance scores, are expected to receive some business from DOD. According to DOD officials and industry representatives, one reason DOD will do this is to keep providing business to those companies that may not otherwise be able to stay open during the nonpeak moving season. These stakeholders said that this helps ensure that there will be enough capacity during peak moving season. However, some servicemembers’ household goods may be moved by companies that did not receive high performance scores, and therefore they may not receive quality moves. If this is not resolved, DOD may be challenged to meet the program’s goal of improving the quality of service from moving companies. Additionally, during the course of our work, stakeholders indicated that they did not consider the business rules final. However, DOD, in commenting on a draft of this report, stated that the business rules are now considered final. Stakeholders indicated that they do not yet know what will be expected of them under Families First or what DPS must include to fully support the program. Stakeholders said that the business rules are not considered final until they have been published in the Defense Transportation Regulation. The U.S. Transportation Command published business rules for phase one of the program in the Defense Transportation Regulation on February 20, 2007. However, it has not published business rules for the second and third phases of Families First in the Defense Transportation Regulation. The business rules have only been published on the Surface Deployment and Distribution Command’s Web site and once in the Federal Register so that stakeholders could comment on them. During our review, U.S. Transportation Command officials indicated that DOD planned to publish the business rules again in the Federal Register in June 2007 so that stakeholders could comment on them again and said that DOD would finalize the business rules in July 2007. It is unclear whether DOD still plans to publish the rules again in the Federal Register. Along with the uncertainty surrounding the business rules, stakeholders do not have procedural guidance and do not yet know what is expected of them under Families First. For example, an Air Force personal property official told us the Air Force needs the finalized Families First business rules so that it can train its staff on these new rules, which the personal property official described as being vastly different from the current program’s business rules. However, the Air Force personal property official said the Air Force is hesitant to develop a training curriculum on business rules that are not finalized. Additionally, without final business rules, the services cannot set up internal regulations to support the business rules. Moreover, representatives from the services and the moving industry are concerned that without a formal set of business rules on which to develop DPS, they cannot evaluate whether the computer system fully supports the Families First business rules. Service officials and industry representatives continue to have questions about Families First business rules and DPS implementation. Finally, the moving companies have concerns about the Families First business rules that define how DOD generates the performance scores used to rank them in the first, second, third, or fourth groups. The majority of a moving company’s performance score comes from a customer satisfaction survey. However, servicemember response rates for the survey have been low (about 16 percent within the past year) and, because of this, most moving companies’ scores are not statistically valid for generating a performance score. Although DOD has, as part of its business rules, devised a methodology to make moving company performance scores valid until survey response rates improve, industry representatives are still concerned that moving companies will be negatively affected by low response rates. In commenting on a draft of this report, DOD stated that while it values the opinion of the moving industry, its personal property program does not require consensus by industry. DOD stated that the main focus of the department is to provide a quality personal property program for servicemembers while being good stewards of taxpayer dollars. Another fundamental challenge facing DOD in implementing DPS is that stakeholders, such as the military services and the moving industry, have not agreed to all of the essential functions of DPS and how they should operate when DPS is made available to servicemembers to use. Service officials told us that prior to the development of the DPS program office, the Surface Deployment and Distribution Command held many meetings to understand what the services wanted DPS to provide servicemembers and personal property officials. However, service officials said that officials overseeing DPS development at that time did not include all of those requirements when first developing DPS. A Surface Deployment and Distribution Command official said that the contract for DPS was written from a requirements list generated by military service and moving industry stakeholder participation. For example, there was a General Officer Steering Committee, Council of Colonels and Captains, and moving industry stakeholder groups, which met to discuss DPS requirements. In early 2007, after the U.S. Transportation Command took over DPS, stakeholders had their first opportunity to test DPS. During these tests, stakeholders identified functions that they expected within DPS but that did not work the way they expected. This resulted in DPS not providing the functionality service officials expected, and this, in turn, could affect the services’ workloads. A U.S. Transportation Command official said that it is possible that there was miscommunication during earlier meetings to define requirements and that it was not until stakeholders were able to test DPS functionality that these issues were identified. For example, DPS users wanted to obtain the status of a moved shipment. When DPS was programmed, it only displayed whether the shipment was in the system. However, users wanted more detail in terms of where the shipment was at a certain point in time. DPS program management is still in the process of identifying and prioritizing the requirements for DPS, but currently lacks stakeholders’ agreement about all of those requirements and their priority. For example, some stakeholders disagree with the categories assigned to some of the test problem reports, because none of the reports were placed in categories 1 or 2, which are used for the most severe types of problems. Further, the moving industry expected that DPS would interface with their computer systems, but this is not yet part of DPS. DPS program officials said that earlier phases of DPS development lacked a mechanism for systematically reviewing DPS problems and requirements and identifying how to fix them. The U.S. Transportation Command and the Surface Deployment and Distribution Command formed a Functional Requirements Board to review and prioritize the problems identified during testing that must be fixed and to address other proposed changes to DPS. The Functional Requirements Board is composed of representatives from the services, the Surface Deployment and Distribution Command, and the U.S. Transportation Command and meets monthly to discuss which testing problems should be the highest priority for correcting. The prioritized list of test problems is then reviewed by a Configuration Control Board, which is composed of DPS program managers, service representatives, DPS development contractors, and software engineers who decide which of the DPS problems can be corrected after considering the resources available. As of March 2007, according to DOD, the Functional Requirements Board had developed initial DPS functional requirements, reviewed many proposed system enhancements, and prioritized the services’ top five needs in each DPS module. In addition to stakeholders’ requirements, additional priorities for DPS may also come from the business rules. This, too, could affect the DPS implementation timeline, as well as implementation of Families First. Another challenge is that without stakeholders’ agreement, DPS requirements continue to change. DPS development is being administered using a firm-fixed-price contract. With a firm-fixed-price contract all major modifications to DPS require negotiation with the contractor, which may lead to additional administrative costs. Even though Families First is projected to cost the services about $1.2 billion over the next 5 years, and DPS is expected to cost about $180 million through fiscal year 2011, the department has not set aside funding to fully cover these costs. The services have taken different approaches in budgeting for the increased costs expected to implement the Families First program, ranging from the Army requesting the entire estimated 13 percent increase to the Navy not requesting any increase at all, in part because they have not received clear guidance from DOD about how to calculate the estimated increase to their budgets. Moreover, the growing cost of DPS has led to funding shortfalls in the DPS program office that are affecting both staffing needs and software development. The services vary in the extent to which they have budgeted for the increased costs expected to implement the Families First program. As previously discussed, DOD estimates that the Families First program will increase the services’ moving budgets by 13 percent above the current budgets needed to move household goods, and DOD has informed the services to budget based on this estimate. However, some personal property officials expressed concerns about DOD’s ability to implement the Families First program within the expected increase of 13 percent; these officials expect that the cost increase will be significantly more. As a result, the services vary in the degree to which they have budgeted for Families First. According to service officials, the services have taken the following actions to budget for Families First: The Army has submitted a budget request for the entire 13 percent increase to the household goods portion of its budget in fiscal years 2008 and 2009. The Coast Guard requested the 13 percent increase based on its entire permanent change of station budget, of which household goods is just a portion. The Air Force submitted a budget that included the 13 percent cost increase for Families First in fiscal year 2008, but the Office of the Secretary of Defense did not agree with the Air Force’s budget submission and reduced its funding for permanent change of station moves. The Marine Corps has requested funding in fiscal years 2007, 2008, and 2009 only for its estimated full replacement value cost. The Navy has not requested any of the expected 13 percent cost increase. In addition, some personal property officials stated that they are having difficulty budgeting because they have not received clear guidance about how to calculate the increase. As a result, the services also vary in how they interpret the effect of the 13 percent cost estimate on their household goods budgets. For example, the Air Force estimated its typical annual expected increase in the current household goods program and then added 13 percent. Army officials told us they were unclear whether the household goods program would be increasing by 13 percent every year or just the first year of Families First. A Coast Guard budget official interpreted the 13 percent increase as an increase to just those portions of the budget that apply to the rates charged by moving companies. Neither the Surface Deployment and Distribution Command nor the Office of the Secretary of Defense Comptroller have provided clear guidance on how the services are supposed to apply the 13 percent estimate to their household goods budgets. As a result, the services may continue to apply the 13 percent in different ways, which could result in the program not being fully funded. According to some service officials, if the expected increase in Families First cost is not included in their budgets and program costs begin to rise as Families First is implemented, then the services may have to consider measures to reduce their household goods budgets. This could affect the number of moves the services can make and could ultimately impact the services’ flexibility in meeting force management needs. Surface Deployment and Distribution Command officials said they plan to monitor the cost of Families First in two ways. First, these officials will use the rate reasonableness methodology to keep the cost at the estimated 13 percent increase. Further, they plan to use reporting functions in DPS to monitor program costs. However, it is unclear how officials will monitor the costs of the program without a fully functioning DPS. Additionally, although the services plan to monitor the actual cost of the program as part of their normal budget processes, there is no plan to provide updated estimates to the services about the cost of the program prior to the services actually incurring the cost. Further, without clear guidance to the services about how to apply the 13 percent cost increase to their permanent change of station budgets, it is unclear whether the services will budget appropriately for the projected Families First cost increase. Without updated information about whether the estimated increase remains accurate as Families First is implemented, the services may not budget for Families First or may budget inaccurately for the program. As a result of the growing costs of DPS, the DPS program office is experiencing funding shortfalls that are affecting both staffing needs and software development. As of April 2007, the U.S. Transportation Command had not identified how it would fully fund its projected costs of DPS, which it estimated in February 2007 to be about $180 million through fiscal year 2011. Without these funds, the U.S. Transportation Command will be challenged to staff the DPS program office and complete DPS software development. The U.S. Transportation Command has been trying to fund DPS and the DPS program office from its transportation working capital fund. In fiscal year 2007, the U.S. Transportation Command reallocated about $7.5 million from its transportation working capital fund to support DPS. According to a U.S. Transportation Command budget planning document, this resulted in other U.S. Transportation Command information technology program delays or affected their ability to provide some services. Even with the reallocation, the U.S. Transportation Command had to defer about $9.7 million needed for high-priority software changes and development essential for DPS to fiscal year 2008. The DPS program office has an anticipated shortfall for fiscal year 2008 of $21 million, which includes staff training, contractor support, and funds for staff travel. Travel funds are important since the DPS contractor will be in Virginia and the program staff will be located at Scott Air Force Base in Illinois. However, the U.S. Transportation Command has not yet developed a detailed budget plan to resource DPS or the DPS program office. The information technology portion of the U.S. Transportation Command’s transportation working capital fund has an annual budget of about $400 million. The DPS program office estimates that it will cost from $28 million to $43 million annually to support DPS and the program office for fiscal years 2008 through 2012. This is from 7 to about 11 percent of the U.S. Transportation Command’s information technology portion of the transportation working capital budget. The U.S. Transportation Command has asked the Office of the Secretary of Defense for $5 million during fiscal year 2008, but the request has not yet been approved. Additionally, U.S. Transportation Command officials said that they have informed the services that they expect them to provide funds for some additional DPS requirements. DPS program office officials based their current cost estimates for DPS and the program office on the aggressive timeline for implementing DPS before it changed in February 2007. Additional delays in the schedule because of problems developing the software will likely increase the costs associated with the program. At the time of our review, it was too early in the DPS implementation process to determine if the oversight provided by the program office will be effective in keeping DPS costs under control given the ongoing changes to the DPS implementation schedule and the significant number of software changes identified during software testing. Despite DOD’s recent focus on its personal property program, long- standing problems persist. The department has invested millions of dollars trying to improve the program since the mid-1990s with little real progress. DOD’s Families First program is intended to address many of these long- standing problems but has faced a myriad of management problems and is now at a critical juncture in its implementation. The underlying problem is that DOD has not developed a comprehensive plan to organize, staff, and fund Families First. Until DOD develops a detailed plan to adequately recruit and retain qualified personnel, gain stakeholder agreement about essential requirements for DPS, and set aside resources such as funding and staff, it will be unable to effectively address the challenges to the program. Relying on DPS to achieve program goals—without analyzing alternatives as required by Congress—puts Families First at risk. Moreover, at a time when our nation faces increasing financial constraints and it is increasingly important for DOD to maximize the return on its investment in new systems, DPS costs are continuing to increase while DOD has little to show for its 11 years of reengineering efforts and millions of dollars of investment. Without a reexamination of the program as required by the mandate and urgent attention commensurate with the program’s importance to millions of servicemembers and their families, these problems are likely to continue to negatively affect servicemembers’ quality of life when they are required to move. We are making the following two recommendations to the Secretary of Defense. To address long-standing problems in DOD’s personal property program we recommend that the Secretary of Defense direct the Commander, U.S. Transportation Command, to expedite the evaluation of the Families First program the John Warner National Defense Authorization Act for Fiscal Year 2007 mandated the department conduct. This act mandates that the report contain the certifications of the Secretary of Defense on the following matters with respect to the Families First program: (1) whether there is an alternative to the system under the program that would provide equal or greater capability at a lower cost; (2) whether the estimates on costs, and the anticipated schedule and performance parameters, for the program and system are reasonable; and (3) whether the management structure for the program is adequate to manage and control program costs. We also recommend that DOD employ comprehensive planning to implement the Families First program and its associated system. At a minimum, this planning should address specific steps to hire and train personnel so that the Surface Deployment and Distribution Command personal property division and the DPS program office have the human capital needed to develop and implement DPS and reach agreement with stakeholders on the essential requirements for DPS and their priority to facilitate the development of DPS. In addition, this comprehensive plan should include an investment strategy that reflects the full cost of accomplishing the goals of Families First and milestones for implementation. In written comments on a draft of this report, DOD concurred with both of our recommendations and cited specific actions it has taken and will take for each recommendation. We believe DOD’s planned actions, if implemented, have the potential to improve the outcome of the Families First program. However, we also believe it is critical that DOD sustain focus on the program, especially given the delays the program has experienced and the challenges it still faces. DOD concurred with our recommendation to expedite the evaluation of the Families First program that the John Warner National Defense Authorization Act for Fiscal Year 2007 mandated the department conduct. In its comments, DOD said that it plans to provide this evaluation of its household goods program to Congress in August 2007. We modified our recommendation to include the details of what the act requires. DOD also concurred with our recommendation that it should employ comprehensive planning to implement the Families First program. In addition, DOD provided technical comments suggesting that we include the Surface Deployment and Distribution Command personal property division as part of this recommendation. We agree, and have modified this recommendation accordingly. Our recommendation now indicates that at a minimum, this planning should include specific steps to hire and train personnel for the Surface Deployment and Distribution Command personal property division and the DPS program office, address specific steps to reach agreement with stakeholders on the essential requirements for DPS and their priority, and include an investment strategy that reflects the full cost of accomplishing the goals of Families First and milestones for implementation. DOD cited specific actions it has taken or will take to implement this recommendation. For example, DOD said that hiring actions are in progress to staff the DPS program office after its relocation to Scott Air Force Base and that other actions are being implemented to staff the Surface Deployment and Distribution Command. In addition, DOD stated that it has implemented a process to reach agreement with stakeholders on the essential requirements for DPS and their priority by establishing the Functional Requirements Board and the Configuration Control Board. DOD stated that this structure has helped to stabilize the functional requirements for DPS. Finally, DOD stated that the U.S. Transportation Command will provide almost $91 million for DPS development, testing, fielding, and maintenance and that there is a DPS line item in the U.S. Transportation Command’s transportation working capital fund budget. The U.S. Transportation Command is also working with the Office of the Secretary of Defense to provide almost $2.8 million of operating/maintenance dollars from transformation funding. DOD’s comments also state that the U.S. Transportation Command will provide funds internally, if required, to fund DPS and the DPS program office. However, DOD’s comments did not address how the department intends to develop an investment strategy to cover the over $1 billion in increased costs associated with implementing Families First. Developing such a plan for Families First will be critical for the program’s future success. DOD also provided technical and editorial comments, which we have incorporated as appropriate. DOD’s comments are reprinted in appendix II. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; the Commander, U.S. Transportation Command; the Office of the Assistant Deputy Under Secretary of Defense (Transportation Policy); and the Director, Office of Management and Budget. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions 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 evaluate the Department of Defense’s (DOD) Families First program, we obtained documentation from and met with DOD officials and stakeholders in the Washington, D.C., area from the Military Surface Deployment and Distribution Command; the Joint Program Management Office for Household Goods Systems; Transportation and personal property offices of the Army, Navy, Air Force, Marine Corps, and Coast Guard; three moving industry associations, including the American Moving and Storage Association, the Household Goods Forwarders Association of America, and the Military Mobility Coalition; and the Offices of the Secretary of Defense, including Transportation Policy and the Comptroller. We also met with DOD officials at Scott Air Force Base, Illinois, from the U.S. Transportation Command’s Program Executive Office for Distribution U.S. Transportation Command’s Strategy, Policy, Programs and Logistics U.S. Transportation Command’s Program Analysis and Financial Management Directorate. To assess the steps DOD has taken to achieve the goals and benefits of the Families First program with or without a new information management system, we identified the goals and benefits of the Families First program by analyzing Families First planning documents and related studies, such as briefings to the U.S. Transportation Command, and verified these goals with personal property officials from the Surface Deployment and Distribution Command. We compared the status of the Families First program to its stated goals by examining Families First implementation timelines provided by program officials and by interviewing officials and stakeholders from the offices listed. We limited our evaluation of the benefits of the Families First program to those benefits that pertain to the servicemembers, specifically full replacement value coverage and expanded counseling services. We determined DOD’s ability to achieve the goals and benefits of Families First with or without a new information management system by monitoring the status of the Defense Personal Property System (DPS) throughout the course of our review. This included observing demonstrations of DPS as it was presented to representatives from the services and moving industry, reviewing test problem reports generated during DPS software acceptance testing, and examining briefings in which DPS program management and stakeholders reevaluated the DPS implementation schedule. We also reviewed a Federal Register notice provided by Surface Deployment and Distribution Command officials, which described its plans for implementing the full replacement value benefit of Families First without DPS. We analyzed the current program business rules and requirements and compared them to the goals and benefits of Families First to determine if alternatives existed in the current program to implement them without DPS. We also interviewed the officials and stakeholders listed. We asked these officials and stakeholders to provide alternatives for achieving the Families First goals and benefits without DPS. When an alternative was identified, we questioned officials and stakeholders about the feasibility and possible challenges of implementing Families First goals and benefits without DPS. To evaluate the growth in the cost of the program since our previous assessment, we determined that we could not evaluate the actual growth in costs because data were unavailable as the program has not yet been implemented. However, we determined that DOD was still advising the services to budget for the previously estimated 13 percent cost increase for Families First. To understand this estimated increase, we reviewed the estimated cost of the Families First program from our two previous reports related to the cost of the Families First program. We analyzed the size of the services’ current permanent change of station budgets and assessed how the cost of the Families First program would increase those budgets using information provided by the Office of the Secretary of Defense Comptroller. Families First program management officials stated that DOD would use a cost-control mechanism known as rate reasonableness to ensure that program costs do not exceed the estimated increase. We analyzed Families First business rules and planning documents, such as its concept of operations, to determine the feasibility and limitations of the rate reasonableness approach. We interviewed officials from the Military Surface Deployment and Distribution Command and the U.S. Transportation Command Office for Transportation Policy to determine whether their estimate of the cost of Families First has changed since our previous assessment and what their plans were to keep the cost of the Families First program within the estimate. We also asked officials from the Military Surface Deployment and Distribution Command if they had plans to monitor the costs during implementation of the program. Although we did not independently test the reliability of data DOD extracted from its data system to develop costs or independently verify the analysis used to generate cost estimates, we determined the data were sufficiently reliable for the purposes of our report because they are the same data DOD decision makers use to manage the program. To assess the growth in the estimated cost of DPS, we reviewed our previous report, which contained DOD’s estimate of the cost of improving its information technology system. We compared this estimate to estimates contained in the U.S. Transportation Command budget planning documents and the DPS economic analysis completed in 2003, which also documented how DOD’s concept for information technology system improvements changed since our last review. To obtain updated information about the current costs of developing and fielding DPS, we analyzed budget documents provided by the Joint Program Management Office for Household Goods Systems as of February 2007. To understand the U.S. Transportation Command’s transportation working capital fund Chief Information Officer Program Review Process, we reviewed related documents, such as the Chief Information Office Program Review Process business flow and interviewed budget officials at the U.S. Transportation Command’s Program Analysis and Financial Management directorate. Although we did not independently test the reliability of data DOD extracted from its data system to develop costs or the analysis used to generate cost estimates, we determined that the data were sufficiently reliable for the purposes of our report because they are the same data DOD decision makers use to manage the program. To assess the extent to which DOD faces management challenges in implementing the Families First program, we analyzed documents, such as Families First program meeting minutes and management briefings to the General Officer Steering Committee, the Council of Colonels and Captains, and the U.S. Transportation Command, which identified difficulties in implementing the Families First program. We also identified best practices for business reengineering and transformation, which we used to compare the process by which DOD is implementing the Families First program. These best practices were found in prior GAO reports. We also reviewed documents pertaining to the Joint Program Management Office for Household Goods Systems, including the draft organization chart, the draft transition plan for the office’s move to Scott Air Force Base as part of a base realignment and closure move, and draft budget documents for developing and implementing DPS. We also interviewed officials and stakeholders. We did not evaluate DOD’s decision to implement the Families First program or develop DPS, nor did we evaluate the solicitation process for awarding the DPS contract. We conducted this performance audit from September 2006 through May 2007 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Lawson Gist, Jr., Assistant Director; Krislin Bolling; Renee S. Brown; Michelle Cooper; Arthur L. James, Jr.; Tina M. Kirschbaum; Lonnie McAllister; Maewanda Michael- Jackson; Charles W. Perdue; and Bethann Ritter made key contributions to this report. Defense Transportation: DOD Has Adequately Addressed Congressional Concerns Regarding the Cost of Implementing the New Personal Property Program Initiatives. GAO-05-715R. Washington, D.C.: June 9, 2005. Defense Transportation: Monitoring Costs and Benefits Needed While Implementing a New Program for Moving Household Goods. GAO-03-367. Washington, D.C.: April 18, 2003. Defense Transportation: Final Evaluation Plan Is Needed to Assess Alternatives to the Current Personal Property Program. GAO/NSIAD-00- 217R. Washington, D.C.: September 27, 2000. Defense Transportation: The Army’s Hunter Pilot Project Is Inconclusive but Provides Lessons Learned. GAO/NSIAD-99-129. Washington, D.C.: June 23, 1999. Defense Transportation: Plan Needed for Evaluating the Navy Personal Property Pilot. GAO/NSIAD-99-138. Washington, D.C.: June 23, 1999. Defense Transportation: Efforts to Improve DOD’s Personal Property Program. GAO/T-NSIAD-99-106. Washington, D.C.: March 18, 1999. Defense Transportation: The Army’s Hunter Pilot Project to Outsource Relocation Services. GAO/NSIAD-98-149. Washington, D.C.: June 10, 1998. Defense Transportation: Reengineering the DOD Personal Property Program. GAO/NSIAD-97-49. Washington, D.C.: November 27, 1996.

The Department of Defense (DOD) has been working to improve its personal property program since the mid-1990s to fix long-standing problems, such as excessive loss or damage to servicemembers' property and poor quality of service from moving companies. DOD plans to replace its current program with Families First, a program that promises to offer servicemembers an improved claims process and quality of service. GAO was mandated to (1) assess the steps DOD has taken to achieve the goals and benefits of the Families First program; (2) evaluate the growth in costs of the program, including the costs for a new information management system, since GAO's last assessment in 2003; and (3) assess the extent to which DOD faces management challenges--such as staffing--in implementing Families First. To address these objectives, GAO analyzed DOD's program, funding and staffing data, and interviewed personal property officials and stakeholders. DOD has taken some initial steps to achieve the goals and benefits of Families First, but delays in developing a new information management system have put the overall goals of improving the quality of service from moving companies and streamlining the claims process at risk. The information management system, the Defense Personal Property System (DPS), is now more than 2 years behind schedule. DOD has missed DPS milestones because of software development issues and is now working to address issues identified in recent software testing. Since DPS has been delayed, DOD is in the process of implementing a backup plan to meet a statutory mandate to provide servicemembers with the full replacement value of goods lost or damaged during a move by March 1, 2008. However, there are risks and costs associated with DOD's backup plan because it relies on an increasingly unreliable legacy computer system; also, DOD's plan may not cover all moves by March 1, 2008. The Families First program could increase costs to DOD by $1.4 billion over current program costs through fiscal year 2011 for two main reasons: (1) DOD estimates the program will increase costs to the services' household goods budgets by 13 percent and (2) DOD has significantly increased the cost estimate for a new information management system since GAO's last assessment. While DOD's estimate that the Families First program will increase costs by 13 percent has not changed since 2005, all of the services have not yet fully budgeted for this cost increase, which GAO analysis shows could be about $1.2 billion. Additionally, DOD has increased its estimate for an information management system for Families First because it decided to develop DPS rather than upgrade the legacy system. DOD estimated that the upgrade would cost $4 million to $6 million, and the program office estimated that DPS will cost about $180 million through fiscal year 2011. DOD's personal property program faces many management challenges--especially staffing, in addition to program requirements and funding problems--because it has not employed comprehensive planning. Sound management practices require a comprehensive approach that includes plans to assemble a qualified, trained, and well-led team; gain stakeholders' agreement about key program elements, such as business rules to define how the moving industry will serve military members; and estimate and plan for adequate resources. DOD has developed several draft plans to address individual portions of Families First and DPS, such as the draft transition plan for moving the DPS program office as part of a base realignment and closure move from Virginia to Illinois, but there is no overall plan that addresses how DOD will (1) fill significant staffing shortfalls in the newly formed DPS program office, (2) gain agreement from stakeholders, and (3) fund the significant and growing costs associated with the program. For example, DOD has not identified sources to fully fund DPS development and operations. Without a comprehensive plan, achieving the goals of the Families First program will likely remain difficult.

You are an expert at summarizing long articles. Proceed to summarize the following text: The DHS Privacy Office was established with the appointment of the first Chief Privacy Officer in April 2003. The Chief Privacy Officer is appointed by the Secretary and reports directly to him. Under departmental guidance, the Chief Privacy Officer is to work closely with other departmental components, such as the General Counsel’s Office and the Policy Office, to address privacy issues. The Chief Privacy Officer also serves as the designated senior agency official for privacy, as has been required by the Office of Management and Budget (OMB) of all major departments and agencies since 2005. The positioning of the Privacy Office within DHS differs from the approach used for privacy offices in other countries, such as Canada and the European Union, where privacy offices are independent entities with investigatory powers. Canada’s Privacy Commissioner, for example, reports to the Canadian House of Commons and Senate and has the power to summon witnesses and subpoena documents. In contrast, the DHS privacy officer position was established by the Homeland Security Act as an internal component of DHS. As a part of the DHS organizational structure, the Chief Privacy Officer has the ability to serve as a consultant on privacy issues to other departmental entities that may not have adequate expertise on privacy issues. The office is divided into two major functional groups addressing Freedom of Information Act (FOIA) and privacy responsibilities, respectively. Within each functional group, major responsibilities are divided among senior staff assigned to oversee key areas, including international privacy policy, departmental disclosure and FOIA, privacy technology, and privacy compliance operations. There are also component-level and program-level privacy officers at the Transportation Security Administration (TSA), U.S. Visitor and Immigrant Status Indicator Technology (US-VISIT) program, and U.S. Citizenship and Immigration Services. Figure 1 details the structure of the DHS Privacy Office. When the Privacy Office was initially established, it had 5 full-time employees, including the Chief Privacy Officer. Since then, the staff has expanded to 16 full-time employees. The Privacy Office has also hired private contractors to assist in meeting its obligations. As of February 2007, the Privacy Office had 9 full-time and 3 half-time contractor staff in addition to its full-time employees. The first Chief Privacy Officer served from April 2003 to September 2005, followed by an Acting Chief Privacy Officer who served through July 2006. In July 2006, the Secretary appointed a second permanent chief privacy officer. In 2004, the Chief Privacy Officer established the DHS Data Privacy and Integrity Advisory Committee, which is to advise the Secretary and the Chief Privacy Officer on “programmatic, policy, operational, administrative, and technological issues within DHS” that affect individual privacy, data integrity, and data interoperability. The Advisory Committee is composed of privacy professionals from the private sector and academia and is organized into three subcommittees; Data Integrity and Information Protection, Privacy Architecture, and Data Acquisition and Use. To date, the Advisory Committee has issued reports on several privacy issues, such as use of commercial data and radio frequency identification (RFID) technology, and has made related policy recommendations to the department. The Advisory Committee’s charter requires that the committee meet at least once a year; however, thus far it has met quarterly. The Advisory Committee meetings, which are open to the public, are used to discuss progress on planned reports, to identify new issues, to receive briefings from DHS officials, and to hold panel discussions on privacy issues. The Privacy Office is responsible for ensuring that DHS is in compliance with federal laws that govern the use of personal information by the federal government. Among these laws are the Homeland Security Act of 2002 (as amended by the Intelligence Reform and Terrorism Prevention Act of 2004), the Privacy Act of 1974, and the E-Gov Act of 2002. Based on these laws, the Privacy Office’s major responsibilities can be summarized into four broad categories: (1) reviewing and approving PIAs, (2) integrating privacy considerations into DHS decision making, (3) reviewing and approving public notices required by the Privacy Act, and (4) preparing and issuing reports. Section 208 of the E-Gov Act is designed to enhance protection of personally identifiable information in government information systems and information collections by requiring that agencies conduct PIAs. According to OMB guidance, a PIA is an analysis of how information is handled: (1) to ensure that handling conforms to applicable legal, regulatory, and policy requirements regarding privacy; (2) to determine the risks and effects of collecting, maintaining, and disseminating personally identifiable information in an electronic information system; and (3) to examine and evaluate protections and alternative processes for handling information to mitigate potential risks to privacy. Agencies must conduct PIAs before they (1) develop or procure information technology that collects, maintains, or disseminates personally identifiable information or (2) initiate any new data collections of personal information that will be collected, maintained, or disseminated using information technology—if the same questions are asked of 10 or more people. To the extent that PIAs are made publicly available, they provide explanations to the public about such things as what information will be collected, why it is being collected, how it is to be used, and how the system and data will be maintained and protected. Further, a PIA can serve as a tool to guide system development decisions that have a privacy impact. The Privacy Office is responsible for ensuring departmental compliance with the privacy provisions of the E-Gov Act. Specifically, the chief privacy officer must ensure compliance with the E-Government Act requirement that agencies perform PIAs. In addition, the Homeland Security Act requires the chief privacy officer to conduct a PIA for proposed rules of the department on the privacy of personal information. The Privacy Office’s involvement in the PIA process also serves to address the Homeland Security Act requirement that the chief privacy officer assure that technology sustains and does not erode privacy protections. Integrating privacy considerations into the DHS decision-making process Several of the Privacy Office’s statutory responsibilities involve ensuring that the major decisions and operations of the department do not have an adverse impact on privacy. Specifically, the Homeland Security Act requires that the Privacy Office assure that the use of technologies by the department sustains, and does not erode, privacy protections relating to the use, collection, and disclosure of personal information. The act further requires that the Privacy Office evaluate legislative and regulatory proposals involving the collection, use, and disclosure of personal information by the federal government. It also requires the office to coordinate with the DHS Officer for Civil Rights and Civil Liberties on those issues. Reviewing and approving public notices required by the Privacy Act The Privacy Office is required by the Homeland Security Act to assure that personal information contained in Privacy Act systems of records is handled in full compliance with fair information practices as set out in the Privacy Act of 1974. The Privacy Act places limitations on agencies’ collection, disclosure, and use of personally identifiable information that is maintained in their systems of records. The act defines a record as any item, collection, or grouping of information about an individual that is maintained by an agency and contains that individual’s name or other personal identifier, such as a Social Security number. It defines “system-of- records” as a group of records under the control of any agency from which information is retrieved by the name of the individual or by an individual identifier. The Privacy Act requires agencies to notify the public, via a notice in the Federal Register, when they create or modify a system-of- records. This notice is known as a system-of-records notice and must include information such as the type of information collected, the types of individuals about whom information is collected, the intended “routine” uses of the information, and procedures that individuals can use to review and correct their personal information. The act also requires agencies to define—and limit themselves to—specific purposes for collecting the information. The Fair Information Practices, which form the basis of the Privacy Act, are a set of principles for protecting the privacy and security of personal information that were first proposed in 1973 by a U.S. government advisory committee. These principles were intended to address what the committee considered the poor level of protection then being afforded to privacy under contemporary law. Since that time, the Fair Information Practices have been widely adopted as a benchmark for evaluating the adequacy of privacy protections. Appendix II contains a summary of the Fair Information Practices. The Homeland Security Act requires the Privacy Office to prepare annual reports to Congress detailing the department’s activities affecting privacy, including complaints of privacy violations and implementation of the Privacy Act of 1974. In addition to the reporting requirements under the Homeland Security Act, Congress has occasionally directed the Privacy Office to report on specific technologies and programs. For example, in the conference report for the DHS appropriations act for fiscal year 2005, Congress directed the Privacy Office to report on DHS’s use of data mining technologies. Congress asked for a follow-up report on data mining in the conference report for the fiscal year 2007 DHS appropriations bill. The Intelligence Reform and Terrorism Prevention Act of 2004 also required the Chief Privacy Officer to submit a report to Congress on the privacy and civil liberties impact of the DHS-maintained Automatic Selectee and No-Fly lists, which contain names of potential airline passengers who are to be selected for secondary screening or not allowed to board aircraft. In addition, the Privacy Office can initiate its own investigations and produce reports under its Homeland Security Act authority to report on complaints of privacy violations and assure technologies sustain and do not erode privacy protections. The DHS Privacy Office has made significant progress in addressing its statutory responsibilities under the Homeland Security Act by developing processes to ensure implementation of privacy protections in departmental programs. For example, the Privacy Office has established processes for ensuring departmental compliance with the PIA requirement in the E-Gov Act of 2002. Instituting this framework has led to increased attention to privacy requirements on the part of departmental components, contributing to an increase in the quality and number of PIAs issued. The Privacy Office has addressed its mandate to assure that technologies sustain, and do not erode, privacy protections through a variety of actions, including implementing its PIA compliance framework, establishing a federal advisory committee, raising awareness of privacy issues through a series of public workshops, and participating in policy development for several major DHS initiatives. The office has also taken action to address its mandate to evaluate regulatory and legislative proposals involving the use of personal information by the federal government and has coordinated with the DHS Officer for Civil Rights and Civil Liberties. While substantial progress has been made in these areas, limited progress has been made in other important aspects of privacy protection. For example, while the Privacy Office has reviewed, approved, and issued 56 new and revised Privacy Act system-of-records notices since its establishment, little progress has been made in updating notices for legacy systems of records—older systems of records that were originally developed by other agencies prior to the creation of DHS. Because many of these notices are not up-to-date, the department is not in compliance with OMB requirements that system-of-records notices be reviewed biennially, nor can it be assured that the privacy implications of its many systems that process and maintain personal information have been fully and accurately disclosed to the public. Further, the Privacy Office has generally not been timely in issuing public reports, potentially limiting their value and impact. The Homeland Security Act requires that the Privacy Office report annually to Congress on department activities that affect privacy, including complaints of privacy violations. However, the office has issued only two annual reports within the 3-year period since it was established in April 2003, and one of these did not include complaints of privacy violations as required. In addition, required reports on several specific topics have also been late. In addition, the office initiated its own investigations of specific programs and produced reports on these reviews, several of which were not publicly released until long after concerns had been addressed. Late issuance of reports has a number of negative consequences beyond failure to comply with mandated deadlines, including a potential reduction in the reports’ value and erosion of the office’s credibility. One of the Privacy Office’s primary responsibilities is to review and approve DHS PIAs, thus ensuring departmental compliance with the privacy provisions (section 208) of the E-Gov Act of 2002. The E-Gov Act requires that federal agencies perform PIAs before developing or procuring technology that collects, maintains, or disseminates personally identifiable information, or when initiating a new collection of personally identifiable information using information technology. In addition, the Homeland Security Act also specifically directs the office to perform PIAs for proposed departmental rules concerning the privacy of personal information. Further, the Privacy Office’s involvement in the PIA process also addresses its broad Homeland Security Act requirement to “assure that technology sustains and does not erode privacy protections.” The centerpiece of the Privacy Office’s compliance framework is its written guidance on when a PIA must be conducted, how the associated analysis should be performed, and how the final document should be written. Although based on OMB’s guidance, the Privacy Office’s guidance goes further in several areas. For example, the guidance does not exempt national security systems and also clarifies that systems in the pilot testing phase are not exempt. The DHS guidance also provides more detailed instructions than OMB’s guidance on the level of detail to be provided. For example, the DHS guidance requires a discussion of a system’s data retention period, procedures for allowing individual access, redress, correction of information, and technologies used in the system, such as biometrics or RFID. The Privacy Office has taken steps to continually improve its PIA guidance. Initially released in February 2004, the guidance has been updated twice, in July 2005 and March 2006. These updates have increased the emphasis on describing the privacy analysis that should take place in making system design decisions that affect privacy. For example, regarding data retention, the latest guidance requires program officials to explain why the personal information in question is needed for the specified retention period. Based on feedback from DHS components, the Privacy Office plans to update the guidance again in 2007 to clarify questions on data mining and the use of commercial data. To accompany its written guidance, the Privacy Office has also developed a PIA template and a number of training sessions to further assist DHS personnel. In addition to written guidance and training, the office developed a procedure, called a privacy threshold analysis (PTA), for identifying which DHS systems contain personally identifiable information and which require PIAs. The privacy threshold analysis is a brief assessment that requires system owners to answer six basic questions on the nature of their systems and whether the systems contain personally identifiable information. System owners complete the privacy threshold analysis document and submit it to the Privacy Office for an official determination as to whether a PIA is required. As of January 2006, all DHS systems have been required to perform privacy threshold analyses. Our analysis of published DHS PIAs shows significant quality improvements in those completed recently compared with those from 2 or 3 years ago. Overall, there is a greater emphasis on analysis of system development decisions that impact privacy, because the guidance now requires that such analysis be performed and described. For example, the most recent PIAs include separate privacy impact analyses for several major topics, including planned uses of the system and information, plans for data retention, and the extent to which the information is to be shared outside of DHS. This contrasts to the earliest PIAs published by the Privacy Office, which do not include any of these analyses. The emphasis on analysis should allow the public to more easily understand a system and its impact on privacy. Further, our analysis found that use of the template has resulted in a more standardized structure, format, and content, making the PIAs more easily understandable to the general reader. In addition to its positive impact on DHS, the Privacy Office’s framework has been recognized by others outside of DHS. For example, the Department of Justice has adopted the DHS Privacy Office’s guidance and template with only minor modifications. Further, privacy advocacy groups have commended the Privacy Office for developing the guidance and associated training sessions, citing this as one of the office’s most significant achievements. Figure 2 illustrates the steps in the development process as established by the Privacy Office’s guidance. In addition to written guidance, the Privacy Office has also taken steps to integrate PIA development into the department’s established operational processes. For example, the Privacy Office coordinated with the Office of the Chief Information Officer (OCIO) to include the privacy threshold analysis requirement as part of OCIO’s effort to compile an inventory of major information systems required by the Federal Information Security Management Act. Through this coordination, the Privacy Office was able to get the PTA requirement incorporated into the software application that DHS uses to track agency compliance with the Federal Information Security Management Act. The Privacy Office also coordinated with OCIO to include submission of a privacy threshold analysis as a requirement within the larger certification and accreditation process. The process requires IT system owners to evaluate security controls to ensure that security risks have been properly identified and mitigated. The actions they have taken are then scored, and systems must receive a certain minimum score in order to be certified and accredited. The inclusion of the PTA as part of the systems inventory and in the certification and accreditation process has enabled the Privacy Office to better identify systems containing personally identifiable information that may require a PIA. Further, the Privacy Office is using the OMB Exhibit 300 budget process as an additional opportunity to ensure that systems containing personal information are identified and that PIAs are conducted when needed. OMB requires agencies to submit an Exhibit 300 Capital Asset Plan and Business Case for their major information technology systems in order to receive funding. The Exhibit 300 template asks whether a system has a PIA and if it is publicly available. Because the Privacy Office gives final departmental approval for all such assessments, it is able to use the Exhibit 300 process to ensure the assessments are completed. According to Privacy Office officials, the threat of losing funds has helped to encourage components to conduct PIAs. Integration of the PIA requirement into these management processes is beneficial in that it provides an opportunity to address privacy considerations during systems development, as envisioned by OMB’s guidance. Because of concerns expressed by component officials that the Privacy Office’s review process took a long time and was difficult to understand, the office has made efforts to improve the process and make it more transparent to DHS components. Specifically, the office established a five- stage review process. Under this process, a PIA must satisfy all the requirements of a given stage before it can progress to the next one. The review process is intended to take 5 to 6 weeks, with each stage intended to take 1 week. Figure 3 illustrates the stages of the review process. Through efforts such as the compliance framework, the Privacy Office has steadily increased the number of PIAs it has approved and published each year. As shown in figure 4, PIA output by the Privacy Office has more than doubled since 2004. According to Privacy Office officials, the increase in output was aided by the development and implementation of the Privacy Office’s structured guidance and review process. In addition, Privacy Office officials stated that as DHS components gain more experience, the output should continue to increase. Because the Privacy Office has focused departmental attention on the development and review process and established a structured framework for identifying systems that need PIAs, the number of identified DHS systems requiring a PIA has increased dramatically. According to its annual Federal Information Security Management Act reports, DHS identified 46 systems as requiring a PIA in fiscal year 2005 and 143 systems in fiscal year 2006. Based on the privacy threshold analysis process, the Privacy Office estimates that 188 systems will require a PIA in fiscal year 2007. Considering that only 25 were published in fiscal year 2006, it will likely be very difficult for DHS to expeditiously develop and issue PIAs for all of these systems because developing and approving them can be a lengthy process. According to estimates by Privacy Office officials, it takes approximately six months to develop and approve a PIA, but the office is working to reduce this time. The Privacy Office is examining several potential changes to the development process that would allow it to process an increased number of PIAs. One such option is to allow DHS components to quickly amend preexisting PIAs. An amendment would only need to contain information on changes to the system and would allow for quicker development and review. The Privacy Office is also considering developing standardized PIAs for commonly-used types of systems or uses. For example, such an assessment may be developed for local area networks. Systems intended to collect or use information outside what is specified in the standardized PIA would need approval from the Privacy Office. Of potential help in dealing with an increasing PIA workload is the establishment of full-time privacy officers within key DHS components. Components with a designated privacy officer have generally produced more PIAs than components without privacy officers. Of the eleven DHS components that have published PIAs, only three have designated privacy officers. Yet these three components account for 57 percent of all published DHS PIAs. Designating privacy officers in key DHS components, such as Customs and Border Protection, the U.S. Coast Guard, Immigration and Customs Enforcement, and the Federal Emergency Management Agency, could help in drafting PIAs that could be processed by the Privacy Office more expeditiously. Components such as these have a high volume of programs that interface directly with the public. Although the Privacy Office has also recommended that such privacy officers be designated, the department has not yet appointed privacy officers in any of these components. Until DHS does so, the Privacy Office will likely continue to be challenged in ensuring that PIAs are prepared, reviewed, and approved in a timely fashion. The Privacy Office has also taken steps to integrate privacy considerations in the DHS decision-making process. These actions are intended to address a number of statutory requirements, including that the Privacy Office assure that the use of technologies sustain, and do not erode, privacy protections; that it evaluate legislative and regulatory proposals involving the collection, use, and disclosure of personal information by the federal government; and that it coordinate with the DHS Officer for Civil Rights and Civil Liberties. In 2004, the first Chief Privacy Officer established the DHS Data Privacy and Integrity Advisory Committee to advise her and the Secretary on issues within the department that affect individual privacy, as well as data integrity, interoperability, and other privacy-related issues. The committee has examined a variety of privacy issues, produced reports, and made recommendations. Most recently, in December 2006, the committee adopted two reports; one on the use of RFID for identity verification, and another on the use of commercial data. As previously mentioned, the Privacy Office plans to update its PIA guidance to include further instructions on the use of commercial data. According to Privacy Office officials, this update will be based, in part, on the advisory committee’s report on commercial data. Appendix III contains a full list of the advisory committee’s publications. In addition to its reports, which are publicly available, the committee meets quarterly in Washington, D.C., and in other parts of the country where DHS programs operate. These meetings are open to the public and transcripts of the meetings are posted on the Privacy Office’s Web site. DHS officials from major programs and initiatives involving the use of personal data such as US-VISIT, Secure Flight, and the Western Hemisphere Travel Initiative, have testified before the committee. Private sector officials have also testified on topics such as data integrity, identity authentication, and RFID. Because the committee is made up of experts from the private sector and the academic community, it brings an outside perspective to privacy issues through its reports and recommendations. In addition, because it was established as a federal advisory committee, its products and proceedings are publicly available and thus provide a public forum for the analysis of privacy issues that affect DHS operations. The Privacy Office has also taken steps to raise awareness of privacy issues by holding a series of public workshops. The first workshop, on the use of commercial data for homeland security, was held in September 2005. Panel participants consisted of representatives from academia, the private sector, and government. In April 2006, a second workshop addressed the concept of public notices and freedom of information frameworks. More recently, in June 2006, a workshop was held on the policy, legal, and operational frameworks for PIAs and privacy threshold analyses and included a tutorial for conducting PIAs. Hosting public workshops is beneficial in that it allows for communication between the Privacy Office and those who may be affected by DHS programs, including the privacy advocacy community and the general public. Another part of the Privacy Office’s efforts to carry out its Homeland Security Act requirements is its participation in departmental policy development for initiatives that have a potential impact on privacy. The Privacy Office has been involved in policy discussions related to several major DHS initiatives and, according to department officials, the office has provided input on several privacy-related decisions. The following are major initiatives in which the Privacy Office has participated. Passenger name record negotiations with the European Union United States law requires airlines operating flights to or from the United States to provide the Bureau of Customs and Border Protection (CBP) with certain passenger reservation information for purposes of combating terrorism and other serious criminal offenses. In May 2004, an international agreement on the processing of this information was signed by DHS and the European Union. Prior to the agreement, CBP established a set of terms for acquiring and protecting data on European Union citizens, referred to as the “Undertakings.” In September 2005, under the direction of the first Chief Privacy Officer, the Privacy Office issued a report on CBP’s compliance with the Undertakings in which it provided guidance on necessary compliance measures and also required certain remediation steps. For example, the Privacy Office required CBP to review and delete data outside the 34 data elements permitted by the agreement. According to the report, the deletion of these extraneous elements was completed in August 2005 and was verified by the Privacy Office. In October 2006, DHS and the European Union completed negotiations on a new interim agreement concerning the transfer and processing of passenger reservation information. The Director of International Privacy Policy within the Privacy Office participated in these negotiations along with others from DHS in the Policy Office, Office of General Counsel, and CBP. The Western Hemisphere Travel Initiative is a joint effort between DHS and the Department of State to implement new documentation requirements for certain U.S. citizens and nonimmigrant aliens entering the United States. DHS and State have proposed the creation of a special identification card that would serve as an alternative to a traditional passport for use by U.S. citizens who cross land borders or travel by sea between the United States, Canada, Mexico, the Caribbean, or Bermuda. The card is to use a technology called vicinity RFID to transmit information on travelers to CBP officers at land and sea ports of entry. Advocacy groups have raised concerns about the proposed use of vicinity RFID because of privacy and security risks due primarily to the ability to read information from these cards from distances of up to 20 feet. The Privacy Office was consulted on the choice of identification technology for the cards. According to the DHS Policy Office, Privacy Office input led to a decision not to store or transmit personally identifiable information on the RFID chip on the card. Instead, DHS is planning on transmitting a randomly generated identifier for individuals, which is to be used by DHS to retrieve information about the individual from a centralized database. REAL ID Act of 2005 Among other things, the REAL ID Act requires DHS, in consultation with the Department of Transportation and the states, to issue regulations that set minimum standards for state-issued REAL ID drivers’ licenses and identification cards to be accepted for official purposes after May 11, 2008. Advocacy groups have raised a number of privacy concerns about REAL ID, chiefly that it creates a de facto national ID that could be used in the future for privacy-infringing purposes and that it puts individuals at increased risk of identity theft. The DHS Policy Office reported that it included Privacy Office officials, as well as officials from the Office of Civil Rights and Civil Liberties, in developing its implementing rule for REAL ID. The Privacy Office’s participation in REAL ID also served to address its requirement to evaluate legislative and regulatory proposals concerning the collection, use, and disclosure of personal information by the federal government. According to its November 2006 annual report, the Privacy Office championed the need for privacy protections regarding the collection and use of the personal information that will be stored on the REAL ID drivers’ licenses. Further, the office reported that it funded a contract to examine the creation of a state federation to implement the information sharing required by the act in a privacy-sensitive manner. As we have previously reported, DHS has used personal information obtained from commercial data providers for immigration, fraud detection, and border screening programs but, like other agencies, does not have policies in place concerning its uses of these data. Accordingly, we recommended that DHS, as well as other agencies, develop such policies. In response to the concerns raised in our report and by privacy advocacy groups, Privacy Office officials said they were drafting a departmentwide policy on the use of commercial data. Once drafted by the Privacy Office, this policy is to undergo a departmental review process (including review by the Policy Office, General Counsel, and Office of the Secretary), followed by a review by OMB prior to adoption. These examples demonstrate specific involvement of the Privacy Office in major DHS initiatives. However, Privacy Office input is only one factor that DHS officials consider in formulating decisions about major programs, and Privacy Office participation does not guarantee that privacy concerns will be fully addressed. For example, our previous work has highlighted problems in implementing privacy protections in specific DHS programs, including Secure Flight and the ADVISE program. Nevertheless, the Privacy Office’s participation in policy decisions provides an opportunity for privacy concerns to be raised explicitly and considered in the development of DHS policies. The Privacy Office has also taken steps to address its mandate to coordinate with the DHS Officer for Civil Rights and Civil Liberties on programs, policies, and procedures that involve civil rights, civil liberties, and privacy considerations, and ensure that “Congress receives appropriate reports on such programs.” The DHS Officer for Civil Rights and Civil Liberties cited three specific instances where the offices have collaborated. First, as stated previously, both offices have participated in the working group involved in drafting the implementing regulations for REAL ID. Second, the two offices coordinated in preparing the Privacy Office’s report to Congress assessing the privacy and civil liberties impact of the No-Fly and Selectee lists used by DHS for passenger prescreening. Third, the two offices coordinated on providing input for the “One-Stop Redress” initiative, a joint initiative between the Department of State and DHS to implement a streamlined redress center for travelers who have concerns about their treatment in the screening process. The DHS Privacy Office is responsible for reviewing and approving DHS system-of-records notices to ensure that the department complies with the Privacy Act of 1974. Specifically, the Homeland Security Act requires the Privacy Office to “assur that personal information contained in Privacy Act systems of records is handled in full compliance with fair information practices as set out in the Privacy Act of 1974.” The Privacy Act requires that federal agencies publish notices in the Federal Register on the establishment or revision of systems of records. These notices must describe the nature of a system-of-records and the information it maintains. Additionally, OMB has issued various guidance documents for implementing the Privacy Act. OMB Circular A-130, for example, outlines agency responsibilities for maintaining records on individuals and directs government agencies to conduct biennial reviews of each system-of- records notice to ensure that it accurately describes the system-of- records. The Privacy Office has taken steps to establish a departmental process for complying with the Privacy Act. It issued a management directive that outlines its own responsibilities as well as those of component-level officials. Under this policy, the Privacy Office is to act as the department’s representative for matters relating to the Privacy Act. The Privacy Office is to issue and revise, as needed, departmental regulations implementing the Privacy Act and approve all system-of-records notices before they are published in the Federal Register. DHS components are responsible for drafting system-of-records notices and submitting them to the Privacy Office for review and approval. The management directive was in addition to system-of-records notice guidance published by the Privacy Office in August 2005. The guidance discusses the requirements of the Privacy Act and provides instructions on how to prepare system-of-records notices by listing key elements and explaining how they must be addressed. The guidance also lists common routine uses and provides standard language that DHS components may incorporate into their notices. As of February 2007, the Privacy Office had approved and published 56 system-of-records notices, including updates and revisions as well as new documents. In establishing Privacy Act processes, the Privacy Office has also begun to integrate the system-of-records notice and PIA development processes. The Privacy Office now generally requires that system-of-records notices submitted to it for approval be accompanied by PIAs. This is not an absolute requirement, because the need to conduct PIAs, as stipulated by the E-Gov Act, is not based on the same concept of a “system-of-records” used by the Privacy Act. Nevertheless, the Privacy Office’s intention is to ensure that, when the requirements do coincide, a system’s PIA is aligned closely with the related system-of-records notice. However, the Privacy Office has not yet established a process for conducting a biennial review of system-of-records notices, as required by OMB. OMB Circular A-130 directs federal agencies to review their notices biennially to ensure that they accurately describe all systems of records. Where changes are needed, the agencies are to publish amended notices in the Federal Register. The establishment of DHS involved the consolidation of a number of preexisting agencies, thus, there are a substantial number of systems that are operating under preexisting, or “legacy,” system-of-records notices— 218, as of February 2007. These documents may not reflect changes that have occurred since they were prepared. For example, the system-of- records notice for the Treasury Enforcement and Communication System has not been updated to reflect changes in how personal information is used that has occurred since the system was taken over by DHS from the Department of the Treasury. The Privacy Office acknowledges that identifying, coordinating, and updating legacy system-of-records notices is the biggest challenge it faces in ensuring DHS compliance with the Privacy Act. Because it focused its initial efforts on PIAs and gave priority to DHS systems of records that were not covered by preexisting notices, the office did not give the same priority to performing a comprehensive review of existing notices. According to Privacy Office officials, the office is encouraging DHS components to update legacy system-of-records notices and is developing new guidance intended to be more closely integrated with its PIA guidance. However, no significant reduction has yet been made in the number of legacy system-of-records notices that need to be updated. By not reviewing notices biennially, the department is not in compliance with OMB direction. Further, by not keeping its notices up-to-date, DHS hinders the public’s ability to understand the nature of DHS systems-of- records notices and how their personal information is being used and protected. Inaccurate system-of-records notices may make it difficult for individuals to determine whether their information is being used in a way that is incompatible with the purpose for which it was originally collected. Section 222 of the Homeland Security Act requires that the Privacy Officer report annually to Congress on “activities of the department that affect privacy, including complaints of privacy violations, implementation of the Privacy Act of 1974, internal controls, and other matters.” The act does not prescribe a deadline for submission of these reports; however, the requirement to report “on an annual basis” suggests that each report should cover a 1-year time period and that subsequent annual reports should be provided to Congress 1 year after the previous report was submitted. Congress has also required that the Privacy Office report on specific departmental activities and programs, including data mining and passenger prescreening programs. In addition, the first Chief Privacy Officer initiated several investigations and prepared reports on them to address requirements to report on complaints of privacy violations and to assure that technologies sustain and do not erode privacy protections. In addition to satisfying mandates, the issuance of timely public reports helps in adhering to the fair information practices, which the Privacy Office has pledged to support. Public reports address openness—the principle that the public should be informed about privacy policies and practices and that individuals should have a ready means of learning about the use of personal information—and the accountability principle—that individuals controlling the collection or use of personal information should be accountable for taking steps to ensure implementation of the fair information principles. The Privacy Office has not been timely and in one case has been incomplete in addressing its requirement to report annually to Congress. The Privacy Office’s first annual report, issued in February 2005, covered 14 months from April 2003 through June 2004. A second annual report, for the next 12 months, was never issued. Instead, information about that period was combined with information about the next 12-month period, and a single report was issued in November 2006 covering the office’s activities from July 2004 through July 2006. While this report generally addressed the content specified by the Homeland Security Act, it did not include the required description of complaints of privacy violations. Other reports produced by the Privacy Office have not met mandated deadlines or have been issued long after privacy concerns had been addressed. For example, although Congress required a report on the privacy and civil liberties effects of the No-Fly and Automatic Selectee Lists by June 2005, the report was not issued until April 2006, nearly a year late. In addition, although required by December 2005, the Privacy Office’s report on DHS data mining activities was not provided to Congress until July 2006 and was not made available to the public on the Privacy Office Web site until November 2006. In addition, the first Chief Privacy Officer initiated four investigations of specific programs and produced reports on these reviews. Although two of the four reports were issued in a relatively timely fashion, the other two reports were issued long after privacy concerns had been raised and addressed. For example, a report on the Multi-state Anti-Terrorism Information Exchange (MATRIX) program, initiated in response to a complaint by the American Civil Liberties Union submitted in May 2004, was not issued until two and a half years later, long after the program had been terminated. As another example, although drafts of the recommendations contained in the Secure Flight report were shared with TSA staff as early as summer 2005, the report was not released until December 2006, nearly a year and a half later. Table 1 summarizes DHS Privacy Office reports issued to date, including both statutorily required as well as self-initiated reports. According to Privacy Office officials, there are a number of factors contributing to the delayed release of its reports, including time required to consult with affected DHS components as well as the departmental clearance process, which includes the Policy Office, the Office of General Counsel, and the Office of the Secretary. After that, drafts must be sent to OMB for further review. In addition, the Privacy Office did not establish schedules for completing these reports that took into account the time needed for coordination with components or departmental and OMB review. Regarding the omission of complaints of privacy violations in the latest annual report, Privacy Office officials noted that the report cites previous reports on Secure Flight and the MATRIX program, which were initiated in response to alleged privacy violations, and that during the time period in question there were no additional complaints of privacy violations. However, the report itself provides no specific statements about the status of privacy complaints; it does not state that there were no privacy complaints received. Late issuance of reports has a number of negative consequences beyond noncompliance with mandated deadlines. First, the value these reports are intended to provide is reduced when the information contained is no longer timely or relevant. In addition, since these reports serve as a critical window into the operations of the Privacy Office and on DHS programs that make use of personal information, not issuing them in a timely fashion diminishes the office’s credibility and can raise questions about the extent to which the office is receiving executive-level attention. For example, delays in releasing the most recent annual report led a number of privacy advocates to question whether the Privacy Office had adequate authority and executive-level support. Congress also voiced this concern in passing the Department of Homeland Security Appropriations Act of 2007, which states that none of the funds made available in the act may be used by any person other than the Privacy Officer to “alter, direct that changes be made to, delay, or prohibit the transmission to Congress” of its annual report. In addition, on January 5, 2007, legislation was introduced entitled Privacy Officer with Enhanced Rights Act of 2007. This bill, among other things, would provide the Privacy Officer with the authority to report directly to Congress without prior comment or amendment by either OMB officials or DHS officials who are outside the Privacy Office. Until its reports are issued in a timely fashion, questions about the credibility and authority of the Privacy Office will likely remain. The DHS Privacy Office has made significant progress in implementing its statutory responsibilities under the Homeland Security Act; however, more work remains to be accomplished. The office has made great strides in implementing a process for developing PIAs, contributing to greater output over time and higher quality assessments. The Privacy Office has also provided the opportunity for privacy to be considered at key stages in systems development by incorporating PIA requirements into existing management processes. However, the Privacy Office faces a difficult task in reviewing and approving PIAs in a timely fashion for the large number of systems that require them. Component-level privacy officers could help coordinate processing of PIAs. Until DHS appoints such officers, the Privacy Office will not benefit from their potential to help speed the processing of PIAs. Although the Privacy Office has made progress publishing new and revised Privacy Act notices since its establishment, privacy notices for DHS legacy systems of records have generally not been updated. The Privacy Office has not made it a priority to address the OMB requirement that existing notices be reviewed biennially. Until DHS reviews and updates its legacy notices as required by federal guidance, it cannot assure the public that its notices reflect current uses and protections of personal information. Further, the Privacy Office has not issued reports in a timely fashion, and its most recent annual report did not address all of the content specified by the Homeland Security Act, which requires the office to report on complaints of privacy violations. There are a number of factors contributing to the delayed release of its reports, including time required to consult with affected DHS components as well as the departmental clearance process, and there is no schedule for reviews to be completed and final reports issued. Late issuance of reports has a number of negative consequences beyond failure to comply with mandated deadlines, such as a perceived and real reduction in their value, a reduction in the office’s credibility, and the perception that the office lacks executive-level support. Until DHS develops a schedule for the timely issuance of reports, these negative consequences are likely to continue. We recommend that the Secretary of Homeland Security take the following four actions: Designate full-time privacy officers at key DHS components, such as Customs and Border Protection, the U.S. Coast Guard, Immigration and Customs Enforcement, and the Federal Emergency Management Agency. Implement a department-wide process for the biennial review of system- of-records notices, as required by OMB. Establish a schedule for the timely issuance of Privacy Office reports (including annual reports), which appropriately consider all aspects of report development, including departmental clearance. Ensure that the Privacy Office’s annual reports to Congress contain a specific discussion of complaints of privacy violations, as required by law. We received written comments on a draft of this report from the DHS Departmental GAO/Office of Inspector General Liaison Office, which are reproduced in appendix IV. In its comments, DHS generally agreed with the content of the draft report and its recommendations and described actions initiated to address them. In its comments, DHS stated that it appreciated GAO’s acknowledgement of its success in creating a standardized process for developing privacy compliance documentation for individual systems and managing the overall compliance process. DHS also stated that it appreciated recognition of the establishment of the DHS Data Privacy and Integrity Advisory Committee and the Privacy Office’s public meetings and workshops. In addition, DHS provided additional information about the international duties of the Privacy Office, specifically its outreach efforts with the European Union and its participation in regional privacy groups such as the Organization for Economic Cooperation and Development (OECD) and the Asian Pacific Economic Cooperation forum. DHS also noted that it had issued its first policy guidance memorandum regarding handling of information on non-U.S. persons. Concerning our first recommendation that it designate full-time privacy officers in key departmental components, DHS noted that the recommendation was consistent with a departmental management directive on compliance with the Privacy Act and stated that it would take the recommendation “under advisement.” DHS noted that component privacy officers not only make contributions in terms of producing privacy impact assessments, but also provide day-to-day privacy expertise within their components to programs at all stages of development. DHS concurred with the other three recommendations and noted actions initiated to address them. Specifically, regarding our recommendation that DHS implement a process for the biennial review of system of records notices required by OMB, DHS noted that it is systematically reviewing legacy system-of-records notices in order to issue updated notices on a schedule that gives priority to systems with the most sensitive personally identifiable information. DHS also noted that the Privacy Office is to issue an updated system-of-records notice guide by the end of fiscal year 2007. Concerning our recommendation related to timely reporting, DHS stated that the Privacy Office will work with necessary components and programs affected by its reports to provide for both full collaboration and coordination within DHS. Finally, regarding our recommendation that the Privacy Office’s annual reports contain a specific discussion of privacy complaints, as required by law, DHS agreed that a consolidated reporting structure for privacy complaints within the annual report would assist in assuring Congress and the public that the Privacy Office is addressing the complaints that it receives. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Homeland Security and other interested congressional committees. Copies will be made available to others on request. In addition, this report will be available at no charge on our Web site at www.gao.gov. If you have any questions concerning this report, please call me at (202) 512-6240 or send e-mail to [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix V. Our objective was to assess the progress of the Department of Homeland Security (DHS) Privacy Office in carrying out its responsibilities under federal law, including the Homeland Security Act of 2002 and the E- Government Act of 2002. To address this objective, we analyzed the Privacy Office’s enabling statutes, Section 222 of the Homeland Security Act; Section 8305 of the Intelligence Reform and Terrorism Prevention Act of 2004; and applicable federal privacy laws, including the Privacy Act of 1974 and Section 208 of the E-Government Act, to identify DHS Privacy Office responsibilities. We reviewed and analyzed Privacy Office policies, guidance, and reports, and interviewed Privacy Office officials, including the Chief Privacy Officer, the Acting Chief of Staff, and the Director of Privacy Compliance, to identify Privacy Office plans, priorities, and processes for implementing its responsibilities using available resources. We did not review or assess the Privacy Office’s Freedom of Information Act responsibilities. To further address our objective, we assessed the Privacy Office’s progress by comparing the information we gathered with the office’s statutory requirements and other responsibilities. We evaluated Privacy Office policies, guidance, and processes for ensuring compliance with the Homeland Security Act, the Privacy Act, and the E-Government Act. We analyzed the system-of-records notices and PIA development processes and assessed the progress of the office in implementing these processes. This analysis included analyzing Privacy Office privacy impact assessment output by fiscal year and assessing improvements to the overall quality of published privacy impact assessments and guidance over time. In addition, we interviewed the DHS Officer for Civil Rights and Civil Liberties, component-level privacy officers at the Transportation Security Administration, US-Visitor and Immigrant Status Indicator Technology, and U.S. Citizenship and Immigration Services, and cognizant component- level officials from Customs and Border Protection, Immigration and Customs Enforcement, and the DHS Policy Office. We also interviewed former DHS Chief Privacy Officers; the chair and vice-chair of the DHS Data Privacy and Integrity Advisory Committee, and privacy advocacy groups, including the American Civil Liberties Union, the Center for Democracy and Technology, and the Electronic Privacy Information Center. We performed our work at the DHS Privacy Office in Arlington, Virginia, and major DHS components in the Washington, D.C., metropolitan area. In addition, we attended DHS Data Privacy and Integrity Advisory Committee public meetings in Arlington, Virginia, and Miami, Florida. Our work was conducted from June 2006 to March 2007 in accordance with generally accepted government auditing standards. The Fair Information Practices are not precise legal requirements. Rather, they provide a framework of principles for balancing the need for privacy with other public policy interests, such as national security, law enforcement, and administrative efficiency. Ways to strike that balance vary among countries and according to the type of information under consideration. The version of the Fair Information Practices shown in table 1 was issued by the Organization for Economic Cooperation and Development (OECD) in 1980 and it has been widely adopted. The Use of Commercial Data. Report No. 2006-03. December 6, 2006. The Use of RFID for Human Identity Verification. Report No. 2006-02. December 6, 2006. Framework for Privacy Analysis of Programs, Technologies, and Applications. Report No. 2006-01. March 7, 2006. Recommendations on the Secure Flight Program. Report No. 2005-02. December 6, 2005. The Use of Commercial Data to Reduce False Positives in Screening Programs. Report No. 2005-01. September 28, 2005. Major contributors to this report were John de Ferrari, Assistant Director; Nancy Glover; Anthony Molet; David Plocher; and Jamie Pressman.

The Department of Homeland Security (DHS) Privacy Office was established with the appointment of the first Chief Privacy Officer in April 2003, as required by the Homeland Security Act of 2002. The Privacy Office's major responsibilities include: (1) reviewing and approving privacy impact assessments (PIA)--analyses of how personal information is managed in a federal system, (2) integrating privacy considerations into DHS decision making, (3) ensuring compliance with the Privacy Act of 1974, and (4) preparing and issuing annual reports and reports on key privacy concerns. GAO's objective was to examine progress made by the Privacy Office in carrying out its statutory responsibilities. GAO did this by comparing statutory requirements with Privacy Office processes, documents, and activities. The DHS Privacy Office has made significant progress in carrying out its statutory responsibilities under the Homeland Security Act and its related role in ensuring compliance with the Privacy Act of 1974 and E-Government Act of 2002, but more work remains to be accomplished. Specifically, the Privacy Office has made significant progress by establishing a compliance framework for conducting PIAs, which are required by the E-Gov Act. The framework includes formal written guidance, training sessions, and a process for identifying affected systems. The framework has contributed to an increase in the quality and number of PIAs issued as well as the identification of many more affected systems. The resultant workload is likely to prove difficult to process in a timely manner. Designating privacy officers in certain DHS components could help speed processing of PIAs, but DHS has not yet taken action to make these designations. The Privacy Office has also taken actions to integrate privacy considerations into the DHS decision-making process by establishing an advisory committee, holding public workshops, and participating in policy development. However, limited progress has been made in updating public notices required by the Privacy Act for systems of records that were in existence prior to the creation of DHS. These notices should identify, among other things, the type of data collected, the types of individuals about whom information is collected, and the intended uses of the data. Until the notices are brought up-to-date, the department cannot assure the public that the notices reflect current uses and protections of personal information. Further, the Privacy Office has generally not been timely in issuing public reports. For example, a report on the Multi-state Anti-Terrorism Information Exchange program--a pilot project for law enforcement sharing of public records data--was not issued until long after the program had been terminated. Late issuance of reports has a number of negative consequences, including a potential reduction in the reports' value and erosion of the office's credibility.

You are an expert at summarizing long articles. Proceed to summarize the following text: Medicaid and SCHIP are joint federal-state programs that finance health care coverage for certain categories of low-income individuals. To qualify for Medicaid or SCHIP, individuals must meet specific eligibility requirements related to their income, assets, and other personal characteristics such as age. Each state operates its program under a CMS- approved state plan. Almost immediately after Hurricane Katrina, CMS announced in a State Medicaid Director’s letter on September 16, 2005, that states could apply for Medicaid demonstration projects authorized under section 1115 of the SSA, through which the federal government would fund its share of expenditures for health care services for certain individuals affected by the hurricane. These demonstration projects provided for (1) time-limited Medicaid and SCHIP services to allow states to quickly enroll eligible individuals who were affected by the hurricane, and (2) time-limited uncompensated care services—allowing states to pay providers rendering services for individuals affected by the hurricane who do not have an alternative method of payment or insurance. Interested states could apply to CMS to offer demonstration projects for either or both categories, and those receiving CMS approval were permitted to seek reimbursement for the federal share of allowable expenditures for covered beneficiaries under the demonstrations. To assist states in applying for these demonstration projects, CMS convened a conference call with all state Medicaid agencies to brief them on the agency’s September 16, 2005, letter, discuss the application process, and provide information on other implementation issues, such as benefits for evacuees and relevant federal regulations regarding Medicaid eligibility. For time-limited Medicaid and SCHIP services under the demonstrations, states received approval to provide Medicaid and SCHIP coverage to certain evacuees and affected individuals. In establishing eligibility for this type of demonstration, states primarily used simplified eligibility criteria that CMS developed to determine if affected individuals and evacuees could enroll to receive time-limited Medicaid and SCHIP services (see table 1). States with approved demonstrations for time-limited uncompensated care services could pay providers who delivered services to affected individuals and evacuees who either did not have any other coverage for health care services (such as private or public health insurance), or who had Medicaid or SCHIP coverage but required services beyond those covered under either program. On February 8, 2006, the DRA appropriated $2 billion to be available until expended for four funding categories—two categories associated with the demonstration projects, and two additional categories of funding. DRA applied time limits on the first two categories that were linked to the demonstration projects—that is, services must have been provided by certain dates. The DRA did not specify time limits for the two remaining funding categories. (See table 2.) States could receive allocations from CMS based on certain criteria identified in the DRA, including whether they were directly affected by the hurricane or hosted evacuees. States directly affected by the hurricane— Alabama, Louisiana, and Mississippi—and states that hosted evacuees could receive DRA funding through Categories I and II, the nonfederal share of expenditures for time-limited Medicaid and SCHIP services and expenditures for time-limited uncompensated care services. In contrast, as specified by DRA, funds for Category III, the nonfederal share of expenditures for existing Medicaid and SCHIP beneficiaries, were available only to certain areas in the directly affected states. These areas were counties or parishes designated under the Robert T. Stafford Disaster Relief and Emergency Assistance Act as areas eligible to receive federal disaster assistance. According to a CMS official, shortly after Hurricane Katrina, 10 counties in Alabama, 31 parishes in Louisiana, and 47 counties in Mississippi were identified as eligible to receive such assistance and were declared individual assistance areas. (See fig. 1.) States receive reimbursement for their expenditures in each of the funding categories through the submission of claims to CMS. To obtain reimbursement of claims for services, providers first submit claims to states for health care services provided to affected individuals and evacuees. States then submit claims to CMS for DRA-covered expenditures made for health care services provided to affected individuals and evacuees under each of the DRA funding categories. In addition, although the DRA was not enacted until February 8, 2006, CMS allowed funding to be retroactive to August 24, 2005. As of September 30, 2006, CMS had allocated approximately $1.9 billion of the total $2 billion in DRA funds to states that were directly affected by Hurricane Katrina or that hosted evacuees in the aftermath of the storm. CMS allocated funds to the first three categories: Category I—the nonfederal share of expenditures for time-limited Medicaid and SCHIP services; Category II—expenditures for time-limited uncompensated care services; and Category III—the nonfederal share of expenditures for existing Medicaid and SCHIP beneficiaries from designated areas of the directly affected states. CMS chose not to allocate any DRA funding to Category IV, for restoring access to health care in impacted communities. CMS allocated the majority of DRA funding (78.3 percent of the $1.9 billion allocated) to Category III, the nonfederal share of expenditures for existing Medicaid and SCHIP beneficiaries, which, by law, was limited to the three directly affected states (Alabama, Louisiana, and Mississippi). CMS allocated funds to states on two occasions—an initial allocation of $1.5 billion on March 29, 2006, and a subsequent allocation on September 30, 2006. Both of these allocations were based on states’ estimates of their DRA expenditures. In the second allocation on September 30, 2006, no state received less funding than it received in the March 29, 2006, allocation, but allocations shifted among the DRA categories. As of September 30, 2006, CMS had allocated approximately $1.9 billion of DRA funds to three DRA funding categories to 32 states. The majority of the $1.9 billion allocation—about $1.5 billion (78.3 percent)—is for Category III, existing Medicaid and SCHIP beneficiaries, which is limited to the three directly affected states (Alabama, Louisiana, and Mississippi). For Category I, time-limited Medicaid and SCHIP services, and Category II, time-limited uncompensated care services, states received about $102 million (5.5 percent of the total allocation) and about $302 million (16.2 percent of the total allocation), respectively. (See fig. 2.) With regard to Category I, 32 states received approval to extend time-limited Medicaid and SCHIP coverage to individuals affected by Hurricane Katrina; however, no states actually enrolled individuals in SCHIP. Therefore, only Medicaid services were covered through this DRA funding category. Of these 32 states, 8 states also received approval for Category II to pay providers for rendering extend time-limited uncompensated care services to individuals affected by the hurricane. CMS officials stated that the agency approved the majority of states’ applications for demonstration projects within 45 days of the hurricane. Of the 32 states that received allocations totaling $1.9 billion, Louisiana received the largest amount—44.6 percent (about $832 million) of the total allocation. Combined, the 3 directly affected states—Louisiana, Alabama, and Mississippi—received approximately 90 percent ($1.7 billion) of the $1.9 billion allocated to states. While not a directly affected state, Texas hosted a large number of evacuees and received about 7.6 percent ($142 million) of the allocation. These 4 selected states together received approximately 97.5 percent ($1.8 billion) of the $1.9 billion allocation. (See table 3.) CMS provided DRA allocations on two occasions, and both allocations were based on states’ estimated DRA expenditures. CMS first allocated $1.5 billion to 32 states on March 29, 2006. After the DRA was enacted in February 2006, CMS requested states’ estimated fiscal year 2006 expenditures for three of the four DRA funding categories: Category I—the nonfederal share of expenditures for time-limited Medicaid services; Category II—expenditures for time-limited uncompensated care services; and Category III—for directly affected states, the nonfederal share of expenditures for existing Medicaid and SCHIP beneficiaries. CMS did not request that the three directly affected states estimate expenditures for Category IV—restoring access to health care in impacted communities. CMS officials told us that they viewed restoring access to care as discretionary in nature and not associated with direct service expenditures. In the March 29, 2006, allocation, CMS fully funded 32 states’ estimated expenditures for DRA funding for Categories I and II, and also provided the three directly affected states with allocations to approximately half of their estimated expenditures for Category III. Because allocations were based on states’ estimates, CMS withheld $500 million of the $2 billion available for the initial allocation, anticipating that allocations would need to be realigned. In July 2006, CMS requested updated estimates of DRA expenditures for fiscal year 2006 for the same three categories: the two time-limited categories for Medicaid and uncompensated care services (Categories I and II) and the existing Medicaid and SCHIP beneficiaries (Category III). On September 30, 2006, CMS allocated an additional amount of about $364 million to states, which, combined with the initial March 29, 2006, allocation of $1.5 billion, provided a total allocation of approximately $1.9 billion. This allocation was based on states’ updated estimated expenditures for each of the three DRA categories for which CMS provided funding. For the second allocation, each of the three directly affected states received allocations of 100 percent of their updated estimated expenditures for all three funding categories. While CMS did not decrease any state’s allocation as a result of the July 2006 request for updated estimates, it did shift allocation amounts among DRA funding categories when necessary for the September 30, 2006, allocation. Therefore, each state received its allocation amount from March 29, 2006, plus any additional funding included in the updated estimated expenditures. As a result, some states that lowered their subsequent estimates received more than they requested. For example, Texas lowered its initial estimated expenditures from $142 million (its March 29, 2006, estimate) to approximately $36 million. CMS did not change Texas’ allocation from the amount the state received on March 29, 2006; thus, Texas retained an allocation of $142 million. Other states received more than they were initially allocated. For example, Alabama requested about $181 million initially, but gave CMS an updated estimate of $248 million. CMS initially allocated Alabama approximately $97 million, but increased its allocation to $248 million on September 30, 2006. (See table 4.) As of September 30, 2006, $136 million in DRA funding remained available for allocation. CMS officials stated that, during the first quarter of fiscal year 2007, they plan to reconcile states’ expenditures submitted to CMS with the allocation amounts provided to states on September 30, 2006. After this reconciliation is completed, CMS will determine how to allocate the remaining $136 million of available DRA funds and any unexpended funds of the approximately $1.9 billion previously allocated to states. As of October 2, 2006, states had submitted to CMS claims for services— including associated administrative costs—totaling about $1 billion (or 54 percent) of the $1.9 billion in DRA funds allocated to them. The amount of claims submitted and the number of states that submitted claims varied by DRA category. Of the 32 states that received allocations from CMS, 22 states have submitted claims, including the 3 directly affected states. Some state officials said they faced obstacles processing DRA-related claims. While DRA-related expenditures varied by state, claims were concentrated in nursing facilities, inpatient hospital care, and prescription drugs. Of the 32 states that received DRA allocations, about two-thirds (22) had submitted claims for expenditures to CMS as of October 2, 2006. The submitted claims accounted for about 54 percent of CMS’s $1.9 billion allocated to states. States that submitted claims for reimbursement did so for amounts that ranged from about 7 percent to approximately 96 percent of their allocations. (See table 5.) Each of the 4 selected states we reviewed—Alabama, Louisiana, Mississippi, and Texas—had submitted claims by this time. Of the claims submitted for the two time-limited funding categories, 22 of 32 states submitted claims for Medicaid services (Category I) and 6 of 8 states submitted claims for uncompensated care services (Category II). The claims submitted constituted approximately 20 percent of total allocations to Medicaid and about 42 percent of total allocations to uncompensated care services. Of the 4 selected states, 3 states—Alabama, Mississippi, and Texas—submitted claims for Medicaid services, while all 4 selected states submitted claims for uncompensated care services. (See table 6.) Only the three directly affected states—Alabama, Louisiana, and Mississippi—were eligible to receive DRA funding for existing Medicaid and SCHIP beneficiaries (Category III). The claims submitted by the directly affected states constituted approximately 58 percent of total allocations to Category III. (See table 7.) In addition, claims from the three directly affected states for existing Medicaid and SCHIP beneficiaries accounted for about 85 percent of all DRA claims filed. While funds for existing Medicaid and SCHIP beneficiaries were available for both programs, about 98 percent of claims submitted were for Medicaid expenditures. It has taken longer than usual for states—both those directly affected by the hurricane as well as states that hosted evacuees—to submit claims. Typically, Medicaid expenditure reports are due the month after the quarter ends. CMS officials estimated that about 75 percent of states submit their Medicaid expenditures within 1 to 2 months after the close of a quarter. However, data are not finalized until CMS and states ensure the accuracy of claims. The process of states submitting claims for DRA- related expenditures has been more prolonged. As with other Medicaid claims, states are permitted up to 2 years after paying claims to seek reimbursement from CMS. Therefore, these initial results are likely to change as states continue to file claims for services. As of October 2, 2006, 10 of 32 states that received allocations of DRA funding had not submitted any claims even though fiscal year 2006 ended on September 30, 2006. Some state officials told us that they were having difficulties submitting claims because of various obstacles related to processing claims or receiving claims from providers, including needing to manually process claims or adapt computer systems to accommodate the new types of claims being submitted. For example, Mississippi officials explained that they were manually processing claims for time-limited uncompensated care services because they did not have an electronic system for processing such claims. Georgia officials reported that the state’s claims processing system had to be adjusted in order to properly accept claims for time-limited uncompensated care services. After such adjustments were made, Georgia officials anticipated accepting these claims from mid- July through the end of August 2006. Alabama officials noted that they had to specifically request that providers submit claims for the costs of providing uncompensated care services they may have assumed would not be reimbursable. Claims that the four selected states submitted for Medicaid expenditures in the three categories of DRA funding we reviewed varied, but were typically concentrated in three service areas: nursing facilities, inpatient hospital care, and prescription drugs. For example, all four selected states had nursing facility services as one of their top four services for which they submitted claims, while only Alabama had home and community- based services as one of its services with the highest expenditures. Of the claims submitted by states, the proportions attributed to specific services varied across the states. (See table 8.) Alabama, Louisiana, and Mississippi submitted claims for the nonfederal share of expenditures for SCHIP services to existing SCHIP beneficiaries. Overall, the dollar amount of claims for SCHIP represented approximately 2 percent of the total value of claims submitted. As of October 2, 2006, the top four SCHIP expenditures in Alabama were for physician services (22.8 percent), prescription drugs (20.7 percent), inpatient hospital services (13.4 percent), and dental services (12.1 percent). The top four SCHIP expenditures in Louisiana were for prescription drugs (45.4 percent), physician services (22.4 percent), outpatient hospital services (12.5 percent), and inpatient hospital services (9.8 percent). For Mississippi, all of the claims for DRA funds were for expenditures associated with paying SCHIP premiums for certain enrollees. Two of our four selected states raised concerns about their ability to meet the future health care needs of those affected by the hurricane once DRA funds have been expended: Louisiana, which is eligible for DRA funding for Category III services that may be provided beyond June 30, 2006; and Texas, which is not eligible for such ongoing assistance. Of the three directly affected states—Alabama, Louisiana, and Mississippi—only Louisiana raised concerns that it would need additional funds to provide coverage for individuals affected by the hurricane who evacuated the state yet remain enrolled in Louisiana Medicaid. Alabama and Mississippi officials did not anticipate the need for additional funding beyond what was already allocated by CMS. In contrast, because Texas is eligible only for the time-limited DRA funds from Category I and Category II, state officials expressed concern about future funding needs in light of the many evacuees remaining in the state. To learn more about this population, the state commissioned a survey that indicated that evacuees responding to the survey continue to have a high need for services, including health care coverage under Medicaid and SCHIP. Only the three directly affected states—Alabama, Louisiana, and Mississippi—are eligible for DRA funds for Category III services, which were designated to compensate states for the state share of expenditures associated with services provided to existing Medicaid and SCHIP beneficiaries from certain areas of directly affected states beyond June 30, 2006. This additional DRA funding could potentially be available from any unused funds of the $1.9 billion allocated on September 30, 2006, and the $136 million remaining from the $2 billion appropriated. It is unclear how much of the $1.9 billion allocation will be unused and thus available for redistribution. Additionally, it is not yet known how the remaining $136 million will be distributed, but CMS will make that determination after reconciling states’ claims submitted during the first quarter of fiscal year 2007 with the allocations. Of the three states eligible for ongoing DRA funding, only Louisiana raised concerns that additional funds will be necessary; Alabama and Mississippi did not anticipate additional funding needs beyond those CMS already allocated. Louisiana’s funding concerns were associated with managing its program across state borders as evacuees who left the state continue to remain eligible for Louisiana Medicaid. State officials acknowledged that their immediate funding needs have been addressed by the September 30, 2006, allocation; however, they remain concerned that they do not have the financial or administrative capacity to serve their Medicaid beneficiaries across multiple states. Louisiana officials also cited the difficulty of maintaining what they characterized as a national Medicaid program for enrolled individuals and providers living in many different states. Louisiana has submitted claims for DRA funding for Category III for existing Medicaid and SCHIP beneficiaries (individuals enrolled in Louisiana Medicaid) who resided in 1 of the 31 affected parishes in Louisiana prior to Hurricane Katrina, but evacuated to another state after the hurricane, and who continue to reside in that state. Because many of these evacuated individuals have expressed intent to return to Louisiana, they have not declared residency in the state where they have been living since Hurricane Katrina. Under these circumstances, these individuals have continued to remain eligible for Louisiana Medicaid. However, Louisiana officials were uncertain how long the state would be expected to continue this coverage on a long-distance basis. While DRA funds cover the nonfederal (Louisiana state) share of service expenditures for these Medicaid and SCHIP beneficiaries (Category III), they are not designated to include reimbursement for the administrative costs associated with serving Louisiana Medicaid beneficiaries living in other states. In particular, Louisiana officials noted the following difficulties, which were also outlined in a May 15, 2006, letter to HHS and a May 26, 2006, letter to CMS. These letters requested specific direction from CMS on the issues presented as well as permission to waive certain federal Medicaid requirements that Louisiana believes it has been unable to comply with. In commenting on a draft of our report, Louisiana officials stated that as of November 30, 2006, they had not received the written guidance that they requested from CMS on the following issues: Managing and monitoring a nationwide network of providers. Covering individuals who have evacuated from the state but remain eligible for Louisiana Medicaid requires the state to identify, enroll, and reimburse providers from other states. According to Louisiana officials, the state has enrolled more than 16,000 out-of-state providers in Louisiana Medicaid since August 28, 2005. The state does not believe that it can manage and monitor a nationwide network of providers indefinitely. Therefore, Louisiana is seeking guidance from CMS to ensure that the state is continuing to comply with federal Medicaid requirements for payments for services furnished to out-of-state Medicaid beneficiaries. Redetermining eligibility. Federal Medicaid regulations require that states redetermine eligibility at least annually as well as when they receive information about changes in individuals’ circumstances. Louisiana officials indicated that they had received approval through its demonstration project to defer redetermination processes through January 31, 2006. Officials noted that they have more than 100,000 individuals from affected areas whose eligibility had not yet been redetermined as of May 26, 2006. Officials say they do not want to take beneficiaries who need coverage off the state’s Medicaid rolls for procedural reasons, and thus would prefer to conduct mail-in renewals and have a process for expedited reenrollment upon return to the state. According to Louisiana officials, the state’s redetermination processes are currently on hold while CMS examines the possibility of granting a waiver for redetermining eligibility for individuals from the most severely affected parishes around New Orleans. Maintaining program integrity. Louisiana officials explained that running a Medicaid program in multiple states raises issues of program integrity. While some providers have contacted Louisiana Medicaid to report that they have received payment from more than one state, Louisiana officials believe that other providers are not reporting overpayments. State officials indicated that they will conduct postpayment claims reviews to ensure that double billing and other fraudulent activities have not occurred. These officials estimated that this effort to review claims could be time consuming, taking approximately 3 to 8 years to complete. Because Louisiana believes that it is unable to ensure the integrity of the program as long as it continues enrolling out-of-state providers, the state requested specific direction from CMS on whether to continue such enrollment efforts. Ensuring access to services. Louisiana officials expressed a concern about the state’s ability to ensure access to home and community-based services in other states. Officials noted that some states have long waiting lists for this type of long-term care, making it difficult for them to provide services that assist in keeping individuals in the community rather than in an institution. Additionally, as a requirement of providing home and community-based services, measures are needed to protect the health and welfare of beneficiaries. However, officials stated that Louisiana is not in the position to assure the health and safety of individuals requiring these services out of the state. Thus, the state asked CMS for direction on how to continue operating its Medicaid program without violating the federal requirement to assure the health and welfare of beneficiaries receiving home and community-based services. While Texas is not a directly affected state and therefore not eligible for DRA funding for any Medicaid or SCHIP services provided beyond June 30, 2006, it has been significantly affected by the number of evacuees seeking services, thus prompting concern among state officials regarding the state’s future funding needs. To address the health needs of evacuees entering the state, Texas enrolled these individuals into Medicaid under Category I—providing time-limited Medicaid services for evacuees who were eligible under an approved demonstration project. In comparison to Alabama and Mississippi, which also enrolled evacuees into time-limited Medicaid services, Texas enrolled the largest number of evacuees— peaking at nearly 39,000 individuals in January 2006. (See table 9). Texas also submitted claims for Category II DRA funds for time-limited uncompensated care services to evacuees, shortly after the hurricane. Enrollment into this category grew steadily from 2,224 individuals in October 2005 to 9,080 individuals in January 2006. Figure 3 shows the enrollment patterns for the Texas Medicaid program, as well as Category I and Category II services provided for the period following Hurricane Katrina. To better understand the characteristics, needs, and future plans of the evacuee population, the Texas Health and Human Services Commission contracted with the Gallup Organization to survey Hurricane Katrina evacuees in Texas. Data from survey respondents indicated that, as of June 2006, evacuees remaining in the state were predominantly adult women who lived in low-income households with children and had increasing rates of uninsurance since the hurricane. Despite the loss of insurance coverage, the survey indicated that fewer evacuees received Medicaid than previously expected and the loss of insurance primarily affected children’s health coverage. Evacuees appear to be turning to hospital emergency departments to meet their health care needs, as survey respondents reported an increase in emergency room visits in the past 6 months. Texas officials confirmed that evacuees who were previously eligible for the two DRA categories for time-limited coverage (Medicaid and uncompensated care services) are beginning to present themselves to local county facilities for their health care needs, thus straining local resources to provide care for all Texas residents. Based on this survey, Texas officials said they are concerned that they will continue to host an evacuee population with high needs who do not have immediate plans to leave the state. In particular, over half of the survey respondents believe they will continue to reside in Texas in the next 6 months and half believe they will still be there in 1 year. Texas was not a directly affected state and is therefore not eligible for ongoing assistance through the DRA; funding for Category I only covers services provided as of June 30, 2006, and funding for Category II only covers services provided as of January 31, 2006. We provided copies of a draft of this report to CMS and the four states we reviewed: Alabama, Louisiana, Mississippi, and Texas. We received written general and additional comments from CMS (see app. II) and from Louisiana and Texas (see apps. III and IV, respectively). Alabama provided technical comments, while Mississippi did not comment on the draft report. In commenting on the draft report, CMS provided information on an initiative it took to respond to Hurricane Katrina. The agency indicated that HHS, which oversees CMS, worked closely with Louisiana’s Department of Health and Hospitals to assist the state in convening the Louisiana Health Care Redesign Collaborative, which will work to rebuild Louisiana’s health care system. We did not revise the text of the report to include information on this effort because it was beyond the scope of this report. However, we have earlier reported on HHS efforts to help rebuild Louisiana’s health care system. CMS also commented on three issues: our characterization of the categories of funding provided through DRA, our description of CMS’s reconciliation process, and criticism it faced in communicating with the states, particularly Louisiana and Texas, regarding program implementation, coverage for out-of-state evacuees, and other issues. These comments are addressed below. CMS commented that we mischaracterized the categories of DRA funding by specifying them in the report as Categories I, II, III, and IV. We developed these four descriptive categories, which were derived from provisions of the DRA, in order to simplify report presentation. However, to respond to CMS’s comment, we included additional legal citations in the report to better link the statutory language of the DRA with the categories of funding presented in this report. We did not, however, adopt all of CMS’s descriptions of DRA provisions as CMS presented some of the descriptions inaccurately. In particular, CMS presented DRA sections 6201(a)(3) and 6201(a)(4) as providing federal funding under an approved section 1115 demonstration project, but as stated in the report, such approval is irrelevant to this funding. CMS also commented that the report was misleading because it did not fully describe the reconciliation process that will be used to allocate remaining and unused DRA funds. Specifically, the agency indicated that we did not explain that additional DRA allocations would be made to states not only from the remaining $136 million in unallocated funds but also from any unspent funds already allocated to states. The draft report did contain a full explanation of the reconciliation process. However, to address CMS’s comment, we clarified this process in the report’s Highlights and Results in Brief. Finally, CMS disagreed with statements in the draft report that Louisiana had not received the requested direction detailed in letters written to HHS on May 15, 2006, and CMS on May 26, 2006. Louisiana’s letters included concerns and questions that arose after the state implemented its section 1115 demonstration project. CMS indicated that it provided and continues to provide technical assistance to all states with section 1115 demonstration projects for Hurricane Katrina assistance beyond the states reviewed in this report. In particular, immediately following the hurricane CMS provided guidance to states through a conference call and a September 16, 2005, letter sent to all state Medicaid directors that explained the process of applying for the section 1115 demonstration project, the benefits and eligibility criteria for evacuees, the uncompensated care pool, and other pertinent information. We revised the report to reflect the guidance that CMS provided to the states immediately following the hurricane. CMS also commented that it worked with Louisiana and the other hurricane-affected states on redetermining eligibility through a conference call, and provided information to Louisiana several times regarding regulations that the state should follow for redetermining eligibility on an annual basis. Further, CMS indicated that it provided technical assistance to Louisiana in its efforts to ensure program integrity and access to health care services. While CMS may have provided such assistance, from Louisiana’s perspective, it was not sufficient to address the many issues the state is facing. In Louisiana’s written comments, state officials maintained that as of November 30, 2006, they had not received written guidance from CMS regarding the issues outlined in their May 15, 2006, letter. Comments from Louisiana and Texas centered on each state’s efforts to assist those affected by the hurricane and the ongoing challenges that exist as a result of Hurricane Katrina. In particular, Louisiana emphasized the lack of response from HHS regarding its concerns about running its Medicaid program in many states and related difficulties to ensuring the program’s integrity. Texas commented on its continued need to provide health care services to Hurricane Katrina evacuees given the results of a survey conducted by the Gallup Organization, which indicated that most of the evacuees still residing in Texas were uninsured as of June 2006. Additional technical and editorial comments from CMS and the states were incorporated into the report as appropriate. We are sending a copy of this report to the Secretary of Health and Human Services and the Administrator of CMS. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7118 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Under the authority of the Deficit Reduction Act of 2005, the Centers for Medicare & Medicaid Services (CMS) allocated funding totaling approximately $1.9 billion to 32 states, as of September 30, 2006. The agency allocated funds to all 32 states for the time-limited Medicaid category of demonstration projects, to 8 of those 32 states for the time- limited uncompensated care category of demonstration projects, and to the 3 directly affected states—Alabama, Louisiana, and Mississippi—for the nonfederal share of expenditures for existing Medicaid and SCHIP beneficiaries. The 4 states selected for this study—Alabama, Louisiana, Mississippi, and Texas—received approximately 97.5 percent of the $1.9 billion allocation. All allocations were based on estimates states submitted for each of the funding categories in response to CMS’s July 2006 request for updated estimates. (See table 10.) In addition to the contact named above, Carolyn Yocom, Assistant Director; Jennie Apter; Laura M. Mervilde; JoAnn Martinez-Shriver; Sari B. Shuman; and Hemi Tewarson made key contributions to this report. Hurricane Katrina: Status of Hospital Inpatient and Emergency Departments in the Greater New Orleans Area. GAO-06-1003. Washington, D.C.: September 29, 2006. Catastrophic Disasters: Enhanced Leadership, Capabilities, and Accountability Controls Will Improve the Effectiveness of the Nation’s Preparedness, Response, and Recovery System. GAO-06-618. Washington, D.C.: September 6, 2006. Hurricane Katrina: Status of the Health Care System in New Orleans and Difficult Decisions Related to Efforts to Rebuild It Approximately 6 Months After Hurricane Katrina. GAO-06-576R. Washington, D.C.: March 28, 2006. Hurricane Katrina: GAO’s Preliminary Observations Regarding Preparedness, Response, and Recovery. GAO-06-442T. Washington, D.C.: March 8, 2006. Statement by Comptroller General David M. Walker on GAO’s Preliminary Observations Regarding Preparedness and Response to Hurricanes Katrina and Rita. GAO-06-365R. Washington, D.C.: February 1, 2006.

In February 2006, the Deficit Reduction Act of 2005 (DRA) appropriated $2 billion for certain health care costs related to Hurricane Katrina through Medicaid and the State Children's Health Insurance Program (SCHIP). The Centers for Medicare & Medicaid Services (CMS) was charged with allocating the $2 billion in funding to states directly affected by the hurricane or that hosted evacuees. GAO performed this work under the Comptroller General's statutory authority to conduct evaluations on his own initiative. In this report, GAO examined: (1) how CMS allocated the DRA funds to states, (2) the extent to which states have used DRA funds, and (3) whether selected states--Alabama, Louisiana, Mississippi, and Texas--anticipate the need for additional funds after DRA funds are expended. To conduct this review, GAO reviewed CMS's allocations of DRA funds to all eligible states, focusing in particular on the four selected states that had the highest initial allocation (released by CMS on March 29, 2006). GAO obtained data from Medicaid offices in the four selected states regarding their experiences enrolling individuals, providing services, and submitting claims; collected state Medicaid enrollment data; and analyzed DRA expenditure data that states submitted to CMS. As of September 30, 2006, CMS allocated $1.9 billion of the $2 billion in DRA funding to states. CMS allocated funds to: Category I--the nonfederal share of expenditures for time-limited Medicaid and SCHIP services for eligible individuals affected by the hurricane (32 states); Category II--expenditures for time-limited uncompensated care services for individuals without a method of payment or insurance (8 of the 32 states); and Category III--the nonfederal share of expenditures for existing Medicaid and SCHIP beneficiaries (Alabama, Louisiana, and Mississippi). CMS did not allocate funds to Category IV--for restoration of access to health care. After CMS reconciles states' expenditures with allocations, it will determine how to allocate the unallocated $136 million and unexpended funds from the $1.9 billion allocated to states. Of the $1.9 billion in allocated DRA funds, almost two-thirds of the 32 states that received these funds submitted claims totaling about $1 billion as of October 2, 2006. Claims from Alabama, Louisiana, and Mississippi for Category III accounted for about 85 percent of all claims filed. These initial results are likely to change as states continue to file claims for services. Of the four selected states, Louisiana and Texas raised concerns about their ability to meet future health care needs once the DRA funds are expended. Louisiana's concerns involved managing its Medicaid program across state borders as those who left the state remain eligible for the program. Texas was significantly affected by the number of evacuees seeking services, thus raising concerns among state officials about the state's future funding needs. CMS, Alabama, Louisiana, and Texas commented on a draft of this report. CMS suggested the report clarify the DRA funding categories, reallocation process, and communication strategy with states, especially Louisiana. Louisiana and Texas commented on their ongoing challenges, and Alabama provided technical comments. The report was revised as appropriate.

You are an expert at summarizing long articles. Proceed to summarize the following text: The federal budget is the primary financial document of the government. The Congress and the American people rely on it to frame their understanding of significant choices about the role of the federal government and to provide them the information necessary to make informed decisions about individual programs and the collective fiscal policy of the nation. In practice, the budget serves multiple functions—it is used to plan and control resources, assess and guide fiscal policy, measure borrowing needs, and communicate the government’s policies and priorities. All of these uses are important, but they can lead to conflicting criteria for judging a budget. For example, the budget should be understandable to policymakers and the public yet comprehensive enough to fully inform resource allocation decisions. Since no one method of budget reporting can fully satisfy all uses, choosing a reporting method ultimately reflects some prioritization of the various uses—and a judgment about the quality of information and what an acceptable degree of uncertainty might be. When I refer to reporting methods, I mean how things are measured in the budget. Spending can be measured on different bases, such as cash, accrual, or obligation. The basis of budget reporting influences decision-making because the way transactions are recorded affects our understanding of the relative cost of different activities, the way critical choices are framed, and how the deficit (or surplus) is measured. For a simple example, suppose the government extends insurance for which it collects $1 million in premiums in the first year but expects total losses of $3 million in future years. If the primary objective of the budget is to track cash flows, then it is appropriate to show the $1 million cash inflow as a reduction in the deficit or increase in the surplus in the first year and to show the payouts as outlays when they occur. But if we want the budget to show the full cost of a decision, then it might be more appropriate to record a net cost of the present value of $2 million in the year the insurance is extended. Both numbers provide useful information and can be tracked over time. However, they provide very different information to policymakers and may lead to different decisions. Although a comprehensive understanding of this hypothetical program requires knowing both numbers, generally only one has been the primary basis upon which budget decisions are made. Historically, government outlays and receipts have been reported on a cash basis, i.e., receipts are recorded when received and expenditures are recorded when paid, without regard to the period in which the taxes or fees were assessed or the costs incurred. Although this has the advantage of reflecting the cash borrowing needs of the government, over the years, analysts and researchers have raised concerns that cash-based budgeting does not adequately reflect either the cost of some programs or the timing of their impact on economic behavior. As a general principle, decision-making is best informed if the government recognizes the costs of its commitments at the time it makes them. For many programs, cash-based budgeting accomplishes this. And, as noted earlier, because it reflects the government’s actual borrowing needs (if in a deficit situation), it is a good proxy for the government’s effect on credit markets. In general, then, the arguments for cash-based budgeting are convincing and deviations should not be lightly undertaken. The cash-based budget, however, often provides incomplete or misleading information about cost where cash flows to and from the government span many budget periods, and/or where the government obligates itself to make future payments or incur future losses well into the future. This is true for federal credit, insurance, and retirement programs. The Federal Credit Reform Act of 1990 addressed this mismatch between budget reporting and cost for credit programs. This act changed the budgetary treatment of credit programs by requiring that the budget reflect the programs’ costs to the government on a net present value basis. This means that, for example, rather than recording a cash outlay for the full amount of a direct loan, the budget records an estimate of what will ultimately be lost, taking into account repayments, defaults, interest subsidies, and any other cash flows on a net present value basis. Such accrual-based budgeting is also being done for the government’s contribution to pensions for civilian employees covered under the Federal Employees Retirement System and for military personnel. Accrual-based reporting recognizes the cost of transactions or events when they occur regardless of when cash flows take place. As I will discuss, cash-based budgeting is misleading for insurance programs. Federal insurance programs are diverse, covering a wide range of risks that the private sector has traditionally been unable or unwilling to cover. The risks include natural disasters under the flood and crop insurance programs and bank and employer bankruptcies under the deposit and pension insurance programs. The federal government also provides life insurance for veterans and federal employees, political risk insurance for overseas investment activities, and insurance against war-related risks and adverse reactions to vaccines. The face value of all of this insurance—the total amount of insurance outstanding—is around $5 trillion, but this dollar amount overstates the potential cost to the government because it is very unlikely that it would ever face claims from all outstanding insurance. The fiscal year 1997 Consolidated Financial Statements of the United States Government reported a $14.6 billion liability for insurance programs—payments already owed by the government because of past events. The financial statement records liabilities incurred for events that have already happened. But budgets are forward-looking documents. Decisionmakers need to make decisions about future commitments as they debate them—before insurance is extended. Therefore, a different measure may be more appropriate—the expected net cost to the government of the risk assumed by extending the insurance commitment (i.e., the “missing premium”), which is the difference between the full premium that would be charged based on expected losses and the actual premium to be charged the insured. At the request of the Chairman, we reported last September on the shortcomings of cash-based budgeting for federal insurance programs and the potential use of accrual concepts in the budget for these programs. In general, cash-based budgeting for insurance programs presents several problems. Its focus on single period cash flows can obscure the program’s cost to the government and thus may (1) distort the information and incentives presented to policymakers, (2) skew the recognition of the program’s economic impact, and (3) cause fluctuations in the deficit unrelated to long-term fiscal balance. With the current cash-based reporting, premiums for insurance programs are recorded in the budget when collected and outlays are reported when claims are paid. This focus on annual cash flows generally does not adequately reflect the government’s cost for federal insurance programs because the time between the extension of the insurance, the receipt of premiums and other collections, the occurrence of an insured event, and the payment of claims may extend over several budget periods. As a result, the government’s cost may be understated in years that a program’s current premium and other collections exceed current payments and overstated in years that current claim payments exceed current collections. These distortions occur even if the collections and payments for an insurance commitment are equal over time. This is similar to the problem with loans prior to the Credit Reform Act. The budget showed direct loans as costly in the year they were extended but then as profitable in future years when repayments exceeded new loans being made. The reasons for the mismatch between insurance premium collections and claim payments vary across the programs. In the case of political risk insurance extended by the Oversees Private Investment Corporation, the length of the government’s commitment can run for up to 20 years. Similarly, benefit payments for pension plans assumed by the Pension Benefit Guaranty Corporation (PBGC) may not be made for years or even decades after a plan is terminated. This is because participants generally are not eligible to receive pension benefits until they reach age 65 and, once eligible, they receive the benefits for many years. In other programs, temporary transactions or the erratic occurrence of insured events cause the mismatch between collections and payments and distort the insurance programs’ apparent costs in the cash-based budget. For example, during the savings and loan crisis, large temporary cash flows from the acquisition and sale of assets from failed institutions resulted in the government’s cost for deposit insurance never being clearly presented in the annual budget. In years when assets were acquired, the full amount of cash required was recorded as an outlay; later, when the assets were sold, the proceeds were recorded as income. Thus, the cash-based budget overstated the cost of the deposit insurance in some years and understated it in others. The inability of the cash-based budget to capture the cost of the government’s insurance commitments at the time decisions are made has significant implications. Cash-based budgeting for federal insurance programs may provide neither the information nor incentives necessary to signal emerging problems, make adequate cost comparisons, control costs, or ensure the availability of resources to pay future claims. The shortcomings of cash-based budgeting for federal insurance programs became quite apparent during the 1980s and early 1990s as the condition of the two largest programs—deposit insurance and pension insurance—deteriorated while the budget continued to show positive cash flows and did not even recognize failures that had actually happened. Although we and others raised concerns at the time about the government’s rapidly accruing deposit insurance costs, the cash-based budget was not effective in signaling policymakers of the emerging problem because it did not show a cost until institutions were closed and depositors paid. This delayed recognition obscured the program’s, as well as the government’s, underlying fiscal condition and limited the usefulness of the budget process as a means for the Congress to assess the problem. At approximately the same time, PBGC was facing growing losses and sponsors of insured pension plans were coming under severe financial stress, yet the cash-based budget showed large and growing cash income for the program. While the financial condition of PBGC has improved considerably in recent years, the Office of Management and Budget reported in the President’s fiscal year 1999 budget that the government’s expected liability for current and future pension plan terminations is approximately $30 billion. Because the cash-based budget delays recognition of emerging problems, it may not provide policymakers with information or incentives to address potential funding shortfalls before claim payments come due. Policymakers may not be alerted to the need to address programmatic design issues because, in most cases, the budget does not encourage them to consider the future costs of federal insurance commitments. Thus, reforms aimed at reducing costs may be delayed. In most cases, by the time costs are recorded in the budget, policymakers do not have time to ensure that adequate resources are accumulated to pay for them or to take actions to control them. The late budget recognition of these costs can reduce the number of viable options available to policymakers, ultimately increasing the cost to the government. For example, the National Flood Insurance Program provides subsidized coverage without explicitly recognizing its potential cost to the government. Under current policy, the Congress has authorized the Federal Insurance Administration to subsidize a significant portion (approximately 38 percent) of the total policies in force without providing annual appropriations to cover these subsidies. Although the flood insurance program has been self-supporting since the mid-1980s—either paying claims from premiums or borrowing and repaying funds to the Treasury—the program has not been able to establish sufficient reserves to cover catastrophic losses and, therefore, cannot be considered actuarially sound. In some cases, the cash-based budget not only fails to provide incentives to control costs, but also may create a disincentive for cost control. Deposit insurance is a key example. Many analysts believe that the cash-based budget treatment of deposit insurance exacerbated the savings and loan crisis by creating a disincentive to close failed institutions. Since costs were not recognized in the budget until cash payments were made, leaving insolvent institutions open avoided recording outlays in the budget and raising the annual deficit but ultimately increased the total cost to the government. Cash-based budgeting also may not be a very accurate gauge of the economic impact of federal insurance programs. Although discerning the economic impact of federal insurance programs can be difficult, private economic behavior generally is affected when the government commits to providing insurance coverage. At this point, insured individuals or organizations alter their behavior as a result of insurance. However, as I noted above, the cash-budget records costs not at this point but rather when payments are made to claimants. These payments generally have little or no macroeconomic effect because they do not increase the wealth or incomes of the insured. Rather, they are merely intended to restore the insured to his or her approximate financial position prior to the insured event. The cash flow patterns of some federal insurance programs can result in fluctuations in the federal deficit unrelated to the budget’s long-term fiscal balance. As noted earlier, uneven cash flows may result from both the erratic nature of some insured risks or temporary cash flows, as in the case of the acquisition and subsequent sale of assets from failed savings and loan institutions. In addition, insurance programs with long-term commitments, such as pension and life insurance programs, can distort the budget’s long-term fiscal balance by reducing the aggregate deficit in years that premium income exceeds payments without recognizing the programs’ expected costs. While annual cash flows for federal insurance programs generally do not provide complete information for resource allocation and fiscal policy, the magnitude of the problem and the implications for budget decision-making vary across the insurance programs reviewed. For example, the implications of the shortcomings of the current budget treatment appear greatest for the largest programs, pension and deposit insurance. Because of their large size, incomplete or misleading information about their cost could distort resource allocation and fiscal policy significantly, making the limitations of cash-based budgeting more pronounced than for other federal insurance programs. In addition, the limitations of cash-based budgeting are most apparent when the government’s commitment extends over a long period of time, as with pension insurance, or when the insured events are infrequent or catastrophic in nature, such as severe flooding or depository losses. Conversely, the implications for budget decision-making may be less severe if relatively frequent claim payments prompt policymakers to consider the financial condition and funding needs of the program. The use of accrual-based budgeting for federal insurance programs has the potential to overcome a number of the deficiencies of cash-based budgeting—if the estimating problems I discuss below can be dealt with. Accrual-based reporting recognizes transactions or events when they occur regardless of when cash flows take place. An important feature of accrual-based reporting is the matching of expenses and revenues whenever it is reasonable and practicable to do so. In contrast to cash-based reporting, accrual reporting recognizes the cost for future insurance claim payments when the insurance is extended and provides a mechanism for establishing reserves to pay those costs. Thus, the use of accrual concepts in the budget has the potential to overcome the time lag between the extension of an insurance commitment, collection of premiums, and payment of claims that currently distorts the government’s cost for these programs on an annual cash flow basis. The use of forward-looking cost measures for federal insurance programs could improve budget reporting. As with the approach taken for credit programs, accrual-based reporting for insurance programs recognizes the cost of the government’s commitment when the decision is made to provide the insurance, regardless of when cash flows occur. For federal insurance programs, the key information is whether premiums over the long term will be sufficient to pay for covered losses and, if not, to identify the net cost to the government. The cost of the risk assumed by the government is the difference between the full risk premium, based on the expected cost of losses inherent in the insurance commitment, and the premium charged to the insured (the missing premium). Earlier recognition of the cost of the government’s insurance commitments under a risk-assumed accrual-based budgeting approach would (1) allow for more accurate cost comparisons with other programs, (2) provide an opportunity to control costs before the government is committed to making payments, (3) build budget reserves for future claims, and (4) better capture the timing and magnitude of the impact of the government’s actions on private economic behavior. It might or might not change the premium charged—that is a separate policy decision. Rather, better information on cost would mean that decisions would be better informed. A crucial component in the effective implementation of accrual-based budgeting for federal insurance programs is the ability to generate reasonable, unbiased estimates of the risk assumed by the federal government. Although the risk-assumed concept is relatively straightforward, generating estimates of these costs is complex and varies significantly across insurance programs. While in some cases, such as life insurance, generating risk-assumed estimates may not be problematic, in most cases, the difficulties faced may be considerably more challenging than those currently faced for some loan programs under credit reform. For insurance, the accuracy of estimated future claims is determined by the extent to which the probability of all potential outcomes can be determined. Unfortunately, probabilities are not known for certain for most activities more complex than the toss of a fair coin. However, for activities in which data on actual outcomes exist, like the length of a human life, the underlying probabilities can be estimated. When the probabilities of future events can be inferred, estimates are said to be made under the condition of risk and the risk undertaken by the insurer can be measured. However, when underlying conditions are not fully understood, estimates are said to be made under uncertainty. This is the case for most federal insurance programs due to the nature of the risks insured, program modifications, and other changes in conditions that affect potential losses. Lack of sufficient historical data for some federal insurance programs also constrains risk assessment. While private insurers generally rely on historical data on losses and claim costs to assess risk, data on the occurrence of insured events over sufficiently long periods under similar conditions are generally not available for federal insurance programs. Frequent program modifications as well as fundamental changes in the activities insured further reduce the predictive value of available data and complicate risk estimation. These factors, which limit the ability to predict losses and the potential for catastrophic losses, have been cited as preventing the development of commercial insurance markets for risks covered by federal insurance programs. Many federal insurance programs cover complex, case-specific, or catastrophic risks that the private sector has historically been unwilling or unable to cover. As a result, private sector comparisons are generally unavailable to aid in the risk estimation process. Thus, the development and acceptance of risk assessment methodologies for individual insurance programs vary considerably. For some programs, the development of risk-assumed estimates will require refining and adapting available risk assessment models while, for other programs, new methodologies may have to be developed. The degree of difficulty in developing estimates and the uncertainty surrounding these estimates will likely be greatest for programs—such as deposit and pension insurance—that require modeling complex interactions between highly uncertain macroeconomic variables and human behavior. Even after years of research, significant debate and estimation disparity exists in the modeling for these programs. This means that in practical terms, attempts to improve cost recognition occur on a continuum since insurance programs and insurable events vary significantly. The extent of improvement in information when moving from cash-based to accrual-based information would vary across programs depending on (1) the size and length of the government’s commitment, (2) the nature of the insured risks, and (3) the extent to which costs are currently captured in the budget. The diversity of federal insurance programs also implies that the period used for estimating risk assumed, the complexity of the models, and the policy responses to this new information will vary. In our report on budgeting for insurance programs, we looked at several different approaches to incorporating risk-assumed estimates into the budget, ranging from the addition of supplemental reporting to incorporation directly into budget authority, outlays, and the deficit. We concluded that although the potential for improved information argued for a risk-assumed approach, the analytic and implementation issues argued for beginning with supplemental information. I will describe the three approaches we explored and then discuss our conclusion. Supplemental approach: Under this approach, accrual-based cost measures would be included as supplemental information in the budget documents. Ideally, the risk-assumed estimates would be reported annually in a standard format along with the cash-based estimates. Showing the two together would highlight the risk-assumed cost estimates at the time budget decisions are made and also increase the likelihood that serious work on improving these estimates would continue. This approach has some advantages, particularly that it would allow time to test and improve estimation methodologies and increase the comfort level of users before considering whether to move to a more comprehensive approach. It would highlight the differences in the type of information provided on a cash basis versus an accrual basis without changing the reporting basis of total budget authority, net outlays, or the budget deficit or surplus. The disadvantage of the supplemental reporting approach is that it may not have a significant effect on the budget decision-making process because the cost information would not directly affect the budget totals and allocations to congressional committees. Therefore, if this approach is selected, it would be important to also create an incentive to improve cost estimates and risk assessment methodologies. For example, demonstrated congressional interest and stated intentions to move toward greater integration into the budget after a period of evaluation might help ensure that agencies and the Office of Management and Budget actively pursue improvements. Budget authority approach: Under this approach, accrual-based cost measures—the full cost of the risk assumed by the government—would be included in budget authority for the insurance program account and in the aggregate budget totals. Net outlays—and hence the budget deficit or surplus—would not change. Budget authority would be obligated when an insurance commitment was made and would be held as an interest-earning reserve. Future claims would be paid from the reserve. A key advantage of this approach is that it would provide earlier recognition of insurance costs directly in the budget while preserving cash-based reporting for net outlays and the budget results. This would incorporate cost estimates directly into the budget debate without potentially subjecting outlays and the deficit or surplus to the uncertainty of the risk-assumed estimates or changing the nature of the outlay and deficit/surplus measure. It might also focus attention on improving the estimates since they will be included in one of the key budget numbers. There are problems with this approach, however. Since the estimates would not be reflected in the deficit or surplus—the numbers that receive the most attention and scrutiny—it is unclear how much more effect this approach would have on the budget decision-making process than the supplemental information approach. In addition, the impact of this approach would be limited by the fact that most insurance programs are mandatory and thus any budget authority needed is automatically provided. In our report, we discuss a variation of this approach that would increase its impact. For mandatory insurance programs, a discretionary account could be created to record the government’s subsidy cost. An appropriation to that account could be required to cover the subsidy costs in the year the insurance is extended, unless alternative actions were taken to reduce the government’s cost, such as increasing program collections or reducing future programs costs. Since the discretionary appropriation would be subject to Budget Enforcement Act caps, decisionmakers would have an incentive to reduce the government’s costs. However, such a change in budgeting would also fundamentally change the nature of most federal insurance programs and, by changing the locus of decisions to the annual appropriation process, might change program operations. Outlay approach: Under this approach, accrual-based cost measures would be incorporated into both budget authority and net outlays for the insurance program account and in the budget totals. Thus, the reported deficit or surplus would reflect the risk-assumed estimate at the time the insurance is extended. Since the government’s insurance programs generally provide a subsidy, the deficit would be larger (or the surplus smaller) than when reported on a cash basis, which could prompt action to address the causes of the increased outlays. Without fundamentally changing the nature of most insurance programs, the outlay approach is the most comprehensive of the three approaches and has the greatest potential to achieve many of the conceptual benefits of accrual-based budgeting. It would recognize the government’s full cost when budget decisions are being made, permitting more fully informed resource allocation decisions. Since the cost is recognized in the budget’s overall results—the deficit or surplus—incentives for managing costs may be improved. Also, recognizing the costs at the time the insurance commitments are made would better reflect their fiscal effects. Conceptually, this approach has the appeal of taking the approach currently used for credit programs and applying it to insurance. However, it is important to recognize that developing estimates of the “missing premium” is much more difficult than developing subsidy estimates for credit programs. The uncertainty surrounding the estimates of the risk assumed presents a major hurdle to implementing accrual budgeting for insurance programs. Risk-assumed estimates for most insurance programs are either currently unavailable or not fully accepted. Even if they become more accepted, the Congress and the President would need to be comfortable with the fact that recognizing the risk-assumed estimate in outlays would mean that any reported deficit would depart further from representing the borrowing needs of the government. Choosing among the three approaches I have presented is further complicated by the fact that the relative implementation difficulties—and the benefits achieved—vary across federal insurance programs. The key implementation issue that I discussed earlier is whether reasonable, unbiased, risk-assumed cost estimates can be developed. The programs for which the risk-assumed estimates are perhaps most difficult to make—deposit and pension insurance—are also the ones for which having the estimates would potentially make the most difference in budget decision-making. While supplemental reporting of risk-assumed estimates would allow time to evaluate the feasibility and desirability of moving to a more comprehensive accrual-based budgeting approach for all insurance programs, the Congress and the President could also consider whether it would be reasonable to phase implementation by type of insurance program over time. If the latter approach were chosen, life, flood, and crop insurance programs could be the starting points because they have more established methodologies for setting risk-related premium rates. The methodology for life insurance is well established in actuarial science. For flood and crop insurance, some modifications and refinements to existing methodologies and other implementation challenges should be expected. Beyond generating estimates, there are other challenges that must be addressed, such as the increased uncertainty accrual-based estimates will inject into the budget. For example, while one of the major benefits of accrual-based budgeting is the recognition of the cost of future insurance claims when programmatic and funding decisions are being made, this recognition is dependent on estimates, which are in turn dependent upon many economic, behavioral, and environmental variables. There will always be uncertainty in the reported accrual-based estimates. However, uncertainty in the estimation of insurance program costs should be evaluated in terms of the direction and magnitude of the estimation errors. For budgeting purposes, decisionmakers probably would be better served by information that is more approximately correct on an accrual basis than they are by cash-based numbers that may be exactly correct but misleading. That said, the estimation uncertainty will make periodic evaluation of the risk estimation methodologies used to generate the estimates crucial. Other challenges to be addressed include how to establish and protect loss reserves, how to handle reestimates, funding shortfalls, previously accumulated program deficits, and administrative costs. To support current and future resource allocation decisions and be useful in the formulation of fiscal policy, the federal budget needs to be a forward-looking document that enables and encourages users to consider the future consequences of current decisions. The potential benefits of an accrual-based budgeting approach for federal insurance programs warrant continued effort in the development of risk-assumed cost estimates. The complexity of the issues involved and the need to build agency capacity to generate such estimates suggest that it is not feasible to integrate accrual-based costs directly into the budget at this time. Supplemental reporting of these estimates in the budget over a number of years could help policymakers understand the extent and nature of the estimation uncertainty and permit an evaluation of the desirability and feasibility of adopting a more comprehensive accrual-based approach. Supplemental reporting of risk-assumed cost estimates in the budget has several attractive features. It would allow time to (1) develop and refine estimation methodologies, (2) assess the reliability of risk-assumed estimates, (3) formulate cost-effective reporting procedures and requirements, (4) evaluate the feasibility of a more comprehensive accrual-based budgeting approach, and (5) gain experience and confidence in risk-assumed estimates. At the same time, the Congress and the executive branch will have had several years of experience with credit reform, which can help inform their efforts to apply accrual-based budgeting to insurance. During this period, policymakers should continue to draw on information provided in audited financial statements. If the risk-assumed estimates develop sufficiently so that their use in the budget will not introduce an unacceptable level of uncertainty, policymakers could consider incorporating risk-assumed estimates directly into the budget. While directly incorporating them in both budget authority and outlays would have the greatest impact on the incentives provided to decisionmakers, it would also significantly increase reporting complexity and introduce new uncertainty in reported budget data. Thus caution is called for in taking steps that move beyond supplemental reporting of risk-assumed estimates. One way to approach the incorporation of risk-assumed estimates in the budget is to start with programs that already have established methodologies for setting risk-assumed premium rates, such as life, flood, and crop insurance. By drawing attention to the need to change the budget treatment of insurance programs, this task force is moving the process in the right direction. As I have noted on other occasions, action and effort are usually devoted to areas on which light is shined. Mr. Chairman, this concludes my written statement. I would be happy to answer any questions you or your colleagues 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. 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GAO discussed: (1) current budget reporting and accrual-based reporting; and (2) accrual budgeting and its specific application for insurance programs. GAO noted that: (1) the cash-based budget often provides incomplete or misleading information about cost where cash flows to and from the government span many budget periods, or where the government obligates itself to make future payments or incurs losses well into the future; (2) the use of accrual-based budgeting for federal insurance programs has the potential to overcome a number of the deficiencies of cash-based budgeting--if estimating problems can be dealt with; (3) the use of accrual concepts in the budget has the potential to overcome the time lag between the extension of an insurance commitment, collection of premiums, and payment of claims that currently distorts the government's cost for these programs on an annual cash flow basis; (4) accrual-based reporting for insurance programs recognizes the cost of the government's commitment when the decision is made to provide insurance, regardless of when cash flows occur; (5) for federal insurance programs, the key information is whether premiums over the long term will be sufficient to pay for covered losses; (6) earlier recognition of the cost of the government's insurance commitments under a risk-assumed accrual-based budgeting approach would: (a) allow for more accurate cost comparisons with other programs; (b) provide an opportunity to control costs before the government is committed to making payments; (c) build budget reserves for future claims; and (d) better capture the timing and magnitude of the impact of the government's actions on private economic behavior; (7) a crucial component in the effective implementation of accrual-based budgeting for federal insurance programs is the ability to generate reasonable, unbiased estimates of the risk assumed by the federal government; (8) GAO reviewed three different approaches to incorporating risk-assumed estimates into the budget: (a) under the supplemental approach, accrual-based cost measures would be included as supplemental information in the budget documents; (b) under the budget authority approach, accrual-based cost measures would be included in budget authority for the insurance program account and in the aggregate budget totals; and (c) under the outlay approach, accrual-based cost measures would be incorporated into both budget authority and net outlays for the insurance program account and in the budget totals; and (9) the complexity of the issues involved and the need to build agency capacity to generate such estimates suggest that it is not feasible to integrate accrual-based costs directly into the budget at this time.

You are an expert at summarizing long articles. Proceed to summarize the following text: Recognizing the potential value of IT for public and private health systems, the federal government has, for several years, been working to promote the nationwide use of health IT. In April 2004, President Bush called for widespread adoption of interoperable electronic health records within 10 years and issued an executive order that established the position of the National Coordinator for Health IT within HHS. The National Coordinator’s responsibilities include developing, maintaining, and directing the implementation of a strategic plan to guide the nationwide implementation of interoperable health IT in both the public and private sectors. According to the strategic plan, the National Coordinator is to lead efforts to build a national health IT infrastructure that is intended to, among other things, ensure that patients’ individually identifiable health information is secure, protected, and available to the patient to be used for medical and nonmedical purposes, as directed by the patient and as appropriate. In January 2007, we reported on the steps that HHS was taking to ensure the protection of personal health information exchanged within a nationwide network and on the challenges facing health information exchange organizations in protecting electronic personal health information. We reported that although HHS and the Office of the National Coordinator had initiated actions to identify solutions for protecting electronic personal health information, the department was in the early stages of its efforts and had not yet defined an overall privacy approach. As described earlier, we made recommendations regarding the need for an overall privacy approach, which we reiterated in subsequent testimonies in February 2007, June 2007, and February 2008. In our report, we described applicable provisions of HIPAA and other federal laws that are intended to protect the privacy of certain health information, along with the HIPAA Privacy Rule and key principles that are reflected in the rule. Table 1 summarizes these principles. We also described in our report and testimonies challenges associated with protecting electronic health information that are faced by federal and state health information exchange organizations and health care providers. These challenges are summarized in table 2. We reported that HHS had undertaken several initiatives intended to address aspects of key principles and challenges for protecting the privacy of health information. For example, in 2005, the department awarded four health IT contracts that included requirements for developing solutions to comply with federal privacy requirements and identifying techniques and standards for securing health information. Since January 2007, HHS has undertaken various initiatives that are contributing to its development of an overall privacy approach, although more work remains. We recommended that this overall approach include (1) identifying milestones and the entity responsible for integrating the outcomes of its privacy-related initiatives, (2) ensuring that key privacy principles in HIPAA are fully addressed, and (3) addressing key challenges associated with the nationwide exchange of health information. In this regard, the department has fulfilled the first part of our recommendation, and it has taken important steps in addressing the two other parts. Nevertheless, these steps have fallen short of fully implementing our recommendation because they do not include a process for ensuring that all key privacy principles and challenges will be fully and adequately addressed. In the absence of such a process, HHS may not be effectively positioned to ensure that health IT initiatives achieve comprehensive privacy protection within a nationwide health information network. The department and its Office of the National Coordinator have continued taking steps intended to address key privacy principles and challenges through various health IT initiatives. Among other things, these initiatives have resulted in technical requirements, standards, and certification criteria related to the key privacy principles described in table 1. The following are examples of ways that the Office of the National Coordinator’s health IT initiatives relate to privacy principles reflected in HIPAA. As part of its efforts to advance health IT, the American Health Information Community defines “use cases,” which are descriptions of specific business processes and ways that systems should interact with users and with other systems to achieve specific goals. Among other things, several of the use cases include requirements and specifications that address aspects of the access, uses and disclosures, and amendments privacy principles. For example, the “consumer empowerment” use case describes at a high level specific capabilities that align with the access principle. It requires that health IT systems include mechanisms that allow consumers to access their own clinical information, such as lab results and diagnosis codes, from other sources to include in their personal health records. The use case also aligns with the uses and disclosures principle and includes requirements that allow consumers to control access to their personal health record information and specify which information can be accessed by health care providers and organizations within health information networks. Further, the consumer empowerment use case aligns with the amendments privacy principle, emphasizing the need for policies to guide decisions about which data consumers should be able to modify, annotate, or request that organizations change. (Other use cases that are related to these privacy principles are the “personalized healthcare” and “remote monitoring” use cases.) Under HHS’s initiative to implement a nationwide health information network, in January 2007, four test network implementations, or prototypes, demonstrated potential nationwide health information exchange and laid the foundation for the Office of the National Coordinator’s ongoing network trial implementations. Activities within the prototypes and the trial implementations are related to privacy principles, including the security, access, uses and disclosures, and administrative requirements principles. For example, the prototypes produced specific requirements for security mechanisms (such as data access control and encryption) that address aspects of the security principle. Additionally, the ongoing trial implementations are guided by requirements for using personal health data intended to address the access, uses and disclosures, and administrative requirements principles. For example, participants in the trial implementations are to provide the capability for consumers to access information, such as registration and medication history data, from other sources to include in their personal health records, to control access to self-entered data or clinical information held in a personal health record, and to control the types of information that can be released from personal health records for health information exchange. In addition, organizations participating in the network are required to provide system administrators the ability to monitor and audit all access to and use of the data stored in their systems. The Healthcare Information Technology Standards Panel continued work to “harmonize” standards directly related to several key privacy principles, primarily the security principle. In addition, the panel developed technical guidelines that are intended to address other privacy principles, such as the authorization principle and the uses and disclosures principle. For example, the panel’s guidelines specify that systems should be designed to ensure that consumers’ instructions related to authorization and consent are captured, managed, and available to those requesting the health information. The Certification Commission for Healthcare Information Technology, which is developing and evaluating the criteria and process for certifying the functionality, security, and interoperability of electronic health records, took steps that primarily address the security principle. For example, the commission defined specific security criteria for both ambulatory and inpatient electronic health records that require various safeguards to be in place before electronic health record systems are certified. Among other things, these safeguards include ensuring that system administrators can modify the privileges of users so that only those who have a need to access patients’ information are allowed to do so and that the minimum amount of information necessary can be accessed by system users. The State-Level Health Information Exchange Consensus Project, a consortium of public and private-sector stakeholders, is intended to promote consistent organizational policies regarding privacy and health information exchange. The consortium issued a report in February 2007 that addresses, among other principles, the uses and disclosures privacy principle. For example, the report advises health information exchange organizations to maintain information about access to and disclosure of patients’ personal health information and to make that data available to patients. The consortium subsequently issued another report in March 2008 that recommended practices to ensure the appropriate access, use, and control of health information. Additionally, two of HHS’s key advisory groups continued to develop and provide recommendations to the Secretary of HHS for addressing privacy issues and concerns: The Confidentiality, Privacy, and Security Workgroup was formed in 2006 by the American Health Information Community to focus specifically on these issues and has submitted recommendations to the community that address privacy principles. Among these are recommendations related to the notice principle that the workgroup submitted in February and April 2008. These recommendations stated that health information exchange organizations should provide patients, via the Web or another means, information in plain language on how these organizations use and disclose health information, their privacy policies and practices, and how they safeguard patient or consumer information. The work group also submitted recommendations related to the administrative requirements principle, stating that the obligation to provide individual rights and a notice of privacy practices under HIPAA should remain with the health care provider or plan that has an established, independent relationship with a patient, not with the health information exchange. The National Committee on Vital and Health Statistics, established in 1949, advises the Secretary of HHS on issues including the implementation of health IT standards and safeguards for protecting the privacy of personal health information. The committee’s recent recommendations related to HHS’s health IT initiatives addressed, among others, the uses and disclosures principle. For example, in February 2008, the National Committee submitted five recommendations to the Secretary that support an individual’s right to control the disclosure of certain sensitive health information for the purposes of treatment. Although the recommendations from these two advisory groups are still under consideration by the Secretary, according to HHS officials, contracts for the nationwide health information network require participants to consider these recommendations when conducting network trials once they are accepted by the Secretary. The Office of the National Coordinator also took actions intended to address key challenges to protecting exchanges of personal electronic health information. Specifically, state-level initiatives (described below) were formed to bring stakeholders from states together to collaborate, propose solutions, and make recommendations to state and federal policymakers for addressing challenges to protecting the privacy of electronic personal health information within a nationwide health information exchange. Outcomes of these initiatives provided specific state-based solutions and recommendations for federal policy and guidance for addressing key challenges described by our prior work (see table 2). The Health Information Security and Privacy Collaboration is pursuing privacy and security projects directly related to several of the privacy challenges identified in our prior work, including the need to resolve legal and policy issues resulting from varying state laws and organizational-level business practices and policies, and the need to obtain individuals’ consent for the use and disclosure of personal health information. For example, the state teams noted the need for clarification about how to interpret and apply the “minimum necessary” standard, and they recommended that HHS provide additional guidance to clarify this issue. In addition, most of the state teams cited the need for a process to obtain patient permission to use and disclose personal health information, and the teams identified multiple solutions to address differing definitions of patient permission, including the creation of a common or uniform permission form for both paper and electronic environments. The State Alliance for e-Health created an information protection task force that in August 2007 proposed five recommendations that are intended to address the challenge of understanding and resolving legal and policy issues. The recommendations, which the alliance accepted, focused on methods to facilitate greater state-federal interaction related to protecting privacy and developing common solutions for the exchange of electronic health information. Beyond the initiatives previously discussed, in June 2008, the Secretary released a federal health IT strategic plan that includes a privacy and security objective for each of its strategic goals, along with strategies and target dates for achieving the objectives. For example, one of the strategies is to complete the development of a confidentiality, privacy, and security framework by the end of 2008, and another is to address inconsistent statutes or regulations for the exchange of electronic health information by the end of 2011. The strategic plan emphasized the importance of privacy protection for electronic personal health information by acknowledging that the success of a nationwide, interoperable health IT infrastructure in the United States will require a high degree of public confidence and trust. In accordance with this strategy, the Office of the National Coordinator is responsible for developing the confidentiality, privacy, and security framework. The National Coordinator has indicated that this framework, which is to be developed and published by the end of calendar year 2008, is to incorporate the outcomes of the department’s privacy-related initiatives, and that milestones have been developed and responsibility assigned for integrating these outcomes. The National Coordinator has assigned responsibility for these integration efforts and the development of the framework to the Director of the Office of Policy and Research within the Office of the National Coordinator. In this regard, the department has fulfilled the first part of our recommendation. While the various initiatives that HHS has undertaken are contributing to the development and implementation of an overall privacy approach, more work remains. In particular, the department has not defined a process for ensuring that all privacy principles and challenges will be fully and adequately addressed. This process would include, for example, steps for ensuring that all stakeholders’ contributions to defining privacy-related activities are appropriately considered and that individual inputs to the privacy framework will be effectively assessed and prioritized to achieve comprehensive coverage of all key privacy principles and challenges. Such a process is important given the large number and variety of activities being undertaken and the many stakeholders contributing to the health IT initiatives. In particular, the contributing activities involve a wide variety of stakeholders, including federal, state and private-sector entities. Further, certain privacy-related activities are relevant only to specific principles or challenges, and are generally not aimed at comprehensively addressing all privacy principles and challenges. For example, the certification and standards harmonization efforts primarily address the implementation of technical solutions for interoperable health IT and, therefore, are aimed at system-level security measures, such as data encryption and password protections, while the recommendations submitted by HHS’s advisory committees and state-level initiatives are primarily aimed at policy and legal issues. Effectively assessing the contributions of individual activities could play an important role in determining how each activity contributes to the collective goal of ensuring comprehensive privacy protection. Additionally, the outcomes of the various activities may address privacy principles and challenges to varying degrees. For example, while a number of the activities address the uses and disclosures principle, HHS’s advisory committees have made recommendations that the department’s activities more extensively address the notice principle. Consequently, without defined steps for thoroughly assessing the contributions of the activities, some principles and challenges may be addressed extensively, while others may receive inadequate attention, leading to gaps in the coverage of the principles and challenges. In discussing this matter with us, officials in the Office of the National Coordinator pointed to the various health IT initiatives as an approach that it is taking to manage privacy-related activities in a coordinated and integrated manner. For example, the officials stated that the purpose of the American Health Information Community’s use cases is to provide guidance and establish requirements for privacy protections that are intended to be implemented throughout the department’s health IT initiatives (including standards harmonization, electronic health records certification, and the nationwide health information network). Similarly, contracts for the nationwide health information network require participants to adopt approved health IT standards (defined by the Healthcare Information Technology Standards Panel) and, as mentioned earlier, to consider recommendations from the American Health Information Community and the National Committee on Vital and Health Statistics when conducting network trials, once these recommendations are accepted or adopted by the Secretary. While these are important activities for addressing privacy, they do not constitute a defined process for assessing and prioritizing the many privacy-related initiatives and the needs of stakeholders to ensure that privacy issues and challenges will be addressed fully and adequately. Without a process that accomplishes this, HHS faces the risk that privacy protection measures may not be consistently and effectively built into health IT programs, thus jeopardizing patient privacy as well as the public confidence and trust that are essential to the success of a future nationwide health information network. HHS and its Office of the National Coordinator for Health IT intend to address key privacy principles and challenges through integrating the privacy-related outcomes of the department’s health IT initiatives. Although it has established milestones and assigned responsibility for integrating these outcomes and for the development of a confidentiality, privacy, and security framework, the department has not fully implemented our recommendation for an overall privacy approach that is essential to ensuring that privacy principles and challenges are fully and adequately addressed. Unless HHS’s privacy approach includes a defined process for assessing and prioritizing the many privacy-related initiatives, the department may not be able to ensure that key privacy principles and challenges will be fully and adequately addressed. Further, stakeholders may lack the overall policies and guidance needed to assist them in their efforts to ensure that privacy protection measures are consistently built into health IT programs and applications. As a result, the department may miss an opportunity to establish the high degree of public confidence and trust needed to help ensure the success of a nationwide health information network. To ensure that key privacy principles and challenges are fully and adequately addressed, we recommend that the Secretary of Health and Human Services direct the National Coordinator for Health IT to include in the department’s overall privacy approach a process for assessing and prioritizing its many privacy-related initiatives and the needs of stakeholders. HHS’s Assistant Secretary for Legislation provided written comments on a draft of this report. In the comments, the department generally agreed with the information discussed in our report; however, it neither agreed nor disagreed with our recommendation. HHS agreed that more work remains to be done in the department’s efforts to protect the privacy of electronic personal health information and stated that it is actively pursuing a two-phased process for assessing and prioritizing privacy-related initiatives intended to build public trust and confidence in health IT, particularly in electronic health information exchange. According to HHS, the process will include work with stakeholders to ensure that real-world privacy challenges are understood. In addition, the department stated that the process will assess the results and recommendations from the various health IT initiatives and measure progress toward addressing privacy-related milestones established by the health IT strategic plan. As we recommended, effective implementation of such a process could help ensure that the department’s overall privacy approach fully addresses key privacy principles and challenges. HHS also provided technical comments, which we have incorporated into the report as appropriate. The department’s written comments are reproduced in appendix II. We are sending copies of this report to interested congressional committees and to the Secretary of HHS. Copies of this report will be made available at no charge on our Web site at www.gao.gov. If you have any questions on matters discussed in this report, please contact me at (202) 512-6304 or Linda Koontz at (202) 512-6240, or by e-mail at [email protected] or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other contacts and key contributors to this report are listed in appendix III. Our objective was to provide an update on the department’s efforts to define and implement an overall privacy approach, as we recommended in an earlier report. Specifically, we recommended that the Secretary of Health and Human Services define and implement an overall approach for protecting health information that would (1) identify milestones and the entity responsible for integrating the outcomes of its privacy-related initiatives, (2) ensure that key privacy principles in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) are fully addressed, and (3) address key challenges associated with the nationwide exchange of health information. To determine the status of HHS’s efforts to develop an overall privacy approach, we analyzed the department’s federal health IT strategic plan and documents related to its planned confidentiality, privacy, and security framework. We also analyzed plans and documents that described activities of each of the health IT initiatives under the Office of the National Coordinator and identified those intended to (1) develop and implement mechanisms for addressing privacy principles and (2) develop recommendations for overcoming challenges to ensuring the privacy of patients’ information. Specifically, we assessed descriptions of the intended outcomes of the office’s health IT initiatives to determine the extent to which they related to these privacy principles and challenges identified by our prior work. To supplement our data collection and analysis, we conducted interviews with officials from the Office of the National Coordinator to discuss the department’s approaches and future plans for addressing the protection of personal health information within a nationwide health information network. We conducted this performance audit at the Department of Health and Human Services in Washington, D.C., from April 2008 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. In addition to those named above, key contributors to this report were John A. de Ferrari, Assistant Director; Teresa F. Tucker, Assistant Director; Barbara Collier; Heather A. Collins; Susan S. Czachor; Amanda C. Gill; Nancy Glover; M. Saad Khan; Thomas E. Murphy; and Sylvia L. Shanks.

Although advances in information technology (IT) can improve the quality and other aspects of health care, the electronic storage and exchange of personal health information introduces risks to the privacy of that information. In January 2007, GAO reported on the status of efforts by the Department of Health and Human Services (HHS) to ensure the privacy of personal health information exchanged within a nationwide health information network. GAO recommended that HHS define and implement an overall privacy approach for protecting that information. For this report, GAO was asked to provide an update on HHS's efforts to address the January 2007 recommendation. To do so, GAO analyzed relevant HHS documents that described the department's privacy-related health IT activities. Since GAO's January 2007 report on protecting the privacy of electronic personal health information, the department has taken steps to address the recommendation that it develop an overall privacy approach that included (1) identifying milestones and assigning responsibility for integrating the outcomes of its privacy-related initiatives, (2) ensuring that key privacy principles are fully addressed, and (3) addressing key challenges associated with the nationwide exchange of health information. In this regard, the department has fulfilled the first part of GAO's recommendation, and it has taken important steps in addressing the two other parts. The HHS Office of the National Coordinator for Health IT has continued to develop and implement health IT initiatives related to nationwide health information exchange. These initiatives include activities that are intended to address key privacy principles and challenges. For example: (1) The Healthcare Information Technology Standards Panel defined standards for implementing security features in systems that process personal health information. (2) The Certification Commission for Healthcare Information Technology defined certification criteria that include privacy protections for both outpatient and inpatient electronic health records. (3) Initiatives aimed at the state level have convened stakeholders to identify and propose solutions for addressing challenges faced by health information exchange organizations in protecting the privacy of electronic health information. In addition, the office has identified milestones and the entity responsible for integrating the outcomes of its privacy-related initiatives, as recommended. Further, the Secretary released a federal health IT strategic plan in June 2008 that includes privacy and security objectives along with strategies and target dates for achieving them. Nevertheless, while these steps contribute to an overall privacy approach, they have fallen short of fully implementing GAO's recommendation. In particular, HHS's privacy approach does not include a defined process for assessing and prioritizing the many privacy-related initiatives to ensure that key privacy principles and challenges will be fully and adequately addressed. As a result, stakeholders may lack the overall policies and guidance needed to assist them in their efforts to ensure that privacy protection measures are consistently built into health IT programs and applications. Moreover, the department may miss an opportunity to establish the high degree of public confidence and trust needed to help ensure the success of a nationwide health information network.

You are an expert at summarizing long articles. Proceed to summarize the following text: Members of the U.S. military serve in different branches in locations across the country and around the world. The various branches within DOD include the Department of the Air Force, the Department of the Army, and Department of the Navy, which also incorporates forces of the Marine Corps. DOD also oversees the members of the Coast Guard along with the Department of Transportation. As of 2004, approximately 1.4 million active duty military personnel served in the various branches in more than 6,000 locations. In addition, 2 million retirees receive pay and benefits from the department. DOD is also the largest employer and trainer of young adults in the United States, recruiting about 200,000 individuals into active duty in 2004—the majority of them recent high school graduates. As shown in figure 1, the pay of typical junior enlisted staff—grades E-1 through E-3— ranges between $1,143 and $1,641 per month. Entry-level military personnel are generally young and have limited education and incomes. A 2002 private research organization report that examined the financial situation of military members noted that the military hires primarily young, untrained, entry-level employees. Comparing data from various surveys done of large numbers of civilians and military members, this report found that less than 5 percent of junior enlisted personnel held bachelor’s degrees compared to 27 percent of the civilians. In terms of income, this report found that 87 percent of junior enlisted personnel had total monthly family incomes of $3,000 or less. However, a DOD commission that reviews military compensation has found that military members are paid at the 70th percentile or higher of comparably educated civilians. In addition, military members receive housing and subsistence benefits, with about half living in on-base housing and many having access to military facilities that provide meals. Various aspects of the military life can increase the challenges that service members face in managing their finances. According to the private research report, factors that appeared to increase the financial distress among military members were the family separations resulting from changes in duty stations and deployments away from home. According to our report on military relocations, DOD reported that about one-third of all military members make Permanent Change of Station (PCS) moves every year. The average length of time spent at each location can also be brief, with 20 percent of such relocations lasting less than 1 year and about 50 percent lasting 2 years or less. Leaving or retiring from the service also represents the last major transition in a service member’s career, with data indicating that most enlisted personnel leave after their initial duty commitment. As with their civilian counterparts, military service members may be offered various types of financial products, including life insurance. Types of life insurance commonly sold include term, whole, universal, and variable life insurance products. Many companies offer term life insurance, which generally provides basic death benefits for a specified time period, such as 10 or 20 years. At the end of this term, the insured can usually renew the coverage at a higher premium rate for another set term period. The coverage on a term policy may also end if the insured person ceases making the required periodic premium payments. Under a whole life policy, an insured person can make level premium payments, which will provide the specified amount of death benefits. Because the premium generally stays the same throughout the time that the policy is in force, premiums for whole life insurance are generally higher initially than for comparable amounts of term life coverage. Whole life insurance policies can build cash value, which can be borrowed upon, though this will reduce death benefits until the loan is repaid in full. Some whole life policies are known as “modified whole life insurance” in which the policyowner pays a lower than normal premium for a specified initial period, such as 5 years, after which time the premium increases to a higher amount that is payable for the life of the policy. Universal life products may also provide permanent insurance—like a whole life policy—but may also offer their purchasers more flexibility. Under such policies, the holder can vary the amount of the premium to build up the cash value of the policy by increasing the amount of the payment, or can pay less into the policy at other times, when money is needed for other purposes. Similarly, under a variable life policy, a cash value accumulates that can be used to invest in various instruments, such as common stocks, bonds, or mutual fund investments. However, with a variable life policy, the policyholder (and not the company) assumes the investment risk tied to the product. If these investments perform well, the death benefits paid on the policy can increase; conversely, if the investments perform poorly, the purchaser may have to increase their premiums to keep the policy in force. The federal government offers service members life insurance as part of their total benefits package. Each member is eligible for inexpensive coverage under Servicemembers’ Group Life Insurance (SGLI), which provides group term life insurance. Until September 1, 2005, service members were automatically covered for the maximum amount of $250,000 of insurance on their first day of active duty status, unless they decline or reduce their coverage, but Congress has now increased this amount to $400,000. Service members leaving the military can also opt to continue coverage through the government-sponsored coverage provided to veterans. Although many life insurance policies exclude coverage for deaths resulting from acts of war, these government-sponsored policies do not contain this exclusion. State government entities are the primary regulators of insurance companies and agents in the United States. When first establishing operations, an insurance company must obtain a charter or license in order to write business in a state. This state becomes its state of domicile. Insurers may obtain approval to market products in multiple states, and therefore the sales by insurers can be overseen by multiple state regulators, though financial solvency of each company is primarily overseen by the regulator in the company’s state of domicile. Some insurance companies market their products using their own proprietary sales force. Some companies may also use agents employed by independent firms who may be marketing the products of multiple companies to their customers. The state insurance regulators oversee the insurance companies and agents that do business in their jurisdictions in several ways, including reviewing and approving products for sale and examining the operations of companies to ensure their financial soundness or proper market conduct behavior. Although each state has its own insurance regulator and laws, the National Association of Insurance Commissioners (NAIC) provides a national forum for addressing and resolving major insurance issues and for allowing regulators to develop consistent policies on the regulation of insurance when consistency is deemed appropriate. This association consists of the heads of each state insurance department, the District of Columbia, and four U.S. territories. It serves as a clearinghouse for exchanging information and provides a structure for interstate cooperation for examinations of multistate insurers. NAIC staff also coordinate the development of model insurance laws and regulations for consideration by states. Its staff also review state insurance departments’ regulatory activities as part of its national financial accreditation program. To meet their financial investment needs, military members may also be offered various securities products. These can include stocks issued by public companies that are traded in various markets, or debt securities, such as bonds that provide interest income to their holders. A common securities product that many investors purchase is a mutual fund. Mutual funds are investment companies that pool the money of many investors, and then invest them in other assets, such as stocks or bonds. By holding the shares of the mutual fund, investors can benefit from owning a broad portfolio of diversified securities managed by professional money managers, whose services they might otherwise be unable to obtain or afford. Investors are charged mutual fund fees, which cover the day-to-day costs of running a fund. Mutual funds are sold through a variety of distribution channels. For instance, investors can buy them directly by telephone or mail, or they can be sold by sales forces, such as the account representatives of third party broker-dealers. Some mutual funds assess sales charges (also called “loads”), which are generally paid at the time of purchase to compensate these sales personnel. Securities—and the firms that market them—are overseen by various regulators. At the federal level, the Securities and Exchange Commission (SEC) oversees securities issued by public companies. The firms that market securities to investors, known as broker-dealers, must also register and subject themselves to SEC oversight. This includes complying with various requirements for regulatory reporting, financial soundness, and sales practice regulations designed to protect investors. In addition to oversight by SEC, broker-dealers also are overseen by private entities known as self-regulatory organizations. The New York Stock Exchange and NASD (formerly called the National Association of Securities Dealers) are two examples of such organizations. State regulators also oversee securities activities. Congressional concerns over the adequacy of military member’s financial literacy and the processes in place to address financial product sales have prompted recent reviews and legislative actions. In response to a Congressional committee’s request to review military members’ financial condition, we recently reviewed and reported on the financial condition of active duty service members and their families. We also reported on DOD’s efforts to evaluate programs to assist deployed and non-deployed service members in managing their personal finances and the extent to which junior enlisted members received required personal financial management training. As part of this study, we found that the financial conditions of deployed and non-deployed service members and their families are similar, but deployed service members and their families may face additional financial problems related to pay. We also found that DOD lacks an oversight framework for evaluating the effectiveness of its personal financial management training programs across services, and that some junior enlisted service members were not receiving personal financial management training required by service regulations. In addition, we reviewed and reported on the extent of violations of DOD’s policies governing the solicitation of supplemental life insurance to active duty service members and DOD personnel’s compliance with procedures for establishing payroll deductions (commonly referred to as allotments) for supplemental life insurance purchases. The findings of this review are discussed later in this report. In response to concerns over the sale of questionable financial products to military members, the House of Representatives passed legislation in 2004 and 2005 requiring additional protections for service members. In February 2005, a similar bill was introduced in the U.S. Senate. Both bills contain various congressional findings, including the finding that military members are being offered high-cost securities and life insurance products by some financial services companies engaging in abusive and misleading sales practices. According to the bills, Congress finds that the regulation of these products and their sale on military bases has been clearly inadequate and requires congressional legislation to address these issues. These bills have been referred to the Senate Committee on Banking, Housing, and Urban Affairs for further consideration. A limited number of insurance companies that appear to target junior enlisted military members nationwide and around the world have sold certain costly, problematic insurance products, sometimes using inappropriate sales practices. These insurance products combine life insurance coverage with a side savings fund. The insurance products typically provide small amounts of death benefits and are considerably more costly than coverage offered to service members by the government or other private firms. Although they combine insurance with a savings component promising high returns, many military personnel did not benefit because any savings accumulated on these products can be used to extend the insurance coverage if service members ever stop making payments and fail to request a refund of their savings. A number of financial regulators are also investigating the claims that these companies have been using inappropriate sales practices when soliciting military members, including examining allegations that agents have been inappropriately marketing the insurance products as “investments.” Some of these companies have also been subject to past disciplinary actions by insurance regulators and for violations of DOD regulations governing commercial solicitation on military installations. According to state insurance regulators we contacted, at least six insurance companies were marketing products combining insurance and savings funds with provisions that reduce the likelihood that military purchasers would accumulate any lasting savings with such products. These state insurance regulators are currently reviewing the operations of these companies. Several of these companies share common ownership, with three owned by the same firm and two others having key executives from the same family. These companies operate extensively throughout the United States, with four licensed to sell insurance in at least 40 states, and the other two licensed in at least 35 states. In addition, as of July 2005, DOD approved five of these companies to conduct business at U.S. military installations overseas. These insurance companies also appeared to market primarily to junior enlisted service members. According to state insurance regulators we contacted, the companies primarily sold insurance policies to military personnel during their first few years of service, including during their initial basic training or advanced training provided after basic training. Although the exact number of service members that have purchased these products is not known, regulators told us that these companies sell thousands of policies to military personnel each year. We also found evidence that large numbers of these products were being sold. For example, base personnel at one naval training facility we visited said they regularly received several hundred allotment forms each month to initiate automatic premium payment deductions from military members’ paychecks for these insurance products. The insurance companies that target military service members are primarily marketing a hybrid product that combines a high-cost insurance policy with a savings component. According to insurance regulators we contacted, and company marketing materials that we examined, the insurance component generally consists of either a term or modified whole life policy that would provide death benefits generally ranging from $25,000 to $50,000 for premiums of approximately $100 per month in the first year with different variations in the premium amounts for subsequent years, depending on the product. In addition to the insurance component, part of the total monthly payment is allocated to a savings fund. Based on our review of these products, most (or all) of the service member’s payments in the first year are applied to the insurance component of the product. In subsequent years, more money is allocated to the savings fund to varying degrees, depending on the specific product. The companies marketing these products advertised that they paid relatively high rates of return on these savings funds. At the time we conducted our work, all of the companies were promising to pay 6.5 percent interest, or higher, on the savings fund portions of their products with a minimum of no less than 4 percent interest guaranteed. In contrast, as of August 30, 2005, the average national interest rate paid for a money market account was 2.16 percent. Company officials also told us that in the past they had paid much higher interest rates. For example, one company’s marketing materials for their product stated that over the past 25 years they had paid an average rate of 11.4 percent on the savings fund. Further, another company’s marketing material stated that their saving fund interest rate for the past 10 years averaged over 10 percent. The six companies that were marketing primarily to military members were selling two primary variations of these combined insurance and saving products. Three of the companies sold a product that provided 20 years of term life insurance. However, the premium payments for this product were structured so that purchasers would pay for the entire 20 years of life insurance coverage within the first 7 years. As a result, most of the service member’s monthly payment for the first 7 years was allocated to the life insurance premium, not the savings fund. After the seventh year, all subsequent payments are to be deposited into the savings fund. In addition, this product also promised the full return of the total premiums paid for the insurance at the end of the 20th year, although state insurance regulators told us they were not aware of any policies that had reached this 20-year point and received this refund. Figure 2 provides an example of how the payments would be allocated for a service member purchasing this “7-year premium” term insurance product, assuming a monthly payment of $100 and a savings portion crediting the guaranteed 4 percent simple interest paid annually. Three other companies marketing primarily to military members sold other variations of the combined insurance and savings product. Generally, these products combined a modified whole life insurance policy with a savings fund. Under the basic terms of these products, most of the service members’ first year’s payments would be applied to the life insurance premium and the remainder allocated to the savings fund. From the second year on, the allocation proportions reverse where most of the money is applied to the savings fund. Premium payments on these products could continue for the life of the purchaser, although the face value of the death benefit would be reduced to half its initial amount after a certain period or when the policyholder reached a certain age, depending on the product. Figure 3 provides an example of how the payments could be allocated for a service member purchasing this type of product with a $100 total monthly payment and 4 percent simple interest credited on the savings fund. These insurance products also cost significantly more than other life insurance coverage available to service members. Prior to September 2005, all service members could purchase $250,000 of term life insurance through SGLI for $16.25 per month. Since September 1, 2005, the total coverage has increased to $400,000 for $26 per month. According to the Department of Veterans Affairs, which administers the SGLI program, 98 percent of all service members opt to receive this coverage. After leaving the service, service members can convert their SGLI coverage to a Veterans’ Group Life Insurance (VGLI) policy which now also provides up to $400,000 of low- cost term life insurance for veterans, with rates dependent upon age. For example, veterans between the ages of 40 and 44 years of age can purchase $50,000 of life insurance for less than $10 per month. In addition to government-sponsored coverage, service members can also purchase similar coverage, including covering combat deaths, from other insurance companies. For example, according to officials of one company that sells insurance and other financial products to military personnel directly, they could provide a 20-year-old service member an additional $250,000 of life insurance to supplement SGLI for $15 to $20 per month. In addition to being many times more expensive than other products already available to military members, companies have been selling insurance products to service members who generally do not appear to need additional life insurance, according to state regulators we contacted. These regulators also said the companies that targeted military members typically marketed their products to junior enlisted service members, who often have no dependents. During our review, we obtained data from the Defense Finance and Accounting Service (DFAS), which maintains military personnel pay records, indicating that most service members that appeared to have purchased life insurance products from some of these insurance companies had no dependents. For example, according to DFAS data on Marine Corps service members, over 6,500 pay deduction allotments to send premium payments to banks used by three of these insurance companies, starting between July 2004 and June 2005, indicated that approximately two-thirds were unmarried service members with no other dependents. Data available from other Services on allotments sent to these insurance companies during the same period also indicated that most of the service members had no dependents. Regulatory officials we contacted noted that the amount of coverage available to these members from SGLI would likely be adequate for their insurance needs, and thus no additional insurance coverage would be necessary. Officials with one of the companies that targeted military members told us that the insurance they sell has benefited some service members. For example, their company has paid $37 million in death claims for service members in the last 5 years, including $1.5 million to survivors of service members killed in the recent conflict in Iraq. The insurance products with combined insurance and savings components being sold by several companies to service members had provisions that reduced their benefits to purchasers that could not--or did not--pay into the product for a long-term period. According to regulators we contacted and our review of selected policies, the products being sold by at least six companies had an automatic premium payment provision, which allows the companies to use money accumulated in the service member’s savings fund to automatically pay any unpaid insurance premiums. The provision extends the period of time that the service member is covered under the life insurance policy if the service member does not proactively contact the insurance company to cancel the insurance policy and request a refund of the savings fund. After the automatic premium payment provision is triggered and the savings fund becomes depleted, the policy then terminates, or lapses. Regulators we contacted were critical of the impact that this provision can have on purchasers of these products. For example, an official at one state regulatory agency described this provision as allowing the company to “parasitize” the savings fund for its own benefit. In contrast, representatives of one company told us that this provision allows the service member to receive extended life insurance coverage. Many military members that purchased these products only made their payments for a short period of time. State insurance regulators we contacted believed that most service members that purchased these products from these companies stopped making payments within the first few years, and that the lapse rates were significantly higher than industry norms. During our review, we received data on the percentage of policies that lapsed or terminated during the first year on products offered by four insurance companies that substantiated lapse rates above industry averages. For instance, information we obtained from one company that targets the military market segment indicated that approximately 40 percent of products purchased had lapsed or terminated within the first year. Data provided to us from three other firms indicated that the majority of policies had lapsed after being held between two and three years. The characteristics of the military population that these companies were marketing to increases the likelihood that service members will stop making payments and not receive any savings they have accumulated in these products. Regulatory officials we spoke with said that one of the reasons so many service members discontinue making payments is that they leave the service and thus the automatic deductions of their premium payments to these companies also stop. Company officials we spoke with told us that service members ceasing payments can request and receive refunds of the amounts accumulated in their savings accounts. However, according to regulators we contacted, companies do not always receive such requests from service members at the time payments cease. According to these regulators, many service members may not have received refunds of any accumulated savings given that such funds are automatically depleted to pay for the insurance policy for an extended period until such amounts were exhausted. As a result, many of the service members who simply stop paying into the product likely did not receive any of the money they had paid into the savings portion of the product. As such, they obtained some extended life insurance coverage after their payments ceased that, as shown previously, was more expensive than insurance they already receive and that they would not likely have purchased except for the promised savings provision. According to our analysis, the amount of time that it takes for a service member’s savings fund on the products these six companies were selling with a monthly payment of $100 to become totally depleted through the automatic payment provision varied. Figure 4 shows the impact on a service member that purchases the 20-year term life product with the 7- year premium period with $30,000 of insurance coverage, makes $100 monthly payments for 4 years totaling $4,800, and then stops making payments. As the figure shows, the money in this service member’s savings fund would be totally depleted to pay the subsequent insurance premiums in just over 1 year. This occurs because the policy requires that the entire 20 years of coverage be paid for in the first 7 years, which results in the monthly premium being larger than comparable policies. In addition, because almost all of the service member’s payments during the first few years are allocated to the insurance policy, the accumulated value of the savings fund is modest. For the modified whole life product previously discussed, which required lower premium payments and larger savings accumulation after the first year, the savings fund of service members that ceased making their payments after 4 years would be sufficient to extend the $30,000 of life insurance coverage for another 13 years. In contrast, a service member could have used the $100 monthly payment to instead purchase $30,000 of SGLI term coverage at a cost of only about $23 per year—totaling $92 for 4 years—and invest the remaining $4,708 into the Thrift Savings Plan (TSP), which is the low-cost retirement savings plan available to military members and federal employees. Although ceasing payments on SGLI after 4 years would terminate the service member’s life insurance, the money contributed to the TSP and left to earn just 4 percent interest would grow to about $9,545 in 20 years. In addition to the high costs associated with the insurance portion of these combination products, other provisions diminished the value of the savings component as well. According to regulators we contacted, withdrawal penalties and unique methods of interest crediting significantly reduced the advertised rate of return for these products. Typically, service members withdrawing all or part of the accumulated money in the savings fund any time after purchase within the first 10 years would be assessed early withdrawal penalties. For example, one of the companies assessed an early withdrawal fee of 10 percent in the first year, with this fee declining by 1 percent each subsequent year until reaching zero in the 10th year. Several companies credit the amount accumulated on the basis of either the year- end balance or the average balance--whichever is less. For sufficiently large withdrawals, a service member would not receive any interest at the end of that policy year on the money withdrawn from the fund. Under this methodology, amounts withdrawn during the year earn no interest, thereby reducing (in some instances significantly) the advertised rate of return. Insurance companies that market primarily to military members have been frequently accused of using inappropriate sales practices by regulators, DOD, and others. As part of our review, we identified at least 15 lawsuits or administrative actions that had been taken against companies that market primarily to military members. In many of these actions taken by state and federal regulators, federal law enforcement organizations, or others, the companies were accused of misrepresenting the products as investments or identifying themselves as representatives of independent benefit or fraternal organizations. (Appendix II lists these actions.) For example, in December 1998, two of the insurance companies that target military members settled a lawsuit filed by DOJ in Washington state that alleged that their agents had misrepresented their insurance policies as investment plans. As part of the settlement the companies had to offer refunds to approximately 215 service members in certain states who purchased life insurance polices between 1994 and 1997. In an agreement with the Attorney General's Office in the state in which one of the companies was domiciled, each of the companies also made $1 million donations to a university in that state. More recently, after the Georgia Insurance and Safety Fire Commissioner initiated investigations to review allegations of improper insurance sales practices at military installations in that state, two insurance companies have agreed to make refunds of about $2.4 million to soldiers who had purchased insurance products. After a series of articles in The New York Times raised concerns over sales of financial products to military members, state regulators in as many as 14 states began new investigations into the practices of companies that target service members. According to regulators in these states, various sales practice concerns are being examined. As of September 2005, the investigations by these states generally had not been concluded. In addition to efforts by insurance regulators, law enforcement organizations and securities regulators are also reviewing the activities of some of the insurance companies that target military members. One of the issues that is again a focus of regulators and others in their new investigations, is whether the companies and their agents were inappropriately marketing these products--not as insurance--but primarily as investment products. State insurance laws generally require any product with an insurance component to be clearly identified and marketed as insurance. However, regulators in various states raised concerns that the companies targeting service members were deemphasizing the insurance aspects of the product. Some state officials told us that the companies would have considerable incentive to obscure the insurance aspects of the product because 98 percent of service members already obtain a substantial amount of life insurance through the government-offered SGLI program. Insurance regulators we contacted told us that when marketing to military members these companies typically emphasize the investment provision of the products even though most, if not all, of the payments in the first year are used to pay the insurance premiums. Furthermore, most of this amount is then used by the companies to pay sales commissions to the selling agents. The marketing materials for the companies that we examined also emphasized the savings component of the products. For example, a script from a sales presentation of one company mentions the insurance coverage third, after describing other product benefits. It also highlighted that the cost of the insurance was “free” if the service member completes the product terms. Insurance regulators with whom we spoke mentioned that such a sales presentation is designed to overcome objections from service members that they did not need any additional life insurance. In addition, examiners in one state reported in 2002 that one of the companies’ materials referred to the premium payments for the insurance product being sold to service members as “considerations” or “contributions,” which were terms that they said were typically used when selling investment products. Our review of information provided by legal offices at Fort Benning, Georgia, and Great Lakes Naval Training Center, Illinois, also indicated issues related to insurance products being marketed and sold primarily as investment products. The design of the products themselves may have also been misleading. Despite emphasizing the investment returns and high rates of promised interest earnings that were possible with these products, regulators in one state told us that the companies may have assumed that their actual policyholders would not generally attain these returns. As part of a class action case previously filed against one of these companies, presented as evidence were a series of internal company memorandums dating from around the time the company was proposing to begin selling a combined insurance and saving fund product. In one of these documents, a company official states the assumption that product purchasers would not earn the initially-promised 11 percent interest, or any amount even close to that, because the product’s savings fund “is inextricably coupled with a rather expensive traditional life insurance policy,” and has restrictive interest crediting and withdrawal provisions. According to a deposition taken of a former company official, the company also assumed that many purchasers would not hold the product for very long. For example, this official stated that the company assumed that as many as 45 percent of purchasers would stop paying into the product within 1 year and another 25 to 30 percent would stop paying by years 2 and 3. In contrast, data from a service that tracks the rates at which insurance policyholders stop paying on their policies—called lapse rates— indicates that the lapse rate in the first year on term life policies requiring monthly premium payments averaged less than 15 percent. Other federal regulators are also investigating the extent to which the companies that market primarily to military members were marketing insurance as investment products. According to SEC officials with whom we spoke, insurance products marketed as investments may need to be registered as securities. Currently, insurance policies and annuity contracts issued by an entity subject to supervision by state insurance or banking regulators are exempt from securities registration. Under existing case law, one factor that is important in determining whether an insurance product is entitled to this exemption is the manner in which the product is marketed. Under a safe harbor created by SEC Rule 151, one condition for annuity contracts to avoid being subject to the federal securities laws is to not be marketed primarily as an investments. As of September 2005, SEC staff told us their inquiries into some of these companies’ operations were continuing. In addition, DOJ officials also confirmed that they are investigating some insurance companies that market primarily to military members. Officials with several of the companies that market primarily to military members told us that they clearly inform service members that the product they are offering is insurance. For example, officials at one of the companies showed us documents that they said are to be initialed and signed in multiple places by purchasers of their product that indicate that the product is insurance. An investigation by DOD personnel into sales at one naval facility indicated that many members knew they were buying insurance as well. However, an investigator of one of the states that previously sanctioned one of these companies told us that they had received information indicating that the company’s sales agents may have found ways to present the products without the service members realizing they were buying insurance. Such allegations illustrate the difficulties that regulators face in determining whether inappropriate sales practices were being used. Insurance regulators and other investigators are also investigating whether some of the companies have been misrepresenting the nature of the products in the forms used to initiate deductions for the premiums from service members’ pay. According to DOD staff responsible for personnel pay systems, service members can have various types of allotments deducted from their pay, including deductions to be sent to savings accounts or to pay for insurance they purchase. However, for insurance allotments for junior enlisted members (those at rank E-3 and below), a 7- day “cooling off period” is required to pass before the allotment can be processed. Although these companies were selling insurance products, state regulatory officials we contacted were concerned that, in some cases, the companies were mislabeling the government pay deduction forms to reinforce the appearance that these purchases were investments and not insurance. For example, we reviewed pay allotment documents that appeared to indicate the service member purchasing this product was initiating a pay deduction that would be sent to a savings account in the member’s name at a bank. In addition, the service member would also be asked to complete a form that authorized the recipient bank to withdraw the premiums due on the insurance product from the service member’s account at that bank. However, state insurance regulators told us that the service members did not actually have accounts at these banks; rather, the money was deposited in a single account belonging to the insurance company. After we contacted officials at some of the banks to which these insurance companies were having service member payments routed, bank officials confirmed to us that the service members did not have accounts at the bank, but rather, contributions were sent to accounts belonging to the insurance companies. Thus, routing the payments to a bank with the allotment appearing as a bank allotment on the service member’s pay statement, rather than an insurance allotment, could reinforce the impression that the service member had purchased an investment product rather than insurance. Insurance regulators in one state also told us that they found instances in which insurance agents were assisting service members to access online military pay systems to add allotments for insurance premiums. Our own review found additional evidence of possible irregularities involving pay allotment forms and other activities by agents selling these combined insurance and saving products. During a review of documents used to initiate allotments from service members’ pay at two military installations we visited, we also found several examples of allotment deduction forms that seemed as though the service member involved had a savings account at a bank used by the insurance company. We also noted several other potentially irregular activities. In some instances, insurance agents mailed allotment forms to the finance office that processes pay transactions for service members stationed at one of these bases using bank envelopes that had a bank’s address as its return address. The use of bank envelopes could help convince base personnel that these were savings rather than insurance allotments, and thus not subject to any required “cooling off period.” In another example of insurance company agents attempting to make the service member allotments used to pay for these insurance products appear to be savings allotments, we saw multiple instances of the use of an allotment form bearing the signature of the same bank official as the initiator of the allotment. After we contacted this bank official, he told us that he had once signed such a form but that the repeated use of the form with his signature was being done by the insurance agents without his knowledge. The results of these reviews and indications of potential fraud were referred to our special investigators, who are conducting further reviews and have initiated contacts with other law-enforcement organizations, DOD investigative agencies, and state regulatory departments. Our review of allotment forms raised questions about whether agents marketing products targeting military members were encouraging service members to reduce tax withholdings and other savings contributions, thus providing a source of income to invest in the insurance products. Specifically, we found several examples of forms canceling service members’ TSP contributions and altering the number of exemptions claimed on service members’ W-4 forms (reducing the amount of tax withheld from their pay) that were submitted along with insurance allotment forms. Forgoing investment in TSP (which is generally recognized as being one of the lowest-cost ways to invest for retirement available anywhere) to purchase expensive insurance would not generally be in the service member’s best interest financially. By reducing the member’s withholdings and TSP contributions, the agents in these cases may have been attempting to overcome service member objections about affording the additional payment for the insurance product. In addition, reducing a service member’s withholdings could potentially result in additional taxes due at year’s end. Another sales practice issue that insurance regulators we contacted have been concerned about is whether some individuals that are selling insurance were not clearly representing themselves as insurance agents when marketing to military service members. In the past, DOD has found that insurance agents who have marketed to service members frequently identify themselves as counselors from benefits associations. Such entities provide counseling on obtaining government benefits or other services and may also offer their members discounts on other products, such as auto services. By representing themselves as benefits counselors, insurance agents may more readily gain access to service members. However, regulators and others have documented prior instances in which insurance agents marketing to military members misrepresented themselves as benefits association employees. For example, in December 2002, DOJ announced a settlement against an insurance company that targeted military members whose agents had misrepresented themselves solely as employees of a benefits association. According to the DOJ complaint, this company had allegedly defrauded military service members who purchased life insurance policies from the company by having its agents pose as independent and objective counselors representing a non- profit fraternal organization that offered as one of its benefits the ability to purchase the company’s life insurance. However, the company’s agents allegedly failed to disclose to the service members that they only were compensated through commissions from the insurance company, and that the company was making undisclosed payments to the benefits association for every policy sold. Under the terms of the settlement, the company agreed to, among other things, increase the face amount of all in force coverage by 6.5 percent, pay $2.7 million to all service members who canceled their policies during a specific period, and to never again sell another insurance policy or reapply for DOD permission to conduct business on U.S. military installations. According to a state insurance department investigation that was finalized in January 2002, agents from an insurance company that is currently being investigated by other states portrayed themselves as benefit association representatives without disclosing that they were insurance agents. As a result these agents were allowed to conduct military training during which they would solicit insurance to groups of service members. According to the report, the service members believed that the benefit association was part of the military establishment. Another aspect of the operations of the companies that market primarily to military members that state insurance regulators were examining was whether the products comply with applicable state laws and regulations. For example, regulators in several states have been examining whether the saving funds that some of the companies had labeled as annuities may not actually qualify as such under their laws. After concerns arose about the sale of these combined insurance and savings products, insurance regulators in Washington state rescinded approval to sell the products that had previously been approved for sales by one of the companies that targeted the military in June 1997 and for three additional companies in October 2004. In taking these actions, the state’s insurance department noted that it had determined that the savings fund provision of these products the companies were marketing were not properly structured to meet the requirements of this state’s regulations pertaining to annuities. In addition to raising concerns among financial regulators, the companies that target military members also have been accused of violating DOD’s own solicitation policies. For example, DOD personnel conducted an April 2005 proceeding in Georgia to review the practice of one of the companies currently being investigated by state insurance regulators regarding allegations of multiple violations of the DOD directive on insurance solicitation. Among the practices alleged at this hearing were misleading sales presentations to captive audiences and solicitations in unauthorized areas, such as in housing or barracks areas. DOD recently began maintaining an online listing of actions taken against insurance companies or their agents by various DOD installations. Last updated on August 11, 2005, this web site lists 21 agents from some of the 6 companies that are permanently barred--or have had their solicitation privileges temporarily suspended--at 8 different military installations. Concerns over such violations are longstanding. For example, in March 1999, the DOD Inspector General also found that insurance companies were frequently employing improper sales practices as part of marketing to service members. Among the activities prohibited by DOD that the Inspector General report found were occurring included presentations being made by unauthorized personnel, presentations being made to group gatherings of service members, and solicitation of service members during duty hours or in their barracks. Similarly, a May 2000 report commissioned by the Office of the Under Secretary of Defense for Personnel and Readiness also reviewed insurance solicitation practices on DOD installations and identified many of the same concerns and recommendations as those the DOD Inspector General had identified. As result of these two reports, DOD officials began efforts to revise its directive governing commercial solicitation on military installations. A few broker-dealers have marketed a unique securities product, often referred to as a contractual plan, to military service members that has proven to be more costly than other commonly available products. These contractual plans were primarily being sold by one large firm and several smaller firms that generally marketed only to service members. These products involve making periodic investments into a mutual fund under contractual agreements with much of the first year’s investments going to pay a sales load that compensates the selling broker-dealer. Purchasers that make all required payments for the entire term of the contractual mutual fund plan would pay charges slightly less than the amount charged by other load funds. However, regulators found that most military purchasers were not making all required payments, resulting in them paying higher sales charges than would have been paid on other commonly available mutual funds. Regulators indicated that contractual plans are rarely sold to civilians and the products have been associated with sales practice abuses for decades. Regulators recently sanctioned the largest seller of these plans for inaccuracies in its marketing materials. Investigations into the activities of other broker-dealers selling contractual plans are also underway. Although being sold to large numbers of service members, contractual mutual fund plans were being marketed by only a few broker-dealers. SEC and NASD staff told us that their investigations have identified only about five broker-dealer firms that were marketing these plans. According to regulators, one of the broker-dealers accounted for over 90 percent of the $11 billion invested in contractual plans as of year-end 2003. Unlike the insurance companies that targeted junior service members, this broker- dealer generally marketed its products to more experienced military members, including commissioned officers and senior noncommissioned officers. According to its marketing materials, this firm had nearly 300,000 military customers, and indicated that one-third of all commissioned officers and 40 percent of active duty generals or admirals were clients. The firm employs about 1,000 registered representatives in more than 200 branch offices throughout the United States, as well as locations in Europe and in the Pacific region. The great majority of the firm's sales representatives are former commissioned or noncommissioned military officers. From January 1999 through March 2004, the firm received approximately $175 million in front-end load revenue from the sale of contractual plans. Officials with the firm announced in December 2004 that they would be voluntarily discontinuing sales of contractual plans after being sanctioned by SEC and NASD. The other four firms that continue to sell contractual plans were smaller broker-dealers. Of these, regulators told us that three also principally targeted military service members although, unlike the largest broker- dealer, these three firms generally sold contractual plans to junior enlisted personnel. According to regulators, the fourth broker-dealer appeared to be marketing to civilians. However, given the availability of other alternative low-cost mutual fund products in the marketplace that allow investors to make relatively small contributions on a regular basis, regulators indicated that they rarely see contractual plans being sold to civilians by other firms. Under the terms of the contractual plans being sold to military service members, the purchaser enters into a contract to make periodic investments for a set term (such as 10 to 15 years). These payments are invested into funds offered by some of the largest mutual fund companies. Under the contractual plan, the firm deducts a sales load of up to 50 percent from each of the first year’s monthly payments but generally no further sales loads are applied thereafter. In contrast, a conventional mutual fund with a sales load will deduct a certain percentage—currently averaging about 5 percent—from each contribution made into the fund. While sales charges for contractual plans are initially much higher than those of other mutual fund products, the effective sales load—the ratio of the total sales charge paid to the total amount invested—becomes lower as additional investments are made. Over time the effective sales load for a contractual plan will decrease to a level comparable to—or even lower than—other conventional mutual funds with a sales load. As illustrated in Figure 5, if all 180 monthly payments are made under a contractual plan, the effective sales load on the total investment decreases to 3.33 percent by year 15. At one time, contractual plans were the only way for small investors to invest in mutual funds. Regulators told us that in the past, many mutual funds required large initial investments that prevented them from being a viable investment option for many individual investors. However, today, other lower-cost alternatives exist for small investors to begin and maintain investments in mutual funds. For example, many mutual fund companies now allow investors to open a mutual fund account with a small initial investment, such as $1,000, if additional investments—including amounts as low as $50 per month---are made through automatic withdrawals from a bank checking or savings account. According to a recent study by the mutual fund industry association, over 70 percent of the companies offering S&P 500 index mutual funds in 2004 had minimum initial investment amounts of $1,000 or less, with 9 having minimum investment amounts of $250 or less. Securities regulators saw the wide availability of such products as the reason that contractual plans were rarely being offered to most investors. Another alternative investment option available to service members since 2002 is the government-provided TSP. Comparable to 401(k) retirement plans available from private employers, service members can invest up to 10 percent of their gross pay into TSP without paying any sales charge. The various funds offered as part of TSP also have much lower operating expenses than other mutual funds, including those being offered as contractual plans. Service members could also choose to invest as many other investors do in mutual funds offered by companies that do not charge any sales load. Called no-load funds, these are available from some of the largest mutual fund companies through toll- free numbers, the Internet, or by mail. According to industry participants, contractual plans provide their purchasers with the incentive to invest for the long term. Officials from the most active broker-dealer that marketed contractual plans told us that the larger upfront sales load encourages the investor to maintain a long-term investment plan because of the financial penalty that results from halting their payments too early. They also said that the contractual nature of the product helps purchasers make regular investments. In addition, these officials explained that the clients they serve are not high-income individuals with considerable accumulated wealth available for investment. As a result, they said that other broker-dealers do not provide financial services to these individuals. The officials from this firm said that their sales representatives spend many hours explaining the products and preparing and updating financial plans for their military clients. As a result, the higher up-front sales charge compensates their staff for the amount of time spent with clients. Officials from this firm told us that clients who purchased contractual plans and received financial plans from their firm generally benefited as the result of an improved financial condition overall. However, according to data obtained from securities regulators, many service members did not benefit from purchasing contractual plans. Although such plans can prove beneficial to an investor that makes all of the required periodic payments, regulators found that many service members were not investing in their plans for the entire term. For example, SEC and NASD found that only 43 percent of the clients that purchased plans between 1980 and 1987 from the largest broker-dealer had completed the full 15 years required under the contract. Instead, 35 percent of these clients that bought during this period had terminated their plans early. Another 22 percent had not cancelled their plans but were not making regular payments. According to securities regulatory staff, most of the clients that stopped making payments into this broker-dealer’s contractual plans ceased doing so after about 3 years. SEC staff told us that the customers of the other broker-dealers that were marketing contractual plans to military members had the same or even lower success rates of contracts completion. For example, they said that only about 43 percent of the clients of one of these broker dealers had made all required payments for a full 15-year period and, at another firm, just 10 percent of the customers had successfully completed a plan. Because of the manner in which sales charges are assessed, terminating a contractual plan or halting payments early can greatly reduce the benefits to an investor. If the investor does not continue paying into the plan, the effective sales load can be much higher than industry norms. For example, as shown previously in Figure 5, an investor terminating after 3 years pays an effective sales load of 17 percent of the amount invested, which is more than three times the current average sales load in the mutual fund industry. As result, many of the service members that purchased contractual plans from these firms likely paid much higher sales charges than they would have under other alternative investments. Even if an investor makes all required payments under a contractual plan, we found that the amount accumulated on a contractual plan investment earning a 7 percent annual return is lower than that of a conventional mutual fund with a 5 percent sales load earning the same projected return until at least year 16 (this analysis is shown in appendix III). Contractual plans have long been associated with sales practice concerns and recently regulators have taken action against the largest seller of these products. According to an SEC study, contractual plans to sell mutual fund securities were first introduced to the public in 1930. However, concerns over the sale of these products, including excessive sales charges, arose and, as a result, the subsequently-enacted Investment Company Act of 1940 included a provision that limited the sales load that could be charged on contractual plans. After the passage of the Act, sales of contractual plans declined, with most of the companies selling such plans halting their marketing of such products. However, during the 1950s and 1960s sales of contractual plans significantly increased. With researchers finding that many contractual plan purchasers were not continuing to invest in their plans, SEC recommended that the Investment Company Act of 1940 be amended to prohibit future sales of contractual plans. Although Congress chose not to ban contractual plans, it amended the Act in 1970 to increase protections for contractual plan investors. Specifically, Section 27 was revised to allow investors who cancel their plans within the first 18 months of purchase to obtain refunds on that portion of the sales charges which exceeds 15 percent of the gross payments made. In addition, investors terminating their plan within the first 45 days could receive their full investment back with no sales charge deductions. Even with such limitations, sales charges associated with contractual plans can still be much higher than those of other mutual fund products and industry norms. However, regulators again found inappropriate sales practices associated with contractual plans even after this provision was changed. For example, in the early 1990s, federal and state securities regulators took action against a broker-dealer, First Investors Corporation, for improper marketing of contractual plan investments, including its alleged failure to notify investors that they could invest in the same funds without having to pay the high sales charge required under the contractual plan. During this period, other low-cost mutual fund products emerged in the marketplace, allowing investors to make relatively small monthly payments into a mutual fund product with low fees. The contractual plan product generally disappeared from the civilian marketplace but continued to be sold in the military market by a few firms, with one emerging as the dominant player in this niche market. Recently, securities regulators have taken actions against a firm marketing contractual plans to military service members. In December 2004, SEC and NASD sanctioned the broker-dealer firm that was the dominant seller of such plans to service members. According to settlements reached with these regulators, the firm’s marketing materials were alleged to have been misleading and to have inappropriately disparaged other viable investment options available to their clients. For example, according to the regulators, the firm’s marketing materials allegedly included various misleading comparisons of contractual plans to other mutual funds, including characterizing non-contractual funds as attracting only speculators, and erroneously stating that withdrawals by investors in other funds force the managers of those funds to sell stocks. The regulators also alleged that the firm’s materials did not present the low-cost TSP as a viable alternative to their contractual plans. The SEC and NASD settlements also alleged that the firm mischaracterized the contractual plan’s high up-front sales load as the only way to ensure that purchasers remain long-term investors and presented comparisons of contractual plans using a holding periods of more than 14 years despite having data within the firm that showed that many of its customers were not successfully completing their plans. As a result, securities regulators found that the firm’s service member clients paid higher than normal sales charges because they frequently did not continue making enough payments into such plans to reduce the effective sales charges to a level comparable to typical mutual fund sales charges in the industry. The regulators also took action against the firm for inappropriate handling of customer complaints. As part of its investigation into this firm’s practices, NASD sanctioned the firm for the actions of one of its supervisors who made improper statements to a service member who had previously expressed dissatisfaction with the broker-dealer. The regulatory settlement provides a summary of a call made to this customer in which the firm’s supervisor appeared to threaten the service member with adverse consequences from his military superiors, including possible cancellation of his previously approved temporary duty orders. In settling with SEC and NASD, the broker-dealer agreed to pay a total of about $12 million, including restitution to compensate customers who paid an effective sales charge of more than five percent on investments made since January 1999. As of October 6, 2005, $4.3 million has been paid to investors. The remaining money is to be used to fund an educational program for service members that NASD will administer (this program is described later in this report). As previously stated, this broker-dealer announced that it has voluntarily discontinued sales of contractual plan products. SEC and NASD continue to investigate the other smaller broker- dealer firms that are marketing contractual plan products to military members and others. In addition, SEC staff also began conducting reviews of sales to military members in overseas locations and at installations in the United States. Two bills before the U.S. Senate (one of which passed the House of Representatives) would amend Section 27 of the Investment Company Act of 1940 to ban further sales of contractual plans. A lack of routine complaint sharing between financial regulators and DOD was the primary reason that regulators did not identify problematic sales of financial products to military service members before such issues were raised in press accounts, although other limitations among regulators’ practices also contributed. Insurance companies are generally required to submit products for regulatory approval before marketing them but the review processes in most states may not have addressed the appropriateness of their features for service members. Although insurance regulators in some states review sales activities periodically, insurance regulators in most states generally rely on complaints from purchasers to indicate that potentially problematic sales are occurring. One reason that insurance company sales activities are not reviewed more extensively is because most states lack any appropriateness or suitability standards for insurance products. Although some states had taken action, other state insurance regulators were not generally aware of problems involving military members until recent press reports, in part because DOD personnel were not usually sharing complaints or information about other inappropriate practices regarding the companies that targeted service members. However, we found evidence that concerns over inappropriate sales to service members exist widely at various military installations. Similarly, securities regulators also did not identify recent problems involving contractual plan sales to service members until such press accounts appeared. These regulators’ ability to detect problems was also hampered by the lack of information on the extent to which broker-dealer customers purchasing contractual plans were successfully making their payments. In light of the problems surrounding sales of financial products to military members, DOD has efforts underway to revise its policies regarding such sales and has reviewed ways in which it could share additional information. However, DOD has not coordinated these efforts with military installation personnel or with regulators. The product approval processes followed by many insurance regulators did not allow them to identify the products being marketed to military members as potentially problematic. One of the ways that state insurance regulators ensure that the products being sold in their states comply with insurance laws and regulations is through product approval requirements. Although insurance regulators in most states require insurance companies to submit products for approval before marketing them, state insurance officials in the states we contacted explained that the processes for approving products varied. In several of these states, insurance companies must submit products to the state regulators for reviews that are intended to assess whether the provisions and terms of the products comply with existing insurance regulations in those states. Companies sometimes submit additions to existing products, called riders, which change terms or provide additional features to their policies. However, according to some regulators in the states we contacted, the entire product may not be reexamined by their reviewers when such riders are submitted. In at least 2 states we contacted, different components of products sold to military members were filed and approved separately but then marketed and sold as a single product. For example, the savings fund of the insurance product being sold by four of the companies that target military members was submitted as a rider to a previously approved policy. However, regulators found that it was being sold as an integral part of the entire product, not as an optional feature to a life insurance policy. In at least one state we contacted, many insurance products are not reviewed but can be sold immediately upon filing notification with their department of the company’s intent to market the products. Additionally, insurance product approval processes may not necessarily reveal how a product is to be marketed or the target market for the product. According to officials in the state insurance departments we contacted, none of these states required insurance companies to provide descriptions of the target market for a particular product during the form filing process. As part of the investigations that state insurance regulators are conducting of the companies that target military members, some of the regulators are also reexamining the products these companies sell to ensure that they meet existing state requirements. For example, insurance regulators in Virginia issued an order in September 2005 to three companies to cease and desist from selling such products. However, the extent to which this review is occurring in other states is not clear. State insurance regulators may conduct various types of reviews of the insurance companies they oversee. Many of the routine reviews that these regulators conduct focus on insurance companies’ financial soundness. During such examinations, the regulators assess the quality of insurance companies’ assets and whether their income is sufficient to meet present and future financial obligations to their policyholders. Some state insurance regulators also review some aspects of insurance product sales as part of market conduct examinations. Designed to help protect consumers from unfair practices, market conduct reviews are done for a wide range of company practices, including sales, underwriting, and claims processing and payment. For example, a regulator may review a sample of sales by a particular company to ensure that its agents have not misrepresented products or otherwise violated the requirements of their particular state. Although some states routinely perform market conduct reviews of the companies they oversee, most states only conduct such investigations when they receive complaints from customers or otherwise obtain information that raises concerns about the activities of an insurance company. One reason that insurance regulators do not review insurance company sales practices more routinely is that standards requiring that any insurance products sold be appropriate or suitable for the purchaser do not generally exist. As a result, when an insurance regulator receives a complaint or other information indicating that potentially problematic sales have occurred, they can review the marketing practices of any insurance companies involved to assess whether any misrepresentations or other fraudulent activities occurred. However, under most state insurance laws, insurance regulators do not have the authority to evaluate whether the product sold was appropriate or suitable given the customer’s needs. In contrast, broker-dealers selling securities products are required to assess the financial circumstances of their customers to ensure that any products they recommend to these customers are suitable. Specifically, broker- dealers are required to consider such factors as their customer’s income level, investment objectives, risk tolerance, and other relevant information. State regulators and others have tried to establish suitability standards for insurance products, but these efforts have generally not been successful. For example, in 2001, NAIC formed a working group to collect and analyze data, prioritize key issues for examination, and assess interstate cooperation in developing guidelines for market conduct standards. These market conduct standards would be intended to protect consumers from abuses in the insurance market, including those related to the availability and affordability of insurance. Using such standards, state insurance regulators would review the underwriting and marketing practices of insurance companies and their agents. However, after being unable to come to consensus on suitability standards that would apply to all insurance sales, the NAIC working group narrowed its approach. Instead, the group drafted a model law that provided standards for annuity products sold to seniors age 65 and over. This draft model legislation would require that before insurance agents recommend the purchase or exchange of an annuity, they must take into account the purchaser’s financial situation (including other investments or insurance policies owned) and reasonably believe that the recommendation is suitable for the purchaser. As of July 2005, NAIC reported that only nine states had fully or partially adopted this model law, 10 others already had similar or related legislation, and 35 states or territories had yet to take any action. Other organizations have also attempted to develop suitability standards. For example, the Insurance Marketplace Standards Association (IMSA) has developed various standards applicable to insurance companies’ marketing practices. IMSA also provides qualification to companies that comply with its marketing practices standards. After becoming IMSA qualified, a company’s salesforce would be expected to assess a potential buyer’s need for insurance before recommending its purchase. A representative of IMSA told us that insurance companies and agents following IMSA’s guidelines for conducting a needs-based selling analysis would review a customer’s insurable needs and financial objectives to determine the appropriate life insurance product, if any, to be offered. In many cases, junior service members with no dependents may not need additional life insurance beyond that available through the low-cost, government-offered SGLI. However, none of the six companies that were primarily marketing to military members with the combined insurance and savings product were IMSA qualified. Legislation has been proposed that would require insurance regulators and DOD to work together to study ways to improve the quality of--and practices used to sell--life insurance products sold on military installations. For example, one option offered by these bills would be to only allow those companies that have met best practice procedures (such as those developed by IMSA) to sell insurance on military installations. These bills also propose that standards that would apply to the sale of products to military members could be developed. Although concerns or complaints involving insurance sales existed on DOD installations, insurance regulators we contacted mentioned that they generally have not historically received complaints from DOD officials about potentially problematic sales of products to service members. The actual extent to which service members have concerns or complaints involving insurance product sales is not known because, as we reported in June 2005, DOD only recently began systematically collecting information on violations of DOD’s solicitation policy by sellers of financial products. However, the DOD reports described earlier in this report, and work we conducted for this report and several other reports we recently issued, appears to indicate that concerns over inappropriate practices related to product sales among military members was widespread. For example, for our April 2005 report on the financial condition of military members, we surveyed 175 U.S. installation-level managers of DOD’s personal financial management program, which provides service members with financial literacy training, financial counseling, and other assistance to avoid or mitigate the adverse effects associated with personal financial problems. We reported in June 2005 that about 25 percent of the managers surveyed believed that insurance company representatives occasionally made misleading sales presentations at their installations during 2004, and 12 percent believed that such presentations were made routinely. At the two bases visited as part of work for this report, we also found evidence that service members had concerns or complaints about the marketing practices used by sales personnel from some of the companies that targeted military members. After complaints were raised by some service members at these bases, military personnel conducted investigations of the matters. For example, at Fort Benning, Georgia, statements were taken from several service members that were solicited insurance products between 2001 and 2004. Of the 41 statements in the investigative files that we were able to review, more than 70 percent indicated that the sales personnel had described the product as a savings or investment product. Additionally, almost all of these service members indicated that the insurance company sales personnel had taken actions that violated one or more of the restrictions in DOD’s solicitation policy, such as making these sales presentations during group training sessions. At Great Lakes Naval Training Center, base legal advisers told us they do not receive many complaints because service members were often being solicited shortly before they transferred to other installations. However, legal staff at Great Lakes Naval Training Center showed us documentation related to 5 complaints pertaining to insurance products from service members between January and June 2005. In addition, they also indicated that they have also seen complaints arising from other military installations after leaving Great Lakes Naval Training Center. We also spoke with finance office personnel at this base who had become concerned about the sale of insurance to service members occurring there. As a result, these personnel had retained copies of some of the pay deduction allotment forms submitted for processing between June and September 2004. Numbering over 100, the copies represented forms that had been used to initiate pay deductions for products purchased by base service members from three different insurance companies, according to military pay personnel. We attempted to contact a random selection of these service members. We were able to speak with three of the service members and a spouse representing a service member who had purchased these products, and all indicated that the insurance product they had purchased had been generally represented as an investment. However, state insurance regulators we contacted generally were not aware of the potentially problematic sales to military members because they generally were not receiving information about concerns or complaints from military personnel. These state insurance regulators and NAIC officials told us that they had received few complaints involving military members. For example, as part of our June 2005 report, we surveyed insurance regulators in 50 U.S. states and 4 territories and received 48 responses. Of these, regulators in only 8 states indicated that they had received life insurance related complaints from service members or on their behalf between October 2003 and December 2004. According to the director of the DOD office that oversees commercial solicitations on military installations, information about service member concerns or complaints involving financial product sales are not generally shared with state regulators for several reasons. In some cases, service members expressing reservations about purchasing one of these products might have received advice from other members or from superior officers to cancel, rather than complain to a regulator. In other cases, DOD officials told us that base personnel will work directly with the selling company to resolve a matter rather than involving a financial regulator. For example, a service member with concerns about a purchase of a financial product could consult with the installations’ legal advisers from the judge advocate general staff. However, DOD officials stated that interactions between service members and these staff are covered by attorney-client privilege and thus are more difficult to share with external parties, such as financial regulators. Attorneys representing two state insurance departments believed that DOD attorneys should be forwarding such complaints because this would be in the best interest of the service members. They emphasized that complaints related to financial products should be forwarded to the financial regulators that can take action on behalf of the service members. They emphasized that failure to notify regulators that there are service members with concerns about financial product sales deprives regulators of important information necessary for their oversight processes to function properly. In some cases in which military installations have reported concerns or complaints, regulators have been able to take action against insurance companies that conduct business with military service members. For example, regulators in Maryland were notified in the 1990s about potential improprieties involving sales of insurance products to junior enlisted personnel by a concerned official at one military training base in their state. In an examination report issued in January 2002, insurance regulators found that companies (including some of those that are currently being investigated by other states) marketing combined insurance and savings products to military personnel in Aberdeen Proving Grounds and other locations had violated various state laws and regulations and had misled some service members about the nature of the products, including misrepresenting insurance products as investments.As noted previously, regulators in Washington state also became aware of problematic sales at military installations in their state in the 1990s. This state eventually took action to rescind approval of certain insurance products where the side savings fund did not meet the state’s requirements for an annuity, a premium deposit fund, or a universal life product. In addition, regulators in Virginia have also ordered that some companies that target military members to cease selling certain products in their state However, regulators in the other states that are currently conducting investigations of the companies targeting military members were not generally aware of such sales until recent press reports because DOD personnel were not generally sharing information about any service member complaints or concerns they received. Lacking information on complaints and data on the extent to which broker- dealer customers were successfully completing contractual mutual fund plans, securities regulators, similar to insurance regulators, also did not identify problems involving military members until press reports appeared. Although SEC and NASD, which has primary regulatory responsibility over the broker-dealers that were marketing contractual plans to service members, took enforcement actions against the firm that was the largest marketer of these products in late 2004, both regulators had conducted earlier examinations of this firm and did not identify any significant problems. SEC and NASD staff told us that identifying the problems involving the sale of this product was made more difficult because neither of the regulators had previously received any complaints about the firm from service members. However, NASD staff told us that after a DOD online periodical reported in 2003 that securities regulators were reviewing contractual plan sales, DOD staff received several inquiries from service members who had concerns about the products they had purchased. To the securities regulator staff, this provided evidence that concerns or complaints from military members were not being directed to the regulators--either by the service members themselves, or by the DOD personnel aware of such concerns. Securities regulators’ ability to detect problems was also hampered by the lack of standardized data on the extent to which customers were completing contractual plans. For example, in response to an article in The Wall Street Journal in 2002 that raised questions about the appropriateness of the sales of such plans to military members, SEC staff reviewed the operations of the largest seller of contractual plans. According to SEC staff, their review did not raise any major concerns because they found no evidence that military members were complaining about their purchases from this firm. In addition, the firm provided the SEC staff with documents that purported to show that the persistency rate for the contractual plans— which represented the proportion of plans that were still open---was over 80 percent for the previous 3 years. The SEC staff told us that their examiners accepted these statistics as valid because they were also able to obtain data from one of the major mutual fund companies whose funds represented the majority of those in which this broker-dealer’s customers had invested. The data showed that most of this broker-dealer’s customers still had open plans with the company. After an article that raised concerns about contractual plan sales to military members appeared in Kiplingers, a personal financial magazine, in 2003, NASD staff also initiated an examination of this broker-dealer. According to NASD staff, although they had concerns over the sales of the contractual plan product, obtaining data on the extent to which the firm’s customers were continuing to make payments and successfully completing their plans was difficult, particularly since no specific requirement mandates that broker-dealers maintain records or standardized data. According to NASD staff, this firm maintained various sets of data on its contractual plan customers and becoming familiar with the differences in the information and determining what would be most useful for their reviews proved to be difficult and time consuming. They also noted that their existing examination procedures did not address issues such as persistency rates that were found to be relevant to examining contractual plans. However, these regulators were able to identify concerns after they required the firm to provide comprehensive data on all customers that purchased such products. According to SEC and NASD staff, they were able to determine how successful this firm’s customers were being with their contractual plans only after they required the firm to provide specific data on all customers that purchased contractual plans covering a full 15- year period. After obtaining this data, regulators determined that the actual proportion of customers making all required payments for the 15-year term of the plans was only 43 percent. This percentage was about half of the persistency or success rate shown in documents that the firm had previously provided to the regulators during their prior examinations, because the previously supplied data had excluded any customer whose account remained open but had not made any payments in the last year. However, in the view of regulators, investors that were no longer making payments into their plans should be taken into consideration when determining the overall extent to which a firm’s customers were successfully completing their plans. DOD has also taken some actions to address potentially problematic sales of financial products to service members, although it does not currently share all relevant information with financial regulators. The primary way that DOD attempts to protect service members from inappropriate sales is through its directive on commercial solicitation on military installations. This directive, DOD Directive 1344.7, is administered by the Office of the Under Secretary of Defense for Personnel and Readiness. The directive currently places various requirements and restrictions on financial firms seeking to market products on military installations in the United States and overseas. For example, it prohibits sales from occurring as part of group meetings and instead requires financial institution personnel to make an advance appointment and meet with service members individually. In addition, sales personnel that are former military members are also prohibited from using their military identification to gain access to an installation. In the event that a company, its agents, or representatives violate DOD’s solicitation policy, installation commanders can permanently withdraw the company’s or individuals’ solicitation privileges through a ban or can temporarily suspend those privileges for a specified period. Following the DOD reports that detailed issues and concerns associated with insurance sales to military members, staff within the Office of the Undersecretary for Defense for Personnel and Readiness began efforts to revise DOD’s solicitation directive. In April 2005, DOD sought public comments on a revised directive that incorporates new requirements. For example, the revised directive expressly prohibits insurance products from being sold as investments. In addition, it also includes a new evaluation form that is intended to be completed by each service member that has been solicited. The form would allow service members to indicate, with yes or no answers, whether the individual soliciting them violated certain aspects of DOD’s policy, such as contacting them during duty hours. The evaluation form also has questions relating to salespersons’ conduct during any solicitation, such as whether they pressured the service member into making a purchase, failed to provide adequate information, or implied that they were endorsed by the military. In addition to revising its solicitation directive, DOD personnel have also taken enforcement actions against several insurance agents for improper solicitations at several military installations. For instance, at Fort Benning, an insurance company and its agents that operate in the military market segment were banned from conducting sales on the base. Additionally, several military personnel in supervisory positions were also disciplined for allowing improper insurance solicitations to occur and not properly enforcing existing solicitation policies. Although DOD has taken some steps to better protect its service members from inappropriate financial products, DOD does not currently require its personnel to share all relevant information with financial regulators, including complaints from service members. DOD’s current policy regarding financial product solicitation only requires installation commanders to notify the appropriate regulatory authorities if they determine that an agent or company does not possess a valid license or has failed to meet other state or federal regulatory requirements. However, the draft of the revised solicitation directive includes provisions that would require installation personnel to report all instances in which they ban or suspend the solicitation privileges of any companies or individuals selling financial products to the Principal Deputy Under Secretary of Defense for Personnel and Readiness. The legislation being considered in Congress would also require DOD to maintain a list of names, addresses, and other appropriate information of any individuals selling financial products that have been barred, banned, or limited from conducting business on any or all military installations or with service members. DOD has already begun collecting and publishing information on actions taken by individual installations for violations of the solicitation policy. As noted previously, DOD has already consolidated this information from its installations and posted it on a web site. Under the legislation before Congress, DOD would also be required to promptly notify insurance and securities regulators of those individuals included or removed from this list. DOD officials have indicated that financial regulators can access the information about the actions taken against individuals or companies that have violated DOD solicitation policies from the web site and that, if these additional requirements become law, they will provide the information on their listing to financial regulators as it changes. Although DOD is planning to share more information with financial regulators, DOD officials remained reluctant to share all information on violations of DOD policies that do not result in bans or suspensions. We recommended in our June 2005 report that DOD implement a department- wide searchable database to capture all violations of its own solicitation policy and provide this information to financial regulators. However, DOD officials told us that violations of some DOD policies, such as when sales personnel solicit without an appointment or solicit groups of service members, would probably not represent violations of financial regulations and therefore would be of little concern to such regulators. DOD officials also said that being required to report every time even minor violations occur, such as when a retired military member uses military identification to obtain base access for a solicitation visit, would be burdensome to their personnel. However, financial regulators’ staff told us that receiving information related to violations of DOD’s commercial solicitation policies also would be very helpful in determining whether further action, such as revocation of licenses, was warranted. For example, officials from one state insurance department told us that insurance agents have the obligation to be trustworthy and that if such individuals are violating any DOD regulations, this information could help them determine whether the conduct of the agents also violate their state’s requirements. Although DOD personnel had not routinely shared service member complaints with financial regulators in the past, DOD officials have also told us that they intend to require their personnel to report more of that type of information to regulators. Under the current solicitation policy directive, DOD personnel are not required to share information relating to service member concerns or complaints with other parties, and the revised draft that was published for comment also lacked any provisions relating to such information. However, staff in the office that oversees the policy directive told us that, as part of addressing the comments they have received, they intend to specifically require in the new directive that base personnel report to financial regulators any service member concerns or complaints that relate to the quality of the financial products offered to them or regarding the appropriateness of the practices used to market these products. Financial regulators indicated that receiving such information from DOD would greatly improve their ability to recognize and act on potentially problematic financial product sales involving service members. Insurance and securities regulator staff told us that promptly receiving concerns or complaints raised by service members would allow their normal regulatory oversight processes to function properly, which rely on complaints as an important indicator of potential problems involving insurance company or broker-dealer practices. Congress also may be increasing the amount of information that both regulators and DOD have about potentially problematic practices by insurance sellers. Both of the bills currently under consideration in Congress would prohibit insurers from using agents that sell life insurance on military installations unless the insurer has a system to report to the state insurance regulators in its state of domicile and in the state of residence of an agent any disciplinary actions known to have been taken by any government entity and any significant disciplinary action taken by the insurer itself against an agent with regard to the agent’s sales on military installations. Furthermore, the bills would require that state insurance regulators develop a system for receiving such information and the ability to disseminate it to all states and to DOD. However, some barriers appear to make sharing between DOD and financial regulators more difficult. As part of conducting their investigations of contractual plan sales, securities regulator staff told us that personnel at some DOD installations were reluctant to share any information involving specific service members for various reasons. According to these regulators, the installation personnel cited military privacy regulations and the restrictions that arise from attorney-client privilege if the service member was being assisted by military legal counsel. According to the director of the DOD office responsible for administering the solicitation policy, such issues can affect their ability to share information with entities outside the military. However, he explained that they have researched these issues with their legal staff and believe that they can share information that is deemed to be necessary for the official needs of the requesting organization, including financial regulators. This DOD official also acknowledged that more coordination could be done to ensure that both its own military installation personnel and financial regulatory staff understand how additional sharing could appropriately occur. In addition, to improve financial regulators’ ability to obtain information from DOD, officials from NASD told us that the financial regulators could create liaisons on their staff to receive complaints and be the primary person responsible for seeking information from the military as part of examinations. Although increased financial literacy could also help protect military service members from inappropriate financial product sales, concerns exist over the adequacy of such efforts to date. In a report on the extent to which consumers understand and review their credit reports, we noted that individuals’ ability to understand credit matters differed across various demographic characteristics. For example, we found that college-educated individuals with high incomes and credit experience exhibited more expertise than those without such characteristics. Similarly, many military members also tend to lack advanced education or high incomes. As our April 2005 report on the financial condition of military members noted, almost 40 percent of service members reported having some trouble managing their financial affairs and studies by private consultants have found that the overall financial literacy among service members is not high. DOD is attempting to increase financial literacy among military members. As noted previously, DOD has developed personal financial management programs to provide service members with financial literacy training, financial counseling, and other assistance to avoid or mitigate the adverse effects associated with personal financial problems. However, as we reported in April 2005, not all service members were receiving the training required as part of these programs. As a result, our report recommended that DOD implement a monitoring plan to ensure that all junior enlisted members receive the required personal financial management training. Similarly, financial regulators have also begun working with DOD to increase financial literacy and awareness among service members, but these efforts have not been completed. For example, approximately $7 million of the settlement that SEC and NASD reached with the largest broker-dealer selling contractual plans to military members will be used to fund financial education efforts among service members. Using the proceeds of the settlement, NASD staff told us that the staff of the NASD Investor Education Foundation plan to conduct research to determine current levels of service members’ investment knowledge and use this to plan and develop its military education efforts. Among the efforts currently being designed are a military-specific online resource center to provide unbiased information on saving and investing. In addition, they plan to develop training to support the military’s current personal financial management program by establishing a coordinated and uniform financial education program. They also plan to conduct a public outreach campaign to promote saving and investing to members of the military and their families. These efforts are anticipated to be publicly launched in late 2005 with many national and local activities taking place in 2006. To help convey information to service members about insurance regulatory organizations outside the military that can receive and help resolve their complaints, NAIC and DOD staff have also been working together on materials to help educate service members. As of October 2005, their efforts have produced a consumer brochure for military members that contains information to help service members better understand factors to consider when purchasing life insurance and regulatory entities that service members can contact should they have complaints concerning insurance sales. According to NAIC officials, they are also working on information to be presented on a NAIC Web site. Congress has also recognized the need for additional information to better protect military service members from inappropriate product sales. For example, both versions of the bill currently under consideration in Congress would require that, for any sales taking place on a military installation, insurance representatives disclose that subsidized life insurance may be available from the government to the service member and that the government has not sanctioned, recommended, or encouraged the sale of the product being offered. In addition, this legislation also would require that service members be provided with information about where to complain regarding any problems involving an insurance sale on a military installation. Specifically, both bills would generally require that, for any sales taking place on federal land or facilities located outside the United States, insurance sellers provide a disclosure that lists the address and phone number where consumer complaints are received by the applicable state insurance regulator. Although DOD currently has a program to provide financial literacy training to junior personnel, not all levels of the services receive such information. Currently, the personal financial management training that the various branches offer to service members are provided only to junior enlisted members. However, an officer in one branch of the service also told us that she and other more senior members of the military are also solicited by financial firms and thus having such training, including addressing proper procedures for directing concerns or complaints, offered to more than just junior personnel would be helpful. Another concern over whether military members are adequately protected from inappropriate sales stems from uncertainty over financial regulators’ jurisdiction on U.S. military installations. Although most of the insurance and securities regulators we contacted believed they had jurisdiction over the sales of financial products on military installations, some regulators expressed uncertainty over their authority to regulate sales on military installations, where the federal government may have “legislative jurisdiction.” For example, regulators from Maryland conducting work on a market conduct examination mentioned that they had asked an agent from the Federal Bureau of Investigation to accompany them when visiting the military installation in case installation personnel questioned the insurance regulators’ authority to conduct an investigation on the installations. Further, according to a Texas insurance department official, he had trouble getting access to complaints information at a military installation because installation personnel question his authority to request such information. In addition, Georgia officials told us that a military installation in their state had an “exclusive federal jurisdiction” designation that could potentially present a jurisdictional issue. However, regulators in Virginia noted that they have been able to conduct examinations after seeking and obtaining written permission from base commanders. As part of the work on DOD’s oversight of insurance sales that we reported on in June 2005, we surveyed the various state and territorial insurance commissioners. Of those that responded to the question regarding whether they had authority over sales of life insurance on military installations, four commissioners indicated that they did not have such authority. State insurance regulators also noted they lack jurisdiction over sales taking place outside the United States at overseas installations. While securities regulators also generally believed they had jurisdiction over sales on military installations, they too indicated that greater clarity would be beneficial. At least one state securities regulator responded to a North American Securities Administrators Association survey that it did not have adequate authority over sales taking place on military installations. Of the legislation under consideration in the Congress, the bill that passed the House of Representatives includes language stating that any state law, regulation, or order pertaining to the regulation of insurance or securities sales is generally applicable to any such activity conducted on Federal land or facilities in the United States and abroad, including military installations. The version introduced in the U.S. Senate includes similar language but would only apply to insurance sales. Large numbers of military service members are being targeted by a few firms offering products that provide limited benefits unless held for long periods, which most military purchasers were failing to do. Thousands of service members across the United States and around the world are purchasing products from insurance companies that combine insurance and savings. Although some service members and their survivors have benefited from these products, many have not. Most of the purchasers of these products were unmarried individuals with no dependents and thus little need for any more coverage than that already provided by the low- cost government insurance service members receive. Instead, they were likely attracted to these products for their investment features. However, by being tied to expensive life insurance, these products appeared to be a poor investment choice for service members because they include provisions that allow the accumulated savings to be used to keep the life insurance in force if the service member ever stops making payments and does not request a refund of this savings. Given that military members move frequently and often leave the service within a few years, many did not continue their payments and failed to request refunds, and as a result, few likely amassed any savings from their purchase. The few companies that sell these products also have been accused of using inappropriate sales practices in the past, have been sanctioned, and are again being investigated by numerous federal and state regulatory and law enforcement authorities. With concerns over potentially inappropriate insurance sales to military members being longstanding, the need to take definitive actions to better protect service members appears overdue. The legislation that passed the House of Representatives and is being considered in the U.S. Senate includes various provisions that, based on our work, would appear to improve the protections for military members. Some of the provisions of these bills are of particular importance. Currently, both would direct insurance regulators and DOD to work together to develop measures to address sales to military members. Given that many service members were obtaining only limited benefits from purchasing these combined insurance and savings products, we believe that congressional action that results in state regulators undertaking reviews to ensure that only products that comply with state insurance regulations, an area in which regulators in some states now have developed concerns, is warranted to provide protections to military personnel in all U.S. jurisdictions. In addition, having insurance regulators and DOD work cooperatively to develop suitability or appropriateness standards could ensure that companies offer only products that address actual service member needs for insurance and that take into account service members’ itinerant lifestyles, income levels, and likely inability to make payments for extended periods of time. This could also provide protection for service members that are located in overseas installations not directly overseen by state regulators. Similarly, military members were also being widely marketed a securities product—the contractual plan—that has largely disappeared from the civilian marketplace. Although potentially providing returns equivalent to other products if steady investments are made over the required 15-year term, these products were likely less beneficial to the many service members that failed to make payments for that extended length of time. In the many years since contractual plans were first offered, a variety of alternative investments have become widely available for individuals with modest incomes, including other load funds, no-load funds, and TSP, which is now available to service members and likely offers the lowest investment expenses of any product. Given the longstanding history of sales practices abuses associated with the contractual plans and the availability of viable alternative investments, we believe that congressional approval of the legislation currently under consideration, which includes language to ban these products, would remove products that appear to have little need to continue to exist. Although insurance and securities regulators have taken actions since allegations of inappropriate sales to military members have come to light, additional actions could mitigate some of the limitations that hampered regulators’ ability to address these problems. As our work found, state insurance and securities regulators sometimes were uncertain of the adequacy of their authority over sales taking place on military installations. As a result, some of these regulators and officials from associations representing state insurance and securities regulators expressed support for congressional action to clarify that state financial regulators have jurisdiction over sales taking place in such locations. In addition, congressional action could serve to better ensure that financial regulators are made aware of potentially inappropriate sales involving military members. As we found, federal and state insurance regulators’ ability to more promptly identify inappropriate sales of financial products involving military members was hampered by the lack of information sharing by DOD. DOD officials have expressed their willingness to provide financial regulators with information on actions taken against individuals or firms that violate DOD’s solicitation policies. They have also indicated their intention to require their personnel to provide information regarding service member complaints and concerns. However, they note that privacy requirements can pose perceived barriers to such sharing. In addition, they remain reluctant to share information about all instances in which sellers of financial products violate DOD solicitation policies. However, such information could allow financial regulators to determine whether such situations also represent potential violations of federal or state laws. As a result, we believe that congressionally-mandated direction is needed to ensure that DOD identifies ways to overcome these barriers and coordinates with its installation personnel and with financial regulators about ways to share additional information about problematic company behavior and service member concerns. Additional DOD actions also could help protect service members from firms using unscrupulous sales practices. DOD officials have indicated that having their personnel share some information relating to service member concerns and complaints is appropriate. Including such a requirement in the revision of DOD’s solicitation policy would better ensure that financial regulators receive this important information. DOD is also currently attempting to provide personal financial management training to improve financial literacy and competence among military members. Such training would also appear to be a useful forum for informing military personnel about proper procedures for submitting concerns or complaints. Given that more senior officers were customers of some of the financial firms that target military members, periodically providing such training to service members at all levels throughout the military would also likely raise awareness and assist them in making sound financial decisions. Financial regulators also appear to have opportunities to improve their ability to protect military members from inappropriate sales. Because complaint information is a critical input to their regulatory processes, proactively seeking such information from DOD and its installations would likely improve regulators’ oversight efforts. Given the uniqueness of the military environment, having staff or offices within regulators’ own organizations that serve as liaisons with DOD and individual installations could allow both DOD and financial regulators to build trust and gain experience in sharing information and assisting investigations of potentially problematic financial product sales. Ensuring that financial regulators’ staff also make use of any listings compiled by DOD of individuals or firms that have been sanctioned by the military for activities relating to financial product sales to target examination and investigation resources would also likely improve the protections that are afforded to military members. SEC and NASD efforts to oversee broker-dealers marketing contractual plan mutual funds were hampered by a lack of standardized data at these firms on the success of clients in investing in these plans. In the event that such plans continue to be legally sold, having these regulators evaluate how best to ensure they will have such information in the future would improve their ability to oversee these products. Some possible ways to ensure such information is readily available would be to implement a rule requiring broker-dealers to maintain standardized records that show how successfully their customers are completing any contractual plans purchased. Alternatively, SEC and NASD examiners could routinely request such information prior to conducting a review of the broker-dealers selling these products. To better protect military service members from financial products with limited benefits to them, the Congress should consider taking the following five actions: Provide that products being marketed primarily to military members are reviewed by state insurance commissioners to ensure that all such product provisions are in compliance with existing state laws, and provide for reports through NAIC to relevant congressional committees on the results of these reviews within 12 months. Provide that state insurance commissioners work cooperatively with DOD to develop appropriateness or suitability standards for sales to military service members. Ban the sale of contractual mutual fund plans. Specify that state insurance and securities regulators have full access to persons and information necessary to oversee sales taking place on military installations or involving service personnel. Require DOD to work cooperatively with financial regulators to develop mechanisms that overcome existing barriers to sharing information about insurance and securities firm activities and service member concerns and complaints that can allow financial regulators to determine whether violations of existing federal or state laws or regulations are occurring. To better protect service members from unscrupulous sales of financial products, the Secretary of Defense should take the following two actions: Issue a revised DOD solicitation policy requiring that information on service member complaints related to financial product sales be provided to relevant state and federal financial regulators. Include in the personal financial management training for all service members information and materials developed in conjunction with insurance and securities regulators that explains how and to whom service members should raise concerns or complaints about potentially inappropriate sales of financial products, including providing the information necessary for contacting these regulators. Such training should also periodically be offered to service members of all levels. To better ensure that federal, state, and other financial regulators can oversee sales of insurance and securities products to military members, the heads of SEC, NASD, and state insurance and securities regulators should designate staff to receive complaints from DOD and conduct outreach with DOD headquarters and individual installations to proactively learn of issues or concerns regarding product sales. These staff should also make use of any listings that DOD maintains of individuals or firms that have been sanctioned by the military for improper solicitation practices. In the event that contractual mutual funds are not banned, the Chairman of SEC and the Chairman of NASD should consider various means of better assuring that their staff has adequate information to assess the sales of contractual plans. We provided a draft of this report to DOD, NAIC, NASD, and SEC for comments. Each of these organizations provided written comments expressing general agreement with our report and its recommendations (these comments appear in appendixes IV through VII). In concurring with our recommendation that DOD require that information on service member complaints be provided to financial regulators, a letter from DOD’s acting principal deputy for the Undersecretary for Personnel and Readiness indicated that their revised solicitation directive will require installations to report such information to regulators. The principal deputy’s letter also indicates they concur with our recommendation to provide all service members with information during personal financial management training on how to complain to regulators and states that they have developed a strategic plan for programs to assist members with determining appropriate financial products for their needs and how to remedy concerns or complaints. They also intend to approach state regulatory agencies to assist in providing educational information to all service members and provide such information during new comer orientations and through toll- free assistance lines. In SEC’s letter, the director of that agency’s Office of Compliance Inspections and Examinations stated that they shared our concerns that securities products be properly marketed to military members. She also stated that in the event that Congress does not ban the sale of contractual plans they will consider our recommendation that SEC consider ways to ensure that it have adequate information to assess sales of such products. In NASD’s letter, the NASD Chairman and Chief Executive Officer states that men and women of the U.S. armed forces deserve the same protection from inappropriate financial product sales as their civilian counterparts and that our report will help NASD and others to ensure that this is achieved. NASD’s letter also describes the actions the organization has taken against the largest seller of contractual plans, including noting, as our report acknowledged, that they began reviewing this firm in 2003. NASD’s letter also describes their efforts to develop education for military members. In its letter, NAIC’s Executive Vice President and Chief Executive Officer notes that we ask Congress to direct the states to review currently approved products being marketed to military members. In response, she indicates that a number of states are examining companies that have engaged in questionable practices involving these products and that an NAIC committee plans to review life insurance sold with a side fund to recommend a position on products being offered in the marketplace in 2006. Regarding our request that Congress direct DOD and the insurance regulators to work together to improve information sharing, NAIC’s letter indicates that they are in the process of; compiling a list of insurance department contacts to ensure that DOD has the proper contact information for further state assistance; updating NAIC's Complaint Database System form to identify complaints that are submitted by military personnel; and providing DOD with a state-by-state premium volume summary for those companies that state insurance regulators know are soliciting or have solicited insurance products on military bases. Regarding our recommendation that DOD and regulators work together to develop training materials, NAIC’s letter indicates that they have worked with DOD to develop a consumer brochure and a Web site specifically addressing life insurance information for military personnel and remain committed to developing other materials to fill any financial literacy needs that DOD identifies. We also received technical comments from each of these organizations that we incorporated where appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this report. At that time, we will send copies of this report to the Chairman and Ranking Minority Member, Senate Committee on Armed Services; Chairman and Ranking Minority Member, House Committee on Armed Services; and Chairman and Ranking Minority Member, House Committee on Financial Services. We will also send copies of this report to the Secretary of Defense, Chairman, SEC; and Chairman, NASD. 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 any questions regarding this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VIII. To identify the insurance products being sold and how these were being marketed to military members, we reviewed prior Department of Defense (DOD) reports, spoke to officials at the National Association of Insurance Commissioners (NAIC), and met with regulatory officials from several state regulators that are currently conducting or have previously conducted reviews of insurance companies that market primarily to military members. This work included interviewing regulatory officials and reviewing available documentation from the Georgia Insurance and Safety Fire Commissioner, the Texas Department of Insurance, the Florida Office of Insurance Regulation, and the Illinois Department of Insurance, and the Virginia State Corporation Commission Bureau of Insurance. In addition, we contacted staff from the Maryland Insurance Administration and the Washington Office of the Insurance Commissioner to discuss their past investigations of certain insurance companies targeting junior enlisted service members and reviewed documents pertaining to such investigations. We also visited Fort Benning, Georgia, and Great Lakes Naval Training Center, Illinois, to better understand the insurance solicitation issues present at two large military training installations. During these site visits we interviewed staff judge advocate personnel and reviewed documents pertaining to current and past investigations of sales of insurance products at these locations. Furthermore, we obtained data on the characteristics of military members making allotments to three different insurance companies in this market from DOD’s Defense Finance and Accounting Service (DFAS), which maintains military personnel pay records. In our prior report, we were unable to reliably determine the total number of service members who have allotments for supplemental life insurance products or the number of dollars that service members pay to life insurance companies through the DFAS systems because not all allotments for insurance were identified as such. To provide accurate information for this report, we instead obtained from DFAS the dependent status of service members for allotments that were being routed to specific banks being used by some of the insurance companies that market primarily to military members, which produced results that we did believe were sufficiently reliable to highlight that a significant percentage of service members who had made allotments to specific companies had no dependents. Further, we contacted officials from the six insurance companies identified by the multistate investigation as being those companies that primarily market to service members, and reviewed their marketing materials for the product sold to service members. To illustrate the cost and the possible performance of sample insurance policies offered by these companies we obtained and analyzed sample policies for a junior enlisted service member from six companies. We also compared the cost and performance of these products to other products offered to service members by the government including Servicemembers’ Group Life Insurance (SGLI), Veterans’ Group Life Insurance (VGLI), and the Thrift Savings Plan (TSP), as well as insurance products offered by a private insurance company. We chose the TSP G Fund as the savings component to be coupled with the government-offered insurance because of its low risk and its comparable return rate to the minimum rates claimed by the insurance companies. We assumed a 4 percent rate of return for all of our analysis based on the guarantee rate claimed on the policies typically marketed to service members by the six companies we reviewed. For approximating the projected TSP return, we compounded the 4 percent rate on a monthly basis. To project the return on the insurance products’ savings components, we used the method of crediting interest in the products’ terms, in which interest is credited on the lesser of the average balance during the year or the year-end balance. We also conducted analysis to illustrate the performance of the products after a service member stops making payments at the end of the fourth policy year. Further, the analyses we conducted are for illustrative purposes only and do not necessarily depict actual policy, plan schedules, or are adjusted according to various proprietary risk classes that could apply for a particular individual. To identify the securities products being sold and how these were being marketed to military members, we interviewed staff from NASD (formerly called the National Association of Securities Dealers), Securities and Exchange Commission (SEC), and North American Securities Administrators Association (NASAA). We also interviewed officials from the largest broker-dealer firm that markets to military members, which represents 90 percent of the military market segment, and two of the investment management firms that manage mutual funds underlying the contractual plans sold to service members. To determine the cost and performance of the contractual plan product offered by this broker-dealer firm, we conducted analysis to illustrate a contractual plan product typically marketed to career service members using a $600 front-end load. To illustrate how this product compared to other similar products we analyzed the cost and performance of a typical fund using the Investment Company Institute recommended 5 percent load and TSP C Fund with no load. We chose the TSP C Fund because it invests in common stocks and was therefore comparable to the contractual plan product. We analyzed these products for a 15 year--or “full term”--period. We assumed a 7 percent annual return that we compounded monthly for all products. Further, we reviewed SEC and NASD investigation files of the sales of securities products to military service members. To assess how financial regulators and DOD were overseeing financial product sales to military members, we interviewed state insurance and federal, state, and other securities regulators. We also reviewed available materials pertaining to product approval, investigations, and regulatory activities and actions involving firms marketing to military members. Specifically, to assess how insurance regulators were overseeing sales of insurance products to military service members, we interviewed officials from NAIC, including the staff working on the multistate investigation of insurance sales involving service members. We also spoke with officials and reviewed available documents on activities and actions from several state insurance departments, including those in Florida, Georgia, Illinois, Maryland, Texas, and the state of Washington, that have previously investigated, or are currently investigating, companies targeting military members. Further, we reviewed legal actions taken against certain insurance companies as part of Department of Justice (DOJ) investigations and law suit cases. To determine the extent to which state insurance regulators received complaints from military service members or had any concerns about their jurisdiction on military installations, we relied on an E-mail survey to the insurance commissioners for the 50 states, the District of Columbia, and four territories: American Samoa, Guam, Puerto Rico, and the Virgin Islands administered as part of our June 2005 report. We received completed surveys from 46 states, the District of Columbia, and one U.S. Territory, yielding an overall response rate of 87 percent. Further, to make the same determination in regards to the sales of securities products to military members, we relied on the results of a survey administered by NASAA. Additionally, we contacted DOD officials, conducted fieldwork at Fort Benning, Georgia and Naval Station Great Lakes, Illinois—two large military training installations--and reviewed findings from other recent work concerning supplemental life insurance sales conducted at several other military installations throughout the country. We performed our work from November 2004 to October 2005 in accordance with generally accepted government auditing standards. Table 2 summarizes various actions that we identified during the course of our review that have been taken by regulators or others against companies that were identified as primarily marketing products to military members. As indicated, many of the actions were settlements in which the companies did not admit to any wrongdoing. Because of the structure of their sales charges, contractual plans are not likely to offer superior returns to a long-term investor compared to other alternative products. Table 1 illustrates that investing $100 per month for 15 years in a contractual mutual fund plan that earns a 7 percent return would result in an account worth less than one in a conventional mutual fund with a 5 percent sales load in which the same payments were made and the same projected return was earned. As shown in the table, the amount that would be accumulated in a contractual plan does not exceed that of a conventional mutual fund until after 16 years. The contractual plan’s accumulated value lags behind the conventional fund because its high up- front sales charge reduces the amount of money that is invested and available to earn the return of the underlying mutual fund from the beginning. In contrast, investing $100 monthly in TSP and earning a 7 percent return would result in an account worth $1,600 more than that accumulated in the contractual plan after 15 years. As table 1 also shows, investors that terminate their periodic investments earlier than the full 15 years are even more likely to be better off with a conventional mutual fund or TSP. For example, an investor ceasing payments after 4 years in the contractual plan would have an account worth about $4,785. However, after 4 years, the account of the conventional mutual fund would be worth almost $5,275 and the TSP account would be worth about $5,553. In addition to the individual above, Cody Goebel, Assistant Director; Joseph Applebaum; Gwenetta Blackwell-Greer; Tania Calhoun; Rudy Chatlos; Lawrence Cluff; Barry Kirby; Marc Molino; Josephine Perez; David Pittman; and Amber Yancey-Carroll made key contributions to this report.

In 2004, a series of press articles alleged that financial firms were marketing expensive and potentially unnecessary insurance or other financial products to members of the military. To assess whether military service members were adequately protected from inappropriate product sales, GAO examined (1) features and marketing of certain insurance products being sold to military members, (2) features and marketing of certain securities products being sold to military members, and (3) how financial regulators and the Department of Defense (DOD) were overseeing the sales of insurance and securities products to military members. Thousands of junior enlisted service members have been sold a product that combines life insurance with a savings fund promising high returns. Being marketed by a small number of companies, these products can provide savings to service members that make steady payments and have provided millions in death benefits to the survivors of others. However, these products are much more costly than the $250,000 of life insurance--now $400,000--that military members already receive as part of their government benefits. In addition, the products also allow any savings accumulated on these products to be used to extend the insurance coverage if a service member ever stops making payments and fails to request a refund of the savings. With most military members leaving the service within a few years, many do not continue their payments and, as a result, few likely amassed any savings from their purchase. Several of the companies selling these products have been sanctioned by regulators in the past and new investigations are underway to assess whether these products were being properly represented as insurance and whether their terms were legal under existing state laws. Thousands of military members were also purchasing a mutual fund product that also requires an extended series of payments to provide benefit. Known as contractual plans, they expect the service member to make payments for set periods (such as 15 years), with 50 percent of the first year's payments representing a sales charge paid to the selling broker-dealer. If held for the entire period, these plans can provide lower sales charges and comparable returns as other funds. However, with securities regulators finding that only about 10 to 40 percent of the military members that purchased these products continued to make payments, many paid higher sales charges and received lower returns than had they invested in alternatively available products. Regulators have already taken action against the largest broker-dealer that marketed this product and are investigating the few remaining sellers for using inappropriate sales practices. With the wide availability of much less costly alternative products, regulators also question the need for contractual plans to continue to be sold. Financial regulators were generally unaware of the problematic sales to military members because DOD personnel rarely forwarded service member complaints to them. Insurance products also usually lacked suitability or appropriateness standards that could have prompted regulators to investigate sales to military members sooner. Securities regulators' examinations of contractual plan sales were also hampered by lack of standardized data showing whether customers were benefiting from their purchases. Although recognizing a greater need for sharing information on violations of its solicitation policies and service member complaints, DOD has not revised its policies to require that such information be provided to financial regulators nor has it coordinated with these regulators and its installations on appropriate ways that additional sharing can occur.

You are an expert at summarizing long articles. Proceed to summarize the following text: Fiscal year 2011 marked the eighth year of implementation of the Improper Payments Information Act of 2002 (IPIA), as well as the first year of implementation for the Improper Payments Elimination and Recovery Act of 2010 (IPERA). IPIA requires executive branch agencies to annually review all programs and activities to identify those that are susceptible to significant improper payments, estimate the annual amount of improper payments for such programs and activities, and report these estimates along with actions taken to reduce improper payments for programs with estimates that exceed $10 million. IPERA, enacted July 22, 2010, amended IPIA by expanding on the previous requirements for identifying, estimating, and reporting on programs and activities susceptible to significant improper payments and expanding requirements for recovering overpayments across a broad range of federal programs. IPERA included a new, broader requirement for agencies to conduct recovery audits, where cost effective, for each program and activity with at least $1 million in annual program outlays. This IPERA provision significantly lowers the threshold for required recovery audits from $500 millionall programs and activities. Another IPERA provision calls for federal agencies’ inspectors general to annually determine whether their respective agencies are in compliance with key IPERA requirements and to report on their determinations. Under Office of Management and Budget (OMB) implementing guidance, federal agencies are required to complete these reports within 120 days of the publication of their annual PARs or AFRs, with the fiscal year 2011 reports for most agencies due on March 15, 2012. to $1 million and expands the scope for recovery audits to OMB continues to play a key role in the oversight of the governmentwide improper payments issue. OMB has established guidance for federal agencies on reporting, reducing, and recovering improper paymentshas established various work groups responsible for developing recommendations aimed at improving federal financial management activities related to reducing improper payments. Each year, hundreds of thousands of our nation’s most vulnerable children are removed from their homes and placed in foster care, often because of abuse or neglect. While states are primarily responsible for providing safe and stable out-of-home care for these children until they are returned safely home, placed with adoptive families, or placed in other arrangements, Title IV-E of the Social Security Act provides states some ACF under HHS is responsible for federal financial support in this area.administering this program and overseeing Title IV-E funds. HHS’s reported fiscal year 2010 outlays to states for their Foster Care programs under Title IV-E totaled more than $4.5 billion, serving over 408,000 children, as of September 30, 2010, the most recent data available at the time of our study. Past work by the HHS Office of Inspector General (OIG), GAO, and others have identified numerous deficiencies in state claims associated with the Title IV-E Foster Care program. In particular, the HHS OIG found hundreds of millions of dollars in unallowable claims associated with Title IV-E funding. A 2006 GAO report also found variations in costs states claimed under the Title IV-E program and recommended a number of actions HHS should take to better safeguard federal resources. In addition, annual state-level audits have identified weaknesses in states’ use of federal funds, such as spending on unallowed activities or costs and inadequate state monitoring of federal funding. As required under IPIA, as amended, HHS has identified the Foster Care program as susceptible to significant improper payments, and has reported annually on estimated improper payment amounts for the program since 2005. For fiscal year 2010, HHS reported estimated improper payments for Foster Care of about $73 million. The reported estimate slightly decreased to about $72 million for fiscal year 2011. Federal agencies reported improper payment estimates totaling $115.3 billion in fiscal year 2011, a decrease of $5.3 billion from the revised prior year reported estimate of $120.6 billion. Based on the agencies’ estimates, OMB estimated that improper payments comprised about 4.7 percent of the $2.5 trillion in fiscal year 2011 total spending for the agencies’ related programs (i.e., a 4.7 percent error rate). The decrease in the fiscal year 2011 estimate—when compared to fiscal year 2010—is attributed primarily to decreases in program outlays for the Department of Labor’s (Labor) Unemployment Insurance program, and decreases in reported error rates for fiscal year 2011 for the Department of the Treasury’s (Treasury) Earned Income Tax Credit program, and HHS’s Medicare Advantage program. According to OMB, the $115.3 billion in estimated federal improper payments reported for fiscal year 2011 was attributable to 79 programs spread among 17 agencies. Ten of these 79 programs account for most of the $115.3 billion of reported improper payments. Specifically, these 10 programs accounted for about $107 billion or 93 percent of the total estimated improper payments agencies reported for fiscal year 2011. Table 1 shows the reported improper payment estimates and the reported primary cause(s) for the estimated improper payments for these 10 programs. While the programs identified in the table above represented the largest dollar amounts of improper payments, 4 of these programs also had some of the highest program improper payment error rates.table 2, the 10 programs with the highest error rates accounted for $45 billion, or 39 percent of the total estimated improper payments, and had rates ranging from 11.0 percent to 28.4 percent for fiscal year 2011. Despite reported progress in reducing estimated improper payment amounts and error rates for some programs and activities during fiscal year 2011, the federal government continues to face challenges in determining the full extent of improper payments. Specifically, some agencies have not yet reported estimates for all risk-susceptible programs, and some agencies’ estimating methodologies need to be refined. Until federal agencies are able to implement effective processes to completely and accurately identify the full extent of improper payments and implement appropriate corrective actions to effectively reduce improper payments, the federal government will not have reasonable assurance that the use of taxpayer funds is adequately safeguarded. In this regard, at the request of this Subcommittee, we recently completed our review of the improper payment estimation methodology used by HHS’s Foster Care program. As discussed in our report released today, we found that the Foster Care program’s improper payment estimation methodology was deficient in all three key areas—planning, selection, and evaluation—and consequently did not result in a reasonably accurate estimate of the extent of Foster Care improper payments. Further, the validity of the reporting of reduced Foster Care program error rates was questionable, and we found that several weaknesses impaired ACF’s ability to assess the effectiveness of corrective actions to reduce improper payments. We found that not all agencies have developed improper payment estimates for all of the programs and activities they identified as susceptible to significant improper payments. Specifically, three federal entities did not report fiscal year 2011 estimated improper payment amounts for four risk-susceptible programs. In one example, HHS’s fiscal year 2011 reporting cited statutory limitations for its state- administered Temporary Assistance for Needy Families (TANF) program, that prohibited it from requiring states to participate in developing an improper payment estimate for the TANF program. Despite these limitations, HHS officials stated that they will continue to work with states and explore options to allow for future estimates for the program. For fiscal year 2011, the TANF program reported outlays of about $17 billion. For another program, HHS cited the Children’s Health Insurance Program Reauthorization Act of 2009 as prohibiting HHS from calculating or publishing any national or state-specific payment error rates for the Children’s Health Insurance Program (CHIP) until 6 months after the new payment error rate measurement rule became effective on September 10, 2010. According to its fiscal year 2011 agency financial report, HHS plans to report estimated improper payment amounts for CHIP in fiscal year 2012. For fiscal year 2011, HHS reported federal outlays of about $9 billion for CHIP. As previously mentioned, OMB excluded estimated improper payment amounts for two DOD programs from the governmentwide total because those programs were still developing their estimating methodologies— Defense Finance and Accounting Service (DFAS) Commercial Pay, with fiscal year 2011 outlays of $368.5 billion, and U.S. Army Corps of Engineers Commercial Pay, with fiscal year 2011 outlays of $30.5 billion. In DOD’s fiscal year 2011 agency financial report, DOD reported that improper payment estimates for these programs were based on improper payments detected through various pre-payment and post-payment review processes rather than using methodologies similar to those used for DOD’s other programs, including statistically valid random sampling or reviewing 100 percent of payments. GAO, DOD Financial Management: Weaknesses in Controls over the Use of Public Funds and Related Improper Payments, GAO-11-950T (Washington, D.C.: Sept. 22, 2011), and Improper Payments: Significant Improvements Needed in DOD’s Efforts to Address Improper Payment and Recovery Auditing Requirements, GAO-09-442 (Washington, D.C.: July 29, 2009). improper payments.statistically valid estimating process for its commercial payments and addresses the known control deficiencies in its commercial payment processes, the governmentwide improper payment estimates will continue to be incomplete. We are currently working on an engagement related to improper payment reporting at DOD. Until DOD fully and effectively implements a For fiscal year 2011, two agency auditors reported on compliance issues with IPIA and IPERA as part of their 2011 financial statement audits. Specifically, the Department of Agriculture (USDA) auditors identified noncompliance with the requirements of IPERA regarding the design of program internal controls related to improper payments. In the other noncompliance issue, while for fiscal year 2011 HHS estimated an annual amount of improper payments for some of its risk-susceptible programs, a key requirement of IPIA, it did not report an improper payment estimate for its TANF program and CHIP. Fiscal year 2011 marked the eighth consecutive year that auditors for HHS reported noncompliance issues with IPIA. We recognize that measuring improper payments for federal programs and designing and implementing actions to reduce or eliminate them are not simple tasks, particularly for grant programs that rely on administration efforts at the state level. The estimation methodologies for these types of programs may vary considerably because of differences in program designs across the states. For example, as I will discuss in more detail later in this statement, the Foster Care program leveraged an existing process to estimate improper payments that included a review of a child’s eligibility for Title IV-E federal funding as claimed by the states administering the program. In another example, the improper payment estimate for HHS’s Medicaid program is based on the results of three different reviews—eligibility, fee-for-service, and managed care—of claims payments made by states to health care providers. The fee-for- service and managed care reviews both include a data processing review to validate that claims were processed correctly. The fee-for-service review also includes a medical necessity determination. The eligibility review identifies payments made for services to beneficiaries that were improperly paid because of erroneous eligibility decisions. We are currently working on an engagement related to improper payment reporting for the Medicaid program. Because of these state differences and complexities within programs, as we previously reported, communication, coordination, and cooperation among federal agencies and the states will be critical to effectively estimate national improper payment rates and meet IPIA reporting requirements for state- administered programs. The results of our recently completed study of the improper payment estimation methodology used by HHS’s Foster Care program serve to provide a more detailed perspective on the challenges one federal agency faced in attempting to develop a complete and accurate nationwide estimate for a program largely administered at the state level. Further, this case study provides an example of the types of problems that may exist but go undetected because of the lack of independent assessments of the reported information. As we previously testified before this Subcommittee,auditors provide a valuable independent validation of agencies’ efforts to report reliable information under IPIA. Independent assessments can also enhance an agency’s ability to identify sound performance measures, monitor progress against those measures, and help establish performance and results expectations. Without this type of validation or other types of reviews performed by GAO or agency OIGs, it is difficult to reliably determine the full magnitude of deficiencies that may exist governmentwide in agencies’ IPIA implementation efforts. For example, our case study of the Foster Care program found that although ACF had established a process to calculate a national improper payment estimate, the estimate was not based on a statistically valid methodology and consequently did not reflect a reasonably accurate estimate of the extent of Foster Care improper payments. Further, without accurate data, the separate assessments conducted by agency validity of the Foster Care program’s reported reductions in improper payments was questionable, and ACF’s ability to reliably assess the effectiveness of its corrective actions was impaired. For programs administered at the state level such as Foster Care, OMB guidance provides that statistically valid annual estimates of improper payments may be based on either data for all states or on statistical data from a sample to generate a national dollar estimate and improper payment rate. In this case, ACF took its existing Title IV-E Foster Care program eligibility review process, already in place under the Social Security Act, and also used it for IPIA estimation. ACF provides a national estimated error rate based on a rolling average of error rates identified in states examined on a 3-year cycle. As a result, ACF’s IPIA reporting for each year is based on new data for about one-third of the states and previous years’ data for the remaining two-thirds of the states. To calculate a national estimate of improper payments, ACF uses error rates that span a 3-year period of Title IV-E eligibility reviews in the 50 states, the District of Columbia, and Puerto Rico. ACF applies the percentage dollar error rate from the sample to the total payments for the period under review for each state. ACF’s methodology for estimating Foster Care improper payments was approved by OMB in 2004 with the understanding that continuing efforts would be taken to improve the accuracy of ACF’s estimates of improper payments in the ensuing years. ACF, however, has since continued to generally follow its initial 2004 methodology. When compared to federal statistical guidance and internal control standards, we found it to be deficient in all three phases of its fiscal year 2010 estimation methodology—planning, selection, and evaluation—as summarized in table 3. These deficiencies impaired the accuracy and completeness of the Foster Care program improper payment estimate of $73 million reported for fiscal year 2010. Planning. ACF’s annual IPIA reporting for the Foster Care program did not include about two-thirds of program expenditures, as shown in figure 1. Specifically, the estimate included improper payments for only one type of program payment activity—maintenance payments—which, for fiscal year 2010, represented 34 percent of the total federal share of expenditures for the Foster Care program. Administrative and other payments, such as those related to the operation and development of the Statewide Automated Child Welfare Information System (SACWIS), were not considered in ACF’s IPIA estimation process and thus were not included in the Foster Care program improper payment estimate. OMB’s December 2004 approval of ACF’s proposed methodology included an expectation that ACF would develop a plan and timetable to test administrative expenses by April 2005. ACF has conducted various pilots in this area since 2007 with the goal of ensuring that improper payment data for administrative costs are sufficiently reliable and valid without imposing undue burden on states. Although ACF expects to estimate for administrative improper payments and recognizes the importance of doing so, it has not yet taken action to augment its existing methodology. Selection. The population of data from which ACF selected its sample— the Adoption and Foster Care Analysis and Reporting System (AFCARS)—were not reliable because ACF’s sampling methodology did not provide for up-front data quality control procedures to (1) ensure that the population of cases was complete prior to its sample selection and (2) identify inaccuracies in the data field used for sample selection. Specifically, ACF had to replace a high percentage of cases sampled from the database of Foster Care cases for the fiscal year 2010 reporting period because of inaccurate information in AFCARS. Of the original 4,570 sample cases ACF selected for testing in its primary and secondary reviews for fiscal year 2010, 298 cases (almost 7 percent) had to be replaced with substitutes because the selected cases had not received Title IV-E Foster Care maintenance payments during the period under review. Of the 298 over-sampled cases used to replace the cases initially selected, 63 cases (more than 21 percent) then had to be replaced again because those cases had also not received Title IV-E Foster Care maintenance payments during the period under review. Further, although we were able to determine how many sampled (or over-sampled) cases had to be replaced because available records showed no Title IV-E payment was received during the reporting period, neither GAO nor ACF were able to determine the extent to which the opposite occurred—cases that had received a payment (and therefore should have been included in the sample population) had not been coded as receiving Title IV-E payments. Without developing a statistically valid sampling methodology that incorporates up-front data quality controls to ensure complete and accurate information on the population, including payment data, ACF cannot provide assurance that its reported improper payment estimate accurately and completely represents the extent of improper maintenance payments in the Foster Care program. Evaluation. Although ACF’s methodology identified some errors related to underpayments and duplicate or excessive payments, it did not include procedures to reliably determine the full extent of such errors. In its fiscal year 2010 agency financial report, ACF reported that underpayments and duplicate or excessive payments represented 19 percent and 6 percent, respectively, or 25 percent of the errors that caused improper payments. However, the extent of underpayments and duplicate or excessive payment errors identified varied widely by state, and in some instances were not identified at all. For example, ACF did not identify underpayments in 31 of 51 state eligibility reviews and did not identify duplicate or excessive payments in 36 of 51 state eligibility reviews.did not assess the validity of the reported data. However, the absence of such errors for some states seems inconsistent with the general distribution of errors reported elsewhere. Further, the lack of detailed We procedures for identifying any such payment errors may have contributed to the variation or to whether the teams found any errors. The purpose of the eligibility reviews is to validate the accuracy of a state’s claim for reimbursement of payments made on behalf of eligible children or the accuracy of federal financial assistance provided to states. Without detailed procedures to guide review teams in the identification of underpayments and duplicate or excessive payments, ACF cannot provide assurance that it has identified the full extent of any such errors in its Foster Care program. The weaknesses we identified in ACF’s methodology to estimate improper payments in the Foster Care program also impaired its ability to reliably assess the extent to which its corrective actions reduced Foster Care program improper payments. For example, although ACF has reported significantly reduced estimated improper maintenance payments, from a baseline error rate of 10.33 percent for 2004 to a 4.9 percent error rate for 2010, the validity of ACF’s reporting of reduced improper payment error rates is questionable because the previously discussed weaknesses in its estimation methodology impaired the accuracy and completeness of the reported estimate and error rate. In addition, we found that ACF’s ability to reliably assess the extent to which its corrective actions reduced improper payments was impaired by weaknesses in its requirements for state-level corrective actions. For example, ACF used the number of cases found in error rather than the dollar amount of improper payments identified to determine whether a state was required to implement corrective actions. ACF required states to implement corrective actions through a program improvement plan, if during the Title IV-E primary eligibility review, a state was found to have an error rate exceeding 5 percent of the number of cases reviewed. We identified six states that were found substantially compliant in their primary eligibility reviews as their case error rates were below the established 5 percent threshold. However, the dollar-based improper payment rates for those six states ranged from 5.1 percent to 19.8 percent—based on the percentage of improper payment dollars found in the sample. Because dollar-based improper payment rates are not used in applying the corrective action strategy, ACF’s method cannot effectively measure states’ progress over time in reducing improper payments. It also cannot effectively help determine whether further action is needed to minimize future improper payments. This limits the extent to which states are held accountable for the reduction of improper payments in the Foster Care program. Our report released today includes seven recommendations to help improve ACF’s methodology for estimating improper payments for the Foster Care program and its corrective action process. In commenting on our draft report, HHS agreed that its improper payment estimation efforts can and should be improved, generally concurred with four of our recommendations, and agreed to continue to study the remaining three recommendations. We reaffirm the need for all seven recommendations. A number of actions are under way across the federal government to help advance improper payment reduction goals. Completing these initiatives, as well as designing and implementing enhanced strategies in the future, will be needed to effectively reduce the federal government’s improper payments. Identifying and analyzing the root causes of improper payments is key to developing effective corrective actions and implementing the controls needed to reduce and prevent improper payments. In this regard, implementing strong preventive controls are particularly important as these controls can serve as the front-line defense against improper payments. Proactively preventing improper payments increases public confidence in the administration of benefit programs and avoids the difficulties associated with the “pay and chase”aspects of recovering improper payments. For example, addressing program design issues that are a factor in causing improper payments may be an effective preventive strategy. Effective monitoring and reporting will also be important to help detect any emerging improper payment issues. In addition, agencies’ actions to enhance detective controls to identify and recover overpayments could help increase the attention to preventing, identifying, and recovering improper payments. For instance, agency strategies to enhance incentives for grantees, such as state and local governments, will be important. Agencies cited a number of causes for the estimated $115.3 billion in reported improper payments, including insufficient documentation; incorrect computations; changes in program requirements; and, in some cases, fraud. Beginning in fiscal year 2011, according to OMB’s guidance, agencies were required to classify the root causes of estimated improper payments into three general categories for reporting purposes: (1) documentation and administrative errors, (2) authentication and medical necessity errors, and (3) verification errors.information on the root causes of the current improper payment estimates is necessary for agencies to target effective corrective actions and implement preventive measures. While agencies generally reported some description of the causes of improper payments for their respective programs in their fiscal year 2011 reports, many agencies did not use the three categories prescribed by OMB to classify the types of errors and quantify how many errors can be attributed to that category. Of the 79 programs with improper payment estimates in fiscal year 2011, we found that agencies reported the root cause information using the required categories for 42 programs in their fiscal year 2011 PARs and AFRs. Together, these programs represented about $46 billion, or 40 percent of the total reported $115.3 billion in improper payment estimates for fiscal year 2011. Of the $46 billion, the estimated improper payments amounts were spread across the three categories, with documentation and administrative errors being cited most often. We could not calculate the dollar amounts associated with each category because the narratives included in some of the agencies’ reporting of identified causes were not sufficiently detailed or documented. Thorough and properly documented analysis regarding the root causes is critical if federal agencies are to effectively identify and implement corrective and preventive actions across their various programs. Many agencies and programs are in the process of implementing preventive controls to avoid improper payments, including overpayments and underpayments. Preventive controls may involve a variety of activities, such as up-front validation of eligibility, predictive analytic tests, training programs, and timely resolution of audit findings, as described below. Further, addressing program design deficiencies that have caused improper payments may be considered as part of an effective preventive strategy. Up-front eligibility validation through data sharing. Data sharing allows entities that make payments—to contractors, vendors, participants in benefit programs, and others—to compare information from different sources to help ensure that payments are appropriate. When effectively implemented, data sharing can be particularly useful in confirming initial or continuing eligibility of participants in benefit programs and in identifying any improper payments that have already been made. Also, in June 2010, the President issued a presidential memorandum, titled Enhancing Payment Accuracy Through a “Do Not Pay List”, to help prevent improper payments to ineligible recipients. This memorandum also directs agencies to review prepayment and reward procedures and ensure that a thorough review of available databases with relevant information on eligibility occurs before the release of any federal funds. Analyses and reporting on the extent to which agencies are participating in data sharing activities, and additional data sharing efforts that agencies are currently pursuing or would like to pursue, are other important elements that merit consideration as part of future strategies to advance the federal government’s efforts to reduce improper payments. For example, Labor reported that its Unemployment Insurance program utilizes HHS’s National Directory of New Hires database to improve the ability to detect overpayments caused by individuals who claim benefits after returning to work—the largest single cause of overpayments reported in the program. In June 2011, Labor established the mandatory use of the database for state benefit payment control no later than December 2011. Labor also recommended operating procedures for cross-matching activity for national and state directories of new hires. GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C: November 1999). identifying opportunities for streamlining or changing the eligibility or other program control requirements. Although strong preventive controls remain the frontline defense against improper payments, agencies’ improper payment reduction strategies could also consider actions to establish additional effective detection techniques to quickly identify and recover those improper payments that do occur. Detection activities play a significant role not only in identifying improper payments, but also in providing data on why these payments were made and, in turn, highlighting areas that could benefit from strengthened prevention controls. The following are examples of key detection activities to be considered. Data mining. Data mining is a computer-based control activity that analyzes diverse data for relationships that have not previously been discovered. The central repository of data commonly used to perform data mining is called a data warehouse. Data warehouses store tables of historical and current information that are logically grouped. As a tool in detecting improper payments, data mining of a data warehouse can enable an organization to efficiently identify potential improper payments, such as multiple payments for an individual invoice to an individual recipient on the same date, or to the same address. For example, in the Medicare and Medicaid program, data on claims are stored in geographically disbursed systems and databases that are not readily available to CMS’s program integrity analysts. Over the past decade, CMS has been working to consolidate program integrity data and analytical tools for detecting fraud, waste, and abuse. The agency’s efforts led to the initiation of the Integrated Data Repository (IDR) program, which is intended to provide CMS and its program integrity contractors with a centralized source that contains Medicaid and Medicare data from the many disparate and dispersed legacy systems and databases. CMS subsequently developed the One Program Integrity (One PI) program,analytical tools by which these data can be accessed and analyzed to a web-based portal and set of help identify any cases of fraudulent, wasteful, and abusive payments based on patterns of paid claims. Recovery auditing. While internal control should be maintained to help prevent improper payments, recovery auditing could be included as a part of agencies’ strategy for identifying and recovering contractor overpayments. The Tax Relief and Health Care Act of 2006 required CMS to implement a national Medicare recovery audit contractor (RAC) program by January 1, 2010. HHS reported that the Medicare Fee-for-Service recovery audit program identified $961 million in overpayments and recovered $797 million nationwide. Further, the Medicaid RAC program was established by the Patient Protection and Affordable Care Act. Under this program, each state is to contract with a RAC to identify and recover Medicaid overpayments and identify any underpayments. The final regulations provided that state Medicaid RACs were to be implemented by January 1, 2012. Similar to the Medicare RACs, Medicaid RACs will be paid on a contingency fee basis—a percentage of any recovered overpayments plus incentive payments for the detection of underpayments. Pub. L. No. 109-432, div. B., title III, § 302, 120 Stat. 2922, 2991-92 (Dec. 20, 2006), codified at 42 U.S.C. § 1395ddd(h). drafted language to address the issue and is working to publish a notice of proposed rule making to amend its regulation. In another instance, USDA reported that Section 281 of the Department of Agriculture Reorganization Act of 1994 precluded the use of recovery auditing techniques because Section 281 provides that 90 days after the decision of a state, county, or an area committee is final, no action may be taken to recover the amounts found to have been erroneously disbursed as a result of the decision unless the participant had reason to believe that the decision was erroneous. This statute is commonly referred to as the Finality Rule. As part of its annual improper payments reporting, USDA did not cite an alternative approach for implementing a recovery auditing strategy. Federal-state incentives. Another area for further exploration for agencies’ improper payment reduction strategies is the broader use of incentives for states to implement effective detective controls. Agencies have applied limited incentives and penalties for encouraging improved state administration to reduce improper payments. Incentives and penalties can be helpful to create management reform and to ensure adherence to performance standards. Chairman Carper, Ranking Member Brown, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you 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 testimony. Individuals making key contributions to this testimony included Carla Lewis, Assistant Director; Sophie Brown; Francine DelVecchio; Gabrielle Fagan; and Kerry Porter. Foster Care Program: Improved Processes Needed to Estimate Improper Payments and Evaluate Related Corrective Actions. GAO-12-312. Washington, D.C.: March 7, 2012. Improper Payments: Moving Forward with Governmentwide Reduction Strategies. GAO-12-405T. Washington, D.C.: February 7, 2012. For our report on the U.S. government’s consolidated financial statements for fiscal year 2011, see Department of the Treasury. 2011 Financial Report of the United States Government. Washington, D.C.: December 23, 2011, pp. 211-231. Medicaid Program Integrity: Expanded Federal Role Presents Challenges to and Opportunities for Assisting States. GAO-12-288T. Washington, D.C.: December 7, 2011. DOD Financial Management: Weaknesses in Controls over the Use of Public Funds and Related Improper Payments. GAO-11-950T. Washington, D.C.: September 22, 2011. Improper Payments: Reported Medicare Estimates and Key Remediation Strategies. GAO-11-842T. Washington, D.C.: July 28, 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. 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. Improper Payments: Significant Improvements Needed in DOD’s Efforts to Address Improper Payment and Recovery Auditing Requirements. GAO-09-442. Washington, D.C.: July 29, 2009. Improper Payments: Progress Made but Challenges Remain in Estimating and Reducing Improper Payments. GAO-09-628T. Washington, D.C.: April 22, 2009. Improper Payments: Status of Agencies’ Efforts to Address Improper Payment and Recovery Auditing Requirements. GAO-08-438T. Washington, D.C.: January 31, 2008. Improper Payments: Federal Executive Branch Agencies’ Fiscal Year 2007 Improper Payment Estimate Reporting. GAO-08-377R. Washington, D.C.: January 23, 2008. Improper Payments: Weaknesses in USAID’s and NASA’s Implementation of the Improper Payments Information Act and Recovery Auditing. GAO-08-77. Washington, D.C.: November 9, 2007. Improper Payments: Agencies’ Efforts to Address Improper Payment and Recovery Auditing Requirements Continue. GAO-07-635T. Washington, D.C.: March 29, 2007. Improper Payments: Incomplete Reporting under the Improper Payments Information Act Masks the Extent of the Problem. GAO-07-254T. Washington, D.C.: December 5, 2006. Improper Payments: Agencies’ Fiscal Year 2005 Reporting under the Improper Payments Information Act Remains Incomplete. GAO-07-92. Washington, D.C.: November 14, 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. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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Over the past decade, GAO has issued numerous reports and testimonies highlighting improper payment issues across the federal government as well as at specific agencies. Fiscal year 2011 marked the eighth year of implementation of the Improper Payments Information Act of 2002 (IPIA), as well as the first year of implementation for the Improper Payments Elimination and Recovery Act of 2010 (IPERA). IPIA requires executive branch agencies to annually identify programs and activities susceptible to significant improper payments, estimate the amount of improper payments for such programs and activities, and report these estimates along with actions taken to reduce them. IPERA amended IPIA and expanded requirements for recovering overpayments across a broad range of federal programs. This testimony addresses (1) federal agencies’ reported progress in estimating and reducing improper payments; (2) challenges in meeting current requirements to estimate and evaluate improper payments, including the results of GAO’s case study of the estimation methodology and corrective actions for the Foster Care program; and (3) possible strategies that can be taken to move forward in reducing improper payments. This testimony is primarily based on prior GAO reports, including the report released today on improper payment estimates in the Foster Care program. It also includes unaudited improper payment information recently presented in federal entities’ fiscal year 2011 performance and accountability reports and agency financial reports. Federal agencies reported an estimated $115.3 billion in improper payments in fiscal year 2011, a decrease of $5.3 billion from the prior year reported estimate of $120.6 billion. According to the Office of Management and Budget (OMB), the $115.3 billion estimate was attributable to 79 programs spread among 17 agencies. Ten programs accounted for about $107 billion or 93 percent of the total estimated improper payments agencies reported. The reported decrease in fiscal year 2011 was primarily related to 3 programs—decreases in program outlays for the Unemployment Insurance program, and decreases in reported error rates for the Earned Income Tax Credit program and the Medicare Advantage program. Further, OMB reported that agencies recaptured $1.25 billion in improper payments to contractors and vendors. The federal government continues to face challenges in determining the full extent of improper payments. Some agencies have not reported estimates for all risk-susceptible programs, while other agencies’ estimation methodologies were found to be not statistically valid. For example, GAO’s recently completed study of Foster Care improper payments found that the Administration for Children and Families (ACF) had established a process to calculate a national improper payment estimate for the Foster Care program, which totaled about $73 million for fiscal year 2010, the year covered by GAO’s review. However, the estimate was not based on a statistically valid methodology and consequently did not provide a reasonably accurate estimate of the extent of Foster Care improper payments. Further, GAO found that ACF could not reliably assess the extent to which corrective actions reduced Foster Care improper payments. A number of strategies are under way across government to help advance improper payment reduction goals. For example, Additional information and analysis on the root causes of improper payment estimates will assist agencies in targeting effective corrective actions and implementing preventive measures. Although agencies were required to report the root causes of improper payments in three categories beginning in fiscal year 2011, of the 79 programs with improper payment estimates that year, 42 programs reported the root cause information using the required categories. Implementing strong preventive controls can help defend against improper payments, increasing public confidence and avoiding the difficult “pay and chase” aspects of recovering improper payments. Preventive controls involve activities such as up-front validation of eligibility using data sharing, predictive analytic technologies, and training programs. Further, addressing program design issues, such as complex eligibility requirements, may also warrant further consideration. Effective detection techniques to quickly identify and recover improper payments are also important to a successful reduction strategy. Detection activities include data mining and recovery auditing. Another area for further exploration is the broader use of incentives to encourage states in efforts to implement effective detective controls. Continuing work to implement and enhance these strategies will be needed to effectively reduce federal government improper payments.

You are an expert at summarizing long articles. Proceed to summarize the following text: Appendix I describes, in chronological order, selected federal interagency policy and planning documents related to combating terrorism that form the foundation for the federal government’s efforts to combat terrorism and protect the nation’s critical infrastructure against attack. These documents delineate federal agencies’ roles and responsibilities for responding to potential or actual terrorist threats or incidents as well as the processes and mechanisms by which the federal government mobilizes and deploys resources and coordinates assistance to state and local authorities. This August 1973 plan provides the organizational structure and procedures for preparing for and responding to discharges of oil and releases of hazardous substances, pollutants, and contaminants. The plan lists the general responsibilities of federal agencies regarding such incidents, identifies the fundamental kinds of activities that are performed pursuant to the plan, and describes the specific responsibilities of the National Response Team, the Regional Response Teams, the National Response Center, and the U.S. Coast Guard’s National Strike Force Teams for planning and responding to such incidents. Federal agencies may conduct consequence management activities in a terrorist incident under the National Oil and Hazardous Substances Pollution Contingency Plan because it provides authority and funding sources to respond to hazardous materials incidents regardless of the suspected cause. For example, a terrorist act may at first appear to be a routine hazardous materials incident, leading to the activation of a federal response under this plan. If the Federal Response Plan is activated, the response actions of the National Contingency Plan are conducted as one of the Federal Response Plan’s emergency support functions. The National Contingency Plan is authorized under section 105 of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. 9605, and 40 Code of Federal Regulations Part 300. This November 1988 Executive Order assigns specific responsibilities during national security emergencies to federal departments and agencies based on extensions of their regular missions. The order also designates the National Security Council (NSC) as the principal forum for consideration of national security emergency preparedness policy, and instructs the Director of the Federal Emergency Management Agency (FEMA) to advise the NSC on issues of national security emergency preparedness, including mobilizing preparedness, civil defense, continuity of government, technological disasters, and other issues. It also directs the FEMA Director to assist in the implementation of national security emergency preparedness policy by coordinating with other federal departments and agencies and with state and local governments. The April 1992 Federal Response Plan, as amended, lays out the manner in which the federal government, with FEMA coordinating the support/assistance efforts of other agencies, responds to domestic incidents or situations in which the President has declared an emergency requiring federal emergency disaster assistance. More specifically, the plan outlines the planning assumptions, policies, concept of operation, organizational structures, and specific assignment of responsibilities to lead departments and agencies in providing federal assistance. The plan also categorizes the types of federal assistance into specific emergency support functions, such as transportation, communications, fire fighting, and health and medical services. The Terrorism Incident Annex establishes a general concept of operations for the federal response to a terrorist incident, including the concurrent operation under other plans such as the National Oil and Hazardous Substances Pollution Contingency Plan and the Federal Radiological Emergency Response Plan. The Federal Response Plan is authorized under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121 et seq., and 44 Code of Federal Regulations Subchapters D (Disaster Assistance) and F (Preparedness). This June 1995 directive sets forth U.S. general policy to use all appropriate means to deter, defeat, and respond to all terrorist attacks against U.S. interests. More specifically, Presidential Decision Directive (PDD) 39 directs federal departments and agencies to take various measures to (1) reduce vulnerabilities to terrorism (e.g., to assess the vulnerabilities of government facilities and critical national infrastructure); (2) deter and respond to terrorism (e.g., to pursue, arrest, and prosecute terrorists and to minimize damage and loss of life and provide emergency assistance); and (3) develop effective capabilities to prevent and manage the consequences of terrorist use of weapons of mass destruction. This May 1996 plan establishes an organizational and operational structure for coordinated responses by federal agencies to peacetime radiological emergencies, taking into consideration the specific statutory authorities and responsibilities of each agency. The plan provides guidance as to which agency will lead and coordinate the federal response to a radiological emergency (i.e., the lead federal agency). According to the guidance, the specific agency depends on the type of emergency involved. For example, the Nuclear Regulatory Commission is the lead agency for an emergency that occurs at a nuclear facility or any activity licensed by the Commission. The plan also identifies the specific roles and responsibilities of each federal lead agency, such as responding to requests from state and local governments for technical information and assistance. This plan may be used whenever any of the signatory agencies respond to a radiological emergency, which would include terrorist acts to spread radioactivity in the environment. The Federal Response Plan may be implemented concurrently with the Federal Radiological Emergency Response Plan. The functions and responsibilities of the Federal Radiological Emergency Response Plan do not change, except for the coordination that occurs between the lead federal agency and the Federal Coordinating Officer (usually a FEMA official). This May 1998 directive attempts to increase the federal government’s effectiveness in countering terrorism threats against U.S. targets. PDD 62 organizes and clarifies the roles and activities of many agencies responsible for combating a wide range of terrorism, including preventing terrorist acts, apprehending and prosecuting terrorists, increasing transportation security and protecting critical computer-based systems. This directive also provides for consequence management of terrorist incidents. To carry out the integrated program, PDD 62 establishes the Office of the National Coordinator for Security, Infrastructure Protection and Counterterrorism. Working with the NSC, the National Coordinator is responsible for overseeing the wide range of policies and programs covered by PDD 62 and is to take the lead in developing guidelines that might be needed for crisis management. This May 1998 directive acknowledges computer security as a national security risk and established several entities within the NSC, the Department of Commerce, and the Federal Bureau of Investigation (FBI) to address critical infrastructure protection, including federal agencies’ information infrastructures. PDD 63 tasks federal agencies with developing critical infrastructure protection (CIP) plans and establishing related links with private industry sectors. It called for the development of a national plan for critical infrastructure protection. The December 1998 classified Attorney General’s Five-Year Plan and its annual updates are intended to provide a baseline strategy for coordination of national policy and operational capabilities to combat terrorism in the United States and against American interests overseas. The plan identifies several high-level goals aimed at preventing and deterring terrorism, facilitating international cooperation to combat terrorism, improving domestic crisis and consequence planning and management, improving state and local capabilities, safeguarding information infrastructure, and leading research and development efforts to enhance counterterrorism capabilities. It also identifies the specific tasks federal agencies perform when responding to terrorist incidents and sets forth current and projected efforts by the Attorney General in partnership with other federal agencies; the National Coordinator for Security, Infrastructure Protection and Counterterrorism; and state and local entities to improve readiness to address the threat of terrorism. The January 2000 National Plan for Information Systems Protection provides a vision and framework for the federal government to prevent, detect, respond to, and protect the nation’s critical cyber-based infrastructure from attack and reduce existing vulnerabilities by complementing and focusing existing Federal Computer Security and Information Technology requirements. Subsequent versions of the plan will (1) define the roles of industry and state and local governments working in partnership with the federal government to protect privately owned physical and cyber-based infrastructures from deliberate attack and (2) examine the international aspects of critical infrastructure protection. The National Plan for Information Systems Protection is authorized by PDD 63, which calls for the development of a national plan for information system protection to prioritize CIP goals, principles, and long-term planning efforts. The November 2000 Domestic Guidelines (Guidelines for the Mobilization, Deployment, and Employment of U.S. Government Agencies in Response to Domestic Terrorist Threat or Incidence in Accordance With Presidential Decision Directive 39) provide a road map for government agencies’ mobilization, deployment, and use under PDD 39 in response to a terrorist threat or incident. The Domestic Guidelines describe specific procedures and responsibilities for deploying the Domestic Emergency Support Team, particularly in weapons of mass destruction (WMD) incidents, and facilitate interagency coordination in support of the lead federal agency’s mission to combat terrorism in the United States. The January 2001 CONPLAN (U.S. Government Interagency Domestic Terrorism Concept of Operations Plan) provides overall guidance to federal, state, and local agencies concerning how the federal government would respond to a potential or actual terrorist threat or incident that occurs in the United States, particularly one involving weapons of mass destruction. The CONPLAN outlines an organized and unified capability for a timely, coordinated response by federal agencies—specifically, the Department of Justice, the FBI, Department of Defense, Department of Energy, FEMA, Environmental Protection Agency (EPA), and Department of Health and Human Services—to a terrorist threat or act. It establishes conceptual guidelines for assessing and monitoring a developing threat, notifying appropriate agencies concerning the nature of the threat, and deploying necessary advisory and technical resources to assist the lead federal agency in facilitating interdepartmental coordination of crisis and consequence management activities. The January 2001 International Guidelines (Coordinating Subgroup Guidelines for the Mobilization, Deployment, and Employment of U.S. Government Elements in Response to an Overseas Terrorist Incident) outline procedures for deploying the Foreign Emergency Support Team and otherwise coordinating federal operations overseas. This February 2001 directive communicates presidential decisions concerning the national security policies of the United States. It also reiterates the role of the NSC system as the process to coordinate executive departments and agencies in the effective development and implementation of those national security policies. The directive designates the NSC Principals Committee as the senior interagency forum for consideration of policy issues affecting national security and tasks the NSC Policy Coordination Committees with the management of the development and implementation of national security policies by multiple U.S. agencies. It also establishes the Policy Coordination Committees and defines their roles and responsibilities. Appendix II describes, in chronological order, selected individual agency plans and guidance for combating terrorism that either have been completed recently or are being drafted. These documents clarify agencies’ roles and procedures for responding to terrorist attacks; provide guidance for the allocation of resources for planning, exercising, and implementing agency plans and programs; and delineate agency strategies for addressing terrorism. This unclassified directive issued on February 18, 1997, establishes DOD policy and assigns responsibility for providing military assistance to civil authorities. The employment of U.S. military forces in response to acts or threats of domestic terrorism is contingent upon authorization by the President as well as approval by the Secretary of Defense. The directive does not address non-federalized National Guard assets in support of local and/or state civil agencies approved by the governor. The guide includes a Biological Warfare Response Template that addresses both crisis and consequence management within five scenarios. States may use the template to formulate an integrated approach to biological weapons emergency responses. The Biological Weapons Improved Program was initiated in 1998 and the final draft of the planning guide was issued on August 1, 2000. The guide was developed as the result of the Defense Against Weapons of Mass Destruction Act of 1996 (P.L. 104- 201, Sept. 23, 1996), which required the Secretary of Defense to develop and implement a program to improve the responses of federal, state, and local agencies to emergencies involving biological and chemical weapons. DOD developed the Biological Warfare Improved Response Program and coordinated the associated planning guide with the Department of Health and Human Services (HHS), Federal Emergency Management Agency (FEMA), the Federal Bureau of Investigation (FBI), Environmental Protection Agency (EPA), the Department of Energy (DOE), and the Department of Agriculture. The August 10, 2000, memorandum states that some chemical, biological, radiological, nuclear, and high-yield explosive incidents may have qualitative and quantitative differences from routine incidents. Thus, all official requests for DOD support for chemical, biological, radiological, nuclear, and high-yield explosive incidents are routed through the Executive Secretary of the Department of Defense, who determines if the incident warrants special operational management. For incidents not requiring special operations, the Secretary of the Army will serve as the Executive Agent through the Director of Military Support channels. DOD has several contingency plans to address its potential crisis and consequence management support roles in both domestic and international situations. Some of these are classified. The April 1999 document, Design Basis Threat for the Department of Energy Programs and Facilities, identifies and characterizes potential adversary threats to DOE’s programs and facilities that could adversely affect national security, the health and safety of employees, the public, or the environment. The document specifically addresses the protection of DOE facilities in the United States against terrorist attacks and is coordinated with DOD and the Nuclear Regulatory Commission as well as with the intelligence community and the FBI. It serves as the foundation for DOE’s defensive policies and requirements, including facility protection strategies and countermeasures. The June 1996 plan provides a coordinated federal response for urgent public health and medical care needs resulting from chemical and/or biological terrorist threats or acts within the United States. The plan supports the FBI and FEMA by leading the Emergency Support Function No. 8 response to the health and medical aspects of a chemical or biological terrorist incident. It also supplements and assists affected state and local governments by providing resources from (1) HHS and its supporting federal agencies and departments and (2) non-federal sources, such as major pharmaceutical suppliers and international disaster response organizations like the Canadian Ministry of Health. The plan is an appendix to Emergency Support Function No. 8 of the Federal Response Plan. Portions of the plan may be implemented under HHS authorities prior to formal implementation of the Federal Response Plan. The April 1999 plan serves as a tool for infection control professionals and healthcare epidemiologists to guide the development of response plans for their institutions in preparation for a real or suspected bioterrorism attack and encourages institution-specific response plans to be prepared in partnership with local and state health departments. The plan is updated as needed to reflect public health guidelines and new information. The unpublished April 2000 report outlines steps for strengthening public health and health care capacity to protect the United States against chemical and biological terrorism in cooperation with law enforcement, intelligence, and defense agencies in addition to the Centers for Disease Control and Prevention (CDC). The June 2000 draft manual outlines criteria for implementation of the smallpox response plan and CDC vaccine and personnel mobilization activities. The draft manual assists state and local health officials with specific activities essential for the management of a smallpox emergency. The January 2001 departmental 5-year plan builds on HHS’ strategic plan to include budget projections for the agencies and offices involved in achieving the department’s goals for (1) prevention of bioterrorism; (2) infectious disease surveillance; (3) medical and public health readiness for mass casualty events; (4) the national pharmaceutical stockpile; (5) research and development; and (6) secure and continuously operating information technology infrastructure. This February 2001 draft-planning guidance is designed to help state public health officials determine their role in terrorism response and understand the emergency response roles of local health departments and emergency management communities. It also may be used to help coordinate efforts among state health departments and agencies and organizations at all levels of government that would respond to a WMD terrorist event. The draft plan describes how HHS will provide coordinated federal assistance for public health and medical care needs resulting from terrorist threats or acts using weapons of mass destruction within the United States or its territories and possessions. The plan encompasses both crisis and consequence management responsibilities; describes the essential features for a systematic, coordinated and effective national health and medical response; and defines procedures for the use of Department resources to augment and support state and local governments. The December 1999 manual serves as a planning resource for special events held within the United States. It provides an overview of the issues FBI personnel consider when planning and coordinating support for special events and identifies the roles and functions of other federal agencies that often support special events. The December 1999 blueprint discusses the role of the National Domestic Preparedness Office as a single coordinating office and information clearinghouse for federal assistance programs to prepare state and local officials to respond to WMD acts of terrorism within the United States. The plan provides guidance to the FBI On-Scene Commander to effectively respond to a WMD threat or incident. The plan highlights the FBI’s policy for crisis management of WMD terrorist events and delineates specific responsibilities of FBI components during a WMD incident. The plan sets out procedures and resources available to support the FBI’s investigative and crisis management responsibilities. This June 2000 interim document provides guidance to the U.S. Coast Guard concerning participation in WMD incidents and planning while recognizing resource and training shortfalls. It also provides guidance concerning command and control and operating procedures. The August 2000 plan provides a national framework for current and future U.S. Coast Guard program operations and strategies for attaining the Marine Safety and Environmental Protection Program’s mission to protect the public, the environment, and U.S. economic interests through the prevention and mitigation of maritime accidents. The plan aims to reduce the vulnerability of the marine transportation system to intentional harm from terrorist acts. It also directs the U.S. Coast Guard to achieve a specific readiness level in interdiction and consequence management responsibilities concerning the use or threat of use of weapons of mass destruction. The Marine Transportation System Report submitted to the Congress in September 1999 and the President’s Commission on Seaport Crime and Security, along with the Oceans Report to the President, “Turning to the Sea: America’s Ocean Future,” provide the blueprint for the U.S. Coast Guard to obtain these objectives as part of their responsibility for port security. The December 2000 document provides guidance for the allocation of resources for planning, exercising, and executing the U.S. Coast Guard’s contingency preparedness program that includes, but is not limited to, terrorist incidents. The guidance seeks to encourage standardization and consistency in the U.S. Coast Guard’s contingency preparedness efforts and to help focus limited resources toward high-risk contingencies. It directs the U.S. Coast Guard to update outdated plans; strengthen ties with federal, state, and local governments, and industry to improve coordination during responses; develop a 5-year national exercise schedule to anticipate planning and resource requirements; and record all exercise after-action reports and lessons learned in a centralized U.S. Coast Guard database. The January 2000 plan supercedes the 1986 version and represents EPA’s current programmatic and operational concepts for responding to radiological incidents and emergencies. It is used as a guide for planning and maintaining readiness to respond to those releases in accordance with EPA’s mission to protect the environment and support the Federal Radiological Emergency Response Plan and National Oil and Hazardous Substances Pollution Contingency Plan. The plan covers both EPA’s role as a lead federal agency for response coordination under the Federal Radiological Emergency Response Plan and its role as a lead agency for directing and managing an emergency response pursuant to the National Oil and Hazardous Substances Pollution Contingency Plan. The March 2000 manual serves as a resource for EPA regional and headquarters personnel to use during domestic terrorism-related planning or response activities. Although the manual is not agency policy, EPA updates it periodically. It provides background information on the response framework and other agencies’ responsibilities and presents details pertaining to the specific roles and responsibilities of EPA response personnel during a terrorist threat or incident. Several annexes provide an overview of EPA’s strategy for addressing counterterrorism, including the EPA organizations involved in developing and implementing its counterterrorism strategy to protect public health and the environment from the threat or adverse effects of nuclear, biological, and/or chemical substances released during terrorist incidents. The annexes also discuss funding for regional counterterrorism activities, supporting legal authorities, and interagency counterterrorism workgroups. FEMA’s September 1997 Strategic Plan presents three strategic goals that support the agency’s mission to reduce the loss of life and property and protect U.S. institutions from all hazards by leading and supporting the nation in a comprehensive, risk-based emergency management program of mitigation, preparedness, response, and recovery. Several of the goals address FEMA’s role as the lead agency for consequence management in a terrorist incident and describe related activities. The June 2000 Terrorism Preparedness Strategic Plan outlines the mission, vision, and goals of FEMA’s Terrorism Preparedness Program and supports FEMA’s Strategic Plan by clarifying agency goals and objectives related to terrorism. The Terrorism Preparedness Strategic Plan presents several goals related to mitigation and preparedness. It emphasizes providing guidance on FEMA’s roles and responsibilities in terrorism related activities; supporting federal, state, and local consequence management planning, training, and exercise programs; improving coordination and sharing of information at all levels of government; establishing an organizational structure for coordinating terrorism preparedness within FEMA; and developing systems to monitor and track resources needed to support FEMA’s terrorism consequence management programs and activities. The August 2000 plan clarifies roles and responsibilities in the implementation of FEMA-wide programs and activities in terrorism preparedness and supports FEMA’s June 2000 Terrorism Preparedness Strategic Plan and overall FEMA Strategic Plan. Under this plan, the Senior Advisor for Terrorism Preparedness provides overall direction, coordination, and oversight for the implementation of FEMA’s terrorism- related programs and activities. It also sets forth the roles and responsibilities of each of FEMA’s directorates that support terrorism- related consequence management activities. In April 2001, FEMA issued Attachment G to the State and Local Guide 101 for All-Hazard Emergency Operations Planning under the authority of the Robert T. Stafford Disaster Relief Act and the Emergency Assistance Act, as amended. Issued in September 1996, the State and Local Guide 101 provides emergency managers with information on FEMA’s concept for developing risk-based, all-hazard emergency operations plans. The voluntary guide provides a “toolbox” of ideas and advice for state and local authorities and clarifies the preparedness, response, and short-term recovery planning elements that warrant inclusion in state and local emergency operations plans. Attachment G to the State and Local Guide 101 aids state and local emergency planners in developing and maintaining a Terrorist Incident Appendix to their Emergency Operations Plan for incidents involving terrorist-initiated weapons of mass destruction. Appendix III lists selected federal crisis management response teams by agency. It describes their mission and number of personnel that could be deployed. If state and local first responders are unable to manage a weapons of mass destruction terrorist incident or become overwhelmed, the incident commander can request these and other federal assets. Agency/Team Department of Defense U.S. Army 52nd Ordnance Group (Explosive Ordnance Disposal) Trained on chemical and nuclear weapons of mass destruction and on specialized equipment for diagnostics and render-safe/mitigation of a nuclear device. Provides field sampling, monitoring, recovery, decontamination, transportation, and verification of weaponized and non-weaponized chemical and biological materials. Determined based upon circumstances. Three Explosive Ordnance Disposal companies located in San Diego, CA; San Antonio, TX; and Andrews AFB, Washington, D.C. Approximately 150 military and civilian personnel at Aberdeen Proving Grounds, MD; Pine Bluff Arsenal, AR; and Dugway Proving Grounds, UT. Determined based upon circumstances. Federal Bureau of Investigation Critical Incident Response Group (includes Hostage Rescue Team, Crisis Negotiation, Crisis Management, and Behavioral Assessment) Approximately 230, including the Hostage Rescue Team. Facilitates rapid response to and management of crisis incidents. Provides on-scene commander with rapid response/support in crisis incidents, including crisis negotiations, command post, behavioral assessment, and crisis information management. Deploys to any location within 4 hours and conducts a successful rescue operation of persons held by a criminal or terrorist force. Plan and execute high-risk tactical operations that exceed the capabilities of field office investigative resources. Provide management support of SWAT operations. Responds safely and effectively to incidents involving hazardous materials and develops the FBI’s technical proficiency and readiness for crime scene and evidence-related operations in cases involving chemical, biological, and radiological materials. Authorized about 90 personnel at the FBI Academy at Quantico, VA. Over 1,000 trained personnel in 56 field offices, with nine enhanced SWAT teams. Headquarters unit plus 17 smaller and less capable units through the United States. Provides specialized technical expertise in resolving nuclear or radiological terrorist incidents. Searches for lost or stolen nuclear material, weapons, or devices. Varies in size from a five- person technical advisory team to a tailored deployment of dozens. Basic team consists of seven persons. Mission Provides technical advice, emergency response, and follow-on expertise to the On-Scene Commander. Number of personnel Eight-person team. Provides expert technical advice to deployable U.S. military Explosive Ordnance Disposal operators concerning diagnostics, render-safe procedures, weapons analysis, and device modeling and effects prediction. Provides advanced technical capabilities to move or neutralize nuclear weapons. Five-person team. Thirty one-person team composed of 21 DOE and 10 DOD personnel, all of whom have other primary duties. Provides technical assistance as needed. Each team provides an operational response capability, including a pharmaceutical cache for treating up to 5,000 people for chemical weapons exposure. The size and composition of each team is determined by the type and location of the event or threat. The size and composition of each team is determined by the type and location of the event or threat. Assists federal, state, and local investigators in meeting the challenges faced at the scenes of significant arson and explosives incidents. Four teams organized geographically to cover the United States. Conducts environmental monitoring, performs laboratory analyses, and provides advice and guidance on measures to protect the public. As many as 60 personnel with these collateral duties are located in Las Vegas, NV, and Montgomery, AL. Appendix IV lists selected federal consequence management response teams by agency. It describes their mission and number of personnel that could be deployed. If state and local first responders are unable to manage a weapons of mass destruction terrorist incident or become overwhelmed, the incident commander can request these and other federal assets. Number of team (dedicated/collateral) members and team’s primary location Sixty dedicated personnel located at Fort Monroe, VA. Fourteen dedicated personnel located at Aberdeen Proving Grounds, MD. Approximately 190 personnel located at Aberdeen Proving Grounds, MD; Fort Belvoir, VA; Pine Bluff, AR; and Dugway, UT. Six teams located at various sites with six members per team who have these collateral duties. Supports lead federal agency, establishes command and control of designated Department of Defense (DOD) forces, and provides military assistance to civil authorities to save lives, prevent human suffering, and provide temporary critical life support. Coordinates and integrates DOD’s technical assistance for the neutralization, containment, dismantlement, and disposal of chemical or biological materials. Assists first responders in dealing with consequence management. Provides chemical/biological advice, assessment, sampling, detection, field verification, packaging, escort, and render-safe for chemical/biological devices or hazards. Provides technical advice in the detection, neutralization, and containment of chemical, biological, or radiological hazardous materials in a terrorist event. Provides a rapid response evacuation unit to any area of the world to transport and provide patient care under conditions of biological containment to service members or U. S. civilians exposed to certain contagious and highly dangerous diseases. Provides force protection or mitigation in the event of a terrorist incident, domestically or overseas. Approximately 20 personnel who have this collateral duty are stationed at Fort Detrick, MD. Assists and furnishes radiological health hazard guidance to the on-scene commander or other responsible officials at an incident site and the installation medical authority. Three hundred seventy-three dedicated personnel at Indian Head, MD. Eight to 10 personnel who have these collateral duties are located at Walter Reed Army Hospital, Washington, D.C. Manage federal medical teams and assets that are deployed in response to an incident. Six to eight dedicated personnel located at Rockville, MD, supplemented by 18 to 20 Department of Veterans Affairs personnel who have these collateral duties. Mission Decontaminate casualties resulting from a hazardous materials incident, provide medical care, and deploy with pharmaceutical cache of antidotes and medical equipment. Provide emergency medical care during a disaster or other event. Provide identification and mortuary services to state and local health officials upon request in the event of major disasters and emergencies. Resupplies state and local public health agencies with pharmaceuticals and other medical supplies in the event of a terrorist incident. Number of team (dedicated/collateral) members and team’s primary location Four teams located at Washington, D.C. (non-deployable); Winston- Salem, NC; Denver, CO; and Los Angeles, CA, with 36 members per team who have these collateral duties. Forty-four teams at various locations nationwide with 34 members per team who have these collateral duties. Ten teams at various locations nationwide with 25 to 31 members per team who have these collateral duties. Six rapid response inventories are located at five of six permanent sites. Assist federal agencies, state and local governments, private business, or individuals in incidents involving radiological materials. Collects, evaluates, interprets, and distributes off- site radiological data in support of the lead federal agency, state, and local governments. Coordinates federal resources in responding to the off-site monitoring and assessment needs at the scene of a radiological emergency. Detects, measures, and tracks ground and airborne radioactivity over large areas using fixed-wing and rotary-wing aircraft. Provides medical advice and on-site assistance in triage, diagnosis, and treatment of all types of radiation exposure events. Twenty-six teams at various locations nationwide with seven members per team who have these collateral duties. Team members deploy in phases. Phases I (15 members) and II (45 members) consist of Department of Energy personnel with these collateral duties from Nellis Air Force Base, NV, and other locations. Phase III (known as Full Federal Radiological Monitoring and Assessment Center) involves multiple federal agencies and may have 150 or more personnel from various federal agencies. Five to 10 dedicated and collateral duty personnel located at Nellis Air Force Base, NV, and Andrews Air Force Base, MD. Four to eight dedicated personnel located in Oak Ridge, TN. Respond to oil and hazardous substance pollution incidents in and around waterways to protect public health and the environment. Area of responsibility includes all Coast Guard Districts and Federal Response Regions. Support Environmental Protection Agency’s On-Scene Coordinators for inland area incidents. Three teams located in Fort Dix, NJ; Mobile, AL; and Novato, CA, with 35 to 39 dedicated members per team. Mission Coordinate all containment, removal and disposal efforts, and resources during a hazardous release incident in coastal or major navigational waterways. Number of team (dedicated/collateral) members and team’s primary location Approximately 50 dedicated personnel in pre-designated Coast Guard regional zones at various locations nationwide. Provides technical advice, radiological monitoring, decontamination expertise, and medical care as a supplement to an institutional health care provider. Twenty-one to 23 personnel with these collateral duties are located at various sites nationwide. Direct response efforts and coordinates all other efforts at the scene of a hazardous materials discharge or release. Provides technical support for assessing, managing, and disposing of hazardous waste. Provides mobile laboratories for field analysis of samples and technical expertise in radiation monitoring, radiation health physics, and risk assessment. Approximately 200 dedicated personnel, plus contractor support, at various locations nationwide. Twenty-two dedicated personnel, plus contractor support, located in Edison, NJ, and Cincinnati, OH. As many as 60 personnel with these collateral duties are located in Las Vegas, NV, and Montgomery, AL. Coordinates federal response and recovery activities within a state. Size is dependent on the severity and magnitude of the incident. Team members with these collateral duties are geographically dispersed at Federal Emergency Management Agency headquarters and 10 regional offices. Carry out the responsibilities and functions of the lead federal agency during incidents at licensed facilities, such as nuclear power plants. Four teams located in Atlanta, GA; Lisle, IL; Arlington, TX; and King of Prussia, PA, with 25-30 members per team who have these collateral duties. The Department of Energy has the lead responsibility for coordinating the Federal Radiological Monitoring Assessment Center during the early phase of an emergency. The Environmental Protection Agency assumes control during later phases. Appendix V provides a compendium of selected GAO recommendations for combating domestic terrorism made over the last 5 years. This appendix also provides the current status of GAO’s prior recommendations. Combating Terrorism: Spending on Governmentwide Programs Requires Better Management and Coordination (GAO/NSIAD-98-39, Dec. 1, 1997). Recommendations, p. 13. GAO recommendations We recommend that consistent with the responsibility for coordinating efforts to combat terrorism, Assistant to the President for National Security Affairs, the National Security Council (NSC), in consultation with the Director, Office of Management and Budget (OMB), and the heads of other executive branch agencies, take steps to ensure that (1) governmentwide priorities to implement the national counterterrorism policy and strategy are established; (2) agencies’ programs, projects, activities, and requirements for combating terrorism are analyzed in relation to established governmentwide priorities; and (3) resources are allocated based on the established priorities and assessments of the threat and risk of terrorist attack. To ensure that federal expenditures for terrorism-related activities are well-coordinated and focused on efficiently meeting the goals of U.S. policy under PDD 39, we recommend that the Director, OMB, use data on funds budgeted and spent by executive departments and agencies to evaluate and coordinate projects and recommend resource allocation annually on a crosscutting basis to ensure that governmentwide priorities for combating terrorism are met and programs are based on analytically sound threat and risk assessments and avoid unnecessary duplication. Status of recommendations Recommendation partially implemented. (1) The Attorney General’s Five-Year Counter-Terrorism and Technology Crime Plan, issued in December 1998, included priority actions for combating terrorism. According to the NSC and OMB, the Five- Year Plan, in combination with Presidential Decision Directives (PDD) 39 and 62, represent governmentwide priorities that they use in developing budgets to combat terrorism. (2) According to the NSC and OMB, they analyze agencies’ programs, projects, activities, and requirements using the Five-Year Plan and related presidential decision directives. (3) According to the NSC and OMB, they allocate agency resources based upon the priorities established above. However, there is no clear link between resources and threats. No national threat and risk assessment has been completed to use for resource decisions. Recommendation partially implemented. OMB now is tracking agency budgets and spending to combat terrorism. According to the NSC and OMB, they have a process in place to analyze these budgets and allocate resources based upon established priorities. However, there is no clear link between resources and threats. No national threat and risk assessment has been completed to use for resource decisions. Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency (GAO/NSIAD-99-3, Nov. 12, 1998). Recommendations, p. 22. GAO recommendations The Secretary of Defense—or the head of any subsequent lead agency—in consultation with the other five cooperating agencies in the Domestic Preparedness Program, refocus the program to more efficiently and economically deliver training to local communities. The Secretary of Defense, or the head of any subsequent lead agency, use existing state and local emergency management response systems or arrangements to select locations and training structures to deliver courses and consider the geographical proximity of program cities. The National Coordinator for Security, Infrastructure Protection and Counterterrorism actively review and guide the growing number of weapons of mass destruction (WMD) consequence management training and equipment programs and response elements to ensure that agencies’ separate efforts leverage existing state and local emergency management systems and are coordinated, unduplicated, and focused toward achieving a clearly defined end state. Status of recommendations Recommendation implemented. The Department of Defense (DOD) transferred the Domestic Preparedness Program to the Department of Justice on October 1, 2000. The Department of Justice has implemented this recommendation by emphasizing the program’s train-the-trainer approach and concentrating resources on training metropolitan trainers in recipient jurisdictions. Recommendation implemented. DOD transferred the Domestic Preparedness Program to the Department of Justice on October 1, 2000. The Department of Justice has implemented this recommendation by modifying the programs in metropolitan areas and requiring cities to include their mutual aid partners in all training and exercise activities. Recommendation partially implemented. The NSC established an interagency working group called the Interagency Working Group on Assistance to State and Local Authorities. One function of this working group is to review and guide the growing number of WMD consequence management training and equipment programs. However, as described in our current report, we believe that more needs to be done to ensure that federal efforts are coordinated, unduplicated, and focused toward achieving a clearly defined end state—a results-oriented outcome as intended for government programs by the Results Act. We make a related recommendation in this current report to consolidate assistance programs. Combating Terrorism: Issues to Be Resolved to Improve Counterterrorist Operations (GAO/C-NSIAD-99-3, February 26, 1999). Recommendations, pp. 38, 39, and 65. GAO recommendations The Attorney General direct the Director, FBI, to coordinate the Domestic Guidelines and CONPLAN with all federal agencies with counterterrorism roles and finalize them. Further, the Domestic Guidelines and/or CONPLAN should seek to clarify federal, state, and local roles, missions, and responsibilities at the incident site. The Secretary of Defense review command and control structures and make changes, as appropriate, to ensure there is unity of command to DOD units participating in domestic counterterrorist operations to include both crisis response and consequence response management and cases in which they might be concurrent. The Secretary of Defense require the services produce after-action reports (AAR) or similar evaluations for all counterterrorism field exercises that they participate in. When appropriate, these AARs or evaluations should include a discussion of interagency issues and be disseminated to relevant internal and external organizations. Status of recommendations Recommendation implemented. The Domestic Guidelines were issued in November 2000. The CONPLAN was coordinated with key federal agencies and was issued in January 2001. Recommendation implemented. In May 2001, the Secretary of Defense assigned responsibility for providing civilian oversight of all DOD activities to combat terrorism and domestic WMD (including both crisis and consequence management) to the Assistant Secretary of Defense for Special Operations and Low Intensity Conflict. Recommendation partially implemented. The Joint After Action Reports database contains lessons learned. These reports address interagency issues, where appropriate. Many DOD units produce AARs and many of them address interagency issues. However, DOD officials acknowledged that service units or commands do not always produce AARs and/or disseminate them internally and externally as appropriate. We make a similar recommendation to DOD and other agencies in this current report. Combating Terrorism: Use of National Guard Response Teams Is Unclear (GAO/NSIAD-99-110, May 21, 1999). Recommendations, p. 20. GAO recommendations The National Coordinator for Security, Infrastructure Protection and Counterterrorism, in consultation with the Attorney General, the Director, FEMA, and the Secretary of Defense, reassess the need for the Rapid Assessment and Initial Detection teams in light of the numerous local, state, and federal organizations that can provide similar functions and submit the results of the reassessment to the Congress. If the teams are needed, we recommend that the National Coordinator direct a test of the Rapid Assessment and Initial Deployment team concept in the initial 10 states to determine how the teams can best fit into coordinated state and federal response plans and whether the teams can effectively perform their functions. If the teams are not needed, we further recommend that they be inactivated. Status of recommendations Recommendation partially implemented. With authorization from the Congress, DOD established additional National Guard teams and changed their names from Rapid Assessment and Initial Detection teams to WMD Civil Support Teams. However, subsequent to our report and a report by the DOD Inspector General, which found some similar problems, DOD has agreed to review the National Guard teams and work with other agencies to clarify their roles in responding to terrorist incidents. We make a similar recommendation in this current report. Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attack (GAO/NSIAD-99-163, Sept. 7, 1999). Recommendations, p. 22. GAO recommendations The Attorney General direct the FBI Director to prepare a formal, authoritative intelligence threat assessment that specifically assesses the chemical and biological agents that would more likely be used by a domestic-origin terrorist—non-state actors working outside a state run laboratory infrastructure. The Attorney General direct the FBI Director to sponsor a national-level risk assessment that uses national intelligence estimates and inputs from the intelligence community and others to help form the basis for, and prioritize, programs developed to combat terrorism. Because threats are dynamic, the Director should determine when the completed national-level risk assessment should be updated. Status of recommendations Recommendation partially implemented. The Federal Bureau of Investigation (FBI) agreed with our recommendation. The FBI, working with the National Institute of Justice and the Technical Support Working Group, has produced a draft threat assessment of the chemical and biological agents that would more likely be used by terrorists. Along these lines, we make a similar recommendation in this current report. The Department of Justice anticipated that a draft of the assessment would be available for interagency review and comment in September 2001 and the final assessment would be published in December 2001. Recommendation partially implemented. According to the Department of Justice, the FBI is in the process of conducting such an assessment. The report will assess the current threat, the projected threat, emerging threats, and related FBI initiatives. Along these lines, we make a similar recommendation in this current report. The Department stated that this assessment is being finalized and anticipated that the classified report would be published in October 2001. Combating Terrorism: Chemical and Biological Medical Supplies are Poorly Managed (GAO/HEHS/AIMD-00-36, Oct. 29, 1999). Recommendations, p. 10. GAO recommendations The Department of Health and Human Services’ (HHS) Office of Emergency Preparedness (OEP) and Centers for Disease Control and Prevention (CDC), the Department of Veterans Affairs (VA), and U.S. Marine Corps Chemical-Biological Incident Response Force (CBIRF) establish sufficient systems of internal control over chemical and biological pharmaceutical and medical supplies by (1) conducting risk assessments, (2) arranging for periodic, independent inventories of stockpiles, (3) implementing a tracking system that retains complete documentation for all supplies ordered, received, and destroyed, and (4) rotating stock properly. Status of recommendations Recommendation partially implemented. All of the agencies have made significant progress toward implementing our recommendations. They have conducted risk assessments, completed periodic physical inventories of the stockpiles, and developed and implemented procedures for stock rotation. Each of the agencies is taking steps to replace their current tracking systems with ones that are capable of tracking pharmaceutical and medical supplies from the time an order is placed until the item is consumed or otherwise disposed of. Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training (GAO/NSIAD-00-64, Mar. 21, 2000). Recommendations, p. 25. GAO recommendations The Secretary of Defense and the Attorney General eliminate duplicative training to the same metropolitan areas. If the Department of Justice extends the Domestic Preparedness Program to more than the currently planned 120 cities, it should integrate the program with the Metropolitan Firefighters Program to capitalize on the strengths of each program and eliminate duplication and overlap. Status of recommendations Recommendation partially implemented. DOD transferred the Domestic Preparedness Program to the Department of Justice on October 1, 2000. The Department of Justice, is attempting to better integrate the assistance programs under its management. We make a similar recommendation in this current report to further consolidate these programs. Combating Terrorism: Federal Response Teams Provide Varied Capabilities; Opportunities Remain to Improve Coordination (GAO-01-14, Nov. 30, 2000). Recommendations, p. 27. GAO recommendations To guide resource investments for combating terrorism, we recommend that the Attorney General modify the Attorney General’s Five-Year Interagency Counterterrorism and Technology Crime Plan to cite desired outcomes that could be used to develop budget requirements for agencies and their respective response teams. This process should be coordinated as an interagency effort. Status of recommendations Recommendation not implemented. The Department of Justice asserts that the current plan includes desired outcomes. As discussed in this report, we disagree with the Department and believe what it cites as outcomes are outputs—agency activities rather than results the federal government is trying to achieve. In this current report, we repeat this recommendation to the Attorney General. We also recommend that the President establish a single focal point for overall leadership and coordination to combat terrorism. If such a focal point is established, then we believe that the focal point, and not the Attorney General, should be responsible for developing a national strategy. FEMA said it will take steps to ensure that the Weapons of Mass Destruction Interagency Steering Group works with relevant scientific and intelligence communities in developing WMD scenarios. The Director, Federal Emergency Management Agency, take steps to require that the Weapons of Mass Destruction Interagency Steering Group develop realistic scenarios involving chemical, biological, radiological, and nuclear agents and weapons with experts in the scientific and intelligence communities. The Director, Federal Emergency Management Agency, sponsor periodic national-level consequence management field exercises involving federal, state, and local governments. Such exercises should be conducted together with national-level crisis management field exercises. FEMA stated it would support and sponsor periodic national consequence management field exercises to ensure better coordination among federal and state and local response teams. Along these lines, we make a similar recommendation in this current report. Combating Terrorism: Accountability Over Medical Supplies Needs Further Improvement (GAO-01-463, Mar. 30, 2001). Recommendations, pp. 25 and 26. Status of recommendations Recommendation partially implemented. CDC’s National Pharmaceutical Stockpile Program has final written agreements in place with most partners and anticipates finalizing those under negotiation within the next few months. CDC also issued written standard operating procedures that address security to its private warehouse partners and installed fencing at all locations where inventories are currently stored. Recommendation partially implemented. OEP finalized its inventory requirements list in February 2001. In June 2001, the supplies stored at the central location were moved to a facility that meets security and controlled temperature requirements. Pharmaceuticals at the central cache are in the process of being potency tested by FDA, and VA has ordered drugs to replace those no longer deemed usable. Further, OEP issued written policies on the frequency of inventory counts and acceptable discrepancy rates. In March 2001, OEP issued national and local operating plans to VA and provided training and conducted periodic quality reviews to ensure that these plans are followed. train VA personnel and conduct periodic quality reviews to ensure that national and local operating plans are followed; and immediately contact FDA or the pharmaceutical and medical supply manufacturers of items stored at its central location to determine the impact of items exposed to extreme temperatures, replace those items deemed no longer usable, and either add environmental controls to the current location or move the supplies as soon as possible to a climate controlled space. The Commandant of the Marine Corps direct the Marine Corps Systems Command to program funding and complete the fielding plan for the CBIRF-specific authorized medical allowance list, require the Commanding Officer of the CBIRF to adjust its stock levels to conform with this list, and remove expired items from stock and replace them with current pharmaceutical and medical supplies. Recommendation partially implemented. The Marine Corps Systems Command programmed funding in June 2001 to cover deficiencies identified in its authorized medical allowance list. CBIRF expects to fill these deficiencies by October 1, 2001. Further, it removed and destroyed expired items from its stock. Critical Infrastructure Protection: Significant Challenges in Developing National Capabilities (GAO-01-323, Apr. 25, 2001). Recommendations, pp. 57, 68, and 85. Status of recommendations Recommendation not implemented. The Administration currently is reviewing the federal critical infrastructure protection (CIP) strategy. As of July 2001, no final documents on this strategy had been issued. develop a comprehensive governmentwide data-collection and analysis framework and ensure that national watch and warning operations for computer-based attacks are supported by sufficient staff and resources; and clearly define the role of the National Infrastructure Protection Center (NIPC) in relation to other government and private- sector entities, including lines of authority among the NIPC and the National Security Council, Justice, the FBI, and other entities; the NIPC’s integration into the national warning system; and protocols that articulate how and under what circumstances the NIPC would be placed in a support function to either the DOD or the intelligence community. Recommendation not implemented. According to the Director of the NIPC, the NIPC has begun developing a plan that incorporates these elements. a description of the relationship between the long-term goals and objectives and the annual performance goals; and a description of how program evaluations could be used to establish or revise strategic goals, along with a schedule for future program evaluations. Recommendation partially implemented. An emergency law enforcement services sector plan has been issued. monitor implementation of new performance measures to ensure that they result in field offices’ fully reporting information on potential computer crimes to the NIPC; and complete development of the emergency law enforcement plan, after comments are received from law enforcement sector members. As the national strategy for critical infrastructure protection is reviewed and possible changes considered, we recommend that the Assistant to the President for National Security Affairs define the NIPC’s responsibilities for monitoring reconstitution. GAO recommendations The Assistant to the President for National Security Affairs (1) direct federal agencies and encourage the private sector to better define the types of information that are necessary and appropriate to exchange in order to combat computer-based attacks and procedures for performing such exchanges; (2) initiate development of a strategy for identifying assets of national significance that includes coordinating efforts already underway, such as those at DOD and Commerce; and (3) resolve discrepancies between PDD 63 requirements and guidance provided by the federal Chief Information Officers Council regarding computer incident reporting by federal agencies. The Attorney General direct the FBI Director to direct the NIPC Director to (1) formalize relationships between the NIPC and other federal entities, including DOD and the Secret Service, and private-sector ISACs so that a clear understanding of what is expected from the respective organizations exists; (2) develop a plan to foster the two-way exchange of information between the NIPC and the ISACs; and (3) ensure that the Key Asset Initiative is integrated with other similar federal activities. Status of recommendations Recommendation partially implemented. The Administration currently is reviewing the federal CIP strategy. As of July 2001, no final documents on this strategy had been issued. The NIPC has created the Interagency Coordination Cell to foster cooperation across government agencies in investigative matters and on matters of common interest and has continued to foster better relationships with the information sharing and analysis centers. Office of Crisis Planning and Management, Washington, D.C. Office of Procurement, Property and Emergency Preparedness, Washington, D.C. Office of the Chief Information Officer, Washington, D.C. Office of the Assistant Secretary of Commerce for Communications and Information, National Telecommunications and Information Administration, Washington, D.C. Critical Infrastructure Assurance Office, Washington, D.C. National Institute of Standards and Technology, Information Technology Laboratory, Computer Security Division, Gaithersburg, Md. Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence, Principal Director (Acting), Security and Information Operations, Washington, D.C. Office of Assistant Secretary of Defense for Command, Control, Communications, and Intelligence, Director, Critical Infrastructure Protection, Arlington, Va. Office of the Assistant Secretary of Defense for Reserve Affairs, Washington, D.C. Office of the Assistant Secretary of Defense for Special Operations and Low Intensity Conflict, Washington, D.C. Office of the Deputy Assistant Secretary of Defense for Counterterrorism, Plans, and Support, Washington, D.C. Office of the Joint Chiefs of Staff, Directorate of Operations (J-3), Chemical, Biological, Radiological, and Nuclear Material, or High-Yield Explosive Division, Washington, D.C. Defense Advanced Research Projects Agency, Arlington, Va. Office of Defense Programs, Germantown, Md. Office of Non-Proliferation Research and Engineering, Washington, D.C. Office of Security and Emergency Operations, Washington, D.C. Office of the Chief Information Officer, Office of the Associate CIO for Cyber Security, Washington, D.C. Office of Critical Infrastructure Protection, Washington, D.C. Office of Security Affairs, Germantown, Md. Office of Safeguards and Security, Germantown, Md. Office of Emergency Operations, Washington, D.C. Office of Emergency Management, Washington, D.C. Office of Emergency Response, Germantown, Md. Office of the Assistant Secretary for Management and Budget, Office of Information Resources Management, Washington, D.C. Office of Emergency Preparedness, Rockville, Md. Centers for Disease Control and Prevention, Atlanta, Ga. U.S. Public Health Service, Rockville, Md. U.S. Public Health Service, Region VIII, Denver, Colo. Office of the Deputy Attorney General, Washington, D.C. Criminal Division, Computer Crime and Intellectual Property Section, Washington, D.C. Justice Management Division, Washington, D.C. Office of Justice Programs, Washington, D.C. Office for State and Local Domestic Preparedness Support, Washington, D.C. National Institute for Justice, Washington, D.C. Federal Bureau of Investigation, Washington, D.C. Counter Terrorism Division, Washington, D.C. Domestic Terrorism/Counterterrorism Planning Section, Washington, D.C. Special Events Management Unit, Washington, D.C. National Domestic Preparedness Office, Washington, D.C. WMD Countermeasures Unit, Washington, D.C. National Infrastructure Protection Center, Washington, D.C. Critical Incident Response Group, Quantico, Va. Crisis Management Unit, Quantico, Va. Office of the Undersecretary of Management, Bureau of Information Resource Management/Chief Information Officer, Washington, D.C. Office of the Under Secretary for Arms Control and International Security Affairs, Bureau of Political-Military Affairs, Washington, D.C. Office of the Undersecretary for Global Affairs, Bureau for International Narcotics and Law Enforcement Affairs, Washington, D.C. Office of the Coordinator for Counterterrorism, Washington, D.C. Technical Support Working Group, Arlington, Va. Office of the Secretary of Transportation, Washington, D.C. Office of Security and Administrative Management, Washington, D.C. Office of Intelligence and Security, Washington, D.C. Federal Aviation Administration, Office of the Assistant Administrator for Information Services and Chief Information Officer, Office of Information Systems Security, Washington, D.C. Research and Special Programs Administration, Washington, D.C. Office of Emergency Transportation, Washington, D.C. Office of Innovation, Research and Education, Washington, D.C. U.S. Coast Guard, Headquarters, Washington, D.C. National Response Center, Washington, D.C. Office of the Under Secretary for Enforcement, Washington, D.C. Bureau of Alcohol, Tobacco and Firearms, Headquarters, Washington, D.C. United States Secret Service, Washington, D.C. Major Events Division, Washington, D.C. Technical Security Division, Washington, D.C. Office of Protective Operations, Olympic Coordinator, Salt Lake Office of the Assistant Secretary for Financial Institutions, Washington, D.C. Office of the Deputy Assistant Secretary (Information Systems) and Chief Information Officer, Washington, D.C. Headquarters, Washington, D.C. Office of Emergency Preparedness/Emergency Management Strategic Healthcare Group, Martinsburg, W.Va. Office of the Assistant Administrator for Environmental Information, Washington, D.C. Office of the Assistant Administrator for Water, Office of Ground and Drinking Water, Washington, D.C. Chemical Emergency Preparedness and Prevention Office, Washington, D.C. Region VIII, Denver, Colo. National Security Council Staff; National Coordinator for Security, Infrastructure Protection and Counterterrorism, Washington, D.C. Office of Management and Budget, Headquarters, Washington, D.C. Office of Science and Technology Policy, Headquarters, Washington, D.C. Office of the Director, Washington, D.C. Information Technology Services, Washington, D.C. Office of the Inspector General , Washington, D.C. Office of National Security Affairs, Washington, D.C. Preparedness, Training, and Exercises Directorate, Washington, D.C. Readiness Division, Washington, D.C. Program Development Branch, Washington, D.C. Response and Recovery Directorate, Washington, D.C. Region VIII, Denver, Colo. Federal Technology Service, Office of Information Assurance and Critical Infrastructure Protection, Washington, D.C. Federal Computer Incident Response Center, Washington, D.C. Office of the Inspector General, Washington, D.C. Tri-County Health Department, Commerce City, Colo. Office of Emergency Management, Arapahoe County, Colo. Sheriff/Emergency Law Enforcement Services Sector Coordinator, Arapahoe County, Colo. Aurora Fire Department, Aurora, Colo. Office of Emergency Management, Aurora, Colo. Aurora Police Department, Aurora, Colo. Buckley Air National Guard Base, Aurora, Colo. 8th Weapons of Mass Destruction Civil Support Team, Aurora, Colo. Denver Police Department, Denver, Colo. Department of Environmental Health, Denver, Colo. Department of Fire, Denver, Colo. Department of Safety, Denver, Colo. Office of Health and Emergency Management, Denver, Colo. Denver Health, Colo. Denver Public Health Department, Denver, Colo. Department of Emergency Medicine, Denver, Colo. Colorado Department of Public Health and Environment, Denver, Colo. Office of Emergency Management, Department of Local Affairs, Division of Local Government, Golden, Colo. Rocky Mountain Poison and Drug Center, Denver, Colo. Banking and Finance Infrastructure Sector Coordinator (a position outlined in Presidential Decision Directive 63), in Washington, D.C. Financial Services—Information Sharing and Analysis Center, Reston, Va. The following are GAO’s comments on the Office of Management and Budget’s (OMB) letter dated September 4, 2001, which provided a consolidated response from selected offices within the Executive Office of the President, including OMB, the Office of Science and Technology Policy, and the National Security Council. We incorporated the consolidated comments where appropriate throughout the report. In addition to the letter reprinted in this appendix, OMB referred us to the President’s May 8, 2001, statement about the Vice President’s effort related to national preparedness. As a result, we have reprinted that statement in this appendix. The following are GAO’s comments on the Department of Agriculture’s letter dated September 5, 2001. The Department of Agriculture (USDA) requested that we revise our discussion of after-action reports (AARs) in chapter 4. After USDA provided us with AARs, we updated table 5 in chapter 4 to indicate that the Department does produce evaluations for terrorism-related exercises that it sponsors. USDA agrees with the practice of writing AARs, but asked that we delete our recommendation to the Secretary of Agriculture because the Department already produces AARs for exercises that it sponsors. We continue to believe that this is a valid recommendation because the Department also could learn valuable lessons when it participates in field exercises sponsored by other agencies. We have incorporated this discussion at the end of chapter 4. In addition, USDA requested that we revise the report to address the issue of terrorism targeted at U.S. agriculture and the role of the Department in such incidents. Its letter stated that an attack aimed at the safety of our food supply and agricultural infrastructure would cause widespread and long-range damage. As our report clearly states, the objectives and scope of our report focused on federal efforts to respond to terrorist using WMD directly against civilian targets. Therefore, we did not focus on terrorism directed against agricultural targets. Consequently, our discussion of USDA was limited. The Department also requested that we address the issue of terrorism targeted at federal government employees, facilities, and programs. Its letter stated that there is an increase in the intensity and frequency of domestic terrorist incidents aimed at its employees, facilities, and programs—particularly those of the Forest Service, Animal and Plant Health Inspection Service, and Agricultural Research Service. Again, the objectives and scope of this report focused on federal efforts to respond to terrorist incidents involving WMD against civilian targets. Therefore, we did not focus on terrorism directed against federal government employees and programs. The Department further requested that we revise the report to include agriculture in our discussion of critical infrastructures in chapter 6. The objectives and scope of this report focused on the critical infrastructures identified by the President’s Commission on Critical Infrastructure Protection and the Critical Infrastructure Assurance Office. While we recognize the importance of the food supply, agriculture has not been designated as a critical infrastructure by either group; therefore, it was not included in our review. The Department provided us with a separate discussion and summary of USDA’s capabilities to prepare for and respond to a terrorist incident. Given the objectives and scope of our review, we have not reprinted that document in this report. The following is GAO’s comment on the Department of Commerce’s letter dated September 7, 2001. We incorporated the Department’s comments where appropriate in chapter 6. The following are GAO’s comments on the Department of Defense’s letter dated August 27, 2001. We incorporated the Department’s comments where appropriate in chapters 4 and 5. In addition to the letter reprinted in this appendix, officials from the Department provided us with technical comments, which we also incorporated where appropriate. The following is GAO’s comment on the Department of Energy’s letter dated August 27, 2001. We incorporated the Department’s comments where appropriate throughout the report. The following is GAO’s comment on the Department of Health and Human Service’s letter dated August 29, 2001. We incorporated the Department’s comments where appropriate throughout the report. The following are GAO’s comments on the Department of Justice’s letter dated September 6, 2001. Regarding the Department of Justice’s comments on chapter 2 about creating a single focal point, on chapter 3 about the Attorney General’s Five-Year Plan, on chapter 4 about lessons learned, on chapter 5 about consolidating some of its functions under FEMA, and on chapter 6 about computer-based threats, we have incorporated its comments as appropriate in those respective chapters. In addition to the letter in this appendix, the Department of Justice provided us with technical comments on our report. The Department’s Office for State and Local Domestic Preparedness Support also provided us with extensive technical comments and supporting documentation. Because these points were not fully addressed in the Department’s letter, we are summarizing them below, including our response. The Department commented that chapter 1 of our draft report needed to clarify its discussion of the concurrency of crisis and consequence management and the respective roles of lead and support agencies. We incorporated its comments as appropriate. The Department commented that chapter 3 of our draft report downplayed the significance of its efforts to help states and local governments conduct threat and risk assessments. It said that the Department plans to use the results of these assessments in deciding how to allocate its equipment, training, and exercise program resources consistent with previous GAO recommendations. We revised the report to discuss these assessments in more detail and to reflect their potential importance. We also separated our discussion of state and local-level assessments from our discussion of a national-level assessment that the FBI had previously agreed to produce. The Department commented that chapter 5 of our draft report did not adequately reflect its efforts to reduce duplication and improve the delivery and coordination of assistance to state and local governments. The Department said it had taken a number of actions to reduce duplication and better integrate these programs across the federal government. We updated the report to reflect these ongoing efforts. The Department also asserted that because of its efforts, state and local first responders are no longer confused by the multitude of federal assistance programs. We disagree with this point and revised the report by providing additional evidence of continued confusion. governments to manage the consequences of WMD terrorism. The Office for State and Local Domestic Preparedness Support took the position that the Department of Justice, in both legal and programmatic terms, was the lead agency for preparing state and local governments for WMD terrorism. We disagree with the Office’s position and discuss this issue at the end of chapter 5. In addition, the Department provided us with an update related to chapter 3 on our previous recommendations that it develop threat and risk assessments. We updated chapter 3 of the report to reflect these efforts and provide the Department’s latest milestones for their completion. The following is GAO’s comment on the Department of the Treasury’s letter dated September 10, 2001. In addition to the letter reprinted in this appendix, the Department provided technical comments from the U.S. Secret Service; the Bureau of Alcohol, Tobacco and Firearms; and the Office of Enforcement. We incorporated these technical comments where appropriate throughout the report. The following are GAO’s comments on the Department of Veterans Affairs’ letter dated September 5, 2001. The Department of Veterans Affairs (VA) concurred with the intent of our recommendation on after-action reports (AARs) in chapter 4 and agreed that it will implement the recommendation. Our past and ongoing work has already demonstrated that VA has a good record of producing AARs. However, VA asked that we change the wording of the recommendation to limit it to exercises that are “designated as federal interagency counterterrorist exercises by the lead federal agency.” We disagree with this revision because it might limit the production of AARs in a manner to exclude important exercises. In our previous work, we found that some of the better consequence management exercises were sponsored by VA or the Department of Defense (DOD), not by FEMA—the lead federal agency for consequence management. For example, in September 1997, VA and DOD sponsored a field exercise to practice providing medical care to victims of a terrorist WMD attack. That exercise, which had over 2,000 participants, also included state and local responders and local community hospitals. Changing the wording of our recommendation, as suggested by VA, might exempt agencies from producing AARs for such exercises. Given the Department’s good record in producing AARs, even in cases when they were not “designated” by a lead federal agency, we believe that the wording in our recommendation will not place any additional burden upon the Department. The following is GAO’s comment on the Federal Emergency Management Agency’s letter dated August 31, 2001. After we received FEMA’s written comments, FEMA provided us with revised figures for the number of persons trained at the National Fire Academy and Emergency Management Institute from fiscal year 1998 through July 31, 2001, of fiscal year 2001. We incorporated the Agency’s comments where appropriate throughout the report. In addition to those named above, Mark A. Pross, Michael W. Gilmore, Richard A. McGeary, Danielle P. Hollomon, James C. Lawson, Krislin M. Nalwalk, Harry L. Purdy, Karl W. Siefert, Yvonne J. Vigil, Keith A. Rhodes, Rahul Gupta, Grace A. Alexander, Jane D. Trahan, and Heather J. Taylor made key contributions to this report. Combating Terrorism: Actions Needed to Improve DOD’s Antiterrorism Program Implementation and Management (GAO-01-909, Sept. 19, 2001). Critical Infrastructure Protection: Significant Challenges in Protecting Federal Systems and Developing Analysis and Warning Capabilities (GAO-01-1132T, Sept. 12, 2001). International Crime Control: Sustained Executive-Level Coordination of Federal Response Needed (GAO-01-629, Aug. 13, 2001). FBI Intelligence Investigations: Coordination Within Justice on Counterintelligence Criminal Matters Is Limited (GAO-01-780, July 16, 2001). Critical Infrastructure Protection: Significant Challenges in Developing Analysis, Warning, and Response Capabilities (GAO-01-769T, May 22, 2001). Combating Terrorism: Comments on H.R. 525 to Create a President’s Council on Domestic Preparedness (GAO-01-555T, May 9, 2001). Critical Infrastructure Protection: Significant Challenges in Developing National Capabilities (GAO-01-323, Apr. 25, 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). Information Security: Serious and Widespread Weaknesses Persist at Federal Agencies (GAO/AIMD-00-295, Sept. 6, 2000). Combating Terrorism: Linking Threats to Strategies and Resources (GAO/T-NSIAD-00-218, July 26, 2000). Critical Infrastructure Protection: Challenges to Building a Comprehensive Strategy for Information Sharing and Coordination (GAO/T-AIMD-00-268, July 26, 2000). Combating Terrorism: Action Taken but Considerable Risks Remain for Forces Overseas (GAO/NSIAD-00-181, July 19, 2000). Security Protection: Standardization Issues Regarding Protection of Executive Branch Officials (GAO/GGD/OSI-00-139, July 11, 2000). Aviation Security: Long-Standing Problems Impair Airport Screeners’ Performance (GAO/RCED-00-75, June 28, 2000). Critical Infrastructure Protection: Comments on the Proposed Cyber Security Information Act of 2000 (GAO/T-AIMD-00-229, June 22, 2000). Weapons of Mass Destruction: DOD’s Actions to Combat Weapons Use Should Be More Integrated and Focused (GAO/NSIAD-00-97, May 26, 2000). Security: Breaches at Federal Agencies and Airports (GAO/T-OSI-00-10, May 25, 2000). Critical Infrastructure Protection: “I LOVE YOU” Computer Virus Highlights Need for Improved Alert and Coordination Capabilities (GAO/T-AIMD-00-181, May 18, 2000). Combating Terrorism: Comments on Bill H.R. 4210 to Manage Selected Counterterrorist Programs (GAO/T-NSIAD-00-172, May 4, 2000). Combating Terrorism: How Five Foreign Countries Are Organized to Combat Terrorism (GAO/NSIAD-00-85, Apr. 7, 2000). Combating Terrorism: Issues in Managing Counterterrorist Programs (GAO/T-NSIAD-00-145, Apr. 6, 2000). Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training (GAO/NSIAD-00-64, Mar. 21, 2000). Critical Infrastructure Protection: National Plan for Information Systems Protection (GAO/AIMD-00-90R, Feb. 11, 2000). Critical Infrastructure Protection: Comments on the National Plan for Information Systems Protection (GAO/T-AIMD-00-72, Feb. 1, 2000). Combating Terrorism: Chemical and Biological Medical Supplies Are Poorly Managed (GAO/HEHS/AIMD-00-36, Oct. 29, 1999). Food Safety: Agencies Should Further Test Plans for Responding to Deliberate Contamination (GAO/RCED-00-3, Oct. 27, 1999). Combating Terrorism: Observations on the Threat of Chemical and Biological Terrorism (GAO/T-NSIAD-00-50, Oct. 20, 1999). Critical Infrastructure Protection: Fundamental Improvements Needed to Assure Security of Federal Operations (GAO/T-AIMD-00-7, Oct. 6, 1999). Critical Infrastructure Protection: The Status of Computer Security at the Department of Veterans Affairs (GAO/AIMD-00-5, Oct. 4, 1999). Critical Infrastructure Protection: Comprehensive Strategy Can Draw on Year 2000 Experiences (GAO/AIMD-00-1, Oct. 1, 1999). Information Security: The Proposed Computer Security Enhancement Act of 1999 (GAO/T-AIMD-99-302, Sept. 30, 1999). Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attack (GAO/NSIAD-99-163, Sept. 7, 1999). Information Security: NRC’s Computer Intrusion Detection Capabilities (GAO/AIMD-99-273R, Aug. 27, 1999). Combating Terrorism: Analysis of Federal Counterterrorist Exercises (GAO/NSIAD-99-157BR, June 25, 1999). Combating Terrorism: Observations on Growth in Federal Programs (GAO/T-NSIAD-99-181, June 9, 1999). Combating Terrorism: Analysis of Potential Emergency Response Equipment and Sustainment Costs (GAO/NSIAD-99-151, June 9, 1999). Combating Terrorism: Use of National Guard Response Teams Is Unclear (GAO/NSIAD-99-110, May 21, 1999). Combating Terrorism: Issues to Be Resolved to Improve Counterterrorist Operations (GAO/NSIAD-99-135, May 13, 1999). Combating Terrorism: Observations on Biological Terrorism and Public Health Initiatives (GAO/T-NSIAD-99-112, Mar. 16, 1999). Combating Terrorism: Observations on Federal Spending to Combat Terrorism (GAO/T-NSIAD/GGD-99-107, Mar. 11, 1999). Combating Terrorism: FBI’s Use of Federal Funds for Counterterrorism- Related Activities (FYs 1995-98) (GAO/GGD-99-7, Nov. 20, 1998). Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency (GAO/NSIAD-99-3, Nov. 12, 1998). Combating Terrorism: Observations on the Nunn-Lugar-Domenici Domestic Preparedness Program (GAO/T-NSIAD-99-16, Oct. 2, 1998). Combating Terrorism: Observations on Crosscutting Issues (GAO/T-NSIAD-98-164, Apr. 23, 1998). Combating Terrorism: Threat and Risk Assessments Can Help Prioritize and Target Program Investments (GAO/NSIAD-98-74, Apr. 9, 1998). Combating Terrorism: Spending on Governmentwide Programs Requires Better Management and Coordination (GAO/NSIAD-98-39, Dec. 1, 1997). Combating Terrorism: Federal Agencies’ Efforts to Implement National Policy and Strategy (GAO/NSIAD-97-254, Sept. 26, 1997). Combating Terrorism: Status of DOD Efforts to Protect Its Forces Overseas (GAO/NSIAD-97-207, July 21, 1997). Chemical Weapons Stockpile: Changes Needed in the Management Structure of Emergency Preparedness Program (GAO/NSIAD-97-91, June 11, 1997). Aviation Security: FAA’s Procurement of Explosives Detection Devices (GAO/RCED-97-111R, May 1, 1997). Aviation Security: Commercially Available Advanced Explosives Detection Devices (GAO/RCED-97-119R, Apr. 24, 1997). Terrorism and Drug Trafficking: Responsibilities for Developing Explosives and Narcotics Detection Technologies (GAO/NSIAD-97-95, Apr. 15, 1997). Federal Law Enforcement: Investigative Authority and Personnel at 13 Agencies (GAO/GGD-96-154, Sept. 30, 1996). Aviation Security: Urgent Issues Need to Be Addressed (GAO/T-RCED/NSIAD-96-151, Sept. 11, 1996). Terrorism and Drug Trafficking: Technologies for Detecting Explosives and Narcotics (GAO/NSIAD/RCED-96-252, Sept. 4, 1996). Aviation Security: Immediate Action Needed to Improve Security (GAO/T-RCED/NSIAD-96-237, Aug. 1, 1996). Terrorism and Drug Trafficking: Threats and Roles of Explosives and Narcotics Detection Technology (GAO/NSIAD/RCED-96-76BR, Mar. 27, 1996). Nuclear Nonproliferation: Status of U.S. Efforts to Improve Nuclear Material Controls in Newly Independent States (GAO/NSIAD/ RCED-96-89, Mar. 8, 1996). Aviation Security: Additional Actions Needed to Meet Domestic and International Challenges (GAO/RCED-94-38, Jan. 27, 1994). Nuclear Security: Improving Correction of Security Deficiencies at DOE’s Weapons Facilities (GAO/RCED-93-10, Nov. 16, 1992). Nuclear Security: Weak Internal Controls Hamper Oversight of DOE’s Security Program (GAO/RCED-92-146, June 29, 1992). Electricity Supply: Efforts Underway to Improve Federal Electrical Disruption Preparedness (GAO/RCED-92-125, Apr. 20, 1992).

As concerns about terrorism have grown, Executive Branch responsibilities and authorities have received greater attention, which led to the 1998 appointment of a national coordinator in the National Security Council. Both Congress and the President have recognized the need to review and clarify the structure for overall leadership and coordination. The President recently requested that the Vice President oversee a coordinated national effort to improve national preparedness, including efforts to combat terrorism. Federal efforts to develop a national strategy to combat terrorism and related guidance have progressed, but key efforts remain incomplete. The first step toward developing a national strategy is to conduct a national threat and risk assessment. The Department of Justice and the Federal Bureau of Investigation have collaborated on such an assessment, but they have not formally coordinated with other departments and agencies on this task. Under current policy, the federal government also has improved its capabilities to respond to a domestic terrorist incident. The Federal Bureau of Investigation and the Federal Emergency Management Agency are tasked with leading federal efforts in their respective roles for managing a terrorist crisis and the consequences of an incident. Several other federal agencies with response capabilities would support these two agencies. Federal assistance to state and local governments to prepare for terrorist incidents has resulted in training for thousands of first responders--those state and local officials who would first respond at the scene of an incident. To improve this training effort, state and local officials have called for a single federal liaison for state and local preparedness programs. To protect computer systems and the critical operations and infrastructures they support, various efforts have been undertaken to implement a national strategy outlined in Presidential Decision Directive 63. However, progress in some areas has been slow. Specifically, federal agencies have taken initial steps to develop critical infrastructure protection plans, but independent audits continue to identify persistent, significant information security weaknesses that place federal operations at high risk of tampering and disruption.

You are an expert at summarizing long articles. Proceed to summarize the following text: In any acquisition, the contract type provides the foundation for incentivizing a contractor’s performance and is just one element of the contract, which may also include performance, cost, or delivery incentives, and other contract terms and conditions that incentivize performance. The type of contract used for any given acquisition inherently determines how risk will be distributed between the government and the contractor. Since the contract type and the contract price are interrelated, they must be considered together. The government’s objective is to negotiate a contract type and price (including cost and the contractor’s fee or profit) that will result in an acceptable level of risk to the contractor, while also providing the contractor with the greatest incentive for effective and efficient performance. Incentive contracts, which include award fee contracts, are designed to attain specific acquisition objectives by including incentive arrangements that (1) motivate contractor efforts that might not otherwise be emphasized, and (2) discourage contractor inefficiency and waste. One of the main characteristics of award fees and other incentives is how they are administered in the contract. Award fees are generally subjectively determined and incentive fees are generally objectively determined. When incentive arrangements are done properly, the contractor has profit motive to keep costs low, deliver a product on time, and make decisions that help ensure the quality of the product. Our prior work has shown, however, that incentives are not always effective tools for achieving desired acquisition outcomes and that, in some cases, there are significant disconnects between program results and incentives paid. Additionally, we have repeatedly found that some agencies did not have methods to evaluate the effectiveness of award fees. More recently, in March 2017, we found that fixed-price incentive shipbuilding contracts did not always lead to desired outcomes, and that the Navy had not assessed whether adding incentives improved contractor performance. We made recommendations to the Navy, including that it conduct a portfolio-wide assessment of its use of additional incentives on fixed-price incentive contracts across its shipbuilding programs. DOD agreed with our recommendations. Numerous contract types are available to the government to provide flexibility in acquiring the supplies and services agencies need, including satellite acquisitions. Table 1 provides an overview of typical contract types and how they may be used to acquire satellites. When determining the contract and incentive structure for satellite acquisitions, the government may consider a number of factors: Where the satellite is in the acquisition phase. Satellite contracts can include design, development, integration, and testing, and can cover more than 15 years. The government can tailor the contract type and fees to meet the specific circumstances of the acquisition, for example, the phase of the acquisition cycle. Figure 1 shows the notional acquisition phases for a satellite. During the design and development phase, when technology risks are higher, the government typically uses cost-reimbursement contracts. When the government is acquiring a “production-model” satellite, or a copy of a satellite with a proven design and build, a fixed-price contract may be used. In addition, for the on-orbit phase, the government typically negotiates with the contractor regarding the amount of incentives related to successful on-orbit performance. Which satellite component is being acquired. Satellites are generally comprised of the bus and the instruments or payloads. The bus is the body of the satellite. It carries the payload and is composed of a number of subsystems, like the power supply, antennas, telemetry and tracking, and mechanical and thermal control subsystems. The bus provides electrical power, stability, and propulsion for the entire satellite. The payload of a satellite, which is carried by the bus, refers to all the devices or instruments a satellite needs to perform its mission, and can differ for each type of satellite. Some examples include cameras to take pictures of cloud formations for a weather satellite, and transponders to relay television signals for a communications satellite. Generally, developing payloads is riskier than developing buses. Number of contracts used to acquire satellite components. The government can choose to award one contract for the development and production of the satellite bus and all associated payloads, or it can award separate contracts for the development and production of the bus and each individual instrument. In the contracts we reviewed, DOD typically awarded a single contract to a prime contractor for the development of the bus and payloads, and according to officials, the prime contractor often awards contracts to subcontractors to provide the various instruments and parts. In contrast, for the NASA contracts and orders we reviewed, NASA typically awarded separate contracts and orders to multiple contractors to develop the bus and each instrument. Number of space vehicles being acquired on a contract. The government can acquire a single satellite or multiple satellites under one contract, and one contract may also include components for multiple satellites. Further, depending on the mission, an agency may buy a single satellite (such as for scientific discovery) or blocks of satellites (such as for global communications). The quality and performance of a satellite—including whether it meets on- orbit requirements—usually cannot be determined until after it launches and reaches its intended orbit. Satellite development and production contracts may include on-orbit performance incentives aimed at ensuring that the satellite will meet performance requirements. Because the incentive is not earned until a satellite successfully demonstrates its performance on-orbit, an on-orbit performance incentive can be thought of as the dollar amount at risk if the contractor fails to meet the performance requirements specified in the contract (see figure 2). On-orbit incentives are typically documented in a satellite contract’s fee plans or in contract clauses. There are generally three mechanisms for on-orbit performance incentives: negative incentives, positive incentives, and withholding of milestone payments. Agencies can use a combination of these when designing on-orbit incentives, which are generally tied to objective performance criteria, such as successfully getting into the right orbit and achieving critical performance parameters once there. When using negative incentives, the government generally pays the contractor incentives as the contractor completes work during the development or production phase. The contractor would have to pay back some or all of the incentives if the satellite fails to meet on-orbit performance parameters. With positive incentives, the government assesses satellite performance in any given period, such as 6 or 12 months, to determine how much the contractor earns for that period. The amount at risk for the contractor could be the same for a positive incentive or a negative incentive. Firm-fixed-price contracts for satellite programs may have progress or performance-based payment plans that require fixed payments to be made upon successful completion of milestones, such as preliminary design review, final system test, and successful on-orbit check-out. If a satellite fails prior to check-out, the government may withhold the final milestone payment from the contractor. Because satellite acquisitions are unlike other acquisitions, the Air Force’s Space and Missile Systems Center (SMC) and NASA have tailored guidance on space acquisitions, and each specifically addresses on-orbit performance incentives. SMC’s March 2007 incentives guide states that on-orbit incentives should be clearly written to ensure enforceability, and require fully demonstrable performance in order to earn fee. The guidance also specifies that the contract should contain specific descriptions as to the rights of the parties in the event of a failure, caused either by the contractor or by the government. One senior SMC contracting official stated that their contracting directorate maintains a repository of on- orbit incentive plans and contract clauses that have been implemented. These incentives arrangements can be used as guides for SMC programs as they develop new contracts. NASA’s FAR supplement generally requires certain contracts for hardware deliverables worth more than $25 million to include performance incentives. In the case of satellite acquisitions, the on- orbit incentives serve as performance incentives. In addition, NASA’s FAR supplement requires that for cost-plus-award-fee contracts for end items, where the true quality of contractor performance cannot be measured until the end of the contract, only the last evaluation is final. This allows NASA to evaluate the contractor’s total performance—after the end item is delivered—against the award fee plan to determine the total earned award fee from the contract award fee pool. In other words, under this “re-look provision,” the total award fee is not earned until the satellite has demonstrated its performance on-orbit. In addition to on-orbit performance incentives, it is important to acknowledge the totality of the incentives and other terms in satellite contracts that are designed to motivate contractors to achieve the cost, schedule, and performance goals of the program. In many cases, multiple incentives are used to achieve such goals. The FAR provides that when multiple incentives are used, a balance must be achieved in which no incentive is either so insignificant that it offers little reward for the contractor, or so large that it overshadows other areas and neutralizes their motivational effect. In addition, it requires all multiple incentive contracts to include a cost incentive that precludes rewarding a contractor for superior technical performance when their cost outweighs their value. For satellite programs, achievement of full mission performance is the primary objective, but cost and schedule goals also play key roles in a program’s success. Our body of prior work has shown that most major government satellite programs experience significant cost growth and schedule delays due to unmatched resources and requirements, immature technologies at program start, and inconsistent application of knowledge-based practices throughout the life of a program. As a result, although some programs may have successful on-orbit performance, they may also have had major cost overruns and schedule delays along the way. There are many nuances when it comes to satellite failures. These can be especially important when considering government opportunities for recourse should a satellite fail or underperform. The Aerospace Corporation (Aerospace), a federally funded research and development center (FFRDC) that provides engineering and technical support to national security space programs, categorizes satellite anomalies based on the criticality or severity of the anomaly and distinguishes them based on their impact on the mission. For the purposes of this report, a catastrophic failure results in the total loss of a satellite, or a satellite that will never meet any of its mission requirements; a partial failure results in a satellite that fails to meet some of its mission requirements or that loses a redundant system. When satellites fail, they often do so in the first few months they are in orbit. Aerospace reported in 2012 that mission-impacting anomalies—or failures—that occur during the first 120 days of a satellite’s on-orbit life account for approximately 40 percent of all such failures that occur during the first 3 years of operation. Causes of failure during a satellite’s first 3 years of operation varied according to Aerospace, but the top three reasons identified were issues related to a satellite’s design, parts, and software. Given high development risks and the likelihood of requirements changes in satellite programs, most government satellite acquisitions use cost- reimbursement contracts. New technologies and unstable requirements mean satellite program officials are unlikely to accurately predict development costs and schedules, making cost-reimbursement contracts a prudent choice. When lower-risk items are being acquired, such as standard spacecraft and communications satellites, agencies are more likely to use firm-fixed-price contracts. In both cases, agencies tend to use incentives in their contracts to help achieve cost, schedule and performance goals. Across the 19 programs we reviewed at DOD, NASA and NOAA, about $43.1 billion of $52.1 billion (83 percent) was obligated on cost- reimbursement contracts and orders, while the remaining $9 billion (17 percent) of obligations were on firm-fixed-price and fixed-price incentive contracts and orders. DOD satellite obligations comprised nearly 80 percent of the government satellite acquisitions in our review (see figure 3). Government satellite programs are often designed to develop and incorporate innovative technologies unavailable in the commercial market. We reported in 2010 that DOD accepts greater technology and development risks with space acquisitions, and as such, costs associated with technology invention are difficult to estimate. For our 12 in-depth case study programs, 15 of the 23 contracts and orders we reviewed were cost-reimbursement type contracts (see appendix III for more detailed information on the contract types for our case study programs). Several of the contract files for these programs cited technical complexity leading to uncertainties in cost performance or uncertain requirements as reasons their program used cost- reimbursement contracts. According to one program’s contract files, a firm-fixed-price contract would not be appropriate for the design and development of the satellite’s primary instrument because of the program’s aggressive performance goals and flexible launch dates. In 2010, we reported that firm-fixed-price contracting normally does not work for DOD space systems because programs tend to start with many unknowns about the technologies and costs needed to develop satellites. Since our 2010 report, however, DOD has begun to consider acquisition approaches that might be more productive using fixed-price contracts such as disaggregating large satellites and advancing technology incrementally. One senior SMC contracting official noted that in recent years, SMC has acquired a number of satellite programs on a fixed-price basis. In these instances, once the programs matured the technologies and reduced risks, the programs were able to shift to a production-type state and use fixed-price contracts. Five of the 23 case study contracts and orders used firm-fixed-price type contracts, mostly to acquire lower-risk items. These included standard spacecraft buses (meaning, those with proven designs) and communications satellites, both of which have relatively lower technical risks. For example, some NASA and NOAA programs we reviewed used firm-fixed-price orders to acquire spacecraft buses from the NASA “catalog,” which contains proven designs from multiple contractors. In some cases, such as communication satellites, the commercial market produces satellites that government programs can use with only minor modifications. These satellites have typically been used in a commercial market—lowering technical risk—and may also have adequate pricing data available to accurately estimate costs, both of which lend themselves to firm-fixed-price contracting. The remaining three of the 23 case study contracts and orders we reviewed used fixed-price-incentive contracts to acquire additional satellites in production. For instance, DOD’s SBIRS program bought its first four satellites under cost-reimbursement contracts, but bought the next two satellites with a fixed-price-incentive contract. According to the SBIRS contract file, program officials deemed the fixed-price incentive contract type the most appropriate because, given the maturity of the satellite vehicle design, they believed they could assess a fair and equitable ceiling price for the acquisition. Fixed-price incentive contracts can be complex, as noted in SMC’s guide to structuring incentives for fixed-price contracts, issued in November 2012. For example, how risk is apportioned on a fixed-price-incentive contract may resemble that of a cost-reimbursable contract or a firm-fixed-price contract, depending on the share ratio—a calculation which represents the allocation of cost risk between the government and the contractor—and the ceiling price. The guide also notes that fixed-price-incentive contracts can lead to unintended, negative outcomes if structured poorly or managed improperly. All of our 12 case study programs used incentives—including award fees, incentive fees, or some combination of the incentives—to motivate contractors to achieve cost, schedule, or performance goals. Program officials told us they used award fees during the development phase to incentivize the contractor to achieve specific, short-term goals. With each award fee determination, which, for example, may occur every 6 months, the government can focus the contractor on specific tasks or areas. Program officials also said that award fee determinations can be effective in changing contractor behavior. For example, one NASA program official stated that during a particular award fee period, they informed the contractor that it needed to address planning for a complicated spacecraft thermal vacuum test that was behind schedule. The official said that after program officials documented their concerns in award fee letters, contractor performance improved, resolving the issue. Table 2 provides examples of how the government tied incentives to cost, schedule, and performance objectives for selected case studies. However, in addition to the 12 in-depth case study programs, several of the NASA programs in our review included contracts or orders with FFRDCs, academic institutions, or non-profit organizations that did not include incentives. In most of these cases, NASA awarded cost-plus- fixed-fee or cost with no fee contracts or orders. For example, several programs used cost-plus-fixed-fee orders issued from an indefinite delivery / indefinite quantity contract between NASA and the California Institute of Technology, a private nonprofit educational institution, which establishes the relationship for the operation of the Jet Propulsion Laboratory (JPL), an FFRDC. The contract includes both service and product deliverables and encompasses a large number of discrete programs and projects. According to NASA procurement officials, the desired program outcomes or objectives and performance requirements are defined in task orders issued under the contract. NASA officials stated that when there are no fees to pay or withhold from a contractor, NASA still has tools available to motivate contractor performance. In these instances, agencies rely on non-fee incentives, such as providing positive or negative evaluations of contractors in the Contractor Performance Assessment Reporting System (CPARS). The CPARS evaluations may affect the ability of FFRDCs and academic institutions to secure future contracts. Officials also stated the general reputation of contractors are important in winning future contracts. NASA officials also stated that with science missions, the academic institutions are self-motivated because they are interested in the data that satellites are collecting and within the science community, there is a sense of pride to be associated with a successful NASA mission. Eleven of the 12 selected in-depth case study programs we reviewed used contract incentives tied to on-orbit performance on at least one contract. We found, however, that the characteristics of the on-orbit incentives—such as the amounts at risk or the timing of the incentive payments—varied widely. In one instance, a satellite program held the contractor’s entire fee at risk pending demonstration of satellite performance, but in other cases, the at-risk amount was a portion of the total fee or profit on the contract. Timing of payments also differed on a program-by-program basis, and in some cases, satellites within the same program had distinctive incentives. When asked how they developed on- orbit incentives for their respective contracts, program officials cited considerations such as other incentives in the contract, agency acquisition preferences, and past history. On-orbit incentives varied widely across our 12 case study programs and in some cases, incentives varied between satellites under the same contract. To compare on-orbit incentives across these programs, we identified the two key characteristics that define each set of incentives— specifically, the amount and timing of the incentives. On-orbit incentive amount. Based on our analysis of 23 contracts and orders representing our 12 case study programs, we found that the amount of on-orbit incentives relative to the overall contract value varied widely (see figure 4). On-orbit incentives included on the contracts and orders for our 12 case study programs ranged from no on-orbit incentive to approximately 10 percent of the contract value (see appendix III for more information on the on-orbit incentive amounts by contract). In some cases, on-orbit incentives were only a portion of the contractor’s expected fee or profit. For one contract we reviewed, the contractor’s full fee was contingent upon successfully demonstrating that the satellite met on-orbit performance requirements. Most of the contracts and orders we reviewed included multiple satellite vehicles, and the on-orbit incentive could vary by vehicle. For example, in one DOD contract we reviewed, the at-risk amount for the entire contract was 7 percent, but the at-risk amount for individual vehicles ranged from 5 percent to 13 percent. The at-risk amount for individual satellites can also change depending on contractor performance during satellite development. Several contracts we reviewed define the potential on-orbit incentive amount as a percentage of the total award fee available, rather than a specific dollar amount. This means that poor contractor performance during the satellite development phase could reduce the amount of the on-orbit incentive. For example, if the total award fee for a contract is $100, and the on-orbit incentive is defined as 50 percent of the available award fee, the contractor could potentially earn $50 for on-orbit performance. If, however, the contractor loses $30 in potential award fee during the satellite development phase due to poor performance, the most the contractor could earn for on-orbit performance falls to $35 (50 percent of $70). Similarly, in one contract we reviewed, the at-risk amount on-orbit was capped as the lesser of 50 percent of the contractor’s realized profit or 50 percent of the target profit. In this case, if the contractor’s realized profit was zero dollars, there would be no payback to the government in the event of a failure. Because on-orbit incentives are realized near the end of a contract performance period, they can grow in importance to the contractor, relative to other incentives. For example, a contracting officer for one of our case study programs said that his program’s contract placed an equal priority on both on-orbit performance and cost and schedule incentives, but the contractor lost most of the cost incentives due to cost overruns. The contracting officer said that the on-orbit incentive was the largest remaining incentive available to the contractor, so in this case, the contractor was more intent on earning the on-orbit incentive and less focused on controlling costs—a potentially bad situation for the program. Incentive timing. The timing of an on-orbit incentive represents how the at-risk amount is spread out over a satellite’s mission life. For some of the contracts and orders we reviewed for selected case study programs, the on-orbit incentives covered a satellite’s entire mission life. There were some contracts and orders, however, for which the on-orbit incentives covered only a portion of the mission life. Given that when satellites fail, it is usually early in their mission life, three of the five firm-fixed-price satellite contracts or orders in our case study programs had milestone payment plans that ended once the on-orbit vehicle completed its check- out. Under this arrangement, depending on the terms of the contract, the government could potentially withhold the last milestone incentive payment if a catastrophic failure occurred prior to check-out, but would not have on-orbit incentives that lasted the remainder of the mission life. In these cases, the government assumes all of the risk once the vehicles complete check-out. Similarly, the on-orbit incentives for one of the SBIRS contracts covered the first 4 years of the satellite’s mission life. The WGS Block II and Block II follow-on contracts have a unique on-orbit incentive structure that includes a 10-year negative incentive followed by a 4-year positive incentive for the satellite’s 14-year mission life. The negative incentive includes calculations to determine how much money the contractor has to pay the government if its satellite fails to meet performance requirements during the first 10 years. The positive incentive, starting at year 11 of the satellite’s mission life, allows the contractor to offset any negative incentives assessed during that satellite’s first 10 years. At the end of 14 years, the government adds up the positive and negative incentive amounts to determine what, if anything, the contractor has to pay back. Satellite or component storage on the ground may also affect on-orbit incentives. For example, the GPS IIF contract reduces the on-orbit performance period by 25 percent if any of the first six vehicles is stored on the ground for 4 years; more if stored longer. DOD, NASA, and NOAA officials cited several factors when developing on-orbit incentives for their respective programs, including the other incentives in the contract, agency acquisition preferences, and individual program history. The overall contract. Program officials do not view on-orbit incentives in isolation, but rather as part of the larger negotiated agreement with the contractor. Officials told us that during contract negotiations, they may be willing to reduce the amount of fee on-orbit or alter the timing of on-orbit incentives, in return for contractor concessions in other areas. Programs negotiated overall incentives for a contract as well as how the incentives were spread out over the contract, including how much was tied to on-orbit performance. Officials said contractors generally prefer front-loaded incentives, whereas agencies may tend to prefer placing incentives at the end of the contract. The resulting contract and incentive structure depends on what the government and the contractor can agree to. Acquisition philosophy. Program officials told us on-orbit incentives reflect the acquisition policies, leadership preferences, and prevailing agency practices at the time the contract is being drafted. For example, DOD promotes the use of incentive fees, where possible, over award fees, to encourage greater use of objective fee criteria. Program officials also said they typically look at other satellite program contracts in their respective agencies, explaining that incentives for new programs may be structured based on what other programs have agreed to. Program history, staff, and contractor experience. Program history can affect incentive structures in different ways. In the case of WGS, the on-orbit incentives for the Block II follow-on contracts were modeled after the incentives in the Block II contract. Further, program officials said they also modified past incentives or established new incentives based on their own contracting experience. They told us that prior experience executing specific incentive structures lends itself to structuring incentives the same way again. Similarly, they said that contractors may seek to negotiate incentive provisions based on their company’s past experience. The government’s recourse in the event of a catastrophic satellite failure on-orbit is generally limited to recovery of a portion of the on-orbit incentive. As discussed above, the on-orbit incentive amount on any given satellite contract can vary widely but is uniformly less than 10 percent of the total satellite contract value. In all likelihood, the amount retained by or paid back to the government would be even less, as what the government may actually recoup depends on the circumstances of the failure. For example, if a contract includes no-fault provisions, when one contractor is at fault for the total loss of a satellite, the government may still be responsible for paying fees to the remaining contractors— whose products were not to blame for the failure. By design, on-orbit incentives are only a portion of the total contract value and therefore will not make the government whole in the event of total failure. Overemphasizing on-orbit incentives could result in the contractor losing sight of cost and schedule goals. Further, the government accepts more of the on-orbit risk than the contractor, in part because catastrophic failures are rare, according to satellite studies and industry experts we spoke to. For our 12 case study programs, we found that the aggregate on-orbit incentive amount at risk is around 4 percent of the aggregate contract value. This means that in a worst-case scenario in which all of the satellites failed prior to checkout, the maximum amount the government could recoup or withhold from the contractors is 4 percent of the total contract value. What the government could actually recoup or withhold depends on the terms of the contract and the circumstances of the failure, such as the extent to which technical parameters are met, the timing of the failure, and whether the contractor is found to be at fault. Two satellites among the programs we reviewed experienced catastrophic or partial failures—DMSP-19 and SMAP. Program officials said the DMSP-19 spacecraft contractor repaid $2.7 million plus interest to the government as a result of the failure, but there was no repayment or payments withheld in the case of SMAP. DMSP-19 suffered a catastrophic failure in the second year of its 5- year mission life when the Air Force lost the ability to control the satellite. There were two prime contractors on the DMSP contracts—one for the spacecraft and one for the sensors. According to program officials, the spacecraft contractor was found to be at fault for the failure, and had to reimburse $2.7 million in fee plus interest. Program officials stated that the sensor contractor was not responsible for the failure and therefore did not have to repay any fee. SMAP experienced a partial failure. One of SMAP’s two primary sensors—the radar—failed, while the other—the radiometer—is operating as intended. NASA was unable to identify the exact cause, but determined that the failure was related to the radar’s high- powered amplifier power supply. According to NASA’s SMAP mishap investigation report, without the radar, SMAP will not be able to meet mission requirements because the radiometer alone cannot meet resolution requirements. Because JPL built SMAP under a task order with no on-orbit incentives, the government had no monetary recourse when the radar sensor failed. The mishap investigation report estimated that the SMAP radar failure resulted in more than $550 million in losses, though the cost of the radar accounted for only 11 percent of that amount. Most of the estimated losses were related to investments in the science of the mission. However, NASA officials told us that the total science value of the shortfall in capability is highly uncertain. These officials noted that although not operating to its full resolution, SMAP provides higher resolution and more accurate soil moisture and sea surface salinity data than any prior NASA missions. No-fault provisions can have implications for satellites with multiple prime contractors, as mentioned in the DMSP example. If one contractor is at fault for the total loss of a satellite, the government may still be responsible for paying fees to the remaining contractors—whose products were not to blame for the failure—even though the satellite on which their products were riding was a total loss. Representatives from commercial companies we spoke with said they typically purchase insurance to mitigate their risk in the event of satellite losses. According to satellite insurance company representatives, insurance for any one satellite is generally spread across multiple insurance companies, each of which insures only a portion of the total value of the satellite. The cost of insuring the launch and full mission life of a commercial satellite could add 10 to 20 percent of its total contract value, according to one insurance broker we spoke with, even though relatively few satellites suffer significant failures. He noted that, at this time, the small market of satellite insurance providers would not have the capacity to insure many government satellites, given their high costs to build and launch. While tying some of a satellite contract’s incentive to on-orbit performance can help focus a contractor on building a quality satellite, overemphasizing performance through on-orbit incentives can unintentionally cause the contractor to lose sight of cost or schedule. For example, JWST program officials stated that the $56 million on-orbit incentive fee in the initial JWST contract encouraged the contractor to exceed performance requirements at the expense of cost and schedule. In other words, the cost and schedule incentives were relatively less significant to the contractor than the on-orbit performance incentive. In December 2014, we found that when the contract was renegotiated in December 2013, the JWST program and the contractor agreed to replace the on-orbit incentive with award fees that could be used to incentivize cost and schedule goals during development. Since that time, JWST officials told us the renegotiated award fees had contributed to better cost and schedule outcomes. Further, in another program’s contract negotiation documents we reviewed, the government was willing to put less of the contractor’s fee at-risk on-orbit in exchange for lower overall fees, which would reduce the contract price. Conversely, negotiation documents reflected that the government considered accepting higher overall fees in exchange for putting more of the contractor’s fee at-risk. Also, it is unclear whether increased on-orbit incentives would decrease the likelihood of on-orbit failures. Program officials expressed a wide range of views on the relative importance of on-orbit incentives in achieving successful outcomes. Program officials agreed that poorly designed incentives might lead to bad program outcomes, but there was no consensus on the effect of well-designed incentives. Officials we spoke with believed that on-orbit incentives were important, but the reasons cited were sometimes more related to how they can used in negotiations with the contractor—leading up to contract award and, in some cases, for contract modifications—than achieving successful on- orbit performance. Attributing positive on-orbit performance directly to on- orbit incentives is challenging, given the many factors that contribute to a satellite program’s success, including requirements and funding stability, technology maturity, and government and contractor experience. Further, on-orbit incentives are unlikely to flow down to the workers who actually build a satellite, or to sub-contractors who produce key parts and components. On-orbit incentives can span 10 years of performance, so the people who were directly involved in building a satellite may not even be with the company when the incentives are paid out. Although contractors may be motivated to achieve on-orbit performance through on-orbit incentives, they are also motivated by other factors. For example, in 2005, we found that various considerations, such as securing future contracts with the government, can be stronger motivators than earning additional profit. Officials from agencies and commercial companies that we spoke to confirmed that this is still true today. Specifically, program officials we interviewed stated that contractors react strongly to negative CPARS evaluations, as this could affect their ability to win future contracts. Officials also noted that contractors take pride in their work and believe in the missions their satellites support. They believed that contractors would do their best to succeed even without on- orbit incentives. They said that universities and FFRDCs are also motivated to do well because they are personally invested in advancing their scientific pursuits. According to program officials and commercial company representatives that we spoke to, the commercial satellite market is small but competitive, and satellite failures generate bad publicity that could affect a company’s ability to win commercial contracts and future government business. Finally, satellite acquisition programs tend to have far more cost and schedule challenges than performance issues. We have a large body of work identifying cost growth and schedule delays for space programs, including some in our case studies, and have made a number of recommendations to address the causes of these challenges. For example, we have previously recommended that agencies should improve their program cost estimates, separate the process of technology discovery from acquisition, and match resources and requirements at program start. The cost growth for some of our case study programs is much larger than their on-orbit incentives. For example, JWST has experienced more than $3.6 billion in cost growth. That exceeds the combined on-orbit incentives for all 56 of the satellite vehicles in our case study programs. Similarly, the first two GPS III satellites have experienced more than $600 million in cost growth. That is more than double the entire amount of on-orbit incentives for all 10 GPS III satellites currently under contract. A number of government officials and commercial companies we spoke with did not express concerns about the extent to which satellites experience catastrophic failures. Studies of satellite reliability vary depending on the timing and scope of the analysis, but the analyses we reviewed indicated that between 2 and 4 percent of satellites, including both government and commercial programs, experience a catastrophic failure before the end of their mission lives. Aerospace officials we spoke with said the failure rate for government satellites is around 2 percent, and that this is somewhat remarkable given that government satellites are often highly complex. Further, many government satellites utilize new, unproven technologies which pose more risk than commercial satellites; commercial satellites tend to use proven designs and rely more on mature technologies. As a result, it appears the most cost effective way to limit the government’s loss in the event of a catastrophic failure may be to reduce cost growth and schedule delays by using best practices during satellite development, as we have previously recommended. We provided a draft of this report to DOD, NASA, and NOAA for their review and comment. DOD and NOAA provided technical comments, which we incorporated as appropriate. NASA had no technical or written comments. We are sending copies of this report to the appropriate congressional committees, the Secretaries of Defense and Commerce, and the NASA Administrator. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have questions about this report, please contact me at (202) 512-4841, or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. The following tables present the missions, original total program costs and quantities, current total program costs and quantities, and the number of satellites in orbit as of March 2017 for all 19 of the programs included in our review. The total acquisition or project costs include development and production costs of the space vehicles and in some cases, costs associated with the ground systems, launch vehicles, and other costs outside of the satellite vehicles. As a result, the total costs for a given program will be larger than the contracts values discussed in this report. To assess the Department of Defense (DOD), National Aeronautics and Space Administration (NASA), and the Department of Commerce’s National Oceanic and Atmospheric Administration’s (NOAA) contract and incentive structures, under the authority of the Comptroller General to conduct evaluations on his own initiative, we examined (1) the types of contracts and incentive structures government satellite programs use to develop satellites and why, (2) how selected programs structure on-orbit incentives, and (3) government options for recourse, if any, when a satellite fails or underperforms. To determine the types of contracts and incentive structures government satellite programs use to develop satellites and the reasons why, we analyzed contract obligations data from the Federal Procurement Data System-Next Generation (FPDS-NG) as of September 2016 for 19 programs, comprising all current major satellite programs across DOD, NASA, and NOAA. To assess the reliability of the FPDS-NG data, we reviewed relevant internal control documents and data quality summaries. We determined that the FPDS-NG data were sufficiently reliable for the purposes of this engagement. For DOD, we included major defense acquisition programs, and at NASA and NOAA, we included programs with a life-cycle cost greater than $250 million. For our analysis, we included each program’s development and production contracts and orders for the spacecraft and instruments and generally excluded contracts and orders related to launch, ground systems, maintenance, operations, and support services if they were separate contracts and orders. If these items or services were included within the development and production contract or order, we included them in our analysis. For each contract and order, we determined the predominant contract type for the design, development, and production of the satellites on the contract. We also reviewed DOD, NASA, and NOAA policies and guidance on contracting and incentives, and Federal Acquisition Regulation (FAR) and agencies’ FAR supplements for regulations and procedures on contracting. To determine the range of on-orbit incentive structures and government options for recourse should a satellite fail or underperform, of the 19 major satellite programs in our review, we selected 12 programs for in- depth analysis as case studies based on program size, contract type, contractor, mission, or notable on-orbit performance. For each case study, we analyzed contract files and conducted interviews with program and contracting officials at DOD, NASA, and NOAA to discuss contract types and incentive structures, rationale for the use of specific contract types and incentive structures, on-orbit performance and programmatic outcomes. Across the 12 case study programs, there were 23 contracts and orders and 56 space vehicles (see table 6). To determine the at-risk on-orbit incentive amount by contract or order, we reviewed contract clauses and fee plans for each of the 23 contracts and orders associated with the 12 case study programs to calculate the amount of money the contractor would not be paid or would need to pay back in the case of a catastrophic failure. We calculated the at-risk amount based on a hypothetical “worst case scenario” for each contract or order, in which the maximum payback or forgone payment would be assessed for a complete failure of the satellites. The at-risk amounts included milestone payments that would be withheld, award and incentives fees that would not be paid, and amounts that would need to be paid back by the contractor. These at-risk amounts were divided by the current value of the contract or order to calculate a percentage of contract or order value that would be at risk. The contract scope varied across our case study contracts. For example, some contracts included costs associated with developing ground systems or sustainment costs whereas others only included satellite development and production costs. However, the contract scope did not significantly alter the at-risk calculations. For all of the contracts and orders we reviewed, regardless of scope, the at-risk amounts were less than 10 percent of the contract value. For the seven remaining satellite programs at DOD and NASA that were not included in our case studies, we developed agency-specific data collection instruments (DCI) that we pre-tested, administered, and from which we analyzed the information collected. We tailored the DCIs to each agency based on agency policies and guidelines for contracting to obtain program-specific contract details, values, obligations to-date, special clauses used, incentive structures, and performance periods. We determined that the data collected from the DCIs were sufficiently reliable for the purposes of this engagement. The seven programs for which we executed DCIs included: Advanced Extremely High Frequency (AEHF); Global Precipitation Measurement (GPM) Mission, Gravity Recovery and Climate Experiment Follow-On (GRACE-FO), Landsat Data Continuity Mission (LDCM), Magnetospheric Multiscale (MMS), Orbiting Carbon Observatory 2 (OCO-2), and Surface Water and Ocean Topography (SWOT). In addition to the case studies above, we reviewed the Defense Meteorological Satellite Program 19 (DMSP-19) because of its recent on- orbit failure. We reviewed DMSP-19’s follow-on storage, maintenance, and support contracts rather than the development and production contracts because at the time of the failure, work was being performed under the follow-on contract. These contracts contained information on the on-orbit incentives and relevant options for government recourse after the on-orbit failure occurred. We also interviewed officials from a nongeneralizable sample of commercial companies: Ball Aerospace, DigitalGlobe, IntelSat, Lockheed Martin, and ViaSat to identify how selected commercial companies use on-orbit incentives and how commercial satellite acquisitions differ from government satellite acquisitions. We selected the companies based on the type of satellites they build or acquire. In addition to commercial satellite companies, we also consulted satellite insurance brokers from Marsh and one underwriter, XL Catlin, to obtain information on the likelihood of satellite failures in the commercial and government markets, the general capacity of the commercial satellite insurance market, and the dollar amounts associated with insuring commercial satellites. We reviewed Aerospace Corporation studies and briefings and interviewed Aerospace Corporation officials to identify the point during the life of a satellite in which most satellite failures occur, the frequency of government satellite failures, and to identify the various categories of satellite failures. We conducted this performance audit from March 2016 to June 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. The 12 in-depth case study satellite programs we reviewed included 23 contracts and orders. For these contracts and orders, we determined the predominant contract type for the design, development, and production of the satellites; and percent of contract value at-risk for on-orbit performance; which are presented in the tables below. We determined the percent of contract value at-risk for on-orbit performance for each contract or order by dividing the maximum dollar amounts the contractor would not be paid or would have to pay back in the event of a catastrophic failure by the current contract value. In addition to the contact named above, key contributors to this report were Rich Horiuchi, Assistant Director; Emily Bond; Brandon Booth; Claire Buck; Claire Li; Michael Shaughnessy; Roxanna Sun; Jay Tallon; and Alyssa Weir.

Acquiring and fielding satellites are high stakes endeavors. Each year, DOD, NASA, and NOAA spend billions of dollars acquiring satellites. Unlike with other major acquisitions, such as ships or aircraft, an agency can only determine the quality of a satellite after it is launched. That means any defects that occur may be impossible to repair, and in space, a single failure can be catastrophic for a mission's success. As a result, contractor performance is critical to a program's success, and contract incentives can be particularly important in aligning government and contractor interests—both in achieving mission success and ensuring responsible financial management. This report addresses (1) the types of contracts DOD, NASA, and NOAA use to develop satellites, (2) how selected programs structure on-orbit incentives, and (3) what recourse, if any, the government has in the event of satellite failure or underperformance. To conduct this work, GAO analyzed contract obligations data and documentation for 19 current satellite programs; reviewed policies and guidance regarding contact types and incentives; selected 12 case studies to determine incentive structures and recourse options; and interviewed program and contracting officials at each agency, as well as commercial representatives and industry experts. Given high development risks and uncertain requirements in satellite programs, most government satellite acquisitions use cost-reimbursement contracts. When lower-risk items are being acquired, such as standard spacecraft and communications satellites, agencies used firm-fixed-price contracts. Overall, across 19 programs GAO reviewed at the Department of Defense (DOD), National Aeronautics and Space Administration (NASA), and the Department of Commerce's National Oceanic and Atmospheric Administration (NOAA), about $43.1 billion of $52.1 billion was obligated on cost-reimbursement contracts and orders, while the remaining $9 billion were on firm-fixed-price and fixed-price incentive contracts and orders. Most of the 12 selected programs that GAO reviewed contained an on-orbit incentive—incentives based on successful performance in space; however, they varied widely in terms of the amount at-risk for the contractor and the timing of payments. For example, the on-orbit incentives included on the contracts and orders for the 12 selected programs ranged from no on-orbit incentive to approximately 10 percent of the contract value. GAO also found variation in how the at-risk amount was spread out over a satellite's mission life. For example, some contracts included on-orbit incentives that covered a satellite's entire mission life while other contracts covered only a portion of the mission life. The government's recourse in the event of a catastrophic satellite failure is limited, relative to its overall investment. Given the small on-orbit incentive amounts included in contracts, the government's maximum financial recovery potential is modest. This is by design, however, as on-orbit incentives are not intended to make the government whole in the event of total failure. The government accepts this level of risk, in part because such failures are rare, according to government and industry experts. Also, it is unclear whether larger on-orbit incentives would reduce on-orbit failures given numerous other factors that affect a program's success, including requirements stability, design maturity and contractor experience. As a result, the most cost effective way to limit the government's loss in the rare case of a catastrophic failure may be to reduce cost growth and schedule delays by using best practices during satellite development, as GAO has previously recommended. GAO is not making any recommendations in this report.

You are an expert at summarizing long articles. Proceed to summarize the following text: The economic well-being of the United States is dependent on the reliability, safety, and security of its physical infrastructure. The nation’s infrastructure is vast and affects the daily lives of virtually all Americans. In total, there are about 4 million miles of roads, 117,000 miles of rail, 600,000 bridges, 79,000 dams, 26,000 miles of commercially navigable waterways, 11,000 miles of transit lines, 500 train stations, 300 ports, 19,000 airports, 55,000 community drinking water systems, and 30,000 wastewater treatment and collection facilities. Collectively, this infrastructure connects communities, facilitates trade, provides clean drinking water, and protects public health, among other things. The nation’s infrastructure is primarily owned and operated by state and local governments and the private sector. For example, state and local governments own about 98 percent of the nation’s bridges and the private sector owns almost all freight railroad infrastructure. The federal government owns a limited amount of infrastructure—for instance, the federal government owns and operates the nation’s air traffic control infrastructure. In addition, through its oversight role, the federal government plays an important role in ensuring the safety, security, and reliability of the nation’s infrastructure. Table 1 provides information on infrastructure ownership. Funding for the nation’s infrastructure comes from a variety of federal, state, local, and private sources. For example, the private and local public owners of water infrastructure as well as multiple federal agencies fund drinking water and wastewater capital improvements. As owners of the infrastructure, state and local governments and the private sector generally account for a larger share of funding for infrastructure than the federal government. However, the federal government has played and continues to play an important role in funding infrastructure. For example: From 1954 through 2001, the federal government invested over $370 billion (in 2001 dollars) in the Interstate Highway System. Federal Airport Improvement Program grants provided an average of $3.6 billion annually (in 2006 dollars) for airport capital improvements between 2001 and 2005. From fiscal year 1991 through fiscal year 2000, nine federal agencies provided about $44 billion (in 2000 dollars) for drinking water and wastewater capital improvements. Through the New Starts program, the federal government provided over $10 billion in capital funds for new fixed-guideway transit (e.g., commuter rail and subway) projects between fiscal year 1998 and fiscal year 2007. To increase the nation’s long-term productivity and growth, the federal government invests in various activities and sectors, including infrastructure.While providing long-term benefits to the nation as a whole, much of this spending does not result in federal ownership of the infrastructure assets. For the most part, the federal government supports infrastructure investments through federal subsidies to other levels of government or the private sector. To address concerns about the state of the nation’s infrastructure, Members of Congress have introduced several bills that are intended to increase investment in the nation’s infrastructure by, for example, issuing bonds and providing tax credits for infrastructure investments. (See table 2.) Congress previously established two commissions to study the condition and future needs of the surface transportation system, including financing options. It created the National Surface Transportation Policy and Revenue Study Commission (Policy Commission) to examine the condition and future needs of the nation’s surface transportation system and short- and long-term alternatives to replace or supplement the fuel tax as the principal revenue source supporting the Highway Trust Fund. In January 2008, the Policy Commission released its final report. Congress also created the National Surface Transportation Infrastructure Financing Commission and charged it with analyzing future highway and transit needs and the finances of the Highway Trust Fund and with recommending alternative approaches to financing transportation infrastructure. This commission issued its interim report in February 2008, and its final report is expected in November 2008. We have previously reported that the nation’s surface transportation, aviation, water, and dam systems face numerous challenges related to their infrastructure. Increasing congestion has strained the capacity of our nation’s surface transportation and aviation systems, decreasing their overall performance in meeting the nation’s mobility needs. Furthermore, significant investments are needed in our nation’s drinking and wastewater systems to address deteriorating infrastructure and deferred maintenance. In light of these and other challenges, we have called for a fundamental reexamination of government programs and developed a set of principles that could help guide such a reexamination. Despite increases in transportation spending at all levels of government and improvements to the physical condition of highways and transit facilities over the past 10 years, congestion has worsened and safety gains have leveled off. For example, according to DOT, highway spending by all levels of government has increased 100 percent in real dollar terms since 1980, but the hours of delay during peak travel periods have increased almost 200 percent during the same period. In addition, demand has outpaced the capacity of the system, and projected population growth, technological changes, and increased globalization are expected to further strain the system. We have previously reported that federal surface transportation programs are not effectively addressing these key challenges because federal goals and roles are unclear, many programs lack links to needs or performance, and the programs may not employ the best tools and approaches.In addition, federal transportation funding is generally not linked to specific performance-related goals or outcomes, resulting in limited assurance that federal funding is being channeled to the nation’s most critical mobility needs. Federal funding is also often tied to a single transportation mode, which may limit the use of federal funds to finance the greatest improvements in mobility. To address these surface transportation challenges, various stakeholders have called for increasing significantly the level of investment by all levels of government in surface transportation. For example, in its January 2008 report, the Policy Commission recommended that all levels of government and the private sector collectively invest at least $225 billion each year to maintain and improve the surface transportation system, which would be about $140 billion more than is currently invested. However, without significant changes in funding, planned spending, or both, the balance of the Highway Account of the Highway Trust Fund—the major source of federal highway funds—is projected to be exhausted at some point during fiscal year 2009. To address this gap between revenues and spending, in its fiscal year 2009 budget request, the administration proposed granting the Secretary of the Treasury, in consultation with the Secretary of Transportation, the flexibility to transfer funds between the Highway and Transit Accounts of the Highway Trust Fund. However, this solution, if enacted, would provide only a short-term reprieve—both the administration and the Congressional Budget Office project that the balances of the Highway and Transit Accounts would be exhausted by the end of fiscal year 2010. The Federal Aviation Administration (FAA) faces significant challenges in keeping the nation’s current airspace system running as efficiently as possible as the demand for air travel increases and the air traffic control system ages. System congestion, and the resulting flight delays and cancellations, are serious problems that have worsened in recent years. For example, according to DOT, 2007 was the second-worst year for delays since 1995. To accommodate current and expected demand for air travel, FAA and aviation stakeholders are developing the Next Generation Air Transportation System (NextGen) to modernize the nation’s air traffic control infrastructure and increase capacity. This effort is complex and costly. Although there is considerable uncertainty about how much NextGen will cost, FAA estimates that NextGen infrastructure will cost the federal government between $15 billion and $22 billion through 2025. Other key challenges for FAA include managing a timely acquisition and implementation of NextGen and dealing effectively with the environmental concerns of communities that are adjacent to airports or under the flight paths of arriving and departing aircraft. For example, as we have previously testified, if not adequately addressed, these concerns, particularly about the noise that affects local communities and the emissions that contribute to global warming, may constrain efforts to build or expand the runways and airports needed to handle the added capacity envisioned for NextGen. In addition, airports face similar funding challenges in attempting to expand their capacity. For example, planned airport development costs total at least $14 billion annually (in 2006 dollars) through 2011—exceeding historical funding levels by about $1 billion per year. We have previously testified that FAA’s current funding mechanisms—the Airport and Airway Trust Fund (Trust Fund) and the U.S. Treasury’s general fund—can potentially provide sufficient resources to support FAA activities, including NextGen.However, there are a number of uncertainties—including the future cost of NextGen investment, the volume of air traffic, the future costs of operating the National Airspace System, and the levels of future appropriations for the Airport Improvement Program—that may influence the funding necessary to support FAA’s activities. In addition, uncertainties surrounding the status of FAA’s reauthorization could have adverse effects on FAA’s ability to carry out its mission unless other revenue sources and spending authority are provided. Without legislative action, both the excise taxes that fund the Trust Fund and FAA’s authority to spend from the Trust Fund will expire on June 30, 2008. Failing to meet these infrastructure challenges in aviation may have significant economic consequences, since aviation is an integral part of the economy. Water utilities nationwide are under increasing pressure to make significant investments to upgrade aging and deteriorating infrastructures, improve security, serve a growing population, and meet new regulatory requirements.Water infrastructure needs across the country are estimated to range from $485 billion to nearly $1.2 trillion over the next 20 years. According to the Environmental Protection Agency’s (EPA) June 2005 Drinking Water Infrastructure Needs Survey, the largest category of need is the installation and maintenance of transmission and distribution systems—accounting for $183.6 billion, or about 66 percent of the needs projected through 2022. For wastewater systems, EPA’s 2004 Clean Watersheds Needs Survey projected infrastructure-related needs for publicly owned wastewater systems of $202.5 billion through 2024.Many drinking water and wastewater utilities have had difficulty raising funds to repair, replace, or upgrade aging capital assets; comply with regulatory requirements; and expand capacity to meet increased demand. For example, based on a nationwide survey of several thousand drinking water and wastewater utilities, we reported in 2002 that about one-third of the utilities (1) deferred maintenance because of insufficient funds, (2) had 20 percent or more of their pipelines nearing the end of their useful life, and (3) lacked basic plans for managing their capital assets.Other GAO work suggests that the nation’s water utilities could more effectively manage their infrastructure at a time when significant investments are needed. Several factors have contributed to the nation’s deteriorating water infrastructure over the years. The adequacy of available funds, in particular, has been a key determinant of how well utility infrastructure has been maintained. However, according to our nationwide survey, a significant percentage of the utilities serving populations of 10,000 or more—29 percent of the drinking water utilities and 41 percent of the wastewater utilities—were not generating enough revenue from user charges and other local sources to cover their full costs of service. In addition, when asked about the frequency of rate increases during the period from 1992 to 2001, more than half the utilities reported raising their rates infrequently: once, twice, or not at all over the 10-year period. Citing communities’ funding difficulties, many have looked to the federal government for financial assistance. However, if budgetary trends over the past few years serve as any indication, federal funding will not close the gap. For example, the trends and overall funding levels associated with the Clean Water and Drinking Water State Revolving Funds, the key federal programs supporting water infrastructure financing, suggest that they will have only a marginal impact in closing the long-term water infrastructure funding gap. We have previously reported that comprehensive asset management, a technique whereby water systems systematically identify their needs, set priorities, and better target their investments, can help utilities make better us of available funds. Additional funds, however, will ultimately be needed to narrow the funding gap. Our nation’s dam infrastructure is an important component of the nation’s water control infrastructure, supplying such benefits as water for drinking, irrigation, and industrial uses; flood control; hydroelectric power; recreation; and navigation. However, as evidenced by the events of Hurricanes Katrina and Rita, the failure of dam infrastructure, which includes levees, also represents a risk to public safety, local and regional economies, and the environment. In particular, the aging of dam infrastructure in the United States continues to be a critical issue for dam safety because the age of dams is a leading indicator of potential dam failure.According to the American Society of Civil Engineers, the number of unsafe dams has risen by more than 33 percent since 1998, to more than 3,500 in 2005.In addition, the number of dams identified as unsafe is increasing faster than the number of dams that are being repaired. To address the challenges facing our nation’s dams, the Federal Emergency Management Agency and the National Dam Safety Review Board identified both short- and long-term goals and priorities for the National Dam Safety Program over the next 5 to 10 years. They include identifying and remedying deficient dams, increasing dam inspections, increasing the number of and updating of Emergency Action Plans, achieving the participation of all states in the National Dam Safety Program, increasing research products disseminated to the dam safety community, and achieving cost efficiencies. However, according to the Congressional Research Service, most federal agencies do not have funding available to immediately undertake all nonurgent repairs, and at some agencies, dam rehabilitation projects must compete for funding with other construction projects. The Association of State Dam Safety Officials reported similar funding constraints on dam investment at the state level. Given the nation’s infrastructure challenges and the federal government’s fiscal outlook, we have called for a fundamental reexamination of government programs. Addressing these challenges requires strategic approaches, effective tools and programs, and coordinated solutions involving all levels of government and the private sector. Yet in many cases, the government is still trying to do business in ways that are based on conditions, priorities, and approaches that were established decades ago and are not well suited to addressing 21st century challenges. A reexamination offers an opportunity to address emerging concerns by eliminating outdated or ineffective programs, more sharply defining the federal role in relation to state and local roles, and modernizing those programs and policies that remain relevant. Through our prior analyses of existing programs, we identified a number of principles that could help drive an assessment for restructuring and financing the federal surface transportation program. While these principles are designed specifically to reexamine the surface transportation programs, most, if not all of these principles could be informative as policymakers consider how to address challenges facing other federal infrastructure programs. These principles include creating well-defined goals based on identified areas of national interest, which involves examining the relevance and relative priority of existing programs in light of 21st century challenges and identifying emerging areas of national importance; establishing and clearly defining the federal role in achieving each goal in relation to the roles of state and local governments, regional entities, and the private sector; incorporating performance and accountability into funding decisions to ensure resources are targeted to programs that best achieve intended outcomes and national priorities; employing the best tools, such as benefit-cost analysis, and approaches to emphasize return on investment at a time of constrained federal resources; and ensuring fiscal sustainability through targeted investments of federal, state, local, and private resources. Various options exist or have been proposed to fund investments in the nation’s infrastructure. These options include altering existing or introducing new funding approaches and employing various financing mechanisms. In addition, some have suggested including an infrastructure component in a future economic stimulus bill, which could provide a one- time infusion of funds for infrastructure. Each of these options has different merits and challenges, and the selection of any of them will likely involve trade-offs among different policy goals. Furthermore, the suitability of any of these options depends on the level of federal involvement or control that policymakers desire for a given area of policy. However, as we have reported, when infrastructure investment decisions are made based on sound evaluations, these options can lead to an appropriate blend of public and private funds to match public and private costs and benefits. To help policymakers make explicit decisions about how much overall federal spending should be devoted to infrastructure investment, we have previously proposed establishing an investment component within the unified budget. Various existing funding approaches could be altered or new funding approaches could be developed to help fund investments in the nation’s infrastructure. These various approaches can be grouped into two categories: taxes and user fees. A variety of taxes have been and could be used to fund the nation’s infrastructure, including excise, sales, property, and income taxes. For example, federal excise taxes on motor fuels are the primary source of funding for the federal surface transportation program. Fuel taxes are attractive because they have provided a relatively stable stream of revenues and their collection and enforcement costs are relatively low. However, fuel taxes do not currently convey to drivers the full costs of their use of the road—such as the costs of wear and tear, congestion, and pollution. Moreover, federal motor fuel taxes have not been increased since 1993—and thus the purchasing power of fuel taxes revenues has eroded with inflation. As Congressional Budget Office (CBO) has previously reported, the existing fuel taxes could be altered in a variety of ways to address this erosion, including increasing the per-gallon tax rate and indexing the rates to inflation. Some transportation stakeholders have suggested exploring the potential of using a carbon tax, or other carbon pricing strategies, to help fund infrastructure. In a system of carbon taxes, fossil fuel emissions would be taxed, with the tax proportional to the amount of carbon dioxide released in the fuel’s combustion. Because a carbon tax could have a broad effect on consumer decisions, we have previously reported that it could be used to complement Corporate Average Fuel Economy standards, which require manufacturers meet fuel economy standards for passenger cars and light trucks to reduce oil consumption. A carbon tax would create incentives that could affect a broader range of consumer choices as well as provide revenue for infrastructure. Another funding source for infrastructure is user fees. The concept underlying user fees—that is, users pay directly for the infrastructure they use—is a long-standing aspect of many infrastructure programs. Examples of user fees that could be altered or introduced include airport passenger facility charges; fees for use of air traffic control services; fees based on vehicle miles traveled (VMT) on roadways; freight fees, such as a per- container charge; highway tolls; and congestion pricing of roads and aviation infrastructure. Aviation user fees. Many commercial airports currently impose a user fee on passengers—referred to as a passenger facility charge—to fund airport capital projects. Over $2 billion in passenger facility charge revenues are collected by airports each year, representing an important source of funding for airport capital projects. In contrast, FAA’s activities, including the transition to NextGen, are largely funded by excise taxes through the Airport and Airway Trust Fund. To better connect FAA’s revenues with the cost of air traffic control services that FAA provides, the administration has proposed, in its FAA reauthorization bill, to replace this excise tax funding system with a cost-based user fee system. This new system would aim to recover the costs of providing air traffic control services through user fees for commercial operators and aviation fuel taxes for general aviation. According to the administration, cost-based user charges would link revenues more closely to costs and could create incentives for more efficient use of the system by aircraft operators. We have previously testified that a better alignment of FAA’s revenues and costs can address concerns about long-term revenue adequacy, equity, and efficiency as intended, but the ability of the proposed funding structure to link revenues and costs depends critically on the soundness of FAA’s cost allocation system in allocating costs to users. We found that the support for some of FAA’s cost allocation methodology’s underlying assumptions and methods is insufficient, leaving FAA unable to conclusively demonstrate the reasonableness of the resulting cost assignments. VMT fees. To more directly reflect the amount a vehicle uses particular roads, users could be charged a fee based on the number of vehicle miles traveled. In 2006, the Oregon Department of Transportation conducted a pilot program designed to test the technological and administrative feasibility of a VMT fee. The pilot program evaluated whether a VMT fee could be implemented to replace motor fuel taxes as the principal source of transportation revenue by utilizing a Global Positioning System (GPS) to track miles driven and collecting the VMT fee ($0.012 per mile traveled) at fuel pumps that can read information from the GPS. As we have previously reported, using a GPS could also be used to track mileage in high-congestion zones, and the fee could be adjusted upward for miles driven in these areas or during more congested times of day such as rush hour—a strategy that might reduce congestion and save fuel.In addition, the system could be designed to apply different fees to vehicles, depending on their fuel economy. On the federal level, a VMT fee could be based on odometer readings, which would likely be a simpler and less costly way to implement such a program. A VMT fee—unless it is adjusted based on the fuel economy of the vehicle—does not provide incentives for customers to buy vehicles with higher fuel economy ratings because the fee depends only on mileage. Also, because the fee would likely be collected from individual drivers, a VMT fee could be expensive for the government to implement, potentially making it a less cost-effective approach than a motor fuel or carbon tax. The Oregon study also identified other challenges including concerns about privacy and technical difficulties in retrofitting vehicles with the necessary technology. Freight fees. Given the importance of freight movement to the economy, the Policy Commission recently recommended a new federal freight fee to support the development of a national program aimed at strategically expanding capacity for freight transportation. While the volume of domestic and international freight moving through the country has increased dramatically and is expected to continue growing, the capacity of the nation’s freight transportation infrastructure has not increased at the same rate as demand. To support the development of a national program for freight transportation, the Policy Commission recently recommended the introduction of a federal freight fee. The Policy Commission notes that a freight fee, such as a per-container charge, could help fund projects that remedy chokepoints and increase throughput. The Policy Commission also recommended that a portion of the customs duties, which are assessed on imported goods, be used to fund capacity improvements for freight transportation. The majority of customs duties currently collected, however, are deposited in the U.S. Treasury’s general fund for the general support of federal activities.Therefore, designating a portion of customs duties for surface transportation financing would not create a new source of revenue, but rather transfer funds from the general fund. Tolling. We have previously reported that roadway tolling has the potential to provide new revenues, promote more effective and rational investment strategies, and better target spending for new and expanded capacity for surface transportation infrastructure. For example, the construction of toll projects is typically financed by bonds; therefore, projects must pass the test of market viability and meet goals demanded by investors, although even with this test, there is no guarantee that projects will always be viable. Tolling potentially can also leverage existing revenue sources by increasing private-sector participation and investment through such arrangements as public-private partnerships. However, securing public and political support for tolling can prove difficult when the public and political leaders perceive tolling (1) as a form of double taxation, (2) unreasonable because tolls do not usually cover the full costs of projects, or (3) unfair to certain groups. Other challenges include obtaining sufficient statutory authority to toll, adequately addressing the traffic diversion that might result when motorists seek to avoid toll facilities, limitations on the types of roads that can be tolled, and coordinating with other states or jurisdictions on a tolling project. Congestion pricing. As we have previously reported, congestion pricing, or road pricing, attempts to influence driver behavior by charging fees during peak hours to encourage users to shift to off-peak periods, use less congested routes, or use alternative modes. Congestion pricing can also help guide capital investment decisions for new transportation infrastructure. In particular, as congestion increases, tolls also increase, and such increases (sometimes referred to as “congestion surcharges”) signal increased demand for physical capacity, indicating where capital investments to increase capacity would be most valuable. Furthermore, these congestion surcharges can potentially enhance mobility by reducing congestion and the demand for roads when the surcharges vary according to congestion to maintain a predetermined level of service. The most common form of congestion pricing in the United States is high- occupancy-toll lanes, which are priced lanes that offer drivers of vehicles that do not meet the occupancy requirements the option of paying a toll to use lanes that are otherwise restricted for high-occupancy vehicles. In its FAA reauthorization proposal, the administration proposed extending congestion pricing to the aviation sector as a means of managing air traffic congestion. Specifically, the administration proposed that FAA establish a fee based on time of day or day of the week for aircraft using the nation’s most congested airports to discourage peak-period traffic. Under such a fee, cargo carriers could pay lower fees by operating at night than they would pay by operating at peak periods of the day, creating an incentive for some cargo carriers to switch daytime operations to nighttime. Like tolling, congestion pricing proposals often arouse political and public opposition, raise equity concerns, and face statutory restrictions. Financing strategies can provide flexibility for all levels of government when funding additional infrastructure projects, particularly when traditional pay-as-you-go funding approaches, such as taxes or fees, are not set at high enough levels to meet demands. The federal government currently offers several programs to provide state and local governments with incentives such as bonds, loans, and credit assistance to help finance infrastructure. Financing mechanisms can create potential savings by accelerating projects to offset rapidly increasing construction costs and offer incentives for investment from state and local governments and from the private sector. However, each financing strategy is, in the final analysis, a form of debt that ultimately must be repaid with interest. Furthermore, since the federal government’s cost of capital is lower than that of the private sector, financing mechanisms, such as bonding, may be more expensive than timely, full, and up-front appropriations. Finally, if the federal government chooses to finance infrastructure projects, policy makers must decide how borrowed dollars will be repaid, either by users or by the general population either now or in the future through increases in general fund taxes or reductions in other government services. A number of available mechanisms can be used to help finance infrastructure projects. Examples of these financing mechanisms follow: Bonding. A number of bonding strategies—including tax-exempt bonds, Grant Anticipation Revenue Vehicles (GARVEE) bonds, and Grant Anticipation Notes (GAN)—offer flexibility to bridge funding gaps when traditional revenue sources are scarce. For example, state-issued GARVEE bonds or GANs provide capital in advance of expected federal funds, allowing states to accelerate highway and transit project construction and thus potentially reduce construction costs. Through April 2008, 20 states and two territories issued approximately $8.2 billion of GARVEE-type debt financing and 20 other states are actively considering bonding or seeking legislative authority to issue GARVEEs. Further, SAFETEA-LU authorized the Secretary of Transportation to allocate $15 billion in private activity bonds for qualified highway and surface freight transfer facilities. To date, $5.3 billion has been allocated for six projects. In aviation, most commercial airports issue a variety of bonds for airport capital improvements, most notably general revenue bonds that are backed by general revenues from the airport—including aircraft landing fees, concessions, and parking fees—and passenger facility charges. Several bills introduced in this Congress would increase investment in the nation’s infrastructure through bonding. For example, the Build America Bonds Act would provide $50 billion in new infrastructure funding through bonding. Although bonds can provide up-front capital for infrastructure projects, they can be more expensive for the federal government than traditional federal grants. This higher expense results, in part, because the government must compensate the investors for risks they assumed through an adequate return on their investment. Loans, loan guarantees, and credit assistance. The federal government currently has two programs designed to offer credit assistance to states for surface transportation projects. The Transportation Infrastructure Finance and Innovation Act of 1998 (TIFIA) authorized FHWA to provide credit assistance, in the form of direct loans, loan guarantees, and standby lines of credit for projects of national significance. A similar program, Railroad Rehabilitation and Improvement Financing (RRIF) offers loans to acquire, improve, develop, or rehabilitate intermodal or rail equipment or facilities. To date, 15 TIFIA projects have been approved for a total of about $4.8 billion in credit assistance and the RRIF program has approved 21 loan agreements worth more than $747 million. These programs are designed to leverage federal funds by attracting substantial nonfederal investments in infrastructure projects. However, the federal government assumes a level of risk when it makes or guarantees loans for projects financed with private investment. Revolving funds. Revolving funds can be used to dedicate capital to be loaned for qualified infrastructure projects. In general, loaned dollars are repaid, recycled back into the revolving fund, and subsequently reinvested in the infrastructure through additional loans. Such funds exist at both the federal and the state levels and are used to finance various infrastructure projects ranging from highways to water mains. For example, two federal funds support water infrastructure financing, the Clean Water State Revolving Fund (CWSRF) for wastewater facilities, and the Drinking Water State Revolving Fund (DWSRF) for drinking water facilities. Under each of these programs, the federal government provides seed money to states, which they supplement with their own funds. These funds are then loaned to local governments and other entities for water infrastructure construction and upgrades and various water quality projects. In addition, State Infrastructure Banks (SIB)—capitalized with federal and state matching funds—are state-run revolving funds, make loans and provide credit enhancements and other forms of nongrant assistance to infrastructure projects. Through June 2007, 33 SIBs have made approximately 596 loan agreements worth about $6.2 billion to leverage other available funds for transportation projects across the nation. Furthermore, other funds—such as a dedicated national infrastructure bank—have been proposed to increase investment in infrastructure with a national or regional significance. A challenge for revolving funds in general is maintaining their capitalized value. Defaults on loans and inflation can reduce the capitalized value of the fund—necessitating an infusion of capital to continue the fund’s operations. Another option proposed for temporarily increasing investment in the nation’s infrastructure is including an investment component in a future economic stimulus bill. According to supporters, including funding for “ready to build” infrastructure projects in a stimulus bill would serve to both boost the economy and improve the nation’s infrastructure through a one-time infusion of funds. For example, the American Association of State Highway and Transportation Officials estimates 42,000 jobs are created for every $1 billion dollars invested in transportation projects. We have previously identified important design criteria for any economic stimulus package. Specifically: Economic stimulus package should be timely. An economic stimulus should not be enacted prematurely, delayed too long, or consist of programs that would take too long to be implemented to lessen any economic downturn. For example, if fiscal stimulus is undertaken when it is not needed, it could result in higher inflation or if fiscal stimulus is enacted too slowly, it could take effect after the economy has already started to recover. Economic stimulus package should be temporary. An economic stimulus should be designed to raise output in the short run, but should not increase the budget deficit in the long-run. If a stimulus program is not temporary and continues after the economy recovers, it could lead to higher inflation. Economic stimulus package should be targeted. An economic stimulus should be targeted to areas that are most vulnerable in a weakening economy and should generate the largest possible increase in short-run gross domestic product. Designing and implementing an economic stimulus package with an infrastructure investment component that is timely, temporary, and targeted would be difficult. First, while an effective stimulus package should be timely, practically speaking, infrastructure projects require lengthy planning and design periods. According to CBO, even those projects that are “on the shelf” generally cannot be undertaken quickly enough to provide a timely stimulus to the economy.Second, spending on infrastructure is generally not temporary because of the extended time frames needed to complete projects. For example, initial outlays for major infrastructure projects supported by the federal government, such as highway construction, often total less than 25 percent of the total funding provided for the project. Furthermore, the initial rate of spending can be significantly lower than 25 percent for large projects. Third, because of differences among states, it is challenging to target stimulus funding to areas with the greatest economic and infrastructure needs. For example, two possible indicators for targeting infrastructure aid to states, gross state product and lane miles per capita, are not correlated. Furthermore, as we have previously reported, states tend to substitute federal funds for funds they would have otherwise spent—making it difficult to target a stimulus package so that it results in a dollar-for-dollar increase in infrastructure investment. We have previously reported that the budget process can favor consumption over investment because the initial cost of an infrastructure project looks high in comparison to consumption spending.Thus, adopting a capital budget is suggested as a way to eliminate a perceived bias against investments requiring large up-front spending when they compete with other programs in a unified budget. However, proposals to adopt a capital budget at the federal level often start with certain concepts and models extended from state and local governments and the private sector, which are not appropriate because of fundamental differences in the role of the federal government. Specifically, when state and local governments and the private sector make investments, they typically own the resulting assets, while this is frequently not the case for the federal government. For example, although the federal government invests in surface transportation, aviation, water, and dam infrastructure, a significant portion of this infrastructure is owned by state and local governments. This makes it difficult to fully apply traditional capital budgeting approaches, such as depreciation, which might be considered when assets are fully owned. Moreover, there are fundamental differences between the roles of the state and local governments and the federal government. In an inclusive, unified budget, it is important to disclose up front the full commitments of the government. Federal fiscal policy, as broadly conceived, plays a key role in managing the short-term economy as well as promoting the savings needed for long-term growth. Rather than recommend adopting a capital budget, we have previously proposed establishing an investment component within the unified budget to address federal spending intended to promote the nation’s long-term economic growth.By recognizing the different effects of various types of federal spending, an investment focus within the budget would provide a valuable supplement to the unified budget’s concentration on macroeconomic issues. Moreover, it would direct attention to the consequences of choices within the budget under existing budget limitations—a level which is now not determined explicitly by policymakers but is simply the result of numerous individual decisions. If an investment component within the unified budget was adopted, Congress could decide on an overall level of investment in a budget resolution or other macro framework, which would be tracked and enforced through the authorizing and appropriations process to ensure that individual appropriations actions supported the overall level. This approach has the advantage of focusing budget decision makers on the overall level of investment supported in the budget without losing sight of the unified budget’s effect on the economy. It also has the advantage of building on the current congressional budget process. Finally, it does not raise the problems posed by capital budgeting proposals that use depreciation and deficit financing. Although the investment component would be subject to budget controls, the existence of a separate component could create an incentive to categorize many proposals as investment. If an investment component within the budget is to be implemented in a meaningful fashion, it will be important to identify what to include. Any changes in the budgetary treatment of investment need to consider broader federal responsibilities. While well-chosen investments may contribute to long-term growth, financing such programs through deficits would undermine their own goal by reducing savings available to fund private investment.Accordingly, reforms in the federal government’s budget for investment should be considered within the overall constraints of fiscal policy based on unified budget principles. The nation’s physical infrastructure is under strain, raising a host of safety, security, and economic concerns. Given these concerns, various investment options have been, and likely will continue to be, identified to help repair, upgrade, and expand our nation’s infrastructure. Ultimately, Congress and other federal policymakers will have to determine which option—or, more likely, which combination of funding and financing options—best meets the needs of the nation. There is no silver bullet. Moreover, although financing mechanisms allow state and local governments to advance projects when traditional pay-as-you-go funding approaches, such as taxes and fees, are insufficient, ultimately these borrowed dollars must be repaid by the users or the general population. Consequently, prudent decisions are needed to determine the appropriate level of infrastructure investment and to maximize each dollar invested. We will continue to assist the Congress as it works to evaluate various investment options and develop infrastructure policies for the 21st century. Messrs. Chairmen, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the Committee might have. For further information on this statement, please contact Patricia Dalton at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony were Kyle Browning, Nikki Clowers, Steve Elstein, JayEtta Hecker, Carol Henn, Bert Japikse, Barbara Lancaster, Matthew LaTour, Nancy Lueke, and Katherine Siggerud. Drinking Water: The District of Columbia and Communities Nationwide Face Serious Challenges in Their Efforts to Safeguard Water Supplies. GAO-08-687T. Washington, D.C.: April 15, 2008. Surface Transportation: Restructured Federal Approach Needed for More Focused, Performance-Based, and Sustainable Programs. GAO-08-400. Washington, D.C.: March 6, 2008. Highway Public-Private Partnerships: More Rigorous Up-front Analysis Could Better Secure Potential Benefits and Protect the Public Interest. GAO-08-44. Washington, D.C.: February 8, 2008. Federal Aviation Administration: Challenges Facing the Agency in Fiscal Year 2009 and Beyond. GAO-08-460T. Washington, D.C.: February 7, 2008. Surface Transportation: Preliminary Observations on Efforts to Restructure Current Program. GAO-08-478T. Washington, D.C.: February 6, 2008. Long-Term Fiscal Outlook: Action Is Needed to Avoid the Possibility of a Serious Economic Disruption in the Future. GAO-08-411T. Washington, D.C.: January 29, 2008. Freight Transportation: National Policy and Strategies Can Help Improve Freight Mobility. GAO-08-287. Washington, D.C.: January 7, 2008. A Call For Stewardship: Enhancing the Federal Government’s Ability to Address Key Fiscal and Other 21st Century Challenges. GAO-08-93SP. Washington, D.C.: December 17, 2007. Transforming Transportation Policy for the 21st Century: Highlights of a Forum. GAO-07-1210SP. Washington, D.C.: September 19, 2007. Railroad Bridges and Tunnels: Federal Role in Providing Safety Oversight and Freight Infrastructure Investment Could Be Better Targeted. GAO-07-770. Washington, D.C.: August 6, 2007. Vehicle Fuel Economy: Reforming Fuel Economy Standards Could Help Reduce Oil Consumption by Cars and Light Trucks, and Other Options Could Complement These Standards. GAO-07-921. Washington, D.C.: August 2, 2007. Public Transportation: Future Demand Is Likely for New Starts and Small Starts Programs, but Improvements Needed to the Small Starts Application Process. GAO-07-917. Washington, D.C.: July 27, 2007. Surface Transportation: Strategies Are Available for Making Existing Road Infrastructure Perform Better. GAO-07-920. Washington, D.C.: July 26, 2007. Highway and Transit Investments: Flexible Funding Supports State and Local Transportation Priorities and Multimodal Planning. GAO-07-772. Washington, D.C.: July 26, 2007. Intermodal Transportation: DOT Could Take Further Actions to Address Intermodal Barriers. GAO-07-718. Washington, D.C.: June 20, 2007. Federal Aviation Administration: Observations on Selected Changes to FAA’s Funding and Budget Structure in the Administration’s Reauthorization Proposal. GAO-07-625T. Washington, D.C.: March 21, 2007. Performance and Accountability: Transportation Challenges Facing Congress and the Department of Transportation. GAO-07-545T. Washington, D.C.: March 6, 2007. U.S. Infrastructure: Funding Trends and Opportunities to Improve Investment Decisions. GAO/RCED/AIMD-00-35. Washington, D.C.: February 7, 2007. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. Fiscal Stewardship: A Critical Challenge Facing Our Nation, GAO-07- 362SP. Washington, D.C.: January 2007. Intercity Passenger Rail: National Policy and Strategies Needed to Maximize Public Benefits from Federal Expenditures. GAO-07-15. Washington, D.C.: November 13, 2006. Freight Railroads: Industry Health Has Improved, but Concerns about Competition and Capacity Should Be Addressed. GAO-07-94. Washington, D.C.: October 6, 2006. Aviation Finance: Observations on Potential FAA Funding Options. GAO-06-973. Washington, D.C.: September 29, 2006. National Airspace System Modernization: Observations on Potential Funding Options for FAA and the Next Generation Airspace System. GAO-06-1114T. Washington, D.C.: September 27, 2006. Highway Finance: States’ Expanding Use of Tolling Illustrates Diverse Challenges and Strategies. GAO-06-554. Washington, D.C.: June 28, 2006. Highway Trust Fund: Overview of Highway Trust Fund Estimates. GAO-06-572T. Washington, D.C.: April 4, 2006. Highway Congestion: Intelligent Transportation Systems’ Promise for Managing Congestion Falls Short, and DOT Could Better Facilitate Their Strategic Use. GAO-05-943. Washington, D.C.: September 14, 2005. Freight Transportation: Short Sea Shipping Option Shows Importance of Systematic Approach to Public Investment Decisions. GAO-05-768. Washington, D.C.: July 29, 2005. Highlights of an Expert Panel: The Benefits and Costs of Highway and Transit Investments. GAO-05-423SP. Washington, D.C.: May 2005. 21st Century Challenges: Reexamining the Base of the Federal Government. GAO-05-325SP. Washington, D.C.: February 2005. Highway and Transit Investments: Options for Improving Information on Projects’ Benefits and Costs and Increasing Accountability for Results. GAO-05-172. Washington, D.C.: January 24, 2005. Federal-Aid Highways: Trends, Effect on State Spending, and Options for Future Program Design. GAO-04-802. Washington, D.C.: August 31, 2004. Surface Transportation: Many Factors Affect Investment Decisions. GAO-04-744. Washington, D.C.: June 30, 2004. Highways and Transit: Private Sector Sponsorship of and Investment in Major Projects Has Been Limited. GAO-04-419. Washington, D.C.: March 25, 2004. Water Infrastructure: Comprehensive Asset Management Has Potential to Help Utilities Better Identify Needs and Plan Future Investments. GAO-04-461. Washington, D.C.: March 19, 2004. Freight Transportation: Strategies Needed to Address Planning and Financing Limitations. GAO-04-165. Washington, D.C.: December 19, 2003. Marine Transportation: Federal Financing and a Framework for Infrastructure Investments. GAO-02-1033. Washington, D.C.: September 9, 2002. Water Infrastructure: Information on Financing, Capital Planning, and Privatization. GAO-02-764. Washington, D.C.: August 16, 2002. Budget Trends: Federal Investment Outlays, Fiscal Years 1981-2003. GAO/AIMD-98-184. Washington, D.C.: June 15, 1998. Budget Trends: Federal Investment Outlays, Fiscal Years 1981-2002, GAO/AIMD-97-88. Washington, D.C.: May 21, 1997. Budget Structure: Providing an Investment Focus in the Federal Budget. GAO/T-AIMD-95-178. Washington, D.C.: June 29, 1995. Budget Issues: Incorporating an Investment Component in the Federal Budget. GAO/AIMD-94-40. Washington, D.C.: November 9, 1993. 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Physical infrastructure is critical to the nation's economy and affects the daily life of virtually all Americans--from facilitating the movement of goods and people within and beyond U.S. borders to providing clean drinking water. However, this infrastructure--including aviation, highway, transit, rail, water, and dam infrastructure--is under strain. Estimates to repair, replace, or upgrade aging infrastructure as well as expand capacity to meet increased demand top hundreds of billions of dollars. Calls for increased investment in infrastructure come at a time when traditional funding for infrastructure projects is increasingly strained, and the federal government's fiscal outlook is worse than many may understand. This testimony discusses (1) challenges associated with the nation's surface transportation, aviation, water, and dam infrastructure, and the principles GAO has identified to help guide efforts to address these challenges and (2) existing and proposed options to fund investments in the nation's infrastructure. This statement is primarily based on a body of work GAO has completed for the Congress over the last several years. To supplement this existing work, GAO also interviewed Department of Transportation officials to obtain up-to-date information on the status of the Highway Trust Fund and various funding and financing options and reviewed published literature to obtain information on dam infrastructure issues. The nation faces a host of serious infrastructure challenges. Demand has outpaced the capacity of our nation's surface transportation and aviation systems, resulting in decreased performance and reliability. In addition, water utilities are facing pressure to upgrade the nation's aging and deteriorating water infrastructure to improve security, serve growing demands, and meet new regulatory requirements. Given these types of challenges and the federal government's fiscal outlook, it is clear that the federal government cannot continue with business as usual. Rather, a fundamental reexamination of government programs, policies, and activities is needed. Through prior analyses of existing programs, GAO identified a number of principles that could guide a reexamination of federal infrastructure programs. These principles include: (1) creating well-defined goals based on identified areas of national interest, (2) establishing and clearly defining the federal role in achieving each goal, (3) incorporating performance and accountability into funding decisions, (4) employing the best tools and approaches to emphasize return on investment, and (5) ensuring fiscal sustainability. Various options are available to fund infrastructure investments. These options include altering existing or introducing new funding approaches and employing various financing mechanisms, such as bonds and loans. For example, a variety of taxes and user fees, such as tolling, can be used to help fund infrastructure projects. In addition, some have suggested including an infrastructure component in a future economic stimulus bill, which could provide a one-time infusion of funds for infrastructure projects. Each of these options has different merits and challenges, and choosing among them will likely involve trade-offs among different policy goals. Furthermore, the suitability of the various options depends on the level of federal involvement or control that policymakers desire. However, as GAO has reported, when infrastructure investment decisions are made based on sound evaluations, these options can lead to an appropriate blend of public and private funds to match public and private costs and benefits. To help policymakers make explicit decisions about how much overall federal spending should be devoted to investment, GAO has previously proposed establishing an investment component within the unified budget.

You are an expert at summarizing long articles. Proceed to summarize the following text: Studies have shown that insured children are more likely than uninsured children to get preventive and primary health care. Insured children are also more likely to have a relationship with a primary care physician and to receive required preventive services, such as well-child checkups. In contrast, lack of insurance can inhibit parents from trying to get health care for their children and can lead providers to offer less intensive services when families seek care. Several studies have found that low-income and uninsured children are more likely to be hospitalized for conditions that could have been managed with appropriate outpatient care. Most insured U.S. children under age 18 have health coverage through their parents’ employment—62 percent in 1996. Most other children with insurance have publicly funded coverage, usually the Medicaid program. Medicaid—a jointly funded federal-state entitlement program that provides health coverage for both children and adults—is administered through 56 separate programs, including the 50 states, the District of Columbia, Puerto Rico, and the U.S. territories. Historically, children and their parents were automatically covered if they received benefits under the Aid to Families With Dependent Children (AFDC) program. Children and adults may also be eligible for Medicaid if they are disabled and have low incomes or, at state discretion, if their medical expenses are extremely high relative to family income. Before 1989, coverage expansions for pregnant women and children based on family income and age were optional for states, although many states had expanded coverage. Starting in July 1989, states were required to cover pregnant women and infants (defined as children under 1 year of age) with family incomes at or below 75 percent of the federal poverty level. Two subsequent federal laws further expanded mandated eligibility for children. By July 1991, states were required to cover (1) infants and children up to 6 years old with family income at or below 133 percent of the federal poverty level and (2) children 6 years old and older born after September 30, 1983, with family income at or below 100 percent of the federal poverty level. Since 1989, states have also had the option of covering infants with family income between 133 percent and 185 percent of the poverty level. States may expand Medicaid eligibility for children by phasing in coverage of children up to 19 years old more quickly than required, by increasing eligibility income levels, or both. The demographic analysis in this report, however, focuses on the group of children for whom coverage is mandated. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L 104-193), also known as the Welfare Reform Act, substantially altered AFDC and Supplemental Security Income (SSI) but made relatively few changes to the Medicaid program itself. The law replaced AFDC with a block grant that allowed states to set different income and resource (asset) eligibility standards for the new program—Temporary Assistance for Needy Families (TANF)—than for Medicaid. To ensure continued health coverage for low-income families, the law generally set Medicaid’s eligibility standards at AFDC levels in effect July 16, 1996, thereby ensuring that families who were eligible for Medicaid before welfare reform continued to qualify, regardless of their eligibility for states’ cash assistance programs. The law tightened the criteria for children to qualify for disability assistance through SSI, thus tightening eligibility for Medicaid. In addition, the law restricted aliens’ access to benefit programs, including SSI, and Medicaid benefits that were conditional on receipt of SSI. State and local governments were given some flexibility in designing policies that governed aliens’ eligibility for TANF, Medicaid, and social services. In a recently released report, we studied the Welfare Reform Act and its impact on Medicaid and found that in the states we visited, most chose to continue to provide Medicaid coverage to previously covered groups. The Balanced Budget Act of 1997 (P.L. 105-33) restored SSI eligibility and the derivative Medicaid benefits to all aliens receiving SSI at the time welfare reform was enacted and to all aliens legally residing in the United States on the date of enactment who become disabled in the future. At the same time, states continued to have flexibility in implementing certain benefits policies for aliens. Current law allows states the option of providing Medicaid coverage to aliens who were legal permanent residents in the country before August 23, 1996. States also have the option of covering legal residents who arrived after August 22, 1996, once they have resided in the United States for 5 years. Illegal aliens are eligible only for emergency services under Medicaid. (See table 1.) The Balanced Budget Act also made two changes that directly affect children’s coverage in the Medicaid program. It gives states the option of providing 12 months of continuous eligibility to children without a redetermination of eligibility, thereby avoiding the problem of children frequently moving on and off Medicaid as their parents’ circumstances change. The act also allows states to extend Medicaid coverage to children on the basis of “presumptive eligibility” until a formal determination is made. Under this provision, certain qualified providers can make an initial determination of eligibility, based on income, that an individual is eligible. The individual is then required to apply formally for the program by the last day of the month following the month in which the determination of presumptive eligibility was made. Finally, the Balanced Budget Act created the Children’s Health Insurance Program (CHIP), a grant program for uninsured children, through which $20.3 billion in new federal funds will be made available to states over the next 5 years. CHIP has a number of implications for Medicaid. If a state chooses to offer coverage through a separate program, the state must coordinate activities with the Medicaid program to ensure that Medicaid-eligible children are enrolled in Medicaid. The Congressional Budget Office estimated that the “outreach effect” of CHIP will result in an additional $2.4 billion in Medicaid spending over the same 5 years due to increased enrollment of 460,000 Medicaid-eligible children each year. States may also use the grant funds to expand coverage under their state Medicaid programs to reach additional low-income children, increasing the number of children potentially eligible for Medicaid. Uninsured Medicaid-eligible children differ somewhat from those currently enrolled in Medicaid, and these differences can be used by states to focus their outreach and enrollment efforts. Overall, about 23 percent—or 3.4 million—of the 15 million children who were eligible for Medicaid were uninsured in 1996. Slightly over half of the Medicaid-eligible children are insured solely by Medicaid, while about 7 percent have both Medicaid and private coverage. The remainder have coverage through other public programs, such as the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) or the Indian Health Service. (See fig. 1.) Medicaid-eligible children who are uninsured have characteristics closer to Medicaid-eligible children who are privately insured than to those with Medicaid. They are disproportionately children of the working poor, Hispanic, and U.S.-born children of foreign-born parents or foreign-born, and they are more likely to live in the West and the South. Medicaid-eligible children are more likely to be uninsured if their parents work, if their parents are self-employed or employed by a small firm, or if they have a two-parent family. Children whose parents worked at all during the year—whether full-time, part-time, or for part of the year—are about twice as likely to be uninsured as those whose parents were unemployed. However, these children are more likely to be covered by employment-based insurance. The explanation for this apparent paradox is that children with employed parents are less likely to be covered by Medicaid, and employment-based coverage does not fully compensate for low rates of Medicaid participation. (See table 2.) Small firms are less likely than larger firms to offer health insurance; therefore, it is not surprising that children whose parents are self-employed or employed by small firms are less likely to be insured. This could suggest selective targeting of smaller firms in Medicaid outreach efforts, especially if it is known that they do not offer insurance. Half of all uninsured Medicaid-eligible children are in two-parent families, compared with only about 28 percent of those insured by Medicaid. The uninsured rate for Medicaid-eligible children is also higher in two-parent families than in single-parent families—30 percent compared with 18 percent. This again underscores that successful outreach efforts need to reach beyond the single unemployed mothers generally associated with both cash assistance programs and Medicaid. Among racial and ethnic groups, the proportion of uninsured Medicaid-eligible children, as well as the proportion enrolled in Medicaid, varies by racial and ethnic group. Among uninsured Medicaid-eligible children, Hispanics have the highest uninsured rate, while blacks are most likely to be enrolled in Medicaid. (See table 3 and table II.1 in app. II.) In 1996, almost 9 out of every 10 uninsured Medicaid-eligible children were U.S.-born, but many—over one-third—lived in immigrant families. In addition to the 11 percent who were immigrants, another one-quarter had at least one foreign-born parent. (See fig. 2.) The large number of children in immigrant families and the high proportion that are uninsured suggest that immigrant communities may be promising targets for outreach. (See table 4.) Over 70 percent of children in immigrant families are Hispanic, suggesting that outreach efforts be targeted to the Hispanic community as well as use Spanish-language outreach materials and applications. Medicaid eligibility criteria allow younger children with higher family income to enroll. Children under 6 years old in families with income at or below 133 percent of the federal poverty level are eligible for the program, according to federal mandate, as compared with older children whose families’ income must be at or below 100 percent of the federal poverty level. As a consequence, 54 percent of children who are Medicaid-eligible but uninsured are less than 6 years old. Nevertheless, outreach through schools could reach some of these younger children, since 42 percent have a school-age sibling aged 6 to 17. This means that it could be possible to reach about 69 percent—or 2.4 million—of uninsured Medicaid-eligible children through schools. Other government programs could be used to reach families of uninsured Medicaid-eligible children, if they were using such programs. Use of government-subsidized services by these families might also indicate their willingness to access certain kinds of government-sponsored programs. While the CPS does not have information on use of public programs such as Head Start or the Department of Agriculture’s Special Supplemental Food Program for Women, Infants, and Children (WIC), it does have information on family use of the Food Stamp program. Compared with similar families with employment-based insurance or Medicaid coverage for their children, children who were Medicaid-eligible but uninsured were less likely to have been in families that received food stamps. Some experts have argued that immigrant families have been less willing to apply for subsidized benefits because of their fear of the government or language and cultural barriers. However, we did not find any significant difference in use of food stamps among uninsured Medicaid-eligible children with U.S.-born parents, foreign-born naturalized citizen parents, and foreign-born noncitizen parents. The demographic makeup of the uninsured child population varies geographically and by community, meaning that national analyses can only suggest potential outreach targets and must be validated in the light of local knowledge. Nonetheless, it is clear that the West and the South as a whole face particular challenges. A larger proportion of Medicaid-eligible children in these regions are uninsured—overall, the West and the South account for 73 percent of all uninsured Medicaid-eligible children nationwide. (See fig. 3.) Several reasons may explain the differences in proportions of uninsured Medicaid-eligible children in different regions. Some areas have higher proportions of workers with employment-based insurance because of the size of local firms, type of business, or degree of unionization. As a result, higher proportions of workers’ dependents are insured. Regions also differ in the number and percentage of immigrant families and various ethnic groups. All of these factors can affect insurance status and how states conduct outreach to the uninsured. Regions differ in the number of uninsured Medicaid-eligible children who are Hispanic or of Hispanic descent and in the number who are members of immigrant families. Both Hispanic and immigrant families are most prevalent in the West, particularly in California, where over 60 percent of uninsured Medicaid-eligible children are Hispanic and over 70 percent live in immigrant families. (See tables II.2 and II.3 in app. II.) Although some differences among states are due to states’ demographic characteristics, differences may also be due to states’ varying efforts to extend health insurance to those who have been unable to receive coverage and to inform these individuals of their eligibility. Having a larger, more visible program is a mechanism that may help. Some states have expanded Medicaid eligibility further for children than other states and may have attracted more of their poorer Medicaid-eligible children to enroll. When asked why families do not enroll their Medicaid-eligible children in the program, state officials, beneficiary advocates, health care providers, and other experts report a variety of contributing factors. Some families do not know about the program or do not perceive a need for its benefits. Some families, especially those who have never enrolled in public benefit programs, may not even be aware that they are eligible. In addition, some parents may associate Medicaid with welfare and dependency, and therefore have an aversion to enrolling their children in the program. Cultural and language differences may limit awareness or understanding, and immigration status may also affect a family’s willingness to apply. Finally, the eligibility process can be difficult for working families because of the limits on where and when enrollment can take place, the lengthy application, and the documentation required. These barriers to the enrollment process can be reduced, but in reducing the length of the application and the amount of documentation a balance must be struck between maximizing enrollment and minimizing program abuse. Most state officials, advocates, providers, and other experts whom we interviewed agreed that many families are unaware of Medicaid. Even families who know about the program may not realize that they could be eligible. With the long-standing link between Medicaid and AFDC, many families—both those who have never received welfare and those who have—assume that if they are not receiving cash assistance, they are not eligible for Medicaid. Two types of families tend to be unaware of their eligibility: working families who assume that Medicaid eligibility is tied to welfare eligibility and families who were previously on welfare and believe that, because of welfare reform, they are no longer eligible for Medicaid. These families are unlikely to understand that children with higher levels of family income may be eligible for Medicaid. Complex eligibility rules—which can result in younger children being eligible while their elder siblings are not—can simply add to families’ confusion. Several state officials, providers, and one expert told us that some families do not become concerned about health care access until their children become sick and, therefore, do not enroll them in Medicaid—especially if the children are relatively healthy. In addition, if families have successfully sought and received care for their children from clinics or emergency rooms in the past without enrolling in a health care program such as Medicaid, they are likely to continue to seek care from these providers. State officials, advocates, and other experts told us that some families are hesitant to enroll in Medicaid because of cultural differences, language barriers, and their understanding of U.S. immigration policies. Experts and a state official said that cultural differences may keep immigrant families from enrolling in Medicaid. Language was often mentioned as a barrier. Individuals who cannot read the Medicaid application and informational materials and cannot easily converse with eligibility workers by telephone or in person are at a distinct disadvantage. One expert told us that the degree of acculturation has a major impact on whether an immigrant will use public assistance of any kind. While time spent in the country is the main predictor of acculturation, some individuals may not participate in mainstream society and use its institutions even after living in the country for many years. According to some state officials, advocates, and experts, immigrant families may also hesitate to enroll in Medicaid because they are concerned that it will negatively affect their immigration status. Immigrants who are legal residents may be afraid that if they receive benefits that they will be labeled a “public charge” and will have difficulties with the Immigration and Naturalization Service (INS) when applying for naturalization, visa renewal, or reentry into the United States. Although advocates question whether aliens receiving benefits may be considered public charges, in some instances actions have been taken against such individuals seeking visa renewals. Several advocates also told us about cases where individuals were prevented from reentering the United States unless they agreed to reimburse Medicaid for services paid for by the program on their behalf—particularly in border states such as California. Publicity about such cases in the immigrant community can deter immigrants from applying for Medicaid benefits for themselves or their children—even in cases where the children were born in the United States and are American citizens. In families where one or more adults are in the country illegally, the reluctance to seek Medicaid benefits for a child may be even greater. When applying for Medicaid for children, families in some states are asked about the immigration status of other members of the household. Again, advocates told us this is a deterrent to enrollment for such families and reported that many immigrant families, both legal and illegal, seek medical assistance through county clinics and public hospitals because these institutions are viewed as more sympathetic and less likely to ask questions about immigration status. State officials and other experts told us that because of its long-standing ties with welfare and other benefit programs, many families associate Medicaid with a family that cannot provide for itself. Experts report that many working poor and near poor do not want to be labeled as welfare recipients, even if the law entitles their children to benefits. They often take the view that they never have received welfare and do not want to start. State officials, beneficiary advocates, providers, and other experts agree that Medicaid enrollment processes and requirements have often been barriers. However, to ensure that all recipients of Medicaid benefits meet income and other requirements, states have found it necessary to develop application processes that use lengthy application forms and require extensive documentation. State officials, beneficiary advocates, and other experts told us that lengthy enrollment forms and the associated documentation requirements create a barrier for families. Long forms are often used when a family is applying for a combination of programs, including Medicaid. Numerous questions relating to income, assets, citizenship, and family composition are used to determine eligibility and to ensure that only those who are entitled to benefits are enrolled in Medicaid. In addition to length, enrollment forms often require extensive documentation. Families are asked to provide paystubs, bank account statements, birth certificates, and other documents that verify the information they provide on the forms. Gathering such documents can be burdensome. For example, obtaining a birth certificate can involve going to a different office and then returning to the eligibility office. Obtaining certain documents can also require a family to pay a fee. A valid and reliable eligibility determination process is important to state officials to ensure program integrity. In addition, states can be assessed a financial penalty by the federal government if their error rates are too high. In an effort to balance these needs, most states have developed shorter forms for children who are applying exclusively for Medicaid, primarily by dropping the asset requirements. Some advocates, however, are still concerned with the length and complexity of application forms and the number of questions they contain. One advocate suggested that if applicants cannot understand the form, they are not going to fill it out. Another advocate pointed out that some questions may be well-intended, but they nonetheless lengthen the application. For example, as a way of identifying if the family may be eligible for other benefit programs, some states’ applications ask questions related to disability. In addition, advocates pointed out that the documentation requirements are so stringent in some states that many applicants are denied enrollment because they cannot produce the documentation required. In an earlier report, we found that such requirements were shown to account for nearly half of all denials. In addition to limits that were developed as part of a legitimate effort to maximize the accuracy of eligibility determinations and monitor the eligibility process, other barriers exist. These include location of enrollment sites and enrollment hours; fluctuations in eligibility status, including the impact of welfare reform; and families’ lack of transportation and communication problems. Many of the state officials and other experts with whom we spoke said that the enrollment process used for welfare was difficult for working families because enrollment locations are limited and open only during typical work hours. This makes it difficult for working parents in families whose children may be eligible for Medicaid to apply. Such parents may not have the flexibility in their job to take time off to enroll through face-to-face interviews, according to one state official and one expert. States are required to provide for the receipt and initial processing of applications for pregnant women, infants, and children at sites not used for AFDC applications—such as federally qualified health centers and hospitals that serve a larger share of uninsured and publicly insured persons—but these efforts may have been limited. Experts also noted that the eligibility system does not accommodate the fluctuating eligibility status of many families. Low-income working families may have changes in their income if they work seasonally or change or lose jobs. A family eligible one month may not be eligible the next month because of an increase in family income, but children in that family may still be covered under other categories of eligibility. According to experts, some states’ eligibility processes do not automatically make redeterminations to see if children who lose their eligibility might be eligible in another category. If the family does not reapply, the child loses coverage. Advocates have also been concerned that welfare reform may make enrollment less likely. Families may be confused about their Medicaid eligibility because, prior to welfare reform, Medicaid and cash assistance had, historically, been so closely linked. For example, if TANF enrollment workers focus on job search strategies and not on benefits, families who come in may not be enrolled for Medicaid. In addition, some families may believe Medicaid is time limited as is TANF. According to experts, advocates, and one provider, limits on the ability to communicate and availability of transportation can be a barrier for applicants. In addition to difficulties for non-English-speaking families, illiteracy may also limit a parent’s ability to enroll without substantial assistance. Experts also pointed out that lack of transportation to enrollment sites can be a barrier, primarily in rural areas, but also in some urban settings. A family may not have a car or have limited time and money to make a long trip to the welfare office. To enroll eligible children in Medicaid, some states are using innovative strategies that are intended to increase knowledge and awareness of the program and its benefits, minimize the perceived social stigma, and simplify and streamline the eligibility process. Education and outreach programs are often targeted to families who have children potentially eligible for Medicaid. Visible support from state leadership and partnerships with community groups are viewed by state officials and advocates as essential to obtaining the necessary resources to implement outreach programs. Some states have even renamed the Medicaid program as a way to change its image. To improve the enrollment process, some states have adopted strategies to assist immigrant families or have simplified and streamlined the eligibility process by shortening forms and accepting applications at many new sites, as well as mail-in applications. However, this kind of simplification and streamlining has required state officials to make difficult trade-offs between the need for program integrity and higher Medicaid enrollment. The states that we contacted have developed multifaceted outreach programs to educate families on the availability of the Medicaid program and the importance of enrolling their children. They generally agreed that a successful education and outreach program should target outreach to low-income working families with children, using nontraditional methods and locations, and work in collaboration with community groups, schools, providers, and advocates. These themes are broadly consistent with several findings from our demographic analysis: low-income working families with children have a high uninsured rate, and most uninsured Medicaid-eligible children are in school or have a sibling in school, which makes the schools an available avenue for reaching children and families. The states that we studied have employed a variety of methods to publicize Medicaid. For example, Massachusetts has placed outreach workers in health centers, hospitals, and other traditional locations; distributed literature in schools; sent material to the YMCA and other community groups; and worked with a supermarket chain to place in grocery bags notices of the program. The governor has held several press conferences around the state to publicize the program, and the state is working with workers in WIC clinics, who are already trained to do income-based eligibility assessments. The state has also used its enrollment data to target communities that have low levels of Medicaid enrollment and worked with local officials to address the problem. The state’s private contractor for managed care enrollment has also assisted with outreach through its presentations in the community. One advocacy group worked with the state to develop a campaign to target high-school athletes, who are required to have health insurance. This campaign involved sending posters and fold-out fliers—developed and produced with the donated time of professionals—to athletic directors in high schools throughout the state and establishing a pool of student athletes to go out and talk to their peers. In another initiative, the state medical society is training its members’ staffs to assist in educating families about program eligibility and benefits. Finally, Massachusetts is making $600,000 available to help community groups conduct outreach and educate families of uninsured Medicaid-eligible children, with the money distributed as grants in amounts between $10,000 and $20,000. In Arkansas, as part of a large media campaign that included television and radio announcements, the state placed color inserts in Sunday newspapers during September 1997. These inserts provided information on program eligibility and benefits, a toll-free number to obtain additional information, as well as a photograph of children with the governor endorsing the program. The state’s children’s hospital paid for the insert. Applications are available at schools, pharmacies, and churches, and brochures have also been placed in fast food bags. The state has also worked with its children’s hospital to place enrollment forms at affiliated clinics, which are located throughout the state. Georgia has made a major commitment to outreach by employing over 140 eligibility workers with the specific job of getting eligible children and families enrolled in Medicaid. These outreach workers are situated in numerous locations, including health departments, clinics, and hospitals. These workers also temporarily set up at nontraditional sites, such as schools, community agencies, and shopping malls. The outreach workers are often available during evening and weekend hours as a convenience to working families. Workers also make presentations regularly to community groups, medical providers, and employers. A flier was developed that is targeted to employers to inform them about benefit programs for which their employees may be eligible. Georgia is also trying to enroll former welfare recipients by emphasizing Medicaid enrollment as an important part of a successful transition to work. The state’s outreach program has also established partnerships with numerous community groups—including local coordinating councils, local teen pregnancy task forces, and school boards—and has used these local partnerships to develop outreach tailored to needs and characteristics of the communities. The state’s private contractor for enrollment in managed care has also assisted with the outreach program through its contacts with the community. In view of its recent welfare reform initiatives, Wisconsin is making a concerted effort to ensure that Medicaid-eligible individuals enroll in Medicaid regardless of their eligibility for the state welfare program. As part of this outreach effort, the state has begun to target county eligibility workers, individual providers, and Medicaid-eligible individuals to communicate that people may still qualify for medical assistance apart from their eligibility for welfare. Additional resources have been made available for outreach, outstationing, and training materials for staff. To plan its outreach efforts, the state is working with outside groups, including the Primary Health Care Association, the state medical society, Milwaukee County, Children’s Hospital, and Marshfield Clinic. We found less targeting of immigrant communities than might have been expected from the demographic analysis, although this was in some measure due to the characteristics of the states that we selected for our study. However, advocates report concern within the immigrant communities that receiving benefits will compromise their immigration status. One expert told us that some states have attempted to assist eligible immigrant families in enrolling their children by providing enrollment information and applications in alternative languages, particularly Spanish, and by hiring bilingual enrollment workers. In general, their outreach approach is similar to those tailored to other communities but with an emphasis on particular immigrant and ethnic cultures and languages. Massachusetts is working with local community groups that provide information and educate immigrants on the availability of Medicaid. Georgia’s outreach workers give presentations to employee groups within firms that have a large proportion of Hispanic immigrants among their workers. In their outreach efforts, states face challenges with the immigrant community because they have to take into account the recent changes of the Welfare Reform Act and the Balanced Budget Act, which make benefits a state option for qualified immigrants who arrived before August 23, 1996, and bar immigrants for 5 years if they arrived after August 22, 1996. However, these limitations do not affect the eligibility of native-born children in immigrant families. States have tried to change the perception that Medicaid is tied to welfare and dependency in a variety of ways. The most direct method for changing the program’s image is changing the program’s name. In addition, states have advertised the program as one that is intended for working families, while some have included policies to avoid displacing private health insurance. They have also adopted alternative enrollment methods so that individuals do not have to go to the local welfare office to enroll. Changing the Medicaid program’s name is not new, but it has become more widespread. Massachusetts recently renamed its program MassHealth with the intent that it would be more appealing to beneficiaries. MassHealth fliers describe several option plans available (six in total), referring to them by names such as “MassHealth Standard” and “MassHealth Basic”—names similar to commercial health plans. Arkansas named its Medicaid expansion program for children ARKids 1st. The logo for the program uses bright colors with the “1” in 1st represented by a crayon. Georgia has not changed the name of Medicaid, but its outreach project is called “Right From the Start” to project a positive message. Advertisements and fliers for these programs emphasize that they are for a broad population, not just those on welfare. MassHealth fliers state, “There is no reason why a child or a teen in Massachusetts should go without health care.” Massachusetts has fliers that outline income levels for eligibility that show families with almost $2,400 a month in income and pregnant women with income up to $3,300 a month as eligible. Georgia has a flier entitled, “Have you heard about benefits for working families?,” and the first program mentioned is Medicaid for children. Another flier targeted to families leaving welfare to work asks the question, “Did you know you could work full time and still receive some benefits?” (See fig. 4.) To minimize the possibility of displacing private insurance, known as “crowd out,” some states have policies to address the issue. The Medicaid program cannot refuse enrollment to any eligible individual based on the fact that he or she has insurance, although Medicaid is the payer of last resort. However, some states that have expanded eligibility through waivers of normal program rules have been allowed to limit eligibility if a family already has insurance. For example, in Arkansas, which received a waiver for its expansion, a child is not eligible for ARKids 1st unless he or she has been uninsured for a period of 12 months or the child lost insurance coverage during that period through no fault of the family. In Massachusetts (which also has a waiver for expansion) and Georgia, officials are cognizant of the potential dangers of crowd out. Massachusetts, as part of MassHealth, will subsidize the cost of insurance available to the family. Some states have developed a number of strategies to make the enrollment process easier for working families. Several states, as part of their outreach effort, have outstationed eligibility workers in sites that families frequent as an alternative to enrolling at the welfare office. In addition, states have simplified and shortened their enrollment applications, allowed applications by mail, dropped asset requirements, and reduced documentation requirements. To help ensure continued coverage of children in families whose income fluctuates, states can provide continuous eligibility. Of the states we contacted, only Arkansas has adopted continuous eligibility for a year for children. Some states have adopted enrollment methods that do not require individuals to visit a welfare office, in part to minimize Medicaid’s association with welfare and welfare families. If families are only seeking Medicaid enrollment for children, Massachusetts and Arkansas allow families to ask questions and request an application by telephone. These two states also accept applications by mail. Completing applications with outreach workers at various nontraditional sites is another way the process is made easier for working families and those without transportation. Each of the states with whom we spoke had shortened and simplified their enrollment form. Massachusetts officials used focus groups to find out why families did not enroll their children and how barriers to enrollment could be removed. Suggestions from the focus groups—such as adding more space on the enrollment form—helped the state design a simplified form that is easier to read. States have had the option of dropping the asset tests for certain populations. When Arkansas dropped its asset test for the ARKids 1st program, it also dropped the related questions about assets and property, shortening the enrollment form to four pages. Georgia also shortened its enrollment form and dropped the asset test. States are concerned with maintaining program integrity and ensuring that benefits go only to qualified individuals. However, 40 states have abolished the asset test for some or all children, primarily because the likelihood that these families have substantial assets is low. Table 5 shows the number of states that have made these changes. Few efforts have been made to address the problem of fluctuating family eligibility status, causing children to be inappropriately disenrolled from Medicaid. As part of its ARKids 1st program, Arkansas is providing 12 months of continuous eligibility to children regardless of changes in family income, under waiver authority granted by HCFA. Until recently, states had to receive a waiver to pursue such a policy. The Balanced Budget Act, however, allows states to adopt 12 months of continuous eligibility. To date, welfare reform has not significantly affected the application process for Medicaid. In a recent report, we found that nine states we contacted have chosen to make few structural changes in their Medicaid programs in the first full year of implementing welfare reform. For example, while the Welfare Reform Act delinked eligibility for cash assistance and Medicaid, the states that we contacted had generally decided not to separate Medicaid and cash assistance program administration. In three of the states that we spoke with for this study, welfare applicants received a combined form that permits families to apply for both cash assistance and Medicaid, but families applying only for Medicaid receive a shorter form with a subset of questions. Despite the importance of and large investment in providing health care to children in low-income families, difficulties in enrolling them in Medicaid leave more than 3 million children vulnerable. The states that we reviewed recognized that uninsured Medicaid-eligible children are generally in working two-parent families and have targeted their outreach accordingly. Targeting working families raises the issue of crowd out—replacing employer-based insurance with Medicaid—but states that we contacted have not seen this as a major problem given the low income levels of these families. Only Arkansas has taken direct action to discourage employers from dropping health insurance coverage by enforcing a 12-month waiting period. We found less outreach targeted to Hispanics and immigrants, and experts whom we interviewed said this was generally true, even in states with large immigrant or Hispanic populations. Immigrants, particularly families in which the parents are not naturalized U.S. citizens, are likely to be a more difficult group to reach, both because of the complexities of the law, which makes some but not all immigrant children eligible for Medicaid, and because of the immigrants’ general wariness of government. Some immigrant families include children who—because they were born in this country—are citizens and fully eligible for Medicaid. The states that we studied are, for the most part, using outreach and enrollment strategies available for some time—but not necessarily used for enrolling uninsured children. However, other strategies provided for by the Balanced Budget Act—such as continuous enrollment and presumptive eligibility—have not been widely implemented. CHIP also has considerable potential for identifying uninsured Medicaid-eligible children. The law provides that any child who applies for CHIP and is determined to be Medicaid-eligible should be enrolled in Medicaid. The more that states publicize CHIP, the greater the number of uninsured Medicaid-eligible children they are likely to identify and enroll in Medicaid—particularly if the states’ screening and enrollment process effectively identifies Medicaid-eligible children and enrolls them in the Medicaid program. We sought comments on a draft of this report from HCFA; from state officials in Arkansas, Georgia, Massachusetts, and Wisconsin; and from experts on children’s health insurance issues with the Southern Institute on Children and Families and the Center on Budget and Policy Priorities. A number of these officials provided technical or clarifying comments, which we incorporated as appropriate. In addition, HCFA noted that it had sent a letter dated January 23, 1998, to state officials to encourage them to simplify enrollment and expand outreach to the Medicaid-eligible population. As arranged with your office, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after its issuance date. At that time, we will send copies to the Secretary of Health and Human Services, the Administrator of HCFA, the directors of the state programs we spoke with; and interested congressional committees. Copies of the report will be made available to others upon request. If you or your staff have any questions about the information in this report, please call me or Phyllis Thorburn, Assistant Director, at (202) 512-7114. Other contributors to this report were Richard Jensen, Sheila Avruch, and Sarah Lamb. To examine the demographic characteristics of Medicaid-eligible uninsured children, we analyzed the Current Population Survey (CPS), which is used by some researchers to measure health insurance coverage in the United States. This technical appendix discusses the survey, how we measured insurance coverage and estimated Medicaid-eligible children, and how we determined parents’ work effort and immigration status. It also discusses some concerns about how well the CPS measures insurance coverage and compares our estimate of the number of Medicaid-eligible uninsured children with other analysts’ estimates. The CPS, a monthly survey conducted by the Bureau of the Census, is the source of official government statistics on employment and unemployment. Although the main purpose of the survey is to collect information on employment, an important secondary purpose is to collect information on the demographic status of the population, such as age, sex, race, marital status, educational attainment, and family structure. The March supplement of the CPS survey collects additional data on work experience, income, noncash benefits, and health insurance coverage of each household member at any time during the previous year. The CPS sample is based on the civilian, noninstitutionalized population of the United States. About 48,000 households with approximately 94,000 persons 15 years old and older and approximately 28,000 children aged 0 to 14 years old are interviewed monthly. The sample also includes about 450 armed forces members living in households that include civilians and are either on or off a military base. For the March supplement, an additional 2,500 Hispanic households are interviewed. The households sampled by the CPS are scientifically selected on the basis of area of residence to represent the United States as a whole, individual states, and other specified areas. Children can have multiple sources of health insurance coverage in the same year. The CPS asks about all sources of health insurance coverage. It is impossible to tell, for example, if a child is reported as having both Medicaid and employment-based insurance, whether the child had duplicate coverage, had Medicaid coverage first and then employment-based coverage, or vice versa. For this report, children who had employment-based insurance were reported as having such coverage even if they also had other sources of coverage. Likewise, children who had Medicaid coverage were reported as having such coverage even if they had other sources of coverage. As result, some children were reported as having both public and private coverage—usually Medicaid and employment-based insurance—for the same year. (See fig. 1.) For this report, children who are uninsured are children for whom no source of coverage during the entire previous year is reported. CPS asks specific questions about whether any members of the household have coverage provided through an employer or union; purchased directly; or have Medicare, Medicaid, or other public coverage. However, it does not directly ask whether an individual is uninsured if no source of coverage is reported. We defined Medicaid-eligible children in 1996 as children eligible by federal mandate based on age and poverty criteria—children from birth through 5 years old with family income at or below 133 percent of the federal poverty level and children 6 through 12 years old with family income at or below the poverty level. We used income in the immediate family rather than the household income to calculate poverty levels. We did this because states have specific rules on what income can be deemed available to the child to determine Medicaid eligibility, and it may not include income provided to the household by people not related to the child. In addition, employment-based health insurance is usually only available to immediate dependents; therefore, the income and work effort within the nuclear family is more relevant to whether or not the child is insured. We matched children’s records with parents’ records to analyze family characteristics. CPS considers a family to be two or more persons residing together and related by birth, marriage, or adoption. The Census Bureau develops family records for the householder (a person in whose name the housing unit is owned, leased, or rented or, if no such person, an adult in the household); other relatives of the householder with their own subfamilies; and unrelated subfamilies. If the house is owned, leased, or rented jointly by a married couple, the householder may be either the husband or wife. We paired children’s records to their parents’ records or, lacking a parent, another adult relative (aged 18 through 64) in their immediate family whom we called a parent. After this pairing, we matched the adult family member’s record to his or her spouse’s record, if any, to get “parents” in our file. We were not able to match all children’s records with records of parents or other relatives in their households. For Medicaid-eligible children, we matched 96 percent of the children’s records. For Medicaid-eligible uninsured children, we matched 92 percent of the children’s records. Some of our tables and figures are based on the entire file of children’s records; others are based on the matched file and are so indicated. Matching parents with children to analyze the association of workforce participation and insurance for children helped us develop a more accurate picture of uninsured and Medicaid-insured children with working parents. We analyzed parent work status on the basis of information about the parent who worked the most. (See table I.1.) This allowed us to more accurately portray the work status of parents in two-parent families. Where two parents were working in the same status—such as full-time—we matched to the first parent in that work status. Either parent worked full-time, full year. Neither parent worked full-time, full year, but at least one worked full-time part of the year. Neither parent worked full-time, but at least one parent worked part-time for the entire year. Neither parent worked either full-time or full year, but at least one parent worked part-time for part of the year. Neither parent worked at all during the entire year. We used the parent with the greater workforce participation to determine children’s birth and immigration status relative to their parents’. This could lead to a slight underestimate of children in immigrant families, since in some two-parent families, spouses do not have the same birth or citizenship status. However, spouses generally share similar birth and citizenship status. We examined birth and citizenship status of one parent compared with the other in two-parent families and found that over 90 percent had the same birth and citizenship status as their spouse. Since only about half of Medicaid-eligible children live in two-parent families to begin with, matching to one parent would lead to over 95 percent of children being accurately categorized, based on a match with one parent. Some researchers who work with survey data to assess health insurance status of the U.S. population are concerned that the currently used surveys, including CPS, may not accurately reflect health insurance coverage in the United States. CPS and the Survey of Income and Program Participation (SIPP)—another survey that is often used to assess health insurance coverage—report lower Medicaid coverage than HCFA data on Medicaid enrollment. Comparing CPS and SIPP data for similar periods of time, some researchers have concluded that although the CPS asks about insurance coverage for the entire previous year, respondents are reporting coverage based on a shorter time frame—perhaps 4 to 6 months. Researchers at the Urban Institute have concluded that some of the uninsured actually have coverage, probably Medicaid coverage, and adjust their estimates of the uninsured accordingly. Although health researchers are concerned that the CPS may not be ideal for analyzing health insurance coverage, neither is any other currently available survey. Therefore, many researchers continue to use it. GAO chose to use CPS data for its analysis of children’s health insurance coverage for several reasons. The CPS can be used to look at trends over time, although care must be taken when making comparisons between years because of questionnaire and methodological changes. It has a large sample, which gives estimates from the data more statistical power. It was designed so that it can be used for some state-level estimates. Information from new health insurance surveys is or is becoming available. The National Health Interview Survey periodically asks questions about health insurance coverage, and the Agency for Health Care Policy and Research has released preliminary 1996 estimates of health insurance coverage from the Medical Expenditure Panel Survey. The Center for Studying Health System Change has surveyed health insurance coverage in 1996 and 1997 in its Community Tracking Study (CTS) and is beginning to publish its data. The Urban Institute has also developed and fielded its own health insurance survey. Comparisons of these surveys with the CPS and SIPP may help researchers more definitively agree on the number of uninsured Americans and trends in insurance over time. Using either CPS or new CTS data, five different groups of researchers compared estimates of uninsured Medicaid-eligible children. (See table I.2.) While the number of Medicaid-eligible children and definition of Medicaid eligibility used by the researchers differed, all came up with a similar conclusion—many uninsured children are eligible for Medicaid. The researchers’ estimates ranged from 24 to 45 percent. Number (in millions) Since CPS estimates come from a sample, they may differ from figures from a complete census using the same questionnaires, instructions, and enumerators. A sample survey estimate has two possible types of errors: sampling and nonsampling. Each of the studies mentioned above—using either CPS or other sampling surveys—has the same possible errors. The accuracy of an estimate depends on both types of error, but the full extent of the nonsampling error is unknown. Several sources of nonsampling errors include the following: inability to get information about all sample cases; definitional difficulties; differences in interpretation of questions; respondents’ inability or unwillingness to provide correct information; respondents’ inability to recall information; errors made in data collection, such as recording and coding data; errors made in processing data; errors made in estimating values for missing data; and failure to represent all units with the sample (undercoverage). Tables II.1 through II.3 provide a demographic profile of Medicaid-eligible children in 1996. Table II.1: Number and Percentage of Medicaid-Eligible Children Who Were Insured by Medicaid or Uninsured in 1996, by Race and Ethnicity Number (in thousands) Percentage enrolled Number (in thousands) Medicaid: Early Implications of Welfare Reform for Beneficiaries and States (GAO/HEHS-98-62, Feb. 24, 1998). Health Insurance: Coverage Leads to Increased Health Care Access for Children (GAO/HEHS-98-14, Nov. 24, 1997). Uninsured Children and Immigration, 1995 (GAO/HEHS-97-126R, May 27, 1997). Health Insurance for Children: Declines in Employment-Based Coverage Leave Millions Uninsured; State and Private Programs Offer New Approaches (GAO/T-HEHS-97-105, Apr. 8, 1997). Employment-Based Health Insurance: Costs Increase and Family Coverage Decreases (GAO/HEHS-97-35, Feb. 24, 1997). Children’s Health Insurance, 1995 (GAO/HEHS-97-68R, Feb. 19, 1997). Children’s Health Insurance Programs, 1996 (GAO/HEHS-97-40R, Dec. 3, 1996). Private Health Insurance: Millions Relying on Individual Market Face Cost and Coverage Trade-Offs (GAO/HEHS-97-8, Nov. 25, 1996). Medicaid and Uninsured Children, 1994 (GAO/HEHS-96-174R, July 9, 1996). Health Insurance for Children: Private Insurance Coverage Continues to Deteriorate (GAO/HEHS-96-129, June 17, 1996). Health Insurance for Children: State and Private Programs Create New Strategies to Insure Children (GAO/HEHS-96-35, Jan. 18, 1996). Health Insurance for Children: Many Remain Uninsured Despite Medicaid Expansion (GAO/HEHS-95-175, July 19, 1995). Medicaid: Spending Pressures Drive States Toward Program Reinvention (GAO/HEHS-95-122, Apr. 4, 1995). Medicaid: Restructuring Approaches Leave Many Questions (GAO/HEHS-95-103, Apr. 4, 1995). Health Care Reform: Potential Difficulties in Determining Eligibility for Low-Income People (GAO/HEHS-94-176, July 11, 1994). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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Pursuant to a congressional request, GAO reported on children who are eligible for Medicaid but are not enrolled, focusing on: (1) the demographic and socioeconomic characteristics of children who qualify for Medicaid, and identifying groups in which uninsured children are concentrated and to whom outreach efforts might be expected; (2) the reasons these children are not enrolled in Medicaid; and (3) strategies that states and communities are using to increase employment. GAO noted that: (1) the demographic and socioeconomic characteristics of uninsured Medicaid-eligible children suggest that outreach strategies could be targeted to specific groups; (2) in 1996, 3.4 million Medicaid-eligible children--23 percent of those eligible under the federal mandate--were uninsured; (3) the majority were children of working poor or near poor, and their parents were often employed by small firms and were themselves uninsured; (4) uninsured children who are eligible for Medicaid are more likely to be in working families, Hispanic, and either U.S.-born to foreign-born parents or foreign born; (5) state officials, beneficiary advocates, and health care providers whom GAO contacted cited several reasons that families do not enroll their children in Medicaid; (6) lower income working families may not realize that their children qualify for Medicaid, or they may think their children do not need coverage if they are not currently sick; (7) under welfare reform, the delinking of Medicaid and cash assistance may cause some confusion for families, although GAO found that states were making efforts to retain a single application and eligibility determination process to avoid this problem; (8) in addition, many low-income families believe that Medicaid carries the same negative image of dependency that they attach to welfare; (9) immigrant families, many of whom are Hispanic, face additional barriers, including language and cultural separateness, fear of dealing with the government, and changing eligibility rules; (10) the enrollment process for Medicaid can involve long forms and extensive documentation, which are intended to ensure program integrity but often are a major deterrent to enrollment; (11) recognizing these impediments, some states have undertaken education and outreach initiatives and have tried to change the image of the program and simplify enrollment to acquire only necessary information; (12) these efforts include mass media campaigns and coordination of effort with community organizations and provider groups; (13) some states have made the enrollment process more accessible for working families, using mail-in applications or enrollment at sites chosen for their convenience; (14) several states have changed the name of the program to minimize its identification with welfare and other assistance programs; (15) many states provide Spanish-language applications and some are working with community groups; and (16) some states have also simplified the enrollment procedure by shortening the enrollment form and reducing the documentation requirements.

You are an expert at summarizing long articles. Proceed to summarize the following text: From 1944 through 1988, the production of plutonium at Hanford generated about 525 million gallons of radioactive and hazardous waste. Some of the waste was dumped directly into the soil, some was encased in drums or other containers and buried, and some was stored on-site, underground in 149 SSTs and 28 DSTs. This section describes the history of the Hanford tanks, the contents of the tanks, and tank regulations and oversight. The first underground storage tanks at Hanford were SSTs and were built from the 1940s through the mid-1960s. The SSTs consist of an outer concrete wall lined with one layer of carbon steel and were built with a design life of approximately 25 years. While a tank’s design life is not a firm deadline beyond which a tank is no longer viable, site engineers at the time considered design life a reasonable estimate of how long a tank could be expected to effectively contain radioactive and hazardous waste. In the 1940s and 1950s, site contractors did not regard the tanks as a permanent solution to the waste produced at Hanford and viewed tank failures as inevitable. It was assumed that as the tanks failed, new tanks would be constructed to store the waste until a more permanent disposal solution could be developed. Beginning in the 1960s, DOE began reporting that some of the SSTs were leaking waste, and DOE estimates that as many as 61 SSTs may have leaked a total of over 1 million gallons of waste into the ground. After DOE discovered leaks in some of the SSTs, a new tank design using two carbon-steel shells (referred to as DSTs) was adopted. From 1968 through 1986, DOE built 28 DSTs, each with a storage capacity of 1 million gallons or more and each with a design life ranging from 20 to 50 years. (See apps. I - III for design life data for each tank.) The primary design difference between Hanford’s single- and double-shell underground waste storage tanks—a second carbon-steel lining, or shell, within the outer concrete housing to provide secondary containment of the waste—improved DOE’s ability to monitor and assess the tanks’ integrity and contents. As shown in figure 1, the two shells in the DSTs are separated by about 3 feet of space, or annulus, which enables workers to use remote leak detection sensors and remotely operated cameras to see between the inner and outer shells, thereby making it possible to find signs of corrosion or leaks before waste breaches the outer shell and leaches outside the tank structure. Beginning in the 1970s, to minimize the risks of leaking tanks, DOE began transferring much of the liquid waste from the SSTs to the DSTs. This process consisted of removing (1) the liquid (more mobile) waste first and then (2) the rest of the waste from the SSTs, thereby effectively emptying the SSTs. The first part of this process—removing liquid waste from the SSTs and transferring it to DSTs—is referred to as interim stabilization and was largely completed by 2005. The interim stabilization for each tank was considered complete, and DOE could stop pumping liquid waste, when DOE and Ecology agreed that the following criteria were metless than 5,000 gallons of free standing liquid waste remained, less than 50,000 gallons of drainable liquid waste (liquid waste interspersed within the solid waste) remained, and pumping was no longer effective. The second part of the process—removing the remaining waste from the SSTs and transferring it to DSTs—began in 2003 and is still under way. This work is governed by two main compliance agreements: (1) the 1989 Hanford Federal Facility Agreement and Consent Order, or Tri-Party Agreement (TPA), an agreement between DOE, Ecology, and the Environmental Protection Agency and (2) a 2010 consent decree. Under the consent decree, DOE is required to retrieve waste from 19 tanks (transferring the waste to DSTs) and begin operating the WTP and treating waste by 2022. The TPA requires DOE to retrieve the waste from all of the SSTs by no later than 2040 and to have all waste retrieved from all DSTs and treated by 2047. As of July 2014, DOE had completed the retrieval and transfer of waste from 12 of the SSTs into DSTs. In addition to concerns about tank leaks, DOE is also monitoring tanks for water intrusion from rain and melting snow that can enter the underground tanks through the piping connected to them. Water intrusions can increase the consequences of waste leaks and also mask tank leaks, as waste levels in the tanks could remain the same even as waste was leaking into the ground. According to DOE documented reviews of the tanks, DOE has been aware of water intrusions in some SSTs since the 1980s and has detected intrusions into the annulus of some DSTs since the 1990s. The waste stored in the tanks at Hanford generally sits in layers and comes in a variety of forms, depending on its physical and chemical properties. The waste in the tanks takes the following three main forms, which are illustrated in figure 2: Supernate. Above or between the denser layers may be liquids composed of water and dissolved salts that are called supernate. Supernate comprises 21.4 million gallons of the waste in the Hanford tanks and about 24 percent of the radioactivity. Saltcake. Above the sludge may be water-soluble components, such as sodium salts, that crystallize or solidify out of the waste solution to form a moist sandlike material called saltcake. Saltcake comprises 24 million gallons of the waste in the Hanford tanks and about 20 percent of the radioactivity. Sludge. The denser, water-insoluble components of the waste generally settle to the bottom of the tank to form a thick layer known as sludge, which has the consistency of peanut butter. Although sludge makes up the smallest portion of waste in the Hanford tanks (10.7 million gallons), it comprises over half (56 percent) of the total radioactivity in the tank waste. The tanks contain a complex mix of radioactive and hazardous waste in both liquid and solid form. About 46 different radioactive elements—by- products of chemically separating plutonium from uranium for use in nuclear weapons—represent the majority of the radioactivity currently in the tanks. Some of these elements lose most of their radioactivity in a relatively short time, while others will remain radioactive for millions of years. The rate of radioactive decay is measured in half-lives, that is, the time required for half the unstable atoms in a radioactive substance to disintegrate, or decay, and release their radiation. The half-lives of radioactive tank constituents differ widely. The vast majority (98 percent) of the radioactivity of the tank waste comes from two elements, strontium- 90 and cesium-137, which have half-lives of about 29 and 30 years, respectively. The remaining radioactive elements, which account for about 2 percent of the waste’s total radioactivity, have much longer half- lives. For example, the half-life of technetium-99 is 213,000 years, and that of iodine-129 is 15.7 million years. The hazardous wastes in the tanks include various metal hydroxides, oxides, and carbonates. Some of the chemicals—including acids, caustic sodas, solvents, and toxic heavy metals, such as chromium—came from chemically reprocessing spent nuclear fuel to extract weapons-grade plutonium. Altogether, about 240,000 tons of chemicals were added to the tanks from the 1940s to the mid-1980s. A majority of the chemicals were added to neutralize acids in the waste. Other chemicals, such as solvents and several organic compounds, were added during various waste extraction operations to help recover selected radioactive elements (uranium, cesium, and strontium) for reuse. These hazardous chemicals are dangerous to human health, and they can remain dangerous for thousands of years. DOE’s storage of waste at Hanford is governed by federal and Washington State laws and regulations. DOE’s tank waste cleanup program at Hanford is governed by, among other things, the Resource Conservation and Recovery Act of 1976, as amended (RCRA), as implemented by Washington under its Hazardous Waste Management Act, and the Atomic Energy Act of 1954. RCRA governs the treatment, storage, and disposal of hazardous waste and the non-radioactive hazardous waste component of mixed waste. The tank waste at Hanford is considered mixed waste because it contains both chemically hazardous For the chemically hazardous waste in and certain radioactive materials.the tanks, as shown in figure 3, RCRA establishes the following three key requirements (subject to certain limited exceptions): Tank integrity. Under RCRA, tanks must have secondary containment—that is, a second shell—and an integrity assessment must be conducted by a qualified professional engineer to assess whether the tanks are fit for use. Leak detection. RCRA requires a leak detection system to be in place for each tank that will detect the failure of either the primary and secondary containment structure or any release of hazardous waste in the secondary containment system within 24 hours, or at the earliest practicable time. Data gathered from monitoring and leak detection equipment must be inspected at least once each operating day to ensure that the tank system is being operated according to its design. Leak response. Within 24 hours after detection of a leak or, if the owner or operator demonstrates that that is not possible, at the earliest practicable time, RCRA requires the tank owner, among other things, to remove as much of the hazardous waste or accumulated liquid as is necessary to prevent further release of hazardous waste to the environment and allow inspection and repair or closure of the tank system to be performed. If the release was to a secondary containment system, all released materials must be removed within 24 hours or in as timely a manner as is possible to prevent harm to human health and the environment. To address these RCRA requirements, DOE conducts a variety of assessments and monitoring activities. Regarding tank integrity, DOE conducted integrity assessments for the SSTs in 2002 and the DSTs in 2006. To address the leak detection monitoring requirement, for the DSTs, DOE has one waste level monitor installed inside the primary tank space and three waste level monitors in the annulus. These monitors collect waste level data on a daily basis. For the SSTs, because they were built decades before the enactment of RCRA, they do not have secondary containment. As such, DOE has determined that the SSTs cannot readily be made compliant with current regulations and these tanks were determined to be “unfit for use.” Under RCRA, unfit for use tanks are no longer allowed to store waste and must generally be closed. DOE plans to ultimately close the tank farms in accordance with tank farm closure permits to be issued by Ecology. In the meantime, DOE monitors the SSTs under modified operating procedures, including modified leak Under detection and monitoring requirements as agreed with Ecology.these modified procedures and additional DOE operating specifications, the majority of the SSTs are required to be monitored weekly, quarterly, or annually for leaks and intrusions depending on DOE’s knowledge of the condition of the tanks and the type and amount of waste inside them. In 2009, DOE developed an emergency pumping guide outlining procedures for responding to leaks in DSTs, to implement the RCRA requirement that the tank system owner/operator must within 24 hours after detection of the leak or, at the earliest practicable time, remove as much waste as necessary to prevent further releases. DOE’s recent assessments of the SSTs and DSTs determined that they are in worse condition than DOE had assumed when developing its 2011 System Plan schedule for emptying the tanks.series of assessments in 2013 and 2014, DOE concluded that water is intruding into at least 14 SSTs and that at least 1, T-111, is actively leaking. For DSTs, DOE concluded in 2012 that waste was leaking from the primary shell in tank AY-102 and subsequently found that 12 other DSTs have construction flaws similar to those that contributed to the leak in AY-102. According to recent DOE reviews of the tank, water has intruded into the space between the inner and outer shells of tank AY-102 and another tank nearby. In 2013 and 2014, DOE completed assessments of the SSTs and found that they are in worse condition than had been previously believed. As of 2005, DOE and Ecology agreed that the interim stabilization process had reduced the risk of leaks in SSTs, which led DOE, with concurrence from Ecology, to reduce the required frequency of monitoring from daily to quarterly or annually depending on the condition of the tank and the amount of liquid waste inside. However, concerns about historical water intrusions led DOE to reexamine all 149 SSTs in 2011 to determine the extent of the intrusions. This reexamination, which concluded in 2014, confirmed that water was intruding into at least 14 tanks and that the intrusions were adding from less than 10 to more than 2,000 gallons of water annually to each tank. According to a DOE report on intrusions, water intrusion creates additional liquid waste in the tanks as the new water becomes contaminated by the waste in the tanks. Furthermore, water intrusions can affect the level of tank waste, making it difficult to ensure that a tank is not leaking. Officials on an expert panel, convened by DOE in 2009 to assess the condition of the SSTs, concluded in August 2014 that significant amounts of drainable liquid still remain in the SSTs and removing that liquid and preventing future water intrusions should be a high priority. In addition to increasing waste levels in several tanks, DOE found in 2013 that waste levels appeared to be decreasing in several tanks and subsequently confirmed that at least one SST, tank T-111, was actively DOE’s report on the tank leak indicates leaking waste into the ground.that the leak likely began in 2010. According to DOE officials, waste is leaking at a rate of approximately 640 gallons annually, and DOE continues to monitor the leak in tank T-111. DOE has also confirmed that T-111 is one of the SSTs experiencing intrusions. Though the tank is leaking, according to DOE officials, DOE is not required by regulation to remove the liquid waste from T-111 because the amount of liquid waste in the tank does not exceed the interim stabilization criteria and because there are no current requirements to reestablish compliance with interim stabilization criteria if conditions in a tank change. Regarding DSTs, prior to the discovery of the leak in AY-102 in 2012, DOE had assumed that all DSTs were sound for storing waste. In 2006, all 28 DSTs were examined by a qualified professional engineer, as required under RCRA, and deemed fit for use. In a 2010 report on the integrity of the DSTs, DOE reaffirmed their fitness for continuing to store waste. However, after the 2012 leak was discovered, in March 2014, DOE reported the discovery of a second accumulation of waste in a different location in the annulus of tank AY-102. As of August 2014, DOE reported that more than 35 gallons of waste had leaked from the primary shell of AY-102 into the annulus at a rate of about 3 gallons per month. To date, no waste has been detected outside of the secondary tank shell, according to DOE officials. DOE is still investigating the factors that caused the AY-102 leak and the extent to which other DSTs may be susceptible to the same factors. DOE reported in October 2012 that tank construction flaws and corrosion in the bottom of the tank stemming from the type of waste and the sequence in which it was loaded into the tank AY-102 were the likely causes for the According to a 2014 expert panel reviewing the leak, leak in AY-102.corrosion was among the likely causes of the leak. The panelists concluded that the corrosion likely occurred as a result of water collecting under the tank before it was fully enclosed and during a 6-year outage of the ventilation system in the annulus from 1991-1997, rather than as a result of the waste loading sequence. Beginning in 2013, DOE examined the other 27 DSTs to determine the extent to which they had construction flaws similar to AY-102. In a series of reports issued between July 2013 and February 2014, DOE reported that at least 12 of the other 27 DSTs have similar construction flaws. However, DOE has not yet assessed the extent to which the factors that led to corrosion that may have caused the leak in AY-102 are also present in the remaining 27 DSTs. DOE also determined in 2012 that water was likely intruding into the annulus of at least 2 DSTs, including the leaking tank AY-102. This is not the first time DOE has detected intrusions in the DSTs. In 1991, DOE first reported unexplained moisture in DSTs AY-101 and AY-102, the oldest DSTs on the site. Since then, DOE has periodically monitored and reviewed the status of this moisture, concluding in 2001 that water intrusions through corroded tank equipment were the likely cause. After removing some of the suspected connections and further inspecting the two tanks with video cameras, DOE concluded in 2009 that the water intrusions had stopped. However, routine inspections of the tanks in 2012 revealed that water may still be seeping into the annulus of both tanks. According to DOE officials, an investigation into this issue is ongoing. In the 2011 System Plan, DOE stated that the DSTs play an integral role in the tank waste cleanup effort. Following the discovery of the leaks in tanks T-111 and AY-102, and water intrusions in some SSTs, DOE has undertaken or planned several actions. For the SSTs, DOE has, among other things, performed additional inspections and temporarily increased the frequency of monitoring the tank waste levels from annually or quarterly to monthly. For the DSTs, DOE has conducted additional inspections, modified its inspection procedures, convened an expert panel to examine its DST leak detection process, and developed a pumping plan for AY-102. In response to the leak in tank T-111 and intrusions in other SSTs, DOE has taken several actions, including the following: Increased monitoring and conducted additional inspections. In 2012, when the leak was initially discovered in T-111, DOE increased the leak detection monitoring for the tank from annually to weekly. In addition, for 19 other SSTs that were under review for decreasing liquid levels, DOE increased the leak monitoring frequency from annually or quarterly (depending on the tank) to monthly. DOE maintained weekly leak detection monitoring for T-111, but in April 2014 went to monthly monitoring. According to a DOE official, the monthly monitoring was deemed sufficient to understand the relationship between the intrusion and the leak and the monitors are always in place and data are collected more frequently than the monthly requirement. Additionally, monitoring procedures for the other SSTs have since returned to their normal frequency of annual monitoring for intrusions only. For the 14 SSTs with confirmed intrusions and the 5 that do not meet interim stabilization criteria, DOE has placed them on a quarterly monitoring regime. DOE also performed additional inspections of the tanks with decreasing liquid levels but, after further analysis, concluded that none of those tanks were likely leaking. Modified waste analysis procedures. As noted above, as part of its reexamination of SST waste levels, DOE discovered flaws in its methods for reviewing data on SST tank waste levels that it uses to monitor the tanks for leaks and intrusions. DOE officials determined that their method for reviewing tank waste data was flawed and masked increases and decreases in the waste levels in the SSTs that may have been due to water intrusions and leaks. In response, DOE modified its waste level monitoring methodology and procedures for analyzing waste data. For example, in 2013, DOE established a systems engineering group responsible for monitoring waste levels in all tanks. DOE is also developing training based on the modified waste level monitoring methodology, including guidance on tank waste data interpretation, trend analysis, documentation requirements, and review and approval procedures for changes in waste levels. Following the discovery of the leak in AY-102, DOE has taken or planned several actions including the following: Conducted additional inspections and modified inspection procedures. Following the discovery of the leak in AY-102, DOE performed video inspections of the annulus of 6 of the 12 DSTs with construction histories similar to AY-102. The video inspections, which according to a DOE official in the past only examined a portion of the annulus, examined between 95 and 100 percent of the annulus in each of the tanks.continue these full video inspections for the remaining 21 DSTs over the next several years. In addition, in April 2014, DOE formally modified its inspection procedures by shortening the time between inspections from every 5 to 7 years to every 3 years. In addition, in June 2014, DOE began soliciting proposals to award a contract for another independent assessment of the integrity of the DSTs to be completed in 2016. According to DOE officials, DOE plans to Convened expert panel. DOE convened an expert panel to review its DST leak detection procedures and make recommendations for improvement. This panel met three times and developed preliminary findings and suggested program improvements. One of the preliminary findings was that additional DST leaks cannot be ruled out given current DST integrity program limitations and the extended schedule for the construction and operation of the WTP. During the panel’s most recent meeting in August 2014, members of the panel said that more analysis needs to be done to understand the factors that led to the leak in AY-102 and the extent to which the other DSTs are susceptible to similar factors. Developed AY-102 pumping plan. If a leak is detected, RCRA requirements call for the hazardous waste or accumulated liquid to be retrieved from the tank to the extent necessary to prevent further releases within 24 hours or as soon as practicable and to allow inspection and repair. In addition, DOE’s emergency pumping guide outlines steps to “immediately” remove waste from a leaking DST. DOE officials stated that this guide did not anticipate a leak from the bottom of the primary shell of a tank such as the one occurring in AY- 102. Instead, DOE proposed that the waste not be retrieved until at least 2016, maintaining that that was as soon as it could practicably retrieve the waste due to concerns that doing so would cause the temperature of the tank to rise to dangerous levels without liquid waste to act as a cooling agent. In addition, DOE noted in its plan that it needed to procure and install additional equipment in order to pump waste out of the tank. In response to DOE’s submitted plan, Ecology issued an administrative order to compel DOE to begin pumping waste out of AY-102 by September 1, 2014, and retrieve enough waste to allow for an inspection to determine the cause of the leaks no later than December 1, 2016. The two sides reached a settlement agreement in September 2014, under which DOE is to begin pumping the waste out of AY-102 no later than March 2016 and to have the waste removed by March 2017—over 5 years after the leak was first discovered. DOE’s current schedule for retrieving the waste from the tanks (developed in 2011), which includes transferring waste from SSTs to DSTs and treating the waste in the DSTs, does not take into account the worsening conditions of the tanks or the delays in the construction of the WTP. The leak in AY-102 combined with planned waste transfers has reduced the available DST space, and DOE’s plans to create additional space remain uncertain. Future leaks and intrusions, which become more likely as the tanks’ conditions worsen, would place additional demands on the limited available DST space, and it is unclear how DOE would respond. According to DOE, recent efforts to evaporate some of the water from the waste have already freed up 750,000 gallons of DST space. In addition, in March 2014, DOE announced that it plans to indefinitely delay construction of the key WTP facilities needed to retrieve and treat tank waste for disposal until technical issues are resolved. As a result, it is unclear how long waste will remain in the tanks. However, without an analysis of the extent to which the factors which may have led to the leak in AY-102 are present in the other DSTs, DOE cannot be sure how long its DSTs will be able to safely store the waste. The free space available in the DSTs is currently limited, and operational requirements and planned transfers from the SSTs constrain DOE’s ability to respond to future emergencies, such as leaks. As shown in figure 4, SSTs hold a total of about 29 million gallons of waste and, as noted above, have been deemed “unfit for use” under RCRA and therefore cannot be used for storing additional waste. The DSTs currently hold a total of about 27 million gallons of waste, leaving about 5.3 million gallons of available space for waste to be transferred from other tanks. However, DOE policy and planned waste transfers further reduce the amount of space available. As shown in figure 5, about 2.5 million gallons of the 5.3 million gallons of empty space is reserved by DOE for safety purposes, for emergency space if necessary, and to enable DOE to more easily transfer waste among tanks. In addition, planned waste transfers from SSTs (about 1.8 million gallons) and AY-102 (about 800,000 gallons) will further reduce available DST space (see fig. 5). Specifically, DOE plans to first empty an additional 15 SSTs, containing a total of approximately 1.8 million gallons of waste, into DSTs by 2022. Second, DOE plans to pump all of the approximately 800,000 gallons of waste in AY-102 into other DSTs no early than 2016. As a result of these planned transfers and operational requirements, about 200,000 gallons of storage space is actually available in the DSTs. DOE officials said that they plan to restart an evaporator facility at Hanford that could reduce the overall amount of waste in the tanks and result in 3 million gallons of additional DST space. This facility, which began operating in 1973 and was designed to operate for 25 years, has not operated since 2010 and was only recently restarted by DOE. According to DOE officials, since restarting the evaporator in September 2014, DOE has reduced the waste volume by over 750,000 gallons. In addition to these scheduled waste transfers, future leaks and intrusions, which become more likely as the tanks’ condition worsens, would require DOE to pump more waste and place additional demands on the limited remaining DST space. Both DOE and Ecology have reported that leaving waste in the tanks past their design life increases the risk of leaks over time. Similarly, the panel of experts that DOE convened to review the AY-102 leak concluded in May 2014 that, given the extended time frames for the cleanup mission and the growing concerns about the integrity of the tanks, additional leaks cannot be ruled out. Such leaks and intrusions could place further demands on the available space in the DSTs because when leaks occur, DOE is required by RCRA and associated tank monitoring and pumping requirements, as described below, to pump hazardous waste from these tanks into the already limited space available in the nonleaking DSTs. For example, if a leak is detected in a SST that exceeds interim stabilization criteria (i.e., it has more than 5,000 gallons of freestanding liquid or 50,000 gallons of drainable liquid waste), DOE is then required by modified leak detection and monitoring requirements as agreed with Ecology to install emergency pumping equipment and begin pumping the liquid waste out of the tank as soon as practicable. At least five SSTs currently fall into this category because they have exceeded the amount of liquid waste allowed under interim stabilization (likely as a result of water intrusion, according to DOE officials). Similarly, if another DST begins to leak, DOE is required by RCRA to remove the hazardous waste or accumulated liquid from the tank to the extent necessary to prevent further releases within 24 hours or as soon as practicable. The only RCRA compliant alternative currently available for storing this retrieved waste is into the limited space available in the nonleaking DSTs. According to the DOE official responsible for managing Hanford’s tank operations, given the current constraints on available DST space, if another DST was to fail before additional DST space is available, DOE would have nowhere to move the waste. However, according to DOE officials, DOE currently has no plans to build new tanks and estimates that it would take about 8 years before the new tanks would be available to receive waste. In March 2014, DOE reported that unresolved technical issues could prevent the WTP from operating safely as currently designed. Under the existing TPA and consent decree, DOE is required to begin operating the WTP and treating waste in 2022, to have retrieved all waste from the SSTs by 2040, and to have all waste retrieved from all DSTs and treated by 2047. DOE reported in March 2014 that, until the technical uncertainties are resolved, it is not possible to predict when the WTP will be completed. In addition, DOE has proposed building at least two new waste processing facilities to allow waste treatment to begin while it is resolving the WTP’s technical uncertainties. One of the two facilities would, if constructed, treat some of the low-activity waste in the tanks. According to DOE officials, this facility would be operational no later than December 2022 and would make available about 1.3 million gallons of DST space after the first 3 years of operation. DOE has not estimated the impact of the WTP delay on its tank management plans, but delays in the schedule to retrieve waste from the SSTs are already occurring. Before its decision to delay the WTP, in a series of letters to Ecology from November 2011 to September 2014, DOE stated that it would likely miss the scheduled milestones in the consent decree, including milestones for completing the WTP and emptying waste from the SSTs. DOE further reported in March 2014 that delays in the WTP will affect the schedule for retrieving waste from the tanks but that, until the technology it is developing to treat the tank waste in the WTP can be demonstrated to work as intended, it is impossible to estimate what the impact will be on the retrieval of waste from the tanks. DOE cannot reliably update its scheduled deadlines for retrieving waste from tanks without considering the impact of the WTP delay. The technical challenges at WTP and the continued uncertainty about the schedule for retrieving and treating the waste mean that the overall cleanup mission will continue to depend on the integrity of the DSTs. However, the extent to which the DSTs can continue to safely store waste is unknown. In the 2011 System Plan, DOE stated that the DSTs play an integral role in the tank waste cleanup effort. members of DOE’s 2014 expert panel, convened to examine the integrity of the DSTs, have stated that corrosion is a threat to DST integrity, and the expert panel also highlighted deficiencies in DOE’s understanding of corrosion in all of the DSTs. The panel officials concluded in August 2014 that more work needs to be done to better understand the factors that led to the corrosion in AY-102. However, as noted previously, DOE has not examined the other DSTs for the same corrosion factors that may have lead to corrosion in AY-102 and therefore lacks information about the extent to which the other 27 DSTs may also be susceptible to similar corrosion. As a result, DOE lacks assurance that these tanks will be available for use through the end of the cleanup mission, as DOE’s 2011 System Plan contemplates, and cannot reliably update its schedule for emptying the SSTs. In 2001, DOE established a DST Integrity Program to implement controls and inspections to ensure that the DSTs will be available for use through the end of the cleanup mission. All of the SSTs and DSTs will be well beyond their design life before they are emptied. Of the 137 SSTs that are still storing waste, all are currently decades beyond their design life, and all but 13 of them would be at least 40 years beyond their design life before being emptied under DOE’s existing schedule for emptying the tanks. While the design life of the DSTs varies, 4 of the 28 DSTs are already past their design life, and under the current TPA milestones, all DSTs are expected to be well beyond their design life by the time they are scheduled to be emptied. (See app. I and III for design life data for each SST and app. II for design life data for each DST. Figure 6, an interactive figure in appendix I, shows a timeline of all Hanford SSTs. Appendix III, table 1, is the noninteractive, printable version of figure 6.) DOE does not have plans to construct additional storage to address its long-term storage needs and the risks presented by the aging tanks. DOE has looked at options for building new tanks to address the constraints on DST space if the cleanup mission were to take significantly longer than currently planned. DOE has developed a rough estimate of the time and cost that would be required to build additional tanks. Specifically, in 2011, Ecology asked DOE to include the option of building new tanks in an update to its System Plan. In response, DOE developed a rough estimate for how much it would cost to build 8 additional storage tanks, if necessary. DOE estimated that doing so would cost about $800 million and would take about 8 years to complete. According to the System Plan, this was a rough order of magnitude estimate and a more detailed estimate would be required before a decision to build new tanks could be considered. In 2012, DOE issued its final EIS for Hanford, which included discussion of several tank waste cleanup alternatives that would have involved building additional DSTs as part of the response to delayed cleanup schedules. DOE has recently taken and has plans for taking additional steps to improve its tank monitoring and inspection procedures at Hanford and is in the process of reassessing the integrity of the DSTs at the site. However, these steps do not address the longer-term concerns about leaving waste in the aging tanks indefinitely. Specifically, DOE lacks specific information about the condition of the DSTs, including whether the factors that may have led to corrosion contributed to the leak in AY- 102 may affect other tanks which are already many years beyond their design life. Given the current condition of the tanks, it is unclear how long they can safely store the waste. Moreover, following the leak in AY-102, available DST space—which is essential to DOE’s tank management plans—is increasingly limited, constraining DOE’s ability to respond to potential future leaks and protect human health and the environment. It is unclear, however, whether DOE has enough DST space available to address current and future waste transfers. As we mentioned earlier, DOE officials responsible for managing Hanford’s tank operations said that given the current constraints on available DST space, if another DST was to fail, DOE may have nowhere to move the waste. Additional space, either from treating waste or building new tanks, is still at least 8 years away assuming DOE’s schedule estimates for these projects are accurate, although DOE has begun recently to free up some DST space by restarting its evaporator facility. Notably, responding to tank leaks can take many years even when there is available DST space, as the leak in AY-102 illustrates. By developing a more a detailed and up-to-date schedule estimate for emptying the tanks, DOE will be in a better position to consider its waste storage needs and need for new tanks. As the tanks age, there will be a continued and increasing risk of tank failure that can only be permanently addressed by emptying the existing SSTs and DSTs. Given the long-standing technical problems facing the WTP, it is highly uncertain when waste treatment operations could begin to create significant available space in the DSTs. However, creating capacity to move some of this waste to RCRA-compliant tanks would allow DOE to respond to future leaks and ensure it has sufficient space for treatment operations once WTP is completed. To ensure that DOE’s long-term plans for storing waste in the existing SSTs and DSTs at Hanford consider the condition of the tanks and the WTP construction delay, we recommend that the Secretary of Energy take the following three actions: Assess the extent to which the factors that may have led to corrosion in AY-102 are present in any of the other 27 DSTs. Update the schedule for retrieving waste from the tanks, taking into the impact of the delays in the WTP, the risks associated with continuing to store waste in aging tanks, and an analysis of available DST space. Assess the alternatives for creating new RCRA-compliant tank space for the waste from the SSTs, including building new DSTs. We provided DOE with a draft of this report for its review and comment. In its written comments, reproduced in appendix IV, DOE agreed with the report and its recommendations. DOE also provided technical comments that were incorporated, as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees; the Secretary of Energy; the Director, Office of Management and Budget; and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Online, roll your mouse over each year in the figure for additional information. For a printable version, see appendix III, page 30. Figure 7 shows design life data for double-shell tanks. Appendix III: Age and Retrieval Schedule for Hanford Single-Shell Tanks (Corresponds to Fig. 6) Table 1 lists information contained in interactive figure 6. In addition to the individual named above, Dan Feehan, Assistant Director; Mark Braza; John Delicath; Scott Fletcher; Rich Johnson; Jeff Larson; Armetha Liles; and Kyle Stetler made key contributions to this report.

DOE recently reported that nuclear waste is leaking from two of its underground storage tanks (T-111 and AY-102) at Hanford and that water was intruding into AY-102 and other tanks. Also, DOE has been experiencing delays in the construction of the WTP, a collection of facilities that are to treat the tank waste for disposal. These recently reported leaks and intrusions, combined with construction delays, have raised questions among regulators, the public, and Congress about the risks posed by continuing to store waste in the aging tanks. GAO was asked to report on the tank waste cleanup program. This report examines: (1) the condition of the tanks, (2) actions DOE has taken or planned to respond to the recent tank leaks and water intrusions, and (3) the extent to which DOE's tank management plans consider the condition of the tanks and the delays in completing construction of the WTP. GAO obtained and reviewed relevant reports concerning the leaks, the status of the tanks, and the volumes of waste and available space in the tanks. GAO toured the site and interviewed DOE officials and responsible contractors. From 2012 to 2014, the Department of Energy (DOE) assessed the physical condition of the 177 storage tanks at its Hanford, Washington, site in which it stores about 56 million gallons of nuclear waste and found them to be in worse condition than it assumed in 2011 when developing its schedule for emptying the tanks. For the 149 single-shell tanks (SST), DOE previously pumped nearly all of the liquid waste out of the SSTs into the 28 newer double-shell tanks (DST) to reduce the likelihood of leaks. However, after detecting water intruding into several SSTs, DOE reexamined them all and found that water was intruding into at least 14 SSTs and that 1 of them (T-111) had been actively leaking into the ground since about 2010 at a rate of about 640 gallons annually. Regarding the DSTs, in 2012, DOE discovered a leak from the primary shell in tank AY-102. DOE determined that the leak was likely caused by construction flaws and corrosion in the bottom of the tank. DOE found that 12 DSTs have similar construction flaws but has not determined the extent to which the other 27 DSTs are subject to the same corrosion that likely contributed to the leak in AY-102. In response to the waste leaks and water intrusion, DOE has taken or planned several actions. For SSTs, DOE conducted additional tank inspections and temporarily increased the frequency of monitoring the tank waste levels from annually or quarterly to monthly. In addition, after finding flaws in its methods to monitor for leaks and intrusions, DOE modified its methods, which it believes may lead to more effective monitoring. For DSTs, DOE increased the frequency (from every 5 to 7 years to every 3 years) and scope of its tank inspections and convened a panel of experts to evaluate existing tank monitoring and inspection procedures. DOE also plans an independent assessment of the integrity of the DSTs (scheduled to be completed no later than 2016). DOE's current schedule for managing the tank waste does not consider the worsening conditions of the tanks or the delays in the construction of the Waste Treatment and Immobilization Plant (WTP), a facility being constructed to treat the waste and prepare it for final, long-term disposal. First, the leak in AY-102 combined with planned waste transfers from SSTs has reduced the available DST tank storage capacity. Future leaks and intrusions, which become more likely as the tanks' condition worsens, would place additional demands on the already limited DST storage space, and it is unclear how DOE would respond. According to DOE, recent efforts to evaporate some of the water from the waste have already freed up 750,000 gallons of DST space. Second, in March 2014, DOE announced further delays in the construction of the WTP and that these delays will affect the schedule for removing waste from the tanks. However, DOE has not estimated the impact of the WTP delays on its schedule to remove the waste from the tanks. As a result, DOE cannot estimate how long the waste will remain in the aging tanks. Also, DOE officials and members of a 2014 expert panel convened to examine the integrity of the DSTs have said that corrosion is a threat to DST integrity, and, according to the panel, that there are deficiencies in DOE's understanding of corrosion in all of the DSTs. DOE lacks information about the extent to which the other 27 DSTs may also be susceptible to corrosion similar to AY-102. Without determining the extent to which the factors that contributed to the leak in AY-102 were similar to the other 27 DSTs, DOE cannot be sure how long its DSTs can safely store waste. GAO recommends that DOE assess the extent to which other DSTs have corrosion factors similar to AY-102, update its schedule for removing waste from the tanks, and assess the alternatives for creating additional DST space. DOE agreed with this report and its recommendations.

You are an expert at summarizing long articles. Proceed to summarize the following text: VA operates one of the nation’s largest health care systems, spending about $26.5 billion a year to provide care to approximately 5.2 million veterans who receive health care through 158 VA medical centers (VAMC) and almost 900 outpatient clinics nationwide. DOD spends about $26.7 billion on health care for over 8.9 million beneficiaries, including active duty personnel and retirees, and their dependents. Most DOD health care is provided at more than 530 Army, Navy, and Air Force military treatment facilities (MTF) worldwide, supplemented by civilian providers. To encourage sharing of federal health resources between VA and DOD, in 1982, Congress passed the Sharing Act. Previously, VA and DOD health care facilities, many of which are collocated or in close geographic proximity, operated virtually independent of each other. The Sharing Act authorizes VAMCs and MTFs to become partners and enter into sharing agreements to buy, sell, and barter medical and support services. The head of each VA and DOD medical facility can enter into local sharing agreements. However, VA and DOD headquarters officials review and approve agreements that involve national commitments such as joint purchasing of pharmaceuticals. Agreements can be valid for up to 5 years. The intent of the law was not only to remove legal barriers, but also to encourage VA and DOD to engage in health resource sharing to more effectively and efficiently use federal health resources. VA and DOD sharing activities fall into three categories: Local sharing agreements allow VA and DOD to take advantage of their capacities to provide health care by being a provider of health services, a receiver of health services, or both. Health services shared under these agreements can include inpatient and outpatient care; ancillary services, such as diagnostic and therapeutic radiology; dental care; and specialty care services such as service for the treatment of spinal cord injury. Other services shared under these agreements include support services such as administration and management, research, education and training, patient transportation, and laundry. The goals of local sharing agreements are to allow VAMCs and MTFs to exchange health services in order to maximize their use of resources and provide beneficiaries with greater access to care. Joint venture sharing agreements, as distinguished from local sharing agreements, aim to avoid costs by pooling resources to build a new facility or jointly use an existing facility. Joint ventures require more cooperation and flexibility than local agreements because two separate health care systems must develop multiple sharing agreements that allow them to operate as one system at one location. National sharing initiatives are designed to achieve greater efficiencies, that is, lower cost and better access to goods and services when they are acquired on a national level rather than by individual facilities—for example, VA and DOD’s efforts to jointly purchase pharmaceuticals for nationwide distribution. VA and DOD are realizing benefits from sharing activities, specifically greater access to care, reduced federal costs, and better facility utilization at the 16 sites we reviewed. While all 16 sites were engaged in health resource sharing activities, some sites share significantly more resources than others. In 1994 VA and DOD opened a joint venture hospital in Las Vegas, Nevada, to provide services to VA and DOD beneficiaries. The joint venture improved access for VA beneficiaries by providing an alternative source for care other than traveling to VA facilities in Southern California. It also improved access to specialized providers for DOD beneficiaries. Examples of the types of services provided include vascular surgery, plastic surgery, cardiology, pulmonary, psychiatry, ophthalmology, urology, computed tomography scan, magnetic resonance imaging (MRI); nuclear medicine, emergency medicine and emergency room, and respiratory therapy. The site is currently in the process of enlarging the emergency room. In Pensacola, Florida, under a sharing agreement entered into in 2000, VA buys most of its inpatient services from Naval Hospital Pensacola. Through this agreement VA is able to utilize Navy facilities and reduce its reliance on civilian providers, thus lowering its purchased care cost by about $385,000 annually. Further, according to a VA official, the agreement has allowed VA to modify its plans to build a new hospital and instead build a clinic at significantly reduced cost to meet increasing veteran demand for health care services. Using VA’s cost per square foot estimates for hospital and clinic construction, the agency estimates that it will cost $45 million to build a new clinic compared to $100 million for a hospital. In Louisville, Kentucky, since 1996, VA and the Army have been engaged in sharing activities to provide services to beneficiaries that include primary care, audiology, radiology, podiatry, urology, internal medicine, and ophthalmology. For fiscal year 2003, a local VA official estimated that VA reduced its cost by $1.7 million as compared to acquiring the same services in the private sector through its agreements with the Army; he also estimated that the Army reduced its cost by about $1.25 million as compared to acquiring the same services in the private sector. As an example of the site’s efforts to improve access to care and reduce costs, in 2003 VA and DOD jointly leased a MRI unit. The unit reduces the need for VA and DOD beneficiaries to travel to more distant sources of care. A Louisville VA official stated that the purchase reduced the cost by 20 percent as compared to acquiring the same services in the private sector. In San Antonio, Texas, VA and the Air Force share a blood bank. Under a 1991 sharing agreement, VA provides the staff to operate the blood bank and the Air Force provides the space and equipment. According to VA, the blood bank agreement saves VA and DOD about $400,000 per year. Further, VA entered into a laundry service agreement with Brooke Army Medical Center in 2002 to utilize some of VA’s excess laundry capacity. Under the contract VA processes 1.7 million pounds of laundry each year for the Army at an annual cost of $875,000. Sites such as Las Vegas, Nevada; Pensacola, Florida; Louisville, Kentucky; and San Antonio, Texas shared significant resources compared to sites at Los Angeles, California and Charleston, South Carolina. For example, the sharing agreement at Los Angeles provided for the use of a nurse practitioner to assist with primary care and the sharing of a psychiatrist and a psychologist. See appendix II for the VA and DOD partners at each of the 16 sites and examples of the sharing activities taking place. The primary obstacle cited by officials at 14 of 16 sites we interviewed was the inability of computer systems to communicate and share patient health information between departments. Furthermore, local VA and DOD officials involved with sharing activities raised a concern that security check-in procedures implemented since September 11, 2001, have increased the time it takes to gain entry to medical facilities located on military installations during periods of heightened security. VA’s and DOD’s patient record systems cannot share patient health information electronically. The inability of VA’s and DOD’s patient record systems to quickly and readily share information on the health care provided at medical facilities is a significant obstacle to sharing activities. One critical challenge to successfully sharing information will be to standardize the data elements of each department’s health records. While standards for laboratory results were adopted in 2003, VA and DOD face a significant undertaking to standardize the remaining health data. According to the joint strategy that VA and DOD have developed, VA will have to migrate over 150 variations of clinical and demographic data to one standard, and DOD will have to migrate over 100 variations of clinical data to one standard. The inability of VA and DOD computer systems to share information forces the medical facilities involved in treating both agencies’ patient populations to expend staff resources to maintain patient records in both systems. For example, at Travis Air Force Base, both patient records systems have been loaded on to a single workstation in each department, so that nurses and physicians can enter patient encounter data into both systems. However, the user must access and enter data into each system separately. In addition to VA and DOD officials’ concerns about the added costs in terms of staff time, this method of sharing medical information raises the potential for errors—including double entry and transcription— possibly compromising medical data integrity. VA and DOD have been working since 1998 to modify their computer systems to ensure that patient health information can be shared between the two departments. In May 2004, we reported that they have accomplished a one-way transfer of limited health data from DOD to VA for separated service members. Through the transfer, health care data for separated service members are available to all VA medical facilities. This transfer gives VA clinicians the ability to access and display health care data through VA’s computerized patient record system remote data views about 6 weeks after the service member’s separation. The health care data include laboratory, pharmacy, and radiology records, and are available for approximately 1.8 million personnel who separated from the military between 1987 and June 2003. A second phase of the one-way transfer, completed in September 2003, added to the base of health information available to VA clinicians by including discharge summaries, allergy information, admissions information, and consultation results. VA and DOD are developing a two-way transfer of health information for patients who obtain care from both systems. Patients involved include those who receive care and maintain health records at multiple VA or DOD medical facilities within and outside the United States. Upon viewing the medical record, a VA clinician would be provided access to clinical information on the patient residing in DOD’s computerized health record systems. In the same manner, when a veteran seeks medical care at an MTF, the attending DOD clinician would be provided access to the veteran’s health information existing in VA’s computerized health record systems. In May 2004, we reported that VA’s and DOD’s approach to achieving the two-way transfer of health information lacks a solid foundation and that the departments have made little progress toward defining how they intend to accomplish it. In March 2004 and June 2004, we also reported that VA and DOD have not fully established a project management structure to ensure the necessary day-to-day guidance of and accountability for the undertaking, adding to the challenge and uncertainties of developing two-way information exchange. Further, we reported that the departments were operating without a project management plan that describes their specific development, testing, and deployment responsibilities. These issues cause us to question whether the departments will meet their 2005 target date for two-way patient health information exchange. During times of heightened security since September 11, 2001, according to VA and DOD officials, screening procedures have slowed entry for VA beneficiaries, and particularly for family members who accompany them, to facilities located on Air Force, Army, and Navy installations. For example, instead of driving onto Nellis Air Force Base in Las Vegas and parking at the medical facility, veterans seeking treatment there must park outside the base perimeter, undergo a security screening, and wait for shuttle services to take them to the hospital for care. Although sharing occurs in North Carolina between the Fayetteville VA Medical Center and the Womack Army Medical Center, Ft. Bragg, the VA hospital administrator expressed concerns regarding any future plans to build a joint VA and DOD clinic at Ft. Bragg due to security precautions— identity checks and automobile searches—that VA beneficiaries encounter when attempting to access care. Consequently, the administrator prefers that any new clinics be located on VA property for ease of access for all beneficiaries. VA provided an example of how it and DOD are working to help resolve these problems. In Pensacola, Florida, VA is building a joint ambulatory care clinic on Navy property through a land-use arrangement. According to VA, veterans’ access to the clinic will be made easier. A security fence will be built around the building site on shared VA and Navy boundaries and a separate entrance and access road to a public highway will allow direct entry. Special security arrangements will be necessary only for those veterans who are referred for services at the Navy medical treatment facility. Veterans who come to the clinic for routine care will experience the same security measures as at any other VA clinic or medical center. VA believes this arrangement gives it optimal operational control and facilitates veterans’ access while addressing DOD security concerns. We requested comments on a draft of this report from VA and DOD. Both agencies provided written comments that are found in appendix III. VA and DOD generally agreed with our findings. They also provided technical comments that we incorporated where appropriate. In commenting on this draft, VA stated that VA and DOD are developing an electronic interface that will support a bidirectional sharing of health data. This approach is set forth in the Joint VA/DOD Electronic Health Records Plan. According to VA, the plan provides for a documented strategy for the departments to achieve interoperable health systems in 2005. It included the development of a health information infrastructure and architecture, supported by common data, communications, security, software standards, and high-performance health information. VA believes these actions will achieve the two-way transfer of health information and communication between VA’s and DOD’s information systems. In their comments, DOD acknowledged the importance of VA and DOD developing computer systems that can share patient record information electronically. According to DOD, VA and DOD are taking steps to improve the electronic exchange of information. For example, VA and DOD have implemented a joint project management structure for information management and information technology initiatives—which includes a single Program Manager and a single Deputy Program Manager with joint accountability and day-to-day responsibility for project implementation. Further, VA and DOD continue to play key roles as lead partners to establish federal health information interoperability standards as the basis for electronic health data transfer. We recognize that VA and DOD are taking actions to implement the Joint VA/DOD Electronic Health Records Plan and the joint project management structure, and that they face significant challenges to do so. Accomplishing these tasks is a critical step for the departments to achieve interoperable health systems by the end of 2005. DOD also agreed with the GAO findings on issues relating to veterans access to military treatment facilities located on Air Force, Army, and Navy installations during periods of heightened security. DOD stated that they are working diligently to solve these problems, but are unlikely to achieve an early resolution. They also stated that as VA and DOD plan for the future, they will consider this issue during the development of future sharing agreements and joint ventures. We are sending copies of this report to the Secretary of Veterans Affairs, the Secretary of Defense, interested congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, this report is available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (202) 512-7101 or Michael T. Blair, Jr., at (404) 679-1944. Aditi Shah Archer and Michael Tropauer contributed to this report. This report describes the benefits that are being realized at 16 Department of Veterans Affairs (VA) and Department of Defense (DOD) sites that are engaged in health resource sharing activities. Nine of the sites were the focus of a February 2002 House Committee on Veterans’ Affairs report that described health resource sharing activities between VA and DOD. We selected seven other sites that actively participated in sharing activities to ensure representation from each service at locations throughout the nation. To obtain information on the resources that are being shared we analyzed agency documents and interviewed officials at VA and DOD headquarters offices and at VA and DOD field offices who manage sharing activities at the 16 sites. To gain information on the benefits of sharing and the problems that impede sharing at selected VA and DOD sites, we asked VA and DOD personnel at 16 sites to provide us with information on: shared services provided to beneficiaries including improvements or enhancements to delivery of health care to beneficiaries, reduction in costs, and their opinions on barriers or obstacles that exist either internally (within their own agency) or externally (with their partner service or agency). Ten sites provided information on estimated cost reductions. We reviewed the supporting documentation and obtained clarifying information from agency officials. Based on our review of the documentation and subsequent discussions with agency officials we accepted the estimates as reasonable. From the 16 sites, we judgmentally selected the following 6 sites to visit: 1) Fairfield, California; 2) Pensacola, Florida; 3) Louisville, Kentucky; 4) Fayetteville, North Carolina; 5) Las Vegas, Nevada; and 6) Charleston, South Carolina. At the sites we visited, we interviewed local VA and DOD officials to obtain their views on resource-sharing activities and obtained documents from them on the types of services that were being shared. The sites were selected based on the following criteria: 1) representation from each military service; 2) geographic location; and 3) type of sharing agreement—local sharing agreement, joint venture, or participant in a national sharing initiative. We conducted telephone interviews with agency officials at the 10 sites that we did not visit and requested supporting documentation from them to gain an understanding of the sharing activities underway at each site. We obtained and reviewed VA and DOD policies and regulations governing sharing agreements and reviewed our prior work and relevant reports issued by the DOD Inspector General and DOD contractors. Our work was performed from June 2003 through June 2004 in accordance with generally accepted government auditing standards. Partners: Alaska VA Healthcare System and 3rd Medical Group, Elmendorf Air Force Base The Department of Veterans Affairs (VA) and the Air Force have had a resource-sharing arrangement since 1992. Building upon that arrangement, in 1999, VA and the Air Force entered into a joint venture hospital. According to VA and Air Force officials, they have been able to efficiently and effectively provide services to both VA and the Department of Defense (DOD) beneficiaries in the Anchorage area that would not have been otherwise possible. The services to VA and DOD beneficiaries include emergency room, outpatient, and inpatient care. Other services the Air Force provides VA includes diagnostic radiology, clinical and anatomical pathology, nuclear medicine, and MRI. VA contributes approximately 60 staff toward the joint venture. VA staff are primarily responsible for operating the 10-bed intensive care unit (ICU). For fiscal year 2002, a DOD official estimated that the Air Force avoids costs of about $6.6 million by utilizing the ICU as compared to acquiring the same services in the private sector. Other VA staffing in the hospital lends support to the emergency department, medical and surgical unit, social work services, supply processing and distribution, and administration. Partners: VA Northern California Health Care System and 60th Medical Group, Travis Air Force Base In 1994, VA and the Air Force entered into a joint venture at Travis Air Force Base. Under this joint venture, VA contracts for inpatient care, radiation therapy, and other specialty, ancillary, and after-hours teleradiology services it need from the Air Force. In return, the Air Force contracts for ancillary and pharmacy support from VA. The most recent expansion of the joint venture in 2001 included activation of a VA clinic located adjacent to the Air Force hospital—this clinic includes a joint neurosurgery clinic. Each entity currently reimburses the other at 75 percent of the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) Maximum Allowable Charge (CMAC) rate. In March 2004, a VA official estimated that the VA saves about $500,000 per year by participating in the joint venture and an Air Force official estimated that the Air Force saves about $300,000 per year through the joint venture. Partners: Veterans Affairs Greater Los Angeles Healthcare System and 61st Medical Squadron, Los Angeles Air Force Base The Air Force contracts for mental health services from the Veterans Affairs medical center (VAMC). According to Air Force and VA local officials, there are two agreements in place; first, VA provides a psychologist and a psychiatrist who provide on-site services to DOD beneficiaries (one provider comes once a week, another provider comes 2 days a month). The total cost of this annual contract is about $200,000. According to the Air Force, it is paying 90 percent of the CMAC rate for these services and is thereby saving about $20,000 to $22,000 a year. Second, the Air Force is using a VA nurse practitioner to assist with primary care. The cost savings were not calculated but the Air Force stated that VA was able to provide this staffing at a significantly reduced cost as compared to contracting with the private sector. Partners: VA San Diego Healthcare System and Naval Medical Center San Diego VA provides graduate medical education, pathology and laboratory testing, and outpatient and ancillary services to the Navy. According to Navy officials, the sharing agreements resulted in a cost reduction of about $100,000 per year for fiscal years 2002 and 2003. As of June 2004, VA and the Navy were in the process of finalizing agreements for sharing radiation therapy, a blood bank, and mammography services. In fiscal year 2003, San Diego was selected as a pilot location for the VA/DOD Consolidated Mail Outpatient Pharmacy (CMOP) program. A naval official at San Diego considers the pilot a success at this location because participation was about 75 percent and it helped eliminate traffic, congestion, and parking problems associated with beneficiaries on the Navy’s medical campus who come on site for medication refills—an average of 350 patients per day. According to a DOD official, the CMOP pilot in San Diego will likely continue through fiscal year 2004. Partners: VA Miami Medical Center and Naval Hospital Jacksonville VA and the Navy have shared space and services since 1987. The Key West Clinic became a joint venture location in 2000. VA physically occupies 10 percent of the Navy clinic in Key West. The clinic is a primary care facility. However, the clinic provides psychiatry, internal medicine, and part-time physical therapy. According to Navy officials, there are two VA physicians on call at the clinic and seven Navy physicians. The Navy’s physicians examine VA patients when needed, and the Navy bills the VA at 90 percent of CMAC. Further, VA reimburses the Navy 10 percent of the total cost for housekeeping and utilities. VA and the Navy share laboratory and pathology, radiology, optometry, and pharmacy services. The VA reimburses the Navy $4 for the packaging and dispensing of each prescription. Partners: VA Gulf Coast Veterans Health Care System and Naval Hospital Pensacola Since 2000, the Navy has provided services to VA beneficiaries at its hospital through sharing agreements that include emergency room services, obstetrics, pharmacy services, inpatient care, urology, and diagnostic services. In turn, VA provides mental health and laundry services to Navy beneficiaries. In fiscal year 2002, the Naval Hospital Pensacola met about 88 percent of VA’s inpatient needs. The Navy provided 163 emergency room visits, 112 outpatient visits, and 8 surgical procedures for orthopedic services to VA beneficiaries. Through this agreement VA has reduced its reliance on civilian providers, thus lowering its purchased care cost by about $385,000 annually. Further, according to a VA official, the agreement has allowed VA to modify its plans to build a new hospital to meet increasing veteran demand for health care services. Rather than build a new hospital VA intends to build a clinic to meet outpatient needs. Using VA’s cost per square foot estimates for hospital and clinic construction, the agency estimates that it will cost $45 million to build a new clinic compared to $100 million for a new hospital. Partners: VA Pacific Islands Healthcare System and Tripler Army Medical Center VA and the Army entered into a joint venture in 1991. According to VA and Army officials, over $50 million were saved in construction costs when VA built a clinic adjacent to the existing Army hospital. According to a VA official, the Army hospital is the primary facility for care for most VA and Army beneficiaries. The Army provides VA beneficiaries with access to the following services: inpatient care, intensive care, emergency room, chemotherapy, radiology, laboratory, dental, education and training for physicians, and nurses. Also, as part of the joint venture agreement, VA physicians are assigned to the Army hospital to provide care to VA patients. VA and the Army provided services to about 18,000 VA beneficiaries in 2003. According to an Army official, the joint venture as a whole provides no savings to the Army. The benefit to the Army is assured access for its providers to clinical cases necessary for maintenance of clinical skills and Graduate Medical Education through the reimbursed workload. Partners: North Chicago VA Medical Center and Naval Hospital Great Lakes VA provides inpatient psychiatry and intensive care, and outpatient clinic visits, for example, pulmonary care, neurology, gastrointestinal care, diabetic care, occupational and physical therapy, speech therapy, rehabilitation, and diagnostic tests to Navy beneficiaries. VA also provides medical training to Naval corpsmen, nursing staff, and dental residents. The Navy provides selected surgical services for VA beneficiaries such as joint replacement surgeries and cataract surgeries. In addition, as available, the Navy provides selected outpatient services, mammograms, magnetic resonance imaging (MRI) examinations, and laboratory tests. The 2-year cost under this agreement from October 2001 through September 2003 is about $295,000 for VA and about $502,000 for the Navy. According to VA officials, VA and DOD pay each other 90 percent of the CMAC rate for these services. As a result, for the 2-year period VA and DOD reduced their costs by about $88,000 through this agreement, as opposed to contracting with the private sector for these services. VA officials also stated that other benefits were derived from these agreements, including sharing of pastoral care, pharmacy support, educational and training opportunities, imaging, and the collaboration of contracting and acquisition opportunities, all resulting in additional services being provided to patients at an overall reduced cost, plus more timely and convenient care. According to VA, in October 2003 the Navy transferred its acute inpatient mental health program to North Chicago VA medical center, where staff operate a 10-bed acute mental health ward, which has resulted in an estimated cost reduction of $323,000. This unit also included a 10-bed medical hold unit. Further, VA and the Navy are pursuing a joint venture opportunity planned for award in fiscal year 2004, which will integrate the medical and surgical inpatient programs. This will result in the construction of four new operating rooms and the integration of the acute outpatient evaluation units at VA. The Navy would continue to provide surgical procedures and related inpatient follow-up care for Navy patients at the VA facility. The joint venture would eliminate the need for the Navy to construct replacement inpatient beds as part of the Navy’s planned Great Lakes Naval hospital replacement facility. According to VA, this joint venture would result in an estimated cost reduction of about $4 million. Partners: VA Medical Center Louisville and Ireland Army Community Hospital, Ft. Knox Since 1996, in Louisville, Kentucky, VA and the Army have been engaged in sharing activities to provide services to beneficiaries that include primary care, acute care pharmacy, ambulatory, blood bank, intensive care, pathology and laboratory, audiology, podiatry, urology, internal medicine, and ophthalmology. For fiscal year 2003, a local VA official estimated that VA reduced its cost by $1.7 million as compared to acquiring the same services in the private sector through its agreements with the Army; he also estimated that the Army reduced its cost by about $1.25 million as compared to acquiring the same services in the private sector. As an example of the site’s efforts to improve access to care, in 2003 VA and DOD jointly leased an MRI unit. The unit eliminates the need for beneficiaries to travel to more distant sources of care. A Louisville VA official stated that the purchase reduced the cost by 20 percent as compared to acquiring the same services in the private sector. Partners: VA Southern Nevada Healthcare System and 99th Medical Group, Nellis Air Force Base In this joint venture, VA and the Air Force operate an integrated medical hospital. Prior to 1994, VA had no inpatient capabilities in Las Vegas. This required VA beneficiaries to travel to VA facilities in Southern California for their inpatient care. This joint venture also improved access to specialized providers for DOD beneficiaries. The following services are available at the joint venture: anesthesia, facility and acute care pharmacy, blood bank, general surgery, mental health, intensive care, mammography, obstetrics and gynecology, orthopedics, pathology and laboratory, vascular surgery, plastic surgery, cardiology, pulmonary, psychiatry, ophthalmology, urology, podiatry, computed tomography scan, MRI, nuclear medicine, emergency medicine and emergency room, and pulmonary and respiratory therapy. VA and Air Force officials estimate that the joint venture reduces their cost of health care delivery by over $15 million annually. Currently, the site is in the process of enlarging the hospital’s emergency room. According to a VA official, during periods of heightened security, veterans seeking treatment from the hospital at Nellis Air Force base in Las Vegas must park outside the base perimeter, undergo a security screening, and wait for shuttle services to take them to the hospital for care. Partners: New Mexico VA Health Care System and 377th Medical Group, Kirtland Air Force Base According to VA and Air Force officials, Albuquerque is the only joint venture site where VA provides the majority of health care to Air Force beneficiaries. The Air Force purchases all inpatient clinical care services from the VA. The Air Force also operates a facility, including a dental clinic adjacent to the hospital. According to an Air Force official, for fiscal year 2003 the Air Force avoided costs of about $1,278,000 for inpatient, outpatient, and ambulatory services needs. It also avoided costs of about $288,000 for emergency room and ancillary services. The Air Force official estimates that under the joint venture it has saved about 25 percent of what it would have paid in the private sector. Further, according to the Air Force official, additional benefits are derived from the joint venture that are important to beneficiaries such as: 1) continuity of care, 2) rapid turnaround through the referral process, 3) easier access to specialty providers, and 4) an overall increase in patient satisfaction. Additionally, both facilities individually provide women’s health (primary care, surgical, obstetrics and gynecology) to their beneficiaries. The Air Force official reported in March 2004 that they were evaluating how they can jointly provide these services. In fiscal year 2003 Kirkland Air Force Base was selected as a pilot location for the CMOP program. According to a DOD official, the CMOP pilot at Kirtland Air Force Base will likely continue through fiscal year 2004. Partners: Fayetteville VA Medical Center and Womack Army Medical Center, Fort Bragg According to a VA official, VA and Army shared resources include blood services, general surgery, pathology, urology, the sharing of one nuclear medicine physician, one psychiatrist, a dental residency program, and limited use by VA of an Army MRI unit. Partners: Ralph H. Johnson VA Medical Center and Naval Hospital Charleston According to Navy officials, with the downsizing of the Naval Hospital Charleston and transfer of its inpatient workload to Trident Health Care system (a private health care system), VA and the Navy no longer share inpatient services, except in cases where the Navy requires mental health inpatient services. However, in June 2004, VA has approved a minor construction joint outpatient project totaling $4.9 million (scheduled for funding in fiscal year 2006 with activation planned for fiscal year 2008). Design meetings are underway. Among the significant sharing opportunities for this new facility are laboratory, radiology, and specialty services. Partners: El Paso VA Health Care System and William Beaumont Army Medical Center, Fort Bliss In this joint venture, the VA contracts for emergency department services, specialty services consultation, inpatient services for medicine, surgery, psychiatric, and intensive care unit from the Army. The Army contracts for backup services from the VA including computerized tomography, and operating suite access. According to VA officials, the Army provides all general and vascular surgery services so that no veteran has to leave El Paso for these services. This eliminates the need for El Paso’s veterans to travel over 500 miles round-trip to obtain these surgical procedures from the Albuquerque VAMC—the veterans’ closest source of VA medical care. The Army provides these services at 90 percent of the CMAC rate or in some cases at an even lower rate. According to a VA official in June 2004, VA and the Army have agreed to proceed with a VA lease of the 7th floor of the William Beaumont Army Medical Center. VA would use the space to operate an inpatient psychiatry ward and a medical surgery ward. VA will staff both wards. In fiscal year 2004 El Paso was approved as a pilot location for testing a system that stores VA and DOD patient laboratory results electronically. Partners: South Texas Veterans Health Care System; Wilford Hall Medical Center, Lackland Air Force Base; and Brooke Army Medical Center, Fort Sam Houston As of March 2004, a VA official stated that VA and DOD have over 20 active agreements in place in San Antonio. Some of the sharing activities between VA and the Air Force include radiology, maternity, laboratory, general surgery, and a blood bank. Since 2001, VA staffs the blood bank and the Air Force provides the space and equipment—the blood bank provides services to VA and Air Force beneficiaries. According to VA, the blood bank agreement saves VA and DOD about $400,000 per year. Further, according to Air Force officials, as of June 2004 VA and the Air Force were negotiating to jointly operate the Air Force’s ICU. The Air Force would supply the acute beds and VA would provide the staff. This joint unit would provide services to both beneficiary populations. In addition, VA and Army agreements include the following areas of service: gynecology, sleep laboratory, radiology, and laundry. According to VA officials, VA entered into a laundry service agreement with Brooke Army Medical Center in 2002 to utilize some of VA’s excess laundry capacity. Under the contract VA processes about 1.7 million pounds of laundry each year for the Army at an annual cost of $875,000. Partners: VA Puget Sound Health Care System and Madigan Army Medical Center, Ft. Lewis As of June 2004, VA and the Army have two sharing agreements in place that encompass several shared services. For example, the Army provides VA beneficiaries with emergency room, inpatient, mammography, and cardiac services. The VA provides the Army with computer training services, laboratory testing, and radiology and gastrointestinal physician services on-site at Madigan. In addition, VA nursing and midlevel staff provide support to the Army inpatient medicine service. In turn, the Army provides 15 inpatient medicine beds for veterans. During fiscal year 2002, VA paid the Army $900 per ward day per patient for inpatient care and $1,720 per ICU day. During fiscal year 2002, there were 69 VA patients discharged, with 117 ward days and 101 ICU days, averaging $1,280 per day. According to VA officials, this agreement resulted in a cost reduction, in that to contract with private providers the average cost per day would have been $1,939. The cost reduction to VA was $143,752. The VA and Army jointly staff clinics for otolaryngology (1/2 day per week) and ophthalmology (3 half-day clinics per month). This agreement results in a cost reduction of about $25,000 per year to VA compared to contracting with the private sector. Other services such as mammography do not result in a cost reduction, but according to VA officials they provide their beneficiaries with another source for accessing care. Computer-Based Patient Records: VA and DOD Efforts to Exchange Health Data Could Benefit from Improved Planning and Project Management. GAO-04-687. Washington, D.C.: June 7, 2004. Computer-Based Patient Records: Improved Planning and Project Management Are Critical to Achieving Two-Way VA-DOD Health Data Exchange. GAO-04-811T. Washington, D.C.: May 19, 2004. Computer-Based Patient Records: Sound Planning and Project Management Are Needed to Achieve a Two-Way Exchange of VA and DOD Health Data. GAO-04-402T. Washington, D.C.: March 17, 2004. DOD and VA Health Care: Incentives Program for Sharing Resources. GAO-04-495R. Washington, D.C.: February 27, 2004. Veterans Affairs: Post-hearing Questions Regarding the Departments of Defense and Veterans Affairs Providing Seamless Health Care Coverage to Transitioning Veterans. GAO-04-294R. Washington, D.C.: November 25, 2003. Computer-Based Patient Records: Short-Term Progress Made, but Much Work Remains to Achieve a Two-Way Data Exchange Between VA and DOD Health Systems. GAO-04-271T. Washington, D.C.: November 19, 2003. DOD and VA Health Care: Access for Dual Eligible Beneficiaries. GAO- 03-904R. Washington, D.C.: June 13, 2003. VA and Defense Health Care: Increased Risk of Medication Errors for Shared Patients. GAO-02-1017. Washington, D.C.: September 27, 2002. VA and Defense Health Care: Potential Exists for Savings through Joint Purchasing of Medical and Surgical Supplies. GAO-02-872T. Washington, D.C.: June 26, 2002. DOD and VA Pharmacy: Progress and Remaining Challenges in Jointly Buying and Mailing Out Drugs. GAO-01-588. Washington, D.C.: May 25, 2001. Computer-Based Patient Records: Better Planning and Oversight By VA, DOD, and IHS Would Enhance Health Data Sharing. GAO-01-459. Washington, D.C.: April 30, 2001. VA and Defense Health Care: Evolving Health Care Systems Require Rethinking of Resource Sharing Strategies. GAO/HEHS-00-52. Washington, D.C.: May 17, 2000. VA and Defense Health Care: Rethinking of Resource Sharing Strategies is Needed. GAO/T-HEHS-00-117. Washington, D.C.: May 17, 2000. VA/DOD Health Care: Further Opportunities to Increase the Sharing of Medical Resources. GAO/HRD-88-51. Washington D.C.: March 1, 1988. Legislation Needed to Encourage Better Use of Federal Medical Resources and Remove Obstacles To Interagency Sharing. HRD-78-54. Washington D.C.: June 14, 1978. 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Congress has long encouraged the Department of Veterans Affairs (VA) and the Department of Defense (DOD) to share health resources to promote cost-effective use of health resources and efficient delivery of care. In February 2002, the House Committee on Veterans' Affairs described VA and DOD health care resource sharing activities at nine locations. GAO was asked to describe the health resource sharing activities that are occurring at these sites. GAO also examined seven other sites that actively participate in sharing activities. Specifically, GAO is reporting on (1) the types of benefits that have been realized from health resource sharing activities and (2) VA- and DOD-identified obstacles that impede health resource sharing. GAO analyzed agency documents and interviewed officials at DOD and VA to obtain information on the benefits achieved through sharing activities. The nine sites reviewed by the Committee and reexamined by GAO are: 1) Los Angeles, CA; 2) San Diego, CA; 3) North Chicago, IL; 4) Albuquerque, NM; 5) Las Vegas, NV; 6) Fayetteville, NC; 7) Charleston, SC; 8) El Paso, TX; and 9) San Antonio, TX. The seven additional sites GAO examined are: 1) Anchorage, AK; 2) Fairfield, CA; 3) Key West, FL; 4) Pensacola, FL; 5) Honolulu, HI; 6) Louisville, KY; and 7) Puget Sound, WA. In commenting on a draft of this report, the departments generally agreed with our findings. At the 16 sites GAO reviewed, VA and DOD are realizing benefits from sharing activities, specifically better facility utilization, greater access to care, and reduced federal costs. While all 16 sites are engaged in health resource sharing activities, some sites share significantly more resources than others. For example, at one site VA was able to utilize Navy facilities to provide additional sources of care and reduce its reliance on civilian providers, thus lowering its purchased care cost by about $385,000 annually. Also, because of the sharing activity taking place at this site, VA has modified its plans to build a new $100 million hospital and instead plans to build a clinic that will cost about $45 million. However, at another site the sharing activity was limited to the use of a nurse practitioner to assist with primary care and the sharing of a psychiatrist and a psychologist. GAO found that the primary obstacle cited by almost all of the agency officials interviewed was the inability of VA and DOD computer systems to communicate and exchange patient health information between departments. VA and DOD medical facilities involved in treating both agencies' patient populations must expend staff resources to enter information on the health care provided into the patient records in both systems. Local VA officials also expressed a concern that security screening procedures have increased the time it takes for VA beneficiaries and their families to gain entry to facilities located on Air Force, Army, and Navy installations during periods of heightened security.

You are an expert at summarizing long articles. Proceed to summarize the following text: CBP’s SBI program is to leverage technology, tactical infrastructure, and people to allow CBP agents to gain control of the nation’s borders. Within SBI, SBInet is the program for acquiring, developing, integrating, and deploying an appropriate mix of surveillance technologies and command, control, communications, and intelligence (C3I) technologies. The surveillance technologies are to include a variety of sensor systems aimed at improving CBP’s ability to detect, identify, classify, and track items of interest along the borders. Unattended ground sensors are to be used to detect heat and vibrations associated with foot traffic and metal associated with vehicles. Radars mounted on fixed and mobile towers are to detect movement, and cameras on fixed and mobile towers are to be used to identify, classify, and track items of interest detected by the ground sensors and the radars. Aerial assets are also to be used to provide video and infrared imaging to enhance tracking of targets. The C3I technologies are to include software and hardware to produce a Common Operating Picture (COP)—a uniform presentation of activities within specific areas along the border. The sensors, radars, and cameras are to gather information along the border, and the system is to transmit this information to the COP terminals located in command centers and agent vehicles, assembling this information to provide CBP agents with border situational awareness. A system life cycle management approach typically consists of a series of phases, milestone reviews, and related processes to guide the acquisition, development, deployment, and operation and maintenance of a system. The phases, reviews, and processes cover such important life cycle activities as requirements development and management, design, software development, and testing. In general, SBInet surveillance systems are to be acquired through the purchase of commercially available products, while the COP systems involve development of new, customized systems and software. Together, both categories are to form a deployable increment of SBInet capabilities, which the program office refers to as a “block.” Each block is to include a release or version of the COP. The border area that receives a given block is referred to as a “project.” Among the key processes provided for in the SBInet system life cycle management approach are processes for developing and managing requirements and for managing testing activities. SBInet requirements are to consist of a hierarchy of six types of requirements, with the high-level operational requirements at the top. These high-level requirements are to be decomposed into lower-level, more detailed system, component, design, software, and project requirements. SBInet testing consists of a sequence of tests that are intended first to verify that individual system parts meet specified requirements, and then verify that these combined parts perform as intended as an integrated and operational system. Having a decomposed hierarchy of requirements and an incremental approach to testing are both characteristics of complex information technology (IT) projects. Important aspects of SBInet—the scope, schedule, and development and deployment approach—remain ambiguous and in a continued state of flux, making it unclear and uncertain what technology capabilities will be delivered and when, where, and how they will be delivered. For example, the scope and timing of planned SBInet deployments and capabilities have continued to change since the program began, and remain unclear. Further, the approach that is being used to define, develop, acquire, test, and deploy SBInet is similarly unclear and has continued to change. The absence of clarity and stability in these key aspects of SBInet introduces considerable program risks, hampers DHS’s ability to measure program progress, and impairs the ability of Congress to oversee the program and hold DHS accountable for program results. The scope and timing of planned SBInet deployments and capabilities have not been clearly established, but rather have continued to change since the program began. Specifically, as of December 2006, the SBInet System Program Office planned to deploy an “initial” set of capabilities along the entire southwest border by late 2008 and a “full” set of operational capabilities along the southern and northern borders (a total of about 6,000 miles) by late 2009. Since then, however, the program office has modified its plans multiple times. As of March 2008, it planned to deploy SBInet capabilities to just three out of nine sectors along the southwest border—Tucson Sector by 2009, Yuma Sector by 2010, and El Paso Sector by 2011. According to program officials, no deployment dates had been established for the remainder of the southwest or northern borders. At the same time, the SBInet System Program Office committed to deploying Block 1 technologies to two locations within the Tucson Sector by the end of 2008, known as Tucson 1 and Ajo 1. However, as of late July 2008, program officials reported that the deployment schedule for these two sites has been modified, and they will not be operational until “sometime” in 2009. The slippages in the dates for the first two Tucson deployments, according to a program official, will, in turn, delay subsequent Tucson deployments, although revised dates for these subsequent deployments have not been set. In addition, the current Block 1 design does not provide key capabilities that are in requirements documents and were anticipated to be part of the Block 1 deployments to Tucson 1 and Ajo 1. For example, the first deployments of Block 1 will not be capable of providing COP information to the agent vehicles. Without clearly establishing program commitments, such as capabilities to be deployed and when and where they are to be deployed, program progress cannot be measured and responsible parties cannot be held accountable. Another key aspect of successfully managing large programs like SBInet is having a schedule that defines the sequence and timing of key activities and events and is realistic, achievable, and minimizes program risks. However, the timing and sequencing of the work, activities, and events that need to occur to meet existing program commitments are also unclear. Specifically, the program office does not yet have an approved integrated master schedule to guide the execution of SBInet. Moreover, our assimilation of available information from multiple program sources indicates that the schedule has continued to change. Program officials attributed these schedule changes to the lack of a satisfactory system-level design, turnover in the contractor’s workforce, including three different program managers and three different lead system engineers, and attrition in the SBInet Program Office, including turnover in the SBInet Program Manager position. Without stability and certainty in the program’s schedule, program cost and schedule risks increase, and meaningful measurement and oversight of program status and progress cannot occur, in turn limiting accountability for results. System quality and performance are in large part governed by the approach and processes followed in developing and acquiring the system. The approach and processes should be fully documented so that they can be understood and properly implemented by those responsible for doing so, thus increasing the chances of delivering promised system capabilities and benefits on time and within budget. The life cycle management approach and processes being used by the SBInet System Program Office to manage the definition, design, development, testing, and deployment of system capabilities has not been fully and clearly documented. Rather, what is defined in various program documents is limited and not fully consistent across these documents. For example, officials have stated that they are using the draft Systems Engineering Plan, dated February 2008, to guide the design, development, and deployment of system capabilities, and the draft Test and Evaluation Master Plan, dated May 2008, to guide the testing process, but both of these documents appear to lack sufficient information to clearly guide system activities. For example, the Systems Engineering Plan includes a diagram of the engineering process, but the steps of the process and the gate reviews are not defined or described in the text of the document. Further, statements by program officials responsible for system development and testing activities, as well as briefing materials and diagrams that these officials provided, did not add sufficient clarity to describe a well-defined life cycle management approach. Program officials told us that both the government and contractor staff understand the SBInet life cycle management approach and related engineering processes through the combination of the draft Systems Engineering Plan and government-contractor interactions during design meetings. Nevertheless, they acknowledged that the approach and processes are not well documented, citing a lack of sufficient staff to both document the processes and oversee the system’s design, development, testing, and deployment. They also told us that they are adding new people to the program office with different acquisition backgrounds, and they are still learning about, evolving, and improving the approach and processes. The lack of definition and stability in the approach and related processes being used to define, design, develop, acquire, test, and deploy SBInet introduces considerable risk that both the program officials and contractor staff will not understand what needs to be done when, and that the system will not meet operational needs and perform as intended. DHS has not effectively defined and managed SBInet requirements. While the program office recently issued guidance that is consistent with recognized leading practices, this guidance was not finalized until February 2008, and thus was not used in performing a number of key requirements-related activities. In the absence of well-defined guidance, the program’s efforts to effectively define and manage requirements have been mixed. For example, the program has taken credible steps to include users in the definition of requirements. However, several requirements definition and management limitations exist. One of the leading practices associated with effective requirements development and management is engaging system users early and continuously. In developing the operational requirements, the System Program Office involved SBInet users in a manner consistent with leading practices. Specifically, it conducted requirements-gathering workshops from October 2006 through April 2007 to ascertain the needs of Border Patrol agents and established work groups in September 2007 to solicit input from both the Office of Air and Marine Operations and the Office of Field Operations. Further, the program office is developing the COP technology in a way that allows end users to be directly involved in software development activities, which permits solutions to be tailored to their needs. Such efforts increase the chances of developing a system that will successfully meet those needs. The creation of a requirements baseline establishes a set of requirements that have been formally reviewed and agreed on, and thus serve as the basis for further development or delivery. According to SBInet program officials, the SBInet Requirements Development and Management Plan, and leading practices, requirements should be baselined before key system design activities begin in order to inform, guide, and constrain the system’s design. While many SBInet requirements have been baselined, two types have not yet been baselined. According to the System Program Office, the operational requirements, system requirements, and various system component requirements have been baselined. However, as of July 2008, the program office had not baselined its COP software requirements and its project-level requirements for the Tucson Sector, which includes Tucson 1 and Ajo 1. According to program officials the COP requirements have not been baselined because certain interface requirements had not yet been completely identified and defined. Despite the absence of baselined COP and project-level requirements, the program office has proceeded with development, integration, and testing activities for the Block 1 capabilities to be delivered to Tucson 1 and Ajo l. As a result, it faces an increased risk of deploying systems that do not align well with requirements, and thus may require subsequent rework. Another leading practice associated with developing and managing requirements is maintaining bidirectional traceability from high-level operational requirements through detailed low-level requirements to test cases. The SBInet Requirements Development and Management Plan recognizes the importance of traceability, and the SBInet System Program Office established detailed guidance for populating and maintaining a requirements database for maintaining linkages among requirement levels and test verification methods. To provide for requirements traceability, the prime contractor established such a requirements management database. However, the reliability of the database is questionable. We attempted to trace requirements in the version of this database that the program office received in March 2008, and were unable to trace large percentages of component requirements to either higher-level or lower-level requirements. For example, an estimated 76 percent (with a 95 percent degree of confidence of being between 64 and 86 percent) of the component requirements that we randomly sampled could not be traced to the system requirements and then to the operational requirements. In addition, an estimated 20 percent (with a 95 percent degree of confidence of being between 11 and 33 percent) of the component requirements in our sample failed to trace to a verification method. Without ensuring that requirements are fully traceable, the program office does not have a sufficient basis for knowing that the scope of the contractor’s design, development, and testing efforts will produce a system solution that meets operational needs and performs as intended. To be effectively managed, testing should be planned and conducted in a structured and disciplined fashion. This includes having an overarching test plan or strategy and testing individual system components to ensure that they satisfy requirements prior to integrating them into the overall system. This test management plan should define the schedule of high- level test activities in sufficient detail to allow for more detailed test planning and execution to occur, define metrics to track test progress and report and address results, and define the roles and responsibilities of the various groups responsible for different levels of testing. However, the SBInet program office is not effectively managing its testing activities. Specifically, the SBInet Test and Evaluation Master Plan, which documents the program’s test strategy and is being used to manage system testing, has yet to be approved by the SBInet Acting Program Manager, even though testing activities began in June 2008. Moreover, the plan is not complete. In particular, it does not (1) contain an accurate and up-to-date test schedule, (2) identify any metrics for measuring testing progress, and (3) clearly define and completely describe the roles and responsibilities of various entities that are involved in system testing. Further, the SBInet System Program Office has not performed individual component testing as part of integration testing. As of July 2008, agency officials reported that component-level tests had not been completed and were not scheduled to occur. Instead, officials stated that Block 1 components were evaluated based on what they described as “informal tests” (i.e., contractor observations of cameras and radar suites in operation at a National Guard facility in the Tucson Sector) and stated that the contractors’ self-certification that the components meet functional and performance requirements was acceptable. Program officials acknowledged that this approach did not verify whether the individual components in fact met requirements. Without effectively managing testing activities, the chances of SBInet testing being effectively performed is reduced, which in turn increases the risk that the delivered and deployed system will not meet operational needs and not perform as intended. In closing, I would like to stress that a fundamental aspect of successfully implementing a large IT program like SBInet is establishing program commitments, including what capabilities will be delivered and when and where they will be delivered. Only through establishing such commitments, and adequately defining the approach and processes to be used in delivering them, can DHS effectively position itself for measuring progress, ensuring accountability for results, and delivering a system solution with its promised capabilities and benefits on time and within budget constraints. For SBInet, this has not occurred to the extent that it needs to for the program to have a meaningful chance of succeeding. In particular, commitments to the timing and scope of system capabilities remain unclear and continue to change, with the program committing to far fewer capabilities than originally envisioned. Further, how the SBInet system solution is to be delivered has been equally unclear and inadequately defined. Moreover, while the program office has defined key practices for developing and managing requirements, these practices were developed after several important requirements activities were performed. In addition, efforts performed to date to test whether the system meets requirements and functions as intended have been limited. Collectively, these limitations increase the risk that the delivered system solution will not meet user needs and operational requirements and will not perform as intended. In turn, the chances are increased that the system will require expensive and time-consuming rework. In light of these circumstances and risks surrounding SBInet, our soon to be issued report contains eight recommendations to the department aimed at reassessing its approach to and plans for the program—including its associated exposure to cost, schedule, and performance risks—and disclosing these risks and alternative courses of action for addressing them to DHS and congressional decision makers. The recommendations also provide for correcting the weaknesses surrounding the program’s unclear and constantly changing commitments and its life cycle management approach and processes, as well as implementing key requirements development and management and testing practices. While implementing these recommendations will not guarantee a successful program, it will minimize the program’s exposure to risk and thus the likelihood that it will fall short of expectations. For SBInet, living up to expectations is important because the program is a large, complex, and integral component of DHS’s border security and immigration control strategy. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the committee may have at this time. For further information, please contact Randolph C. Hite at (202) 512-3439 or at [email protected]. Other key contributors to this testimony were Carl Barden, Deborah Davis, Neil Doherty, Lee McCracken, Jamelyn Payan, Karl Seifert, Sushmita Srikanth, Karen Talley, and Merry Woo. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Department of Homeland Security's (DHS) Secure Border Initiative (SBI) is a multiyear, multibillion-dollar program to secure the nation's borders through, among other things, new technology, increased staffing, and new fencing and barriers. The technology component of SBI, which is known as SBInet, involves the acquisition, development, integration, and deployment of surveillance systems and command, control, communications, and intelligence technologies. GAO was asked to testify on its draft report, which assesses DHS's efforts to (1) define the scope, timing, and life cycle management approach for planned SBInet capabilities and (2) manage SBInet requirements and testing activities. In preparing the draft report, GAO reviewed key program documentation, including guidance, plans, and requirements and testing documentation; interviewed program officials; analyzed a random probability sample of system requirements; and observed operations of the initial SBInet project. Important aspects of SBInet remain ambiguous and in a continued state of flux, making it unclear and uncertain what technology capabilities will be delivered and when, where, and how they will be delivered. For example, the scope and timing of planned SBInet deployments and capabilities have continued to be delayed without becoming more specific. Further, the program office does not have an approved integrated master schedule to guide the execution of the program, and the nature and timing of planned activities has continued to change. This schedule-related risk is exacerbated by the continuous change in, and the absence of a clear definition of, the approach that is being used to define, develop, acquire, test, and deploy SBInet. SBInet requirements have not been effectively defined and managed. While the program office recently issued guidance that is consistent with recognized leading practices, this guidance was not finalized until February 2008, and thus was not used in performing a number of important requirements-related activities. In the absence of this guidance, the program's efforts have been mixed. For example, while the program has taken steps to include users in developing high-level requirements, several requirements definition and management limitations exist. These include a lack of proper alignment (i.e., traceability) among the different levels of requirements, as evidenced by GAO's analysis of a random probability sample of requirements, which revealed large percentages that were not traceable backward to higher level requirements, or forward to more detailed system design specifications and verification methods. SBInet testing has also not been effectively managed. While a test management strategy was drafted in May 2008, it has not been finalized and approved, and it does not contain, among other things, a high-level master schedule of SBInet test activities, metrics for measuring testing progress, and a clear definition of testing roles and responsibilities. Further, the program office has not tested the individual system components to be deployed to the initial deployment locations, even though the contractor initiated testing of these components with other system components and subsystems in June 2008. In light of these circumstances, our soon to be issued report contains eight recommendations to the department aimed at reassessing its approach to and plans for the program, including its associated exposure to cost, schedule and performance risks, and disclosing these risks and alternative courses of action to DHS and congressional decision makers. The recommendations also provide for correcting the weaknesses surrounding the program's unclear and constantly changing commitments and its life cycle management approach and processes, as well as implementing key requirements development and management and testing practices.

You are an expert at summarizing long articles. Proceed to summarize the following text: DOD’s total workforce is made up of three main components: military personnel (including the active military and the reserve and guard forces), , and contractor support. Figure 1 shows the DOD civilian employeesnumber of the active and reserve components of the military, civilians, and estimated contractor FTEs that comprised DOD’s total workforce in fiscal year 2011. Over the last decade, Congress has enacted or amended several laws that govern DOD’s management of its total workforce. These interconnected provisions provide a framework for DOD total workforce management that requires DOD to adopt and enforce specific policies. In addition to those policy requirements, DOD is also required to submit information to Congress about its workforce and workforce planning, including, among other things, a strategic plan for shaping its civilian workforce, an annual inventory of contracted services and budget justification information concerning its contractor workforce. Other provisions govern the overall composition of DOD’s workforce, and outline the circumstances under which it is appropriate to convert performance of functions from one of the three workforce components to another. This section provides a high level overview of selected relevant provisions, as well as the major responsibilities regarding workforce management assigned to departmental leadership and organizations. 10 U.S.C. § 129a governs DOD’s general policy for total force management and was significantly amended in December of 2011. Section 129a now requires the Secretary of Defense to establish policies and procedures for determining the most appropriate and cost efficient mix of military, civilian, and contractor personnel to perform the mission of the department. These policies and procedures are required to clearly provide that attainment of a DOD workforce sufficiently sized and comprised of the appropriate mix of personnel necessary to carry out the mission of the department and the core mission areas of the armed forces takes precedence over cost. The law also specifies that these procedures shall specifically require DOD to use, among other things, the civilian strategic workforce plan (see 10 U.S.C. § 115b below) and the inventory of contracted services (see 10 U.S.C. § 2330a below) when making determinations regarding the appropriate workforce mix. 10 U.S.C. § 115b requires the biennial submission of a strategic workforce plan to shape and improve DOD’s civilian workforce. Among other things, the plan is required to address the appropriate mix of military, civilian, and contractor personnel capabilities, a requirement that DOD’s plan submissions have not addressed to date. 10 U.S.C. § 2330a requires the Secretary of Defense to submit an annual inventory of activities performed pursuant to contracts for services, which, among other things, is required to include information concerning the number of contractor employees, expressed as full- time equivalents, subject to certain exceptions. Section 2330a also requires that the DOD component heads perform a review of the contracts and activities in the inventory to ensure that the activities on the list do not include inherently governmental functions or illegal personal services contracts, and, to the maximum extent practicable, do not include functions closely associated with inherently governmental functions. The inventory is also to be used to identify additional categories of functions for possible conversion to civilian performance pursuant to 10 U.S.C. § 2463 (below). Additionally, section 2330a requires DOD component heads to develop a plan, including an enforcement mechanism and approval process, to use the inventory to implement 10 U.S.C. § 129a (above), to inform strategic workforce planning, such as the plan required by 10 U.S.C. § 115b (above), to facilitate the use of the inventory in the submission of budgetary information in compliance with 10 U.S.C. § 235 (below), and to perform conversions identified during the review described above. 10 U.S.C. § 2463 requires the Secretary of Defense make use of the inventory of contracted services, compiled pursuant to 10 U.S.C. § 2330a (above), for the purpose of identifying certain functions performed by contractors, to include closely associated with inherently governmental functions, critical functions and acquisition workforce functions, that should be given special consideration for conversion to civilian performance. 10 U.S.C. § 235 requires that the Secretary of Defense include (in the budget justification materials submitted to Congress) information that clearly and separately identifies both the amount requested for the procurement of contract services for each DOD component, installation, or activity and the number of contractor FTEs projected and justified for each DOD component, installation, or activity based on the inventory of contracts for services and the statutorily required reviews of the inventory data (see 10 U.S.C. § 2330a and 10 U.S.C. § 2463 above). Following DOD’s fiscal year 2010 announcement of its efficiency initiatives (including a cap on its civilian workforce FTEs at fiscal year 2010 levels), and in light of the planned drawdown of military personnel, Congress enacted two additional provisions that shape the composition of DOD’s total workforce. Section 808 of the National Defense Authorization Act for Fiscal Year 2012 (Pub. L. No. 112-81 (2011)) requires, among other things and subject to certain exceptions, that the total amount obligated by DOD for contract services in fiscal years 2012 and 2013 may not exceed the total amount requested for contract services in the fiscal year 2010 President’s budget. The fiscal year 2010 president’s budget was the baseline DOD used in developing its civilian workforce cap; the effect of this provision is to provide a parallel cap on contracted services working from a similar baseline. Section 955 of the National Defense Authorization Act for Fiscal Year 2013 (Pub. L. No. 112-239 (2013)) requires the Secretary of Defense to, among other things, develop an efficiencies plan for the civilian and contract workforces. The plan is required to achieve savings in the total funding of those workforces not less than savings achieved for basic military personnel pay from reductions in end strength over the same period of time, subject to certain exceptions. Among these exceptions are expenses for personnel performing critical functions identified by the Secretary of Defense as requiring exemption in the interest of the national defense. Additionally, there is a body of guidance that relates to determining what work should be performed by each sector of the total DOD workforce, including an Office of Federal Procurement Policy Letter, and several DOD guidance documents. These documents, collectively, require that migration of work between DOD’s three workforce components be supported by analysis, and provide when the relevant components should be considered for performing new requirements. Office of Federal Procurement Policy Policy Letter 11-01: This policy letter, among other things, (1) clarifies what functions are inherently governmental, (2) explains how agencies must manage work that is “closely associated” with inherently governmental functions, and (3) requires agencies to identify “critical functions” to ensure that they have enough internal capability to retain control over functions that are core to the agency’s mission and operations. DOD Directive 1100.4: This directive outlines manpower requirements determination noting that national military objectives shall be accomplished with a minimum of manpower that is organized and employed to provide maximum effectiveness and combat power. It requires that military (active and reserve) and civilian manpower resources be programmed in accordance with validated manpower requirements, and within fiscal limits and acceptable levels of risk identified in defense planning and programming guidance. DOD Instruction 1100.22: This instruction outlines DOD policy and procedures for determining the appropriate mix of manpower (military and civilian) and private sector support (contractors). DOD Directive Type Memorandum 09-007: Provides business rules for use in estimating and comparing the full costs of military and DOD civilian manpower and contract support. It requires components to use certain business rules when performing an economic analysis in support of workforce decisions, which include determining the workforce mix of new or expanding mission requirements that are not inherently governmental or exempt from private-sector performance. 10 U.S.C. §§ 2461 and 2463 and OMB circular A-76 are also relevant to the subject of transitions between workforce types, depending on the type of transition. Collectively, this body of law and guidance requires DOD to collect a variety of information for its decision makers to review and use in making strategic workforce management decisions. These requirements are especially significant in light of the current and long-term future fiscal pressures facing DOD, which will require identification of all of those functions currently being performed by each workforce sector, prioritization of those functions, and strategic determinations as to whether the performance of functions is appropriately distributed across these three sectors. Several offices have responsibility for implementing these laws and regulations and managing the department’s total workforce. The Office of the Under Secretary of Defense, Personnel and Readiness (USD, P&R), has overall responsibility for issuing guidance on manpower management to be used by the DOD components, providing guidance on manpower levels of the components, and developing manpower mix criteria and other information to be used by the components to determine their workforce mix. The Under Secretary of Defense (Comptroller) and the Director, Cost Assessment and Program Evaluation (CAPE) play key roles in determining the amounts budgeted for military and civilian personnel, as well as contracted services. The Under Secretary of Defense (Comptroller) is responsible for ensuring that the budget for DOD is consistent with the total force management policies and procedures. The Secretaries of the military departments and heads of the defense agencies have overall responsibility for the requirements determination, planning, programming, and budgeting for total force management policies and procedures, as well as having numerous responsibilities related to manpower management as detailed in DOD guidance. For example, they are responsible for designating an individual with full authority for manpower management including: (1) implementing fiscal year guidance and manpower management policy within their respective component, (2) ensuring manpower levels are programmed to optimize readiness, (3) developing annual manpower requests for Congress, including the consideration of converting from one form of manpower to another, (4) conducting continuous review of manpower utilization plans and programs, and (5) establishing and maintaining manpower data systems that account for all manpower resources. DOD’s data shows that since fiscal year 2001, its combined active, reserve, and civilian workforce peaked in fiscal year 2011 at 3.1 million personnel, and is projected by DOD to gradually decrease over the next five years to below its fiscal year 2001 level. Comparable historical data on the contractor component of DOD’s total workforce are not available, in part because DOD was not required to compile an annual inventory of activities performed pursuant to contracts for services until 2008. In its inventory for fiscal year 2011, DOD reported that about 710,000 contractor FTEs were performing various functions under contracts for services—which is equal to about 90 percent of the size of DOD’s civilian workforce of 807,000 FTEs for that same fiscal year. Our analysis of DOD’s obligations for contracted services using fiscal year 2013 constant dollars shows DOD’s spending peaked in fiscal year 2010 at about $195 billion, more than twice the amount spent in fiscal year 2001. Such spending decreased to about $174 billion in fiscal year 2012. Our analysis of DOD’s military and civilian workforce data indicates that the collective growth in DOD’s military and civilian workforce peaked in fiscal year 2011 and is projected by DOD to gradually decrease over the next five years to below its fiscal year 2001 level, which was about 2.9 million servicemembers and DOD civilians combined. In fiscal year 2011, DOD’s military and civilian workforce totaled about 3.1 million servicemembers and civilians, or about 139,000 more than fiscal year 2001, with the most growth occurring within the civilian workforce. Specifically, in fiscal year 2011, DOD’s civilian workforce numbered about 807,000 FTEs, an increase of 17 percent or 120,000 FTEs over fiscal year 2001 levels. The active component of the military workforce increased by 3 percent, or about 40,000 personnel, to about 1.425 million, and the reserve component of the military workforce decreased by 2 percent, or about 21,000 personnel, to about 848,000 during this same time period. By fiscal year 2017, DOD projects that its active component end strength will fall below its fiscal year 2001 level to about 1.32 million, and its reserve component end strength will continue to be below its fiscal year 2001 level. DOD projects that the civilian workforce will also decrease by fiscal year 2017 to about 784,000 FTEs—about 14 percent above its fiscal year 2001 level. Historically, the size of the civilian workforce has represented about a quarter of DOD’s combined military and civilian workforce. This ratio has remained relatively constant, ranging from 23 to 27 percent since the 1960s and reflects substitution between these workforces. Figure 2 shows the active component and reserve component end strength and civilian FTEs from fiscal year 2001 through 2017. Among each of the military services, military and civilian workforce growth differed over the course of the conflicts in Iraq and Afghanistan; however, most military services project a decrease in the military and civilian components of the workforce through fiscal year 2017. For example, from fiscal year 2001 through fiscal year 2011, the Army and the Marine Corps significantly increased the number of active component personnel to execute the warfighting effort, whereas during this same time period, the Navy and the Air Force decreased the number of active component personnel by 14 and 6 percent, respectively. During this period of time, the civilian workforce for all of the military services also increased. In light of the withdrawal from Iraq and planned withdrawal from Afghanistan, as well as changing priorities and missions, the Army, the Navy, and the Marine Corps project decreases among both the active component and civilian workforce by 2017. The Air Force also projects a decrease in the number of active component personnel, but projects a civilian workforce increase of approximately 1 percent by fiscal year 2017. Collectively, the defense-wide organizations, which include the Office of the Secretary of Defense, the Joint Staff, and the Defense Agencies and Field Activities, project an increase of approximately 1 percent for their civilian workforce by fiscal year 2017. Table 1 shows the changes in the number and percentage of the military and civilian components of the workforce between fiscal years 2001 and 2011, with projected changes for fiscal years 2012 through 2017 by service. DOD and military service officials identified several factors that contributed to changes in the size of the military and civilian components of the workforce since fiscal year 2001. For example, DOD officials noted that the conflicts in Iraq and Afghanistan, as well as recognition of the need to rebuild the acquisition workforce, which had been significantly reduced during the 1990s, and reduce DOD’s reliance on contractors contributed to the shape and size of the military and civilian sectors of the workforce over the past decade. Further, DOD cited other factors that led to growth within the civilian workforce, such as the department’s new cyber mission and areas specifically designated by Congress. The following are examples that DOD officials have cited as contributing to the change in the size and mix of DOD’s workforce. Military to civilian/contractor conversion: DOD officials stated that about 50,000 military positions were converted to DOD civilian positions or contractor performance since fiscal year 2004 to devote more military positions to support of ongoing military operations. Conversion to civilian performance may not be one-for-one due to differences in military and civilian availability and productivity rates. For example, civilians who are typically hired must be qualified for their position, whereas military personnel often require on-the-job training in addition to technical training received prior to assignments. DOD’s military to civilian conversions were partly due to the high pace of operations that occurred after September 11, 2001, which created significant stress on the military’s operating forces. Further, in late 2003, DOD reported that studies had found thousands of military personnel were being used to accomplish work tasks that were not military essential. DOD found that civilians or contractors could perform these tasks in a more efficient and cost-effective manner than military personnel. The Navy and the Air Force reduced their military end strength when functions performed by military billets, or positions, were converted to civilian or contractor performance. Conversely, when the Army and the Marine Corps converted functions performed by military billets to DOD civilians, they retained these military billets to be used in the operating force. Contractor to civilian conversion (in-sourcing): DOD officials noted that in-sourcing, or converting previously contracted functions to performance by civilians, has been an effective tool for the department to rebalance its workforce, realign inherently governmental and other critical and core functions to government performance, and in many cases, generate resource efficiencies for higher priority goals. In April 2009, the Secretary of Defense announced his intention to reduce the department’s reliance on contractors and increase funding for new civilian authorizations. In our February 2012 report, DOD officials stated that they could not determine the number of contractor FTEs whose functions were in- sourced because DOD contracts for services, not positions, and the number of contractor FTEs used to perform a service is determined by each private sector provider. Nonetheless, one of the data elements DOD is required to collect and include in its inventory of contracted services is the number of contractor FTEs performing each identified activity pursuant to a contract. Growth of acquisition workforce: DOD officials noted that rebuilding the acquisition workforce is another reason for growth. In our June 2012 report, we reported that according to DOD officials, the civilian acquisition workforce gained about 17,500 positions from fiscal year 2009 to December 2011. As noted previously, a portion of this growth was attributed to in-sourcing. The acquisition workforce had experienced significant erosion in some areas of expertise due to a nearly 50 percent cut in its workforce during the 1990s. This reduction took place as part of DOD’s larger effort to reduce its civilian workforce by nearly 20 percent overall during that time. When we evaluated DOD’s approach to this force reduction in 1992, we found that it was not oriented toward shaping the makeup of the workforce, resulting in significant imbalances in terms of shape, skills, and retirement eligibility. At that time, we found that the department’s efforts were hampered by incomplete data and lacked a clear strategy for avoiding the adverse effects of downsizing and minimizing skills imbalances. The downsizing produced serious imbalances in the skills and experience of the highly talented and specialized civilian acquisition workforce, putting DOD on the verge of a retirement-driven talent drain that has had long-lasting implications. To help alleviate some of these long standing challenges and provide additional funds for the recruitment, training, and retention of acquisition personnel, in 2008, Congress established the Defense Acquisition Workforce Development Fund (DAWDF). DOD officials stated that of the approximately 17,500 positions, about 5,850 were hired using DAWDF funds. Growth of cyber security workforce: DOD officials stated that focus on the new cyber mission increased the size of the cyber workforce. DOD’s 2010 Quadrennial Defense Review designated cyberspace operations as a key mission area and discussed steps the department was taking to strengthen capabilities in the cyber domain, including developing a department-wide comprehensive approach to DOD operations in cyberspace that will help build an environment in which cyber security and the ability to operate effectively in cyberspace are viewed as priorities for DOD. According to the Quadrennial Defense Review, to aid its efforts in countering cyberspace threats, DOD established the U.S. Cyber Command in 2010 to lead, integrate and better coordinate the day-to-day defense, protection, and operation of DOD networks. In November 2011, we reported that DOD established a cybersecurity workforce plan but faced challenges in determining the size of its cybersecurity workforce because of variations in how work is defined and the lack of an occupational series specific to cybersecurity. For these reasons, in February 2013, we included workforce planning for cybersecurity personnel as a factor in designating human capital management as a high risk area for the federal government. The withdrawal from Iraq and planned withdrawal from military operations in Afghanistan will impact both the military and, to some extent, the civilian workforce. DOD currently projects a reduction in its civilian workforce by 2 percent from fiscal year 2012 through fiscal year 2017. Several factors have prompted the department to develop plans to reshape and possibly reduce the numbers of civilians performing certain functions, while other needs may require additional civilian positions. DOD and military service officials identified the following factors as key drivers of projected future change within DOD’s total workforce. Shift in focus to Pacific region: DOD is refocusing its strategy in the Asia-Pacific region in the interest of promoting regional security with its allies in the area. DOD officials stated that this restructuring could result in a reshaped force and might require changes to installations and support as forces are restructured. Budget constraints and uncertainty: DOD, as well as the entire federal government, is currently operating in a fiscally constrained environment. The Office of the Secretary of Defense, the military departments, and other organizations within DOD have issued guidance to their commands on immediate actions that can be taken to mitigate some, but not all, of the effects of a constrained budget in the near-term. Actions include implementing a civilian hiring freeze, reducing temporary employees, and furloughing the civilian workforce. Efficiency initiatives: As the federal government confronts growing fiscal challenges and DOD faces competition for funding, DOD announced efficiency initiatives in 2010, which the Secretary of Defense stated were to reduce duplication, overhead, and excess, and instill a culture of savings and restraint across the department. Some of the efficiency initiatives focused directly on civilian workforce levels, including the goals of reducing civilian positions in offices and commands across DOD, attempting to hold the civilian workforce level constant at fiscal year 2010 levels, the elimination of some civilian senior executive positions, and the disestablishment of the Business Transformation Agency and Joint Forces Command. Continued growth of cyber workforce: According to officials we spoke to from each of the services, DOD is continuing to focus its resources on emerging threats such as cyber attacks. For example, efforts are underway to further develop and implement the cyber mission. Each service has its own part in this mission and expects a continued hiring increase in civilian personnel with skills in cybersecurity. Further, the Secretary of Defense recently stated that the cyber mission is critical for the department and will continue to be an investment priority. Equipment reset: Military service officials stated that the equipment that returns from the military operations in Afghanistan will be sent to depots for repair and maintenance. Reset work, which is performed, in part, by the civilian workforce, will take two to three years to complete. Medical assistance for returning servicemembers: More than a decade of fighting two wars has resulted in a large number of soldiers, marines, sailors, and airmen needing medical care, including, among other things, adjusting to the use of prosthetic limbs and treatment for post traumatic stress disorder and traumatic brain injuries. DOD officials stated that it will be important to retain and recruit additional medical personnel to continue to provide for the medical needs of servicemembers, who can sometimes require long-term care. We analyzed the active component of the military and civilian workforce to provide further perspectives on areas of growth between fiscal years 2001 and 2011. Our analysis of active component end strength and civilian FTEs by force and infrastructure categories shows that between fiscal years 2001 and 2011, the civilian workforce generally grew while the active component workforce generally declined in most force and infrastructure categories compared to fiscal year 2001. For example, from fiscal year 2001 through fiscal year 2011, the acquisition infrastructure and the defense health program civilian workforce grew by 15 workforcepercent and 57 percent respectively, while the active component declined in those categories by 16 percent and 3 percent respectively. Further, according to DOD officials, the growth from fiscal year 2001 through fiscal year 2011 of the civilian workforce in certain categories such as operating forces and command and intelligence was in large part due to military to civilian conversions. Table 2 shows the growth and decline of various force and infrastructure categories. Historical information on the trends of the contractor component of DOD’s total workforce since 2001 that would be comparable to information known about the military and civilian components is not available. This has occurred in part because DOD contracts for services, not individuals, and because DOD was not required to track such information until 2008 when Congress required DOD to compile its first annual inventory of contracted services, starting with the services DOD contracted for in fiscal year 2007. To date, DOD has submitted annual inventories of contracted services to Congress for fiscal years 2007, 2008, 2009, 2010, and 2011. However, DOD officials cautioned against comparing the number of contractor FTEs reported across fiscal years because of differences in the estimating formula, changes in reporting for the research and development category, and other factors. In fiscal year 2011, DOD reported that about 710,000 contractor FTEs were performing various functions pursuant to contracts for services—about 90 percent of the size of DOD’s civilian workforce of 807,000 FTEs. Further, in its fiscal year 2011 inventory, DOD reported that these 710,000 contractor FTEs provided services to DOD under contracts with obligations totaling about $145 billion.FTEs reported and obligation dollars reported in DOD’s inventory of contracted services for fiscal years 2008 through 2011. DOD has taken some steps to improve its understanding and management of its workforce, including service-specific efforts to obtain better data about the workforce; however, several shortcomings remain. Specifically, DOD has yet to include an assessment of the appropriate mix of military, civilian, and contractor personnel capabilities in its strategic workforce plan as required by law. Further, DOD has not updated its policies and procedures to reflect the most current statutory requirements to use its civilian strategic workforce plan and the inventory of contracted services to help determine the appropriate mix of personnel in its workforce. DOD has taken some steps to develop better information and data about the size, capabilities, and skills possessed and needed by its workforce, but gaps remain. As part of the statutory requirement to develop a civilian strategic workforce plan, DOD has been mandated since 2006 to assess the critical skills and competencies of its current and future civilian To date, DOD has workforce and to assess gaps in those areas.developed and updated its strategic workforce plan four times. In its latest strategic plan issued in March 2012, DOD identified 22 mission critical occupations, which according to DOD are civilian personnel occupations that merit special attention based on their importance and the presence of human capital challenges. In September 2012, we issued a report on DOD’s March 2012 plan that found that DOD had conducted competency gap analyses for just 8 of the 22 mission critical occupations identified in the plan, and it still did not contain an assessment of the appropriate workforce mix as required by law. Examples of occupations where DOD did not report conducting gap analyses included budget analysis, information technology management, and logistics management. Many of the occupations are associated with areas identified in our high-risk report.of its mission critical occupations, and DOD partially concurred with this recommendation and stated that it plans to complete competency gap analysis for mission critical occupations and other major civilian occupations by fiscal year 2015. We recommended that DOD conduct and report on gap analysis Further, section 115b of title 10 of the United States Code requires DOD to include in its strategic workforce plan an assessment of the appropriate mix of military, civilian, and contractor personnel capabilities. However, as we have previously reported, DOD did not include an assessment of the appropriate mix of military, civilian, and contractor personnel or an assessment of the capabilities of each of these workforces. In the most recent version of the strategic workforce plan issued in March 2012, DOD included information submitted by 11 functional communities, which are groups of employees who perform similar functions. We found that 2 of the 11 functional communities included in the plan—the medical and human resources functional communities—provided data on the mix of their workforces, while 9 communities provided partial or no data. For example, the logistics and information-technology functional communities provided only the military and civilian workforce data and did not include contractor workforce data. In September 2012, we recommended that DOD direct the functional communities to collect information that identifies not only the number or percentage of personnel in its military, civilian, and contractor workforces but also the capabilities of the appropriate mix of those three workforces, and DOD partially concurred with this recommendation. Further, in January 2013, we recommended that DOD use competency gap analyses to assist in decision making regarding the size of its civilian workforce. Congress has also required several actions to provide more complete and accurate information about DOD’s contractor workforce similar to the type of information DOD already has about its civilian and military workforces, such as the requirement, as noted previously, to compile an inventory of contracted services, including the number of contractor FTEs performing Section 2330a services for DOD and the type of functions they perform. of title 10 of the United States Code requires DOD to submit to Congress an annual inventory of contracted services. This section further requires each DOD component head to conduct comprehensive reviews of these services to determine, for example, whether they are inherently governmental, critical, or acquisition workforce functions, and whether performance of such functions by contractors should be converted to performance by the civilian workforce. Additionally DOD component heads are required to develop a plan, including an enforcement mechanism and approval process, to provide for the use of the inventory to implement the requirements of 10 U.S.C. § 129a, such as using the inventory in making workforce mix decisions, to inform strategic workforce planning, such as the strategic workforce plan required by 10 U.S.C. § 115b, and to facilitate the use of the inventory for compliance with 10 U.S.C. § 235, which requires the inclusion of certain contractor information in budget submissions. We previously reported that while DOD made a number of changes to improve the inventory, there were still factors that limited the utility, accuracy, and completeness of the inventory data. Therefore, we made a series of recommendations to DOD to further improve its inventory of contracted services. During the course of this review, we found that some of the military services are taking additional steps to better manage their civilian or total workforces. For example, Army officials stated that they developed a list of nearly 40 mission critical occupations that are specific to the Army, which are in addition to the department wide mission critical occupations identified in the most recent version of the civilian strategic workforce plan, and that they plan to complete competency gap analyses for the Army-specific mission critical occupations by the end of 2014. Officials from the Marine Corps reported that they are developing a six step process for strategic workforce management planning to be implemented at the command level by late 2013. These officials stated that the process would include steps such as assessing current and future missions, performing gap analysis, and developing action plans to address gaps. DOD’s primary policies for determining workforce mix—DOD Directive 1100.4 and DOD Instruction 1100.22—largely reflect statutory requirements for DOD policies concerning workforce mix, though there The are several recent amendments that have yet to be incorporated.directive provides general guidance concerning determining requirements, managing resources, and future planning, while the instruction provides manpower mix criteria and guidance for determining how individual positions should be designated based on the work performed. For example, the latter provides guidance concerning how to identify whether a task is inherently governmental, and consequently must be performed by military personnel or civilians, or whether a commercial activity should be performed by the contractor workforce or meets DOD criteria to exempt the activity from contract performance. Officials from the Office of the Undersecretary of Defense, Personnel and Readiness told us that they review shifts in trends among the various segments of the workforce, and that they rely upon the oversight of the military services to determine which segment of the workforce should perform specific types of work in accordance with DOD guidance. Various OSD officials further noted that the requirements determination process is associated with the department’s Planning, Programming, Budgeting and Execution processes to help ensure fully informed risk and cost decisions are translated into justified and transparent manpower requirements. DOD Instruction 1100.22 states that the heads of the DOD components shall require their designated manpower authority to issue implementing guidance that requires the use of the instruction when manpower officials determine the workforce mix for current, new, or expanded missions, or when revalidating manpower requirements, among other circumstances. Each military service has issued service- specific workforce management guidance that implements the DOD-wide instruction as required and officials we spoke with from each service stated that the DOD-wide guidance was used when making workforce mix decisions. To make workforce decisions, manpower officials within the components are to identify the appropriate workforce component to perform the activity based on the nature of the work and circumstances of its performance as outlined in the instruction. Criteria are reviewed to determine if the work associated with the activity is an inherently governmental function, exempt from commercial performance, or suitable for performance by contractors, and for work that is inherently governmental or exempt from commercial performance, whether the work should be performed by military personnel or civilian personnel. The focus of the process of determining the workforce mix is primarily at the position level, as opposed to a holistic view of the overall appropriate mix of military, civilian, and contractor personnel. DOD issued its directive and instruction in February 2005 and April 2010, respectively, prior to significant changes to relevant legislation in December of 2011. Prior to these 2011 changes, the legislation governing DOD’s personnel required that the department use the least costly form of personnel consistent with military requirements and other departmental needs. Section 129a was revised to clarify that when determining the most appropriate and cost efficient mix of military, civilian, and contractor personnel to perform the mission of the department, that the attainment of a DOD workforce sufficiently sized and comprised of the appropriate mix of personnel necessary to carry out DOD’s mission and the core mission areas of the armed forces takes precedence over cost. The law also specifies that the Secretary of Defense shall establish policies and procedures that shall specifically require DOD to use, among other things, the civilian strategic workforce plan and the inventory of contracted services when making determinations regarding the appropriate workforce mix. Although DOD Instruction 1100.22 had already addressed the requirement that risk mitigation take precedence over cost in making workforce decisions prior to the enactment of section 129a, DOD has not yet implemented the new requirement that determinations regarding the appropriate workforce mix be made using the civilian strategic workforce plan and the inventory of contracted services. As a result, DOD decision makers may lack key elements necessary to make appropriate, informed decisions concerning DOD’s mix of personnel because the department has not updated its existing policies and procedures or issued new guidance for determining workforce mix that reflects the new statutory requirements. OSD officials stated that both DOD Directive 1100.4 and DOD Instruction 1100.22 are currently under revision, and stated that they intend to revise DOD Directive 1100.4 to require the use of the inventory of contracted services to inform budget requests and decisions for total force management. The officials provided a draft of the directive for our review and stated that is was in the early stages of coordination and review. DOD did not provide a draft of the instruction or discuss timelines for issuance of a revised instruction. Related to the statutory changes to departmentwide workforce management, similar legislation requires certain defense components to use the inventory of contracted services as part of their strategic workforce management. Specifically, 10 U.S.C. § 2330a(e) requires that DOD component heads perform a review of the contracts and activities in the inventory to ensure that the activities on the list do not include inherently governmental functions or illegal personal services contracts, and, to the maximum extent practicable, do not include functions closely associated with inherently governmental functions. The review is also required to identify activities that should be considered for conversion to civilian performance pursuant to 10 U.S.C. § 2463. In 2012, our review of DOD’s fiscal year 2010 inventory of contracted services found that the military departments’ required reviews of their fiscal year 2009 inventories were incomplete, and that with the exception of the Army, DOD had much further to go in addressing the requirements for compiling and reviewing the inventories of contracted services. Additionally 10 U.S.C. § 2330a(f) requires the secretaries of the military departments and heads of the defense agencies to develop a plan, including an approval process and enforcement mechanism, to provide for the use of the inventory of contracted services to implement the requirements of 10 U.S.C. § 129a, to ensure the inventory is used to inform strategic workforce planning, such as the strategic workforce plan (as required by 10 U.S.C. § 115b), and to determine the appropriate workforce mix necessary to perform its mission. However, the extent to which the military departments have developed the required plans and accompanying approval process and enforcement mechanism varies. Some military department officials indicated that they are in the final stages of developing a plan to integrate the required information, and other military department officials stated that they plan to move forward once better information on contractors required by the inventory of contracted services becomes available. For example, Army manpower officials stated that the Army had conducted analyses that could support the required plan. Regarding the required enforcement mechanism and approval process, an Army official stated that the Army has established its Panel for the Documentation of Contractors review process, which requires commands to fill in a pre-award contract approval form in order to justify a request to procure services. This form asks executives to certify that contracted services do not include inherently governmental functions, among other things. In addition, the official stated that the Army’s annual inventory of contracted services, and its inventory review process, the Panel for the Documentation of Contractors, are intended to inform strategic workforce planning, provide information for in-sourcing decisions, and to the extent possible, inform budget requests. Air Force manpower officials stated that while the Air Force lacks a single plan, a number of separate efforts are moving towards the required elements of the plan. The officials stated that the Air Force plans to modify its manpower data system to accommodate the important contractor information captured in and required by the inventory of contracted services, and then define the utilization, approval and enforcement process in an Air Force Instruction. Navy manpower officials stated that the Navy has authorized the establishment of a Total Force Integration Board, including multiple stakeholders, to address all required elements. Marine Corps personnel officials stated that the Marine Corps is awaiting guidance from the Department of the Navy on a proposed plan and the related enforcement mechanism. DOD clearly identifies the core mission areas of the armed forces, which cover broad areas of military activity that the department is statutorily required to identify, but given the wide range of missions and responsibilities of its various components, DOD has not developed a list of “core or critical functions” for the department as a whole, nor is it required to do so. OMB policy requires executive agencies to identify critical functions in the context of contracting; but DOD’s current workforce mix policies do not fully reflect the need to identify critical functions, and as such the department may not have assurance that it properly identifies and retains the ability to maintain control over critical functions. DOD clearly identifies the core mission areas of the armed forces, but it does not perform analysis to specifically identify a list of “core or critical functions.” Section 129a of Title 10 of the United States Code requires that the Secretary of Defense adopt policies that clearly provide that the attainment of a workforce sufficiently sized and comprised of the appropriate mix of personnel necessary to carry out the mission of the department and the core mission areas of the armed forces takes precedence over cost. The core mission areas of the armed forces are broad strategic military activities required to achieve strategic objectives of the National Defense Strategy and National Military Strategy, such as providing homeland defense and carrying out major combat operations, in support of DOD’s overall mission to deter war and provide for the security of the nation.Quadrennial Roles and Missions Review Report which is issued near the end of implementation of the department’s quadrennial defense review cycle. DOD manpower officials we spoke with stated that this top-level direction is communicated throughout the department. The core mission areas are identified in DOD’s Determining the core or critical work of the department can be complicated by the various contexts under which the terms “core” or “critical,” are used. For example, as discussed previously in this report, DOD identifies “mission critical occupations” in its strategic workforce plan. These are occupations that merit special attention based on their importance and the presence of human capital challenges, and only apply to the civilian workforce. On the other hand, OMB policy requires that the executive agencies define “critical functions to ensure that they have sufficient internal capability to maintain control over certain functions that are core to the agency’s mission and operations. DOD’s current workforce mix policy, DOD Instruction 1100.22, does not fully reflect the need to identify critical functions. Office of Federal Procurement Policy Policy Letter 11-01 (OFPP 11-01), issued in September 2011, requires agencies to identify “critical functions” to ensure that they have sufficient internal capability, in DOD’s case civilian and military personnel, to maintain control over functions that are core to the agency’s mission and operations, but are otherwise permissible to contract out to the private sector.would help ensure that DOD can accomplish its mission even if contractors are unable to perform or otherwise default on their contractual responsibilities. While critical functions often represent important functions that may be necessary in support of the department’s mission, they do not include functions that are inherently governmental in nature, or functions that are closely associated with inherently governmental functions. The identification of critical functions DOD officials stated that they do not plan to develop a list of critical functions for the department as a whole because the missions of organizations within a department as large as DOD vary considerably, and that other designations serve the same purpose. Further, they stated a function that might be critical for one organization may be a lesser priority, and therefore not critical, for another. DOD officials told us that the designation of billets or positions as exempt from commercial performance (commercial-exempt billets) meets the intention of identifying critical functions. Based on guidance in DOD Instruction 1100.22, DOD components review all billets on an annual basis to determine which segment of the workforce should perform certain types of work. The Instruction provides for a variety of reasons for which a billet may be given a commercial-exempt designation, thereby reserving that billet for performance by civilian or military personnel. However, under this Instruction, positions may be designated as commercial exempt for a variety of reasons aside from their possible consideration as critical, including reasons such as esprit d’ corps and professional development. It is therefore unclear how DOD can determine if the exemption of individual positions from commercial performance ensures that DOD maintains sufficient internal capability to retain control over critical functions. DOD’s current guidance does not fully reflect the need to identify critical functions as required by federal policy because DOD has not updated its workforce policies and procedures to reflect the requirements of OFPP 11-01. Officials from OFPP stated that many of the general principles behind OFPP 11-01 were reflected in DOD’s current guidance, but acknowledged that current DOD guidance may not specifically incorporate the concept of critical functions as defined by the policy letter. Part of the impetus for the guidance was the need to provide a consistent understanding of the term “critical functions”. Ensuring that DOD maintains sufficient internal capability to maintain control over its mission is a key aspect of ensuring that departmental officials have enough information and expertise to be accountable for the work product and can continue critical operations with in-house resources should contractor assistance be withdrawn. Absent specific policies and procedures that delineate requirements relating to critical functions and explain how components should identify these functions, DOD may lack assurance that it properly identifies and retains the ability to maintain control over critical functions. These efforts may be further hampered by the lack of sufficient information necessary for DOD to make strategic determinations of an appropriate workforce mix, as it may be difficult for the department to determine if it has sufficient internal capability to perform a critical function should contractors default on their responsibilities. DOD components we reviewed used various methods and data sources, including their inventories of contracted services, to project contractor FTEs for their fiscal year 2013 and 2014 budget submissions, but our analysis found that the components’ contractor FTE projections have significant limitations. DOD’s Comptroller directed DOD components to report contractor FTEs in their budget submissions that were consistent with both the inventories, and funding levels of contracted services. Among the challenges encountered by the DOD components in using the inventory of contracted services, however, are the use of estimating techniques based on inventory data that may not be accurate or current, and the lack of a crosswalk between the inventory of contracted services and specific budget lines of accounting. While the Army has a process that addresses these challenges, it may be several years before the remaining DOD components are able to do the same. DOD is taking steps to help the remaining components address these challenges, but, in the meantime, the budget does not provide an explanation of how the contractor FTE estimates are derived and what limitations apply. Disclosure of this information would help ensure that decision makers draw informed conclusions. In December 2011, the Comptroller issued guidance to defense components instructing them to report contractor FTEs and funding levels for contracted services in their fiscal year 2013 budget submissions in accordance with 10 U.S.C. § 235. Specifically, the guidance directed the components to: provide contractor FTE data that were consistent with the inventory of contracted services they submit annually to the Congress, provide contractor FTEs that were consistent with the funding levels for contracted services, and report contractor FTE data and funding levels for contracted services in two separate budget exhibits in the operation and maintenance budget account. Though the Comptroller’s guidance does not specifically refer to it, 10 U.S.C. § 235(b)(2) requires that contractor FTE projections for the budget submissions are to be based on both the inventory data and the reviews of that data that DOD components are required to conduct to identify whether contractors are performing services that should be converted to civilian performance. DOD’s fiscal year 2013 budget, submitted in February 2012, included the information on contractor FTEs and related funding levels from the two operation and maintenance budget exhibits. Overall, DOD requested about $72 billion for contracted services in the operations and maintenance account and projected that roughly 285,000 contractor FTEs would be funded with that amount. Two of the five components we reviewed—the Air Force and the Navy— used their inventories of contracted services as a starting point to derive the contractor FTE projections, but the data they relied on has significant limitations. To derive their projections, Air Force and Navy budget officials obtained the operation and maintenance budget requests for sub activity groups prepared by resource managers for fiscal year 2013 and divided these by an average contractor FTE cost figure derived from their fiscal year 2010 inventories. This resulted in estimates of contractor FTEs for the corresponding sub activity groups. For example, the Navy requested $166 million for contracted services related to mission and other flight operations activities for fiscal year 2013. Using the fiscal year 2010 inventory and applying inflationary factors, the Navy used an average contractor FTE cost of $180,119 to derive a contractor FTE figure of 924 for this sub activity group. Navy budget officials told us they used the same average contractor FTE cost for all of its different types of services. Both services’ fiscal year 2010 inventories were based primarily on data from the Federal Procurement Data System-Next Generation (FPDS-NG) system. DOD has acknowledged that FPDS-NG has a number of limitations that affect the utility, accuracy, and completeness of the inventory data. For example, FPDS-NG does not identify more than one type of service purchased for each contract action, is not able to capture any services performed under contracts that are predominantly for supplies, and cannot provide the number of contractor FTEs used to perform each service, among other things. DOD officials acknowledge that the use of derived average cost figures can result in inaccurate reporting of contractor FTEs. For example, Navy budget officials noticed that the funding for satellite lease services had decreased significantly, but the contractor FTE estimate related to the services remained stable. The budget officials believed that since the program had moved from the development phase of its life cycle to the maintenance phase, the number of contractor FTEs needed for the program would be less than 10 compared to the approximately 1,000 FTEs calculated for budget purposes. The budget officials decided not to make adjustments to the projections because they wanted to use a consistent approach to derive the contractor FTEs. In January 2011, we reported that Army manpower and OSD officials raised concerns about the use of average labor rates and ratios to project contractor FTEs given the tendency of those averages to obscure variations in the underlying data. Further, our analysis showed that the use of these averages resulted in significant variations for some specific categories of services and particular contracts. For the fiscal year 2013 budget submissions, budget officials from the remaining three components we examined used other data sources they considered to be more reliable for their contractor FTE projections. These officials explained that the fiscal year 2010 inventories were not aligned to their budget data, were outdated or were not appropriate for budget projection purposes. For example, DISA and DLA budget officials noted that the most current inventory data available at the time the components were preparing their fiscal year 2013 budgets reflected contracts that were active in fiscal year 2010. Further, component budget officials noted that object class codes (used in preparing the budget) and product service codes (used in tracking contracts in FPDS-NG) often did not have a direct relationship, making the translation between the two categories subjective. For example, object class 25.1, which is used to delineate advisory and assistance services, is broad enough to encompass numerous product service codes associated with multiple categories of services. As a result, DISA and DLA relied on program managers to provide their projections on what level of contractor FTEs would be funded by the operation and maintenance budget requests. Army budget officials explained that they did not use the inventory data compiled from the Army’s Contractor Manpower Reporting Application (CMRA) system when preparing their fiscal year 2013 budget submission. The CMRA system is intended to capture data directly reported by contractors on each service performed at the contract line item level, including information on the direct labor dollars, direct labor hours, total invoiced dollars, the functions and mission performed, and the Army unit on whose behalf contractors are performing the services. It also captures selected information from FPDS-NG and the Army’s accounting systems (to include budget codes). While DOD’s AT&L and P&R leadership considers the Army as currently having a reporting process and infrastructure in place that fully complies with inventory legislative requirements, CMRA data was not available in time. Instead, budget officials relied on the Army’s Structure and Manpower Allocation System (SAMAS), which according to budget and program officials contains civilian, military, and contractor personnel information and is used during the Army’s program and budget development process. However, an Army manpower official explained that SAMAS does not include object class data, dollars projected for contracted services, or information on inherently governmental and closely associated with inherently governmental functions. Table 4 summarizes the methods used by DOD components in our review to derive their respective contractor FTE projections. The Comptroller issued updated guidance in June 2012 for the fiscal year 2014 through 2018 budget submissions. The updated guidance incorporated two significant changes from the 2011 guidance. The components are now required to (1) include contractor FTE estimates for not only the operation and maintenance account, but also for non- operation and maintenance accounts including the procurement and research, development, test and evaluation budget accounts and (2) report contractor FTE and budget data together, rather than separately for different budget accounts. According to Navy and Air Force officials, for the fiscal year 2014 budget submission, they followed the same approach used to project contractor FTEs that they did for their fiscal year 2013 budget submission; that is, they derived an average contractor FTE cost from their fiscal year 2011 inventory data. Therefore, the resulting projections will have the same limitations as their fiscal year 2013 projections. Navy and Air Force officials indicated that they used an average contractor FTE cost derived from their inventory to generate estimates for procurement and research, development, test and evaluation contractor FTEs in the same manner as they did for operation and maintenance-related activities. DLA and DISA officials indicated that they followed the same process as they did for their fiscal year 2013 budget submission whereby they relied on inputs from their program managers. According to Army budget officials, the Army used a different process to project contractor FTEs for their fiscal year 2014 budget submission. These officials told us that the Army used information contained in its inventory of contracted services, which was compiled using data from its CMRA system, as well as the results of its reviews as the basis for its fiscal year 2014 contractor FTE projections. Army budget and manpower officials noted that several factors facilitated the use of CMRA data for its fiscal year 2014 budget contractor FTE projections. First, Army budget officials noted that they received fiscal year 2011 CMRA data in sufficient time to use for the fiscal year 2014 budget submission. Further, as part of the Army’s inventory review process, when the individual commands reviewed the inventory data associated with their contracted services, they had assigned budget codes to the CMRA data so that it could be aligned with the Army’s budget lines of accounting. In this regard, during the Army’s inventory review process, Army command officials assigned budget codes to the CMRA contract data through a web based application. This process allowed budget officials to gain additional insight into the types of services included in each line of accounting, and align contractor FTES in the budget submissions in an easier and more transparent manner. At the conclusion of our review, DOD released the fiscal year 2014 Operation and Maintenance Overview, which reported that DOD requested about $52.5 billion for contracted services in the operations and maintenance account and projected that about 223,000 contractor FTEs would be funded with that amount. During our review of the document, we found that the funding amounts and the contractor FTE summary information for each military department did not match the figures that the military departments reported as part of their individual fiscal year 2014 budget submissions. When we inquired as to the possible reasons for the discrepancies, a Comptroller official, with knowledge of the Operation and Maintenance Overview document, told us that a variety of factors could have contributed to the differences, including that the overview document excluded Health Program and Research and Development contracts that the military services included in their budget documents. The Comptroller official, however, did not know the exact reasons for the discrepancies. DOD officials recognize that the contractor FTE information provided in their fiscal year 2013 and 2014 budget submissions had significant limitations, but noted that DOD has initiatives underway to improve the accuracy of components’ inventories of contracted services and the linkage between the inventories and budget data. However, according to DOD officials, these initiatives are not expected to be fully implemented for several years. DOD officials stated that having a reliable, current inventory of contractor FTEs is a fundamental building block for developing future contractor FTE estimates. DOD has initiated efforts to improve inventory data by collecting manpower data directly from contractors, using the Army’s CMRA system as the model. To do so, DOD directed its components in November 2012 to include a reporting requirement in new and current contracts for services to collect direct labor hours from contractors, which can subsequently be used to calculate contractor FTEs performing each service or function. In addition, DOD is developing a department-wide CMRA system to collect and house this data. DOD officials expect to have a fully functional system available for all components to begin to use in fiscal year 2014 and that components will be in compliance with the reporting requirement by 2016. One challenge identified by Comptroller and manpower officials is the need to link contractor manpower information in the inventories of contracted services to specific budget lines of accounting. There are approximately 2,200 contract codes, referred to as product and service codes, in the FPDS-NG inventory and the CMRA inventory that correspond to specific types of services which, according to acquisition officials, need to be linked to roughly 21 budget codes. According to an Army official, the Army CMRA as implemented contains both budget codes and product service codes; therefore, it is not be dependent on DOD’s crosswalk effort. For example, the Defense Acquisition University has mapped 17 product and service codes to one budget code related to printing and reproduction. According to an acquisition official, the department recently formed a working group comprised of officials from the acquisition community and the Comptroller’s office to develop a more complete crosswalk between the product and service codes and the budget lines of accounting. This acquisition official also told us that formal guidance related to the crosswalk is expected to be issued in April 2013 and modifications to financial systems to capture product and service code information should occur in 2014. Finally, although DOD officials do not expect these initiatives to be fully implemented for several years, one could expect to see incremental improvements in the fidelity of contractor FTE projections as DOD components compile more accurate and complete inventories and conduct the required reviews of that inventory data. DOD manages a large and diverse workforce that is tasked with accomplishing a wide variety of missions, from shipyard maintenance to cybersecurity. Over the past decade and in the context of fighting two wars, both the military and civilian parts of this workforce have grown in number, as has spending on contracted services, but the department now faces a changing environment that includes a strategic shift and a period of fiscal constraint that will likely last for some time. As DOD decides how to face these changes, total workforce management and planning will be important elements of ensuring the department’s continued ability to meet the unique requirements of its missions. To be successful, the department must carefully consider what critical skills and competencies are needed to meet these requirements, and what strategies it can use to monitor and plan for retaining those skills in its workforce. Ensuring that its guidance is up to date would aid the department in assessing an appropriate workforce mix, properly identifying critical functions as required by the Office of Federal Procurement’s Policy’s September 2011 memorandum, and mitigating inappropriate risks that may be posed by contractors performing certain functions. Congress, recognizing the importance of identifying the extent to which DOD relies on contractors to help carry out its mission, has enacted new legislative requirements over the past five years requiring DOD to collect data on its contractor workforce and make determinations about the nature of the activities that contractors perform, and amended legislation to require DOD to include contractor workforce information in DOD’s strategic planning and total force management efforts and budget requests. DOD’s approach to including projected contractor FTE information in its fiscal year 2013 and 2014 budget requests had a number of limitations and DOD acknowledges that the FTE information does not accurately reflect the number of contractors performing work in support of DOD. The department is taking steps to improve the accuracy of the data contained in its inventory of contracted services and enable the inventory and required reviews to be used to project contractor FTEs for budgetary purposes, but it may be several years before DOD is able to do so. To help ensure DOD’s workforce mix guidance reflects the current statutory requirements for total force management policy set forth in 10 U.S.C. § 129a as well as the regulatory requirements set forth in the Office of Federal Procurement Policy’s September 2011 policy letter, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness to revise DOD’s existing workforce policies and procedures to address the determination of the appropriate workforce mix, and identification of critical functions. Until such time that DOD is able to accurately project contractor FTE estimates it presents in budget submissions using the inventories and required reviews, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Comptroller) to include an explanation in annual budget exhibits of the methodology used to project contractor FTE estimates and any limitations of that methodology or the underlying information to which the methodology is applied. In written comments on a draft of this report, DOD partially concurred with both recommendations. DOD’s comments are reprinted in appendix III. Additionally, DOD provided technical comments on the draft report, which we incorporate as appropriate. We provided a draft of this report to the Office of Management and Budget, but we did not receive comments. DOD made two overarching comments in its agency response to our draft report. First, DOD commented that it is concerned by the emphasis we placed on the strategic workforce plan as it relates to the department’s total force management and resulting workforce size and structure. DOD stated that the plan is an integral tool in informing policies and procedures for retention, recruitment, and accession planning and it helps inform the demographic makeup of its civilian personnel inventory, including the talent, competencies, education, and skills of that workforce. DOD stated that it uses a capabilities-based approach to determine the size and structure of the workforce needed to implement national military and security strategies. These capabilities are based on the department’s mission, function, and task hierarchy, and are informed by workload, risk mitigation, and resource availability. According to DOD, it justifies its workforce size based on mission workload, rather than competency or skill gaps. We agree that DOD’s mission workload should determine the size of its total workforce. However, the type of personnel—military, civilian, or contractor—that performs the work is dependent on the nature of the work and circumstances of its performance. DOD is required by law to establish policies and procedures that require the use of the strategic workforce plan when making determinations of the appropriate mix of total workforce personnel necessary to perform its mission, and to include in the strategic workforce plan an assessment of the appropriate mix of military, civilian, and contractor personnel capabilities, which it has not included to date. While the primary focus of this report is not on DOD’s strategic workforce plan, we have reported in this and a body of prior work, that without knowledge of the skills and competencies that are necessary to perform its mission workload and any associated gaps in those skills and competencies, DOD may be challenged to appropriately identify its current and future civilian workforce needs. Moreover, without assurance that its civilian workforce possesses the necessary skills and competencies, DOD may not be able to readily convert the performance of a function from contractor to civilian personnel, should DOD determine that it would be more appropriate to do so. Therefore, a fully developed strategic workforce plan that addresses the statutory requirements to include an assessment of the appropriate mix of military, civilian, and contractor personnel capabilities and report on the results of competency and skill gap analysis, could serve as an important resource for the department as it makes workforce mix decisions, especially in light of current fiscal constraints and budgetary pressures. DOD commented that it is also concerned by the apparent lack of reference in our draft report to the Planning, Programming, Budgeting, and Execution process carried out annually across the department, especially as these processes relate to the size and shape of the department’s total force. DOD explained that the process provides direction on spending levels, mission priorities, and strategic goals, which then impact decisions regarding force structure and operational capabilities, and ultimately addresses prioritization and resource alignment. We agree with DOD that the Planning, Programming, Budgeting, and Execution process is an important aspect of workforce planning and decisionmaking; both requirements and resources drive workforce decisions. We noted in our draft report that various OSD officials stated that the workforce requirements determination process is part of the department’s Planning, Programming, Budgeting and Execution process to help ensure fully informed risk and cost decisions are translated into justified and transparent manpower requirements. Further, we noted the roles and responsibilities of the various offices involved in developing workforce requirements, including as part of the budget process. However, we also noted that a recently enacted statute requires that DOD and prioritize the attainment of a workforce sufficiently sized and comprised of the appropriate mix of military, civilian and contractor personnel to carry out DOD’s mission over cost. Our report addresses steps DOD is taking to implement statutory requirements to develop and utilize certain policies, analyses, and tools to aid in making such workforce mix determinations. As DOD stated, the budgeting process involves prioritization of requirements and making trade-offs among competing needs as part of resource allocation. Therefore, having the most reliable and accurate information is imperative for making well informed budgetary and other workforce planning decisions. Consequently we believe, DOD should continue to take steps to obtain and develop the information and data that will allow it to make more informed and strategic workforce mix decisions, such as analyses of the gaps in skills and competencies within the civilian workforce, identification of the functions that are critical to the department’s mission, and the collection of more accurate and complete information regarding contractors performing work in support of DOD. DOD partially concurred with our recommendation to revise the department’s existing workforce policies and procedures to address the determination of the appropriate workforce mix and identification of critical functions. As we noted in our report, DOD has not issued new guidance or revised existing guidance to reflect the current statutory and other federal requirements for total force management policy. Specifically, we reported that DOD’s primary policies for determining workforce mix— DOD Directive 1100.4 and DOD Instruction 1100.22—largely reflect current statutory requirements set forth in 10 U.S.C. § 129a for DOD policies concerning workforce mix, though there are several recent amendments that have yet to be incorporated, such as that DOD has not yet implemented the new requirements that determinations regarding the appropriate workforce mix be made using the civilian strategic workforce plan and the inventory of contracted services. Further, we reported that the guidance similarly does not reflect federal requirements for the identification of critical functions as required by Office of Federal Procurement Policy’s Policy Letter 11-01. In response to our draft report, DOD stated in its agency comments that DOD Directive 1100.4. is currently undergoing revision and entering the formal issuance process for signature by the Deputy Secretary of Defense. Further, DOD stated that the updated directive will authorize and direct the revision of the instruction. We noted in our report that OSD officials told us that they were in the process of revising both the directive and instruction, and they provided us with a draft of the revised directive. DOD should issue this revised guidance in a timely manner and ensure that revisions to both guidance documents address statutory requirements related to determinations of the appropriate mix of the department’s workforce and federal requirements to identify critical functions in order for decisionmakers to make better informed decisions regarding the mix of personnel and ensure that the department retains enough government employees to maintain control of functions that are critical to its mission. DOD also partially concurred with our recommendation to include an explanation in annual budget exhibits of the methodology used to project contractor FTE estimates and any limitations of that methodology or the underlying information to which the methodology is applied. DOD stated in its agency comments that its financial management regulations and annual budget submission guidance memorandums issued by the Office of the Under Secretary of Defense (Comptroller) are the means used to explain budget exhibit preparation methodologies and the guidance directs how components are to develop and display budgetary estimates. DOD stated in its comments that this office will strengthen the annual guidance as improvements are made in the inventory of contracted services. Further, DOD stated that if a component’s methodology deviates from the process defined in the annual guidance, a footnote explaining the deviation will be included in the contracted services section of the Operation and Maintenance Overview book within the budget. We recognize DOD has efforts underway to improve its inventory of contracted services, including its use in providing contractor FTEs within its annual budget exhibits. While footnoting any component methodologies that deviate from DOD’s guidance is a step in the right direction, most components use methodologies that reflect inherent limitations that undermine the utility and accuracy of the FTE estimate. DOD acknowledged during the course of this review that the contractor FTE information provided in their fiscal year 2013 and 2014 budget submissions had significant limitations. Consequently, to improve transparency, we continue to believe that DOD should disclose the methodologies used and any limitations thereof until such time DOD is able to accurately project contractor FTEs. We are sending copies of this report to the Secretary of Defense, the Under Secretary of Defense for Personnel and Readiness, the Under Secretary of Defense for Acquisition, Technology and Logistics, the Under Secretary of Defense Comptroller, the Office of Management and Budget, and appropriate congressional committees. In addition, this report will also be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact us at (202) 512-3604 or [email protected] or (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Appendix I: Recent GAO Recommendations for DOD’s Strategic Workforce Management Prior Recommendation Involve functional community managers and to the extent possible, use information from gap assessments of its critical skills and competencies as they are completed, to make informed decisions for possible future reductions or justify the size of the force that it has. Document its efforts to strategically manage its civilian workforce and maintain critical skills and competencies for future reductions. Direct the Under Secretary of Defense for Personnel and Readiness to include in the guidance that it disseminates for developing future strategic workforce plans clearly defined terms and processes for conducting these assessments. Conduct competency gap analyses for DOD’s mission-critical occupations and report the results. When managers cannot conduct such analyses, we recommend that DOD report a timeline in the strategic workforce plan for providing these assessments. Establish and adhere to timelines that will ensure issuance of future strategic workforce plans in accordance with statutory timeframes. Provide guidance for developing future strategic workforce plans that clearly directs the functional communities to collect information that identifies not only the number or percentage of personnel in its military, civilian, and contractor workforces but also the capabilities of the appropriate mix of those three workforces. Enhance the department’s results-oriented performance measures by revising existing measures or developing additional measures that will more clearly align with DOD’s efforts to monitor progress in meeting the strategic workforce planning requirements in section 115b of Title 10 of the United States Code. Conduct assessments of the skills, competencies, and gaps within all five career civilian senior leader workforces and report them in DOD’s future strategic workforce plans. Ensure that the military departments and defense components issue guidance to their commands that provides clear lines of authority, responsibility, and accountability for conducting an inventory review and resolving instances where functions being performed by contractors are identified as inherently governmental functions. To ensure that the six instances we reviewed in which the Army identified that contractors were still performing functions it deemed inherently governmental, as well as those at Kwajalein Atoll, have been properly resolved, we recommend that the Secretary of the Army review these functions, determine the status of actions to resolve the issues, and, as appropriate, take necessary corrective actions. Prior Recommendation To ensure that the two instances we reviewed where contractors were still performing functions the Air Force had previously identified as inherently governmental are properly resolved, we recommend that the Secretary of the Air Force review these functions, determine the status of actions to resolve the issues, and, as appropriate, take necessary corrective actions. To enhance insights into and facilitate oversight of the department’s in-sourcing efforts, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness to issue guidance to DOD components requiring that the components establish a process to help ensure the accuracy of any data collected on future in-sourcing decisions. To improve DOD’s strategic workforce planning, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Personnel and Readiness to better align the data collected on in-sourcing with the department’s strategic workforce plans and establish metrics with which to measure progress in meeting any in-sourcing goals. To determine the historical trends and future projections of the levels of military, civilian, and contractor personnel, we obtained relevant data and performed trend analysis. For our analysis of historical trends, we included fiscal year 2001 through fiscal year 2011 and, for our analysis of future projections, we included fiscal year 2012 through fiscal year 2017. At the time of our review, the fiscal year 2013 president’s budget contained the most recent data available for projections and it included actuals through fiscal year 2011 and projections for fiscal years 2012 through fiscal year 2017. For our analysis of military end strength and civilian personnel FTEs, we relied on data from DOD’s Future Years Defense Program (FYDP), Office of the Under Secretary of Defense Comptroller’s Comptroller Information System (CIS) and DOD budget documents. For our analysis of growth within type of activity performed, we used force and infrastructure categories from the FYDP to provide further perspectives on areas of workforce growth from fiscal years 2001 to 2011. We determined that these data were sufficiently reliable for use in discussing historical and future trends of the military and civilian workforce. Specifically, we reviewed previous GAO reports using workforce data, compared military and civilian personnel levels to published data, performed electronic testing, and discussed the reliability of the data with knowledgeable DOD and service officials. Further, we interviewed DOD officials to obtain their views on the major drivers for workforce changes. For our analysis of historical trends of the contractor workforce, we reviewed DOD’s inventory of contracted services for fiscal years 2008, 2009, 2010, and 2011. We did not independently assess the accuracy or reliability of the underlying data supporting the fiscal year inventories. However, we reviewed our prior work, which addressed limitations of the inventory data. Due to the lack of consistent reporting of contractor FTE data, we reviewed the obligated dollars for contracted services from fiscal year 2001 through fiscal year 2012 and the projected obligations for contracted services from fiscal year 2013 through fiscal year 2014. We relied on budget data on obligations for contracted services (object class 25). Based on discussions with various OSD officials, we excluded object classes 25.3 that represent dollars obligated for goods and services from federal sources. We adjusted the current dollars to constant fiscal year 2013 dollars using the Fiscal Year GDP Price Index to eliminate the effects of inflation. GAO has designated DOD’s financial management area as high risk due to long- standing deficiencies in DOD’s systems, processes, and internal controls. Since some of these systems provide the data used in the budgeting process, there are limitations to the use of DOD budget data. However, based on discussions with appropriate DOD officials and our comparison of the trends in the budget data against other data sources, we believe the contracted service obligation data are sufficiently reliable for showing overall trends for contracted services. To determine the extent to which DOD has taken action to determine the appropriate workforce mix to accomplish its mission, we reviewed relevant legislation and departmental guidance concerning requirements for DOD to carry out such analysis. We also interviewed DOD and military service officials to assess the actions DOD has taken to ensure it is employing the appropriate workforce mix. Specifically, we discussed the process of categorizing parts of the workforce based on the nature of the work they perform, DOD’s process for identifying mission critical occupations as part of its strategic workforce planning process, and efforts by the services to improve implementation of its total workforce management in the future. We compared statutory requirements concerning the processes by which DOD is to determine its appropriate workforce mix to its efforts to date, and noted any differences. To determine the extent to which DOD conducts analysis to identify core or critical functions, we reviewed relevant legislation, federal policy, and departmental guidance concerning the process for identifying core or critical functions. We interviewed DOD and military service officials to explore the various ways in which “core” or “critical” functions could be We defined and reviewed documents that supported those definitions.interviewed DOD and military service officials to determine the actions DOD has taken to define critical functions and respond to federal requirements. Additionally, we met with officials from the Office of Federal Procurement Policy within the Office of Management and Budget to discuss their views on DOD’s implementation of those requirements. We compared federal policy concerning the identification of critical functions to DOD’s efforts to date, and noted any differences. To determine how the military departments and defense agencies used the inventory of contracted services to inform their fiscal year 2013 and 2014 budget submissions, we focused our efforts on five DOD components—the departments of the Army, Navy, and Air Force, and the Defense Logistics Agency (DLA) and Defense Information Systems Agency (DISA). We selected these components based on the amount of their obligations for contracted services and the large number of contractor full time equivalents they identified in their fiscal year 2011 inventory of contracted services, the most current inventory available at the time of our review. We reviewed relevant guidance that directed the DOD components on how to use the inventory of contracted services to provide contractor FTE information in their budget submissions for fiscal years 2013 and 2014. We also interviewed officials from the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics, Office of Defense Procurement and Acquisition Policy; the Office of the Under Secretary of Defense for Personnel and Readiness; and the Office of the Under Secretary of Defense (Comptroller) regarding the guidance and ongoing initiatives that will impact how the inventory data can be used to inform future budget submissions. In addition, we interviewed relevant budget and workforce officials from the five components we included in our review regarding the use of the inventory in the development of their fiscal year 2013 and 2014 budget submissions, and we obtained corroborating documentation from the three components that could provide it to determine the processes used to develop contractor FTE information included in these budget submissions. In addition to the contacts named above, Margaret A. Best, Assistant Director; Cheryl K. Andrew, Jerome Brown, Katheryn S. Hubbell, LeAnna Parkey, Suzanne M. Perkins, Carol D. Petersen, Guisseli Reyes-Turnell, Terry L. Richardson, Stephanie J. Santoso, Adam G. Smith, Erik Wilkins- McKee, and Michael Willems made key contributions to this report.

The federal government’s growing fiscal challenges underscore the importance of DOD employing a strategic approach to determining the appropriate mix of its military, civilian, and contractor personnel to perform its mission, and determining the functions that are critical for the department to achieve its missions. A committee report accompanying the National Defense Authorization Act for Fiscal Year 2013 directed GAO to assess the measures DOD is taking to balance its workforce against its requirements. GAO examined (1) historical and projected workforce trends, (2) the actions DOD has taken to determine an appropriate workforce mix, (3) the analysis DOD performs to identify core or critical functions, and (4) how DOD used its inventory of contracted services to inform budget submissions. GAO performed trend analysis to determine historical and future workforce levels. GAO also reviewed relevant statutes, DOD and military department guidance, and budgetary submissions, and interviewed officials from DOD and the Office of Management and Budget (OMB). Since fiscal year 2001, the Department of Defense's (DOD) military and civilian workforces peaked in fiscal year 2011 at 3.1 million personnel combined, and is projected to decrease over the next five years to below the fiscal year 2001 level of 2.9 million. Comparable historical data on DOD's contractor workforce are not available. In fiscal year 2011, DOD reported that it contracted for services performed by an estimated 710,000 contractor full time equivalents (FTEs)--a workforce equal to about 90 percent of the size of DOD's civilian workforce of 807,000 FTEs. Using fiscal year 2013 constant dollars, GAO's analysis of DOD spending on contracted services shows obligations peaked in fiscal year 2010 at about $195 billion, more than twice the amount spent in fiscal year 2001. This spending decreased to about $174 billion in fiscal year 2012. DOD has taken some steps to improve its understanding and management of its total workforce; however, several shortcomings remain. Specifically, DOD has yet to assess the appropriate mix of its military, civilian, and contractor personnel capabilities in its strategic workforce plan as required by law. Further, DOD has not updated its policies and procedures to reflect current statutory requirements to use its civilian strategic workforce plan and the inventory of contracted services to determine the appropriate mix of personnel to perform DOD's mission. Moreover, DOD's strategic human capital plan does not contain certain required elements and information and several factors limit the accuracy of its inventory of contracted services. As a result, the department is hampered in making more informed strategic workforce mix decisions, which is crucial to meeting DOD's congressional mandate to manage its total workforce. Although DOD is not required to perform analysis to identify a list of core or critical functions across the department as a whole, DOD has identified broad core mission areas of the department. However, its current policies do not fully reflect federal policy concerning the identification of critical functions. Office of Federal Procurement Policy Policy Letter 11-01 requires agencies to identify and ensure that they retain control over critical functions that are core to the agency's mission, but may be contracted out to the private sector. DOD's policies and procedures predate the publication of this requirement, and consequently contain no reference to it. Absent specific policies and procedures on this process, DOD may lack assurance that it retains enough government employees to maintain control over these important functions. DOD components used various methods and data sources, including their inventories of contracted services, to estimate contractor FTEs for budget submissions, but GAO's analysis found that the contractor FTE estimates have significant limitations and do not accurately reflect the number of contractors providing services to DOD. Components encountered challenges, to include the use of estimating techniques based on inventory data that may not be accurate and the lack of a crosswalk between the inventory and specific budget codes. While the Army has a process that addresses these challenges, it may be several years before the remaining DOD components are able to do the same. DOD is taking steps to help the remaining components address these challenges, but, in the meantime, the budget does not provide an explanation of how the contractor FTE estimates are derived and what limitations apply. GAO recommends that DOD revise its policies and procedures to incorporate (1) legislative requirements for workforce planning and (2) federal requirements for the identification of critical functions. GAO also recommends that DOD provide better information regarding contractor FTEs used in budget submissions. DOD noted actions that it has underway or planned to respond to these recommendations.

You are an expert at summarizing long articles. Proceed to summarize the following text: Under the provisions of the National Aeronautics and Space Act of 1958, NASA is authorized to acquire aircraft. Since its creation, NASA has operated a small fleet of aircraft, primarily to provide passenger transportation. According to the 2004 General Services Administration’s Federal Aviation Interactive Reporting System, NASA is one of six civilian agencies that reported operating aircraft primarily for the purpose of passenger transportation. In fiscal year 2003, NASA reported owning and operating a fleet of 85 aircraft valued at $362 million, including aircraft dedicated to program support, research and development, and passenger transportation. NASA reported owning 53 aircraft that were used to provide support to programs such as the Space Shuttle, International Space Station, and Astronaut programs. The majority of these aircraft are located at the Johnson Space Center. For example, shuttle trainers are one type of program support aircraft. These aircraft have been modified to duplicate the shuttle’s approach profile, cockpit cues, and handling qualities so that astronaut pilots can see and feel simulated approaches and landings before attempting an actual shuttle landing. NASA reports owning 25 aircraft to support its research and development efforts. These aircraft have been modified to support the agency’s mission to conduct aeronautical research at varying altitudes and atmospheric conditions. For example, NASA operates a modified Learjet 23 as a research platform for the Airborne Terrestrial Land Application Scanner. NASA owns seven aircraft that are used to provide passenger transportation. In fiscal year 2004, NASA reported its seven passenger aircraft carried nearly 10,000 passengers and logged nearly 4 million passenger miles. Figure 1 provides an overview of the aircraft owned and operated by NASA to provide passenger transportation and their location. In addition, NASA obtained passenger transportation services through the Economy Act, a cooperative agreement, and a fractional ownership contract with DOD, FAA, and Flexjet, respectively. DOD–-Under provisions of the Economy Act, NASA acquired additional passenger aircraft services from DOD using Gulfstream V aircraft. DOD provided documentation for three NASA flights of more than 60 flight hours during fiscal years 2003 and 2004. DOD billed NASA approximately $290,000 for these services. FAA—During fiscal years 2003 and 2004, NASA and FAA entered into a shared-use cooperative agreement for four aircraft, three of which were owned by FAA and the other by NASA. All four aircraft were housed at Reagan National Airport in Washington, D.C. In exchange for contributing its one aircraft and $1.1 million annually during 2003 and 2004, NASA received the right to 450 total flight hours per year on any of the four aircraft. Under this agreement, NASA could schedule flights on these aircraft with a minimum of 24 hours advance notice. FAA agreed to pay routine maintenance, fuel, and personnel costs associated with the NASA aircraft. NASA was also allowed to purchase additional hours, beyond the agreed 450 hours, at the hourly rate for the specific aircraft used. During the 2-year period, NASA utilized the four aircraft in this arrangement for approximately 1,600 flight hours for a reported cost of $4.5 million, which included charges for the original 900-hour agreement plus charges for additional hours. Flexjet–-In October 2000, conferees on the NASA fiscal year 2001 appropriation bills directed NASA to prepare a plan that considers whether fractional ownership of passenger aircraft may be beneficial. In July 2002, pursuant to the conferee guidance, NASA awarded a contract with Flexjet for a 2-year demonstration program to determine the viability of using fractional ownership to meet NASA’s administrative air transportation requirements. Under the 2-year demonstration NASA reported cost of approximately $3.5 million in return for a total of approximately 800 flight hours of passenger transportation services. OMB Circular No. A-126 (Revised), Improving the Management and Use of Government Aircraft (May 22, 1992), prescribes policies for executive agencies to follow in acquiring, managing, using, accounting for the costs of, and disposing of government aircraft. This circular applies to all government-owned, leased, chartered, and rental aircraft and related services operated by executive agencies, except for aircraft while in use by or in support of the President or Vice President. OMB Circular No. A-126, section 6, a., provides that the number and size of aircraft acquired and retained by an agency and the capacity of those aircraft to carry passengers and cargo should not exceed the level necessary to meet the agency’s mission requirements. OMB Circular No. A-126, section 5, b., defines mission requirements to include activities related to the transport of troops and/or equipment, training, evacuation (including medical evacuation), intelligence and counter narcotics activities, search and rescue, transportation of prisoners, use of defense attaché-controlled aircraft, and aeronautical research and space and science applications. OMB Circular No. A-126, section 5, b. explicitly states that mission requirements do not include official travel to give speeches, attend conferences or meetings, or make routine site visits. In addition to the policies prescribed by OMB Circular No. A-126, agencies must also follow the guidance of OMB Circular No. A-76 before purchasing, leasing, or otherwise acquiring aircraft and related services, to assure that these services cannot be obtained from and operated by the private sector more cost effectively. Further, agencies must review periodically the continuing need for all of their aircraft and the cost effectiveness of their aircraft operations in accordance with the requirements of OMB Circular No. A-76 and report the results of these reviews to GSA and OMB. Agencies are to report any excess aircraft and release all aircraft that are not fully justified by these reviews. Once an agency has justified that it has a valid mission requirement for owning aircraft, OMB Circular No. A-126, section 8, a., permits agencies to use aircraft for official, but nonmission-required travel when: no commercial airline or aircraft service is reasonably available (i.e., able to meet the traveler’s departure and/or arrival requirements within a 24-hour period, unless the traveler demonstrates that extraordinary circumstances require a shorter period) to fulfill effectively the agency requirement; or actual cost of using a government aircraft is not more than the cost of using commercial airlines. OMB Circular No. A-126, section 14, also provides that agencies maintain systems that will enable them to: (1) justify the cost-effective use of government aircraft in lieu of commercially available air transportation services, and the use of one government aircraft in lieu of another; (2) recover the costs of operating government aircraft when appropriate; (3) determine the cost effectiveness of various aspects of their aircraft programs; and (4) conduct the cost comparisons required by OMB Circular No. A-76 to justify in-house operation of government aircraft versus procurement of commercially available passenger aircraft services. Attachment B of OMB Circular No. A-126 also provides that agency systems must accumulate and summarize costs into the standard passenger aircraft program cost elements. For example, standard cost elements would include items such as fixed and variable crew costs, maintenance costs, fuel costs, and overhaul and repair costs. In addition, the General Services Administration (GSA) established governmentwide policy on the operation of aircraft by the federal government—including policies for managing the acquisition, use, and disposal of aircraft that the agencies own or hire. GSA publishes its regulatory policies in the Code of Federal Regulations (C.F.R.). GSA also publishes a number of other guides and manuals to help agencies manage the acquisition, use, and disposal of aircraft. These publications include the U.S. Government Aircraft Cost Accounting Guide, which contains information on how agencies should account for aircraft costs, and the Fleet Modernization Planning Guide, which provides guidance on developing cost-effective fleet replacement plans. NASA’s Inspector General (IG) issued two reports on NASA’s passenger aircraft, one in 1995 and another in 1999. Both NASA IG reports were critical of NASA’s management of these aircraft, identifying weaknesses in NASA’s accounting and justification for its passenger aircraft. In its 1995 report, the NASA IG reported that NASA passenger aircraft cost an estimated $5.8 million more annually when compared with commercial airline transportation. The IG recommended actions with respect to NASA’s (1) compliance with many of the provisions of OMB Circular Nos. A-126 and A-76 (including fully considering commercial airlines as an alternative to NASA operations of passenger aircraft services), (2) use of outdated and incomplete cost data to justify trips and approval of some trips without adequate justifications, and (3) use of passenger aircraft that were more expensive to operate than using commercial airline services. The IG’s 1999 report focused on one passenger aircraft located at NASA’s Marshall Space Flight Center and estimated that the cost of commercial airlines in comparison with the NASA-owned aircraft was $2.9 million less over a 5-year period. Similar to the 1995 report, the 1999 report was also critical of NASA’s implementation of guidance in OMB Circular Nos. A-126 and A-76. Further, the report noted that the agency had not effectively addressed actions recommended in the 1995 report concerning the need to more fully and effectively evaluate the use of commercial airlines. The IG recommended that NASA management dispose of the passenger aircraft at Marshall and instead use commercial airlines to satisfy Marshall’s air transportation requirements. NASA management disagreed with the findings of both IG reports, stating that commercial airlines cannot effectively meet all the mission requirements and the capability of NASA aircraft outweighs the marginal costs savings of total reliance on commercial airlines. An analysis of NASA’s reported costs for its passenger aircraft services shows they are an estimated five times more costly than commercial airline coach tickets. For purposes of this aggregate comparative cost analysis, we considered available NASA reported data on costs applicable to its passenger aircraft services—both variable and fixed costs--in comparison with commercial airline service costs. Specifically, to assess the aggregate costs associated with NASA-owned and -chartered passenger aircraft, we accumulated available NASA annual report passenger aircraft services cost data for fiscal years 2003 and 2004, validated to the extent feasible with industry standards, and compared these cost estimates with total estimated commercial airline costs based on the cost of an average coach ticket. We determined that NASA’s reported costs for the aircraft it owned or chartered were on the order of about $20 million more costly over a 2-year period than if NASA had used commercial airline services to carry out the same number of business trips. Specifically, estimated costs associated with NASA’s passenger aircraft operations during fiscal years 2003 and 2004 were almost $25 million, while we estimated the cost of commercial coach tickets for the same number of travelers would have been approximately $5 million—about $20 million more to provide NASA passenger aircraft services than if commercial airlines were used to provide passenger transportation over the 2-year period. Table 1 summarizes our analysis of commercial and NASA passenger transportation costs by types of NASA-owned or -chartered aircraft. We identified the number of passengers from NASA’s aircraft request forms and NASA annual performance reports. We then multiplied the identified number of passengers by our estimate of NASA’s average commercial coach round-trip ticket cost. We determined the average coach round-trip ticket cost of approximately $426 by analyzing all airfares purchased with NASA’s travel cards in fiscal years 2003 and 2004. Specifically, we identified approximately $49,776,000 in round-trip airfare tickets in NASA travel card purchases during fiscal years 2003 and 2004, and divided this dollar amount by the number of tickets purchased (116,865) to determine an average ticket cost of approximately $426. Finally, we compiled an estimate of NASA’s passenger aircraft service costs, which included costs related to personnel, maintenance, and fuel, from annual cost reports and budget information provided by NASA. This calculation of the difference between the relative cost of NASA- provided passenger transportation services and commercial airline costs does not consider per diem, in-transit salary and benefits, and other factors associated with using NASA passenger services. NASA officials believe that a comparison of NASA and commercial airline passenger services should include estimates of such cost savings shown in its passenger aircraft request forms. We recognize that, to the extent that all passengers on the aircraft had a valid purpose for travel, there may be personnel- related cost savings associated with use of NASA’s passenger aircraft services; however, it was not feasible for us to reliably identify such costs using independent (non-NASA) sources. Further, as discussed in a subsequent section of this report, we have concerns about the reliability of some of NASA’s cost and associated savings data captured in its flight request documentation. In addition, we also identified questionable savings attributed to non-official travelers. However, NASA’s cost estimates do serve to provide indicators of general ranges of costs that may be avoided by using NASA passenger aircraft services. Using available NASA documentation of costs that would have been incurred if commercial airlines were used would increase the estimated commercial airline costs to approximately $11 million, and reduce the difference between NASA’s passenger airline services and commercial airlines to about $13 million over the 2-year period. Specifically, available NASA passenger aircraft services flight request documentation generally included estimated costs associated with not only airline tickets, but also estimates for salary and benefit costs associated with lost work time, per diem expenses, and rental car costs associated with the additional time required if commercial airlines were used to provide passenger transportation. Consequently, even when available NASA estimates of costs associated with commercial airline transportation services were included, a comparison with the costs of its passenger air transportation services shows that they are nearly 2.3 times more costly than commercial airlines. Our cost analysis, based primarily on data included in NASA’s annual reporting on its aircraft operations, did not include data on all relevant types of costs attributable to NASA’s passenger aircraft services. Consequently, the full cost of continued operation of NASA’s passenger aircraft fleet in comparison with commercial airline services would be substantially more than the $20 million estimate for fiscal years 2003 and 2004. Specifically, the following types of costs were not accounted for in NASA’s various annual reports on its passenger aircraft services. NASA’ s current inventory of seven passenger aircraft is valued at more than $33 million, including two Gulfstream II aircraft purchased in 2001 for a total of about $13.9 million. An allocable portion of the acquisition and associated capital improvements to these assets is part of NASA’s annual cost of operating its passenger aircraft services. In addition, these costs may increase in the near future. A July 2004 fleet plan prepared for NASA recommended upgrading and expanding its passenger aircraft fleet as soon as possible with an initial investment of $75 million. Further, NASA is considering an investment of an estimated $1.5 million in a noise restriction package for its Gulfstream III aircraft during fiscal year 2008, making the total investment that NASA is currently considering about $77 million. NASA aircraft received hangar and maintenance services even though they were housed on government property. Industry data on hangar costs show that they total about 5 percent of total aircraft operation costs. Although the government operates under a self-insurance policy, the liability associated with operation of passenger aircraft is a cost factor that must be considered given the significant number of passenger flights taken using NASA-owned aircraft over the last 2 years. Industry estimates show liability insurance costs represent approximately 2 percent of total aircraft operating costs. Not only were NASA’s passenger aircraft services significantly more costly than commercial airlines, but NASA’s continued ownership of aircraft to provide air transportation supporting routine NASA business operations was not in accordance with OMB guidance. OMB guidance (1) limits the number and size of aircraft acquired and owned by an agency to carry passengers to the level necessary to meet mission requirements, including, for example, use of aircraft for prisoner transportation, intelligence and counter narcotics activities, and aeronautical research; and (2) explicitly prohibits owning aircraft to support routine business functions, including providing air transportation to attend meetings, conferences, and routine site visits. In contrast, NASA’s implementing guidance, while generally consistent with OMB guidance, was interpreted to allow acquiring and retaining aircraft for any official travel, regardless of the mission-required nature of the travel. Our analysis of available flight data showed that an overwhelming majority (86 percent) of the flights taken during fiscal years 2003 and 2004 using NASA passenger aircraft services were to support routine business operations, including attending meetings, conferences, and site visits. Excluding flights related to the Columbia accident, routine business flights accounted for about 97 percent of NASA passenger aircraft flights. Further, although OMB guidance required NASA to periodically prepare studies to determine if continued ownership of passenger aircraft was justified, the agency’s studies were either incomplete or did not consider commercial airline service alternatives. NASA implementation is not consistent with OMB policy on aircraft ownership. OMB Circular No. A-126, the governing federal policy guidance in this area, provides that agencies should own aircraft only to the extent needed to meet mission requirements, such as troop transportation, prisoner transportation, intelligence and counter narcotics activities, and aeronautical research. OMB’s policy guidance further provides that agencies should not own aircraft to provide transportation to meetings, routine site visits, and speeches. However, NASA implementing guidance, while generally consistent with OMB policy, does not clearly and uniformly address the federal policy limiting aircraft ownership to those assets needed to meet mission requirements. NASA Procedural Requirements (NPR), section 3.3.2, reiterates the OMB policy prohibition on using passenger aircraft to provide transportation supporting routine business operations as a basis for continuing to own aircraft. However, in the following sections (sections 3.3.2.1 through 3.3.2.5), NASA’s guidance provides that mission-required use of aircraft includes support for activities “directly related to approved NASA programs and projects.” These elaborating sections were mistakenly operationally determined to mean that all travel using NASA passenger aircraft services was directly related to NASA programs or projects, regardless of whether they were of a routine, nonemergency nature. The NASA IG’s 1999 report on NASA’s passenger aircraft at its Marshall Space Flight Center also questioned whether that aircraft’s use was consistent with the OMB limitation on owning aircraft only for mission- required purposes. The audit report recommended that NASA change the definition of mission requirements in its policy guidance to conform to the definition of mission requirement stated in OMB guidance. However, in its response to the audit report, NASA management stated that there was no difference between its guidance and the OMB guidance and therefore it would not take any action to clarify its policy guidance. Our analysis of available documentation on flight purposes shows that NASA’s implementation of its guidance related to using aircraft in direct program or project support has resulted in owning aircraft to support meetings, conferences, and speeches in direct conflict with OMB’s policy prohibition in this area. In effect, NASA circumvented the OMB policy on restricting aircraft ownership to those needed to carry out mission requirements by operationally determining that nearly all travel using passenger aircraft services was directly related to NASA programs or projects. Our analysis of NASA passenger air transportation services for fiscal years 2003 and 2004 showed that about 86 percent of the flights were taken to support the types of routine business operations that are expressly prohibited by OMB’s guidance for aircraft ownership. Specifically, we categorized the documented flight purpose listed on 1,188 NASA aircraft request forms for NASA passenger aircraft usage during fiscal years 2003 and 2004 into 10 categories in order to determine the frequency of different uses for NASA’s passenger aircraft services. In conducting our analysis, we categorized any flight as mission required if it could be linked to OMB’s definition of mission requirements, regardless of its apparent, non-emergency nature. As a result, some flights we categorized as mission required may have actually been routine in nature. For example, in response to the 1999 NASA IG report, NASA management stated that launch support flights were required to transport NASA emergency response teams to launch sites within hours to help resolve unexpected launch-related problems. However, most launch support flights during our audit period were scheduled more than 24 hours before the flight departure date. Of the 19 flights we identified as directly supporting NASA launches, only 7 were scheduled less than 2 days prior to the flight, and overall the flights were scheduled an average of approximately 3 days prior to departure. In one example, on July 29, 2003, Kennedy Space Center requested the use of a NASA passenger aircraft to fly from Florida to California as launch support for the joint Canadian Space Agency/NASA Scientific Satellite Atmospheric Chemistry Experiment Mission. The flight was requested on July 29, 2003, 12 days before the flight’s August 10, 2003, departure and 14 days before the August 12, 2003, launch. We categorized this flight as being related to launch support. However, the fact that the flight was scheduled nearly 2 weeks in advance of the flight departure brings into question whether the flight was time sensitive and indicates that commercial coach service could have been used. Figure 2 presents the results of our analysis and categorization of NASA’s use of owned and chartered aircraft over fiscal years 2003 and 2004 into 10 categories. As shown in figure 2, available data showed that about 14 percent of the flights taken using NASA passenger aircraft had a stated purpose that appeared to comply with OMB Circular No. A-126’s definition of mission required. As shown in figure 3, excluding flights related to the Columbia accident investigation, only 3 percent of NASA’s passenger aircraft activity was related to mission-required travel. Table 2 highlights examples of flights in which NASA passenger aircraft services were used to support non mission-critical NASA business operations that are not consistent with OMB’s definition of mission- required use necessary to justify continued passenger aircraft ownership. The results of our interviews with passengers on such flights showed that, while use of the NASA aircraft was more convenient, better accommodated busy NASA SES-level staff schedules, and was more productive, the trip purposes could have been accomplished through travel on regularly scheduled commercial airlines. OMB Circular No. A-126 policy guidance instructs agencies to periodically conduct OMB Circular No. A-76 cost comparisons to determine whether commercial activities should be conducted using government resources or commercial sources. NASA’s A-76 studies conducted to date have asserted that because not all flight purposes could be achieved using commercial airlines, commercial airlines are not a viable alternative and were not considered in any of the studies. However, as discussed previously, our analysis of NASA passenger aircraft flights taken during fiscal years 2003 and 2004 as well as our discussions with passengers on those flights disclosed that the vast majority of the flights could have been accomplished using commercial airlines. As a result, NASA’s A-76 studies inappropriately excluded potentially more cost-effective commercial airline services from consideration. Little supporting documentation is available for four of the seven aircraft in NASA’s passenger aircraft fleet that were acquired decades ago. Consequently, it was difficult to determine how these aircraft acquisitions were justified and if there was a mission requirement justifying aircraft ownership at that time. The five NASA A-76 studies on NASA-owned aircraft did not include a comparison of NASA’s passenger aircraft costs with commercial airline costs. NASA’s studies compared its aircraft ownership costs against costs of NASA leasing aircraft to provide passenger transportation services because “commercial airlines cannot effectively meet all mission requirements.” For example, NASA’s March 2004 A-76 study was based on the assumption that NASA aircraft would be required to support mission requirements of an estimated 400-450 flight hours a year--essentially the total number of flight hours flown by that NASA center’s passenger aircraft during 2003 and 2004. While NASA may continue to require access to some mission-required passenger aircraft services for which commercial airlines would not be a viable alternative, assuming that all prior flight hours were mission required without first examining the purpose for these flights is not consistent with the OMB guidance. In addition to NASA-owned aircraft, as discussed previously, NASA obtained passenger aircraft services through interagency agreements with DOD and FAA, and a fractional ownership pilot demonstration contract with Flexjet. These alternative approaches offer ready access to passenger aircraft without the fixed cost investment and the need to fund aircraft maintenance, pilot training, and other costs associated with aircraft ownership. For example, under NASA’s contract with Flexjet, NASA had guaranteed availability to passenger air transportation services. Specifically, the contract with Flexjet allowed NASA to schedule flights with a minimum of 8 hours advance notice. According to a NASA contractor’s December 2004 study, such arrangements to obtain passenger transportation services provide a cost-effective alternative to agency ownership of aircraft when demand is highly variable or less than 150 to 200 hours a year. Such flexible arrangements could provide NASA with quick-turnaround access to air passenger transportation services, and appear to have the ability to have met NASA’s limited mission-required needs during the period of our review. Further, NASA has not performed any A-76 studies for three of its aircraft that were used as passenger aircraft. NASA purchased two Gulfstream II aircraft in 2001 as contingency backups to, and eventual replacements for, its existing shuttle trainer aircraft fleet. However, since purchasing the aircraft, NASA has been using these aircraft as part of its passenger aircraft services fleet. Subsequent changes in NASA’s long-term strategy for space flight now show that shuttles will not be used after about 2010. As a result, the continuing mission-required need to retain these aircraft is questionable. In its 1995 and 1999 reports, the NASA IG expressed concern over NASA’s exclusion of commercial airline transportation from its A-76 studies. In both reports, the IG reported that the A-76 studies NASA management performed with respect to its passenger aircraft improperly excluded a cost comparison with commercial airlines. While the IG recommended that NASA program offices responsible for passenger aircraft operations perform A-76 studies to include consideration of accomplishing air travel needs using commercial airlines, NASA management contended that because of isolated travel destinations and extremely short advance notice, commercial airlines could not meet its travel needs. However, our analysis of available documentation supporting flights taken during fiscal years 2003 and 2004 shows that most were requested more than 24 hours in advance of flight departure and most NASA centers are located within an hour’s drive of commercial airports. NASA’s oversight and management controls over its passenger aircraft operations were ineffective. NASA lacks the systems or procedures to accumulate and use agencywide usage and cost data needed to provide the transparency and accountability necessary to effectively support day-to- day management of its passenger aircraft service operations. Specifically, NASA did not Maintain agencywide records on the purposes for which its passenger aircraft are used and their costs. Such data are critical to (1) determining whether usage is consistent with OMB guidance limiting aircraft ownership to those agencies with mission requirement needs, and (2) maintaining visibility and accountability for the full costs associated with its passenger aircraft operations. Lacking such full cost visibility and passenger accountability, NASA’s passenger aircraft services are sometimes viewed as a “free” resource by NASA project and program officials. Correctly justify the cost effectiveness of individual flights. These justifications were flawed in that they relied on (1) inaccurate cost data and (2) other unsupported factors used in the cost-justification calculation. Have processes in place to obtain reimbursements from nonofficial passengers flying on NASA-owned or -chartered aircraft. This may include NASA employee spouses and relatives, contractors, or other federal agency personnel. NASA systems or procedures in place to accumulate detailed usage and cost data related to its passenger aircraft services were flawed. Other than data compiled once a year to meet external reporting requirements, neither NASA management nor congressional oversight officials had agencywide aircraft usage and cost data needed to provide the transparency and accountability needed to make informed decisions on continued ownership of passenger aircraft. Costs associated with ownership and operation of NASA’s passenger aircraft services were usually included in center overhead accounts that were allocated to programs based on the number of personnel assigned to programs without regard to the extent to which program personnel actually used NASA passenger aircraft services. Therefore, it is not surprising that some NASA personnel expressed the view that use of NASA-owned or -chartered aircraft is a “free” resource to them in that they did not have visibility or accountability over associated costs as part of their program or project budget execution reporting. Because NASA lacked a system for routinely collecting agencywide usage and cost data, it could not provide us with the complete and accurate agencywide information on aircraft usage and cost that we requested as part of this audit. Although each center that possesses and manages passenger aircraft is required to maintain a flight justification and manifest for each trip, the flight usage data contained in these documents are not compiled or analyzed on an agencywide basis to support decisions related to mission-required needs. Specifically, NASA data on the purposes and costs of its passenger aircraft services during fiscal years 2003 and 2004 were contained in paper flight justifications and manifests maintained at six different locations. We created a database of descriptive cost and usage data for approximately 1,200 flights using NASA-owned or -chartered aircraft for which sufficiently complete data were available. Although, as mentioned previously, we obtained evidence that NASA also utilized at least two additional program support aircraft to meet its passenger air transportation needs, the limited data on use and costs associated with flights using these aircraft did not allow us to include data on these flights in our database. Further, data on passenger aircraft services for about 200 flights at one center was missing most of the data elements on the flight request justification forms, including flight purpose and cost-justification calculations. Without agencywide data on flight purposes and costs related to its passenger aircraft services, NASA managers and Congress lack critical information they need to make key aircraft ownership decisions. In addition to the limited agencywide usage and cost data, we also found that the data provided by NASA, although certified by NASA management as complete and accurate, were not always complete or accurate. Our comparison of NASA-supplied data on flights taken in fiscal years 2003 and 2004 with FAA data showed that (1) data on 97 passenger flights were not included in the aircraft usage data NASA certified as complete; and (2) as discussed in a subsequent section, NASA-supplied data did not always include all legs of trips taken using NASA passenger aircraft. After our identification of the flights, while not complete in all cases, NASA was able to provide some form of supporting documentation showing these flights occurred, including proof of authorization, approval, or a determination of cost effectiveness. Examples of some of the flights not included in the data NASA officials certified as complete are summarized in table 3. Further, we identified a breakdown in controls over flight data record integrity at one center. Specifically, when we inquired about provided documents that did not appear to be originals, NASA officials told us that flight requests and approvals related to a 1-year period covering parts of fiscal years 2003 and 2004 were lost and recreated after flights took place. NASA officials stated that the loss of these important aircraft usage data was apparently not discovered until after our initial request for documentation as part of this audit. NASA officials did not inform us that documents were recreated until after we questioned inconsistencies in the documentation. “Although everything about the flight was very positive – convenience, shorter trip time, professional service, etc. – the cost was considerably more than flying a commercial airline. ... As much as I enjoyed the door to door service, if the travel costs had been coming out of my project I would have chosen to fly commercial.” This statement summarizes how NASA decision making on aircraft operations is distorted by the lack of complete data on the cost of using this resource. Second, NASA does not classify costs related to passenger aircraft services in its annual financial and budget reports to Congress as a cost of transportation of persons. In annual reports, one specific object expense class, object class 21, is designed to capture and disclose agencies’ costs for transporting passengers. Instead, the cost of NASA passenger aircraft services are included in overhead cost accounts, which understates the true cost of transporting NASA passengers. As discussed previously, our analysis of available estimates of NASA’s aggregate costs associated with its passenger aircraft services in comparison with commercial airline ticket costs showed that NASA’s passenger aircraft services cost about $20 million more than commercial airlines. In addition, NASA’s individual flight cost justification process for its passenger aircraft services was flawed. Our analysis of cost-comparison documentation supporting passenger aircraft flights taken during fiscal years 2003 and 2004 revealed critical flaws, including variable cost data that were 6 years out of date and unsupported cost factors. Available NASA documentation supporting NASA’s individual flight justifications for flights taken during 2003 and 2004 showed a total estimated savings of $6 million over the 2-year period. However, if these justifications had included up-to-date NASA variable costs and excluded unsupported cost factors attributed to the additional time required to use commercial airline flights, most flights would not have been approved because they would have been more costly than commercial air travel. Policy guidance in OMB Circular A-126 provides an agency may use aircraft on a flight-by-flight approval basis for routine business purposes to the extent that a comparison between the agency’s specified variable costs and the costs of commercial travel shows the proposed flight is cost effective. Specifically, OMB Circular A-126, Attachment A, provides that costs of commercial travel must be compared with the variable costs of operating the agencies’ passenger aircraft and that proposed flights using agencies’ passenger aircraft for routine business purposes should only be approved if they result in a cost savings to the government. Further, OMB guidance provides that variable cost estimates used in flight-by-flight cost justification calculations are to be updated annually. This policy on flight- by-flight variable cost justification does not replace the agencies’ need to first establish a valid mission requirement for owning aircraft, and overall cost effectiveness. As discussed previously, our analysis of flight purposes showed that about seven of every eight flights were for routine business travel. Consistent with OMB policy guidance, NASA regulations provide that individual cost justifications comparing estimated commercial airline travel costs with estimated variable costs associated with using NASA- owned or -chartered aircraft should be prepared prior to all passenger aircraft flights. Figure 4 provides an overview of the methodology NASA used to compare NASA and commercial costs for its flight-by-flight justifications. vs. 2.5 (multiplier) Several NASA centers had not updated the variable costs used in their flight-by-flight cost-comparison calculations for over 6 years. Such out-of- date variable costs significantly understated NASA’s flight-by-flight costs. For example, at two centers, the $964 variable cost per flight hour used for flight-by-flight justifications during fiscal years 2003 and 2004 was over 6 years out of date. According to NASA aircraft management officials, this hourly rate was last adjusted in 1998. At one center, a recent recalculation, done in 2005 pursuant to our audit, increased the center’s variable cost rate from $964 to $1828 an hour, almost a 90 percent increase. Further, even this 90 percent higher rate may understate NASA’s actual variable costs. For example, the aircraft manufacturer for the aircraft in use at that center reported a direct cost per flight hour rate of approximately $3,000 a flight hour, including estimated fuel costs alone in excess of $1,300 an hour. NASA variable costs were also understated at one center because the flight- by-flight justifications included only variable cost estimates for one round trip when the aircraft actually made two round trips to meet passengers’ transportation requirements. Our analysis of FAA flight information and flight documentation obtained from the center showed that the flight request data we were provided included estimates related to only two of four flight legs flown to complete 14 flight requests over the 2-year period of our review. For example, on August 6, 2003, NASA’s passenger aircraft transported passengers from Houston, Texas, to Pueblo, Colorado, and then returned without passengers to Houston the same day. Three days later, pilots flew an empty aircraft to Pueblo to pick up passengers and return them to Houston. Center officials stated that additional round trips were necessary to return the flight crew to their home station where they could be more productive performing other duties. Center officials stated that they did not include the two extra flight legs in their calculations of the variable costs associated with NASA’s passenger transportation because they classified these legs as crew training flights. Nonetheless, the costs incurred by these additional flights should be considered among the costs related to NASA’s passenger air transportation services. In addition to understatements of NASA’s variable costs, NASA’s flight-by- flight cost comparisons were also flawed in that they increased the cost associated with flying commercially by using a largely unsupported multiplier of 2.5. NASA could not provide any specific NASA-related empirical evidence to validate use of the multiplier in its flight-by-flight justification process. NASA used this multiplier in addition to factors for time and salary costs accounted for in its cost-justification calculation. The use of a multiplier to increase the value of an employee’s time beyond his or her salary and fringe benefits is not expressly provided as part of OMB’s Circular No. A-126 guidance. Further, cognizant OMB officials told us that it was not their intent that agencies use any such multiplier (beyond the salary and fringe benefits associated with any time savings) in determining whether proposed flights were cost effective. They also stated they were not aware of any agencies using such a multiplier in their flight justification calculations. While NASA officials informed us that they had been using this multiplier for a number of years and that they believed it was a conservative factor, they did not provide any documentation demonstrating the appropriateness of the multiplier as it applies specifically to the experiences of NASA personnel who used these aircraft. Consequently, lacking such documentation, NASA’s use of a 2.5 multiplier improperly overstates the costs of commercial alternatives. The overall effect of understating NASA costs and overstating commercial costs in NASA’s flight-by-flight justifications was that NASA incorrectly approved individual flights as cost effective. For example, NASA justified one round trip from Kennedy Space Center, FL to Burbank, CA as cost effective, calculating a savings of $4,800. NASA calculated a cost savings for the flight because it used a 1998-based variable cost factor for the NASA plane of $964 per hour and also multiplied the travelers’ salary costs savings by the unsupported 2.5 multiplier. If the variable cost was updated to NASA’s 2004 estimate of $2,528 per hour for that aircraft and the unsupported multiplier was removed, the estimated variable costs associated with the proposed NASA passenger aircraft flight would have exceeded estimated commercial airline costs by $17,408. Further, even after incorporating NASA’s unsupported estimate that employee fringe benefits increase employee direct salary costs by an additional 50 percent, the NASA aircraft variable costs for this flight would still have exceeded commercial costs by about $16,000. NASA lacks procedures to consistently and effectively identify and recover the applicable costs of operating government aircraft when nonofficial passengers fly on NASA-owned or -chartered aircraft. As a result, nonofficial travelers were provided free transportation using NASA’s passenger aircraft services. However, because of the lack of procedures and documentation in place concerning the determination of the official status of travelers, we could not determine, and more importantly NASA could not determine, if any of the travelers should have, but did not, reimburse the government for the cost of their transportation. According to OMB Circular No. A-126, travelers flying on a space-available basis on government aircraft for a purpose other than the conduct of official agency business generally must reimburse the government for the full coach fare. Reimbursement for travel at the government rate for the cost of coach tickets would have covered about one fifth of NASA’s reported costs associated with the use of NASA’s passenger aircraft services. However, NASA has not implemented agencywide policies and procedures to ensure that such travelers reimburse the government for the corresponding coach cost. Processes in place at each of the six centers to obtain reimbursements ranged from none at all to ad hoc procedures that essentially relied on individual travelers to identify and submit payments. For example, at one center, NASA’s procedures consisted of notifying NASA travelers of the need to obtain reimbursement from nonofficial travelers flying on the aircraft, but did not provide for any follow-up to monitor and collect the requisite amount from non-NASA travelers. For example, between September 2, 2004, and September 6, 2004, several Kennedy Space Center employees and their families and contractors and their families used the center’s Gulfstream II aircraft to fly to Washington, D.C. in advance of Hurricane Francis. According to center officials, the center was required to evacuate the aircraft from the path of the approaching hurricane, and a decision was made to transport the contractor pilots, mechanics, and their families over 800 miles north to Washington. After flying the contractors and their families out of the area, the aircraft then returned to pick up other center management personnel, personnel associated with the aircraft management, and their families and flew them to Washington. A NASA official stated that at least one of the passengers on these flights should have reimbursed the government for a portion of the cost of their transportation. However, the official did not know if such reimbursement was obtained. NASA officials at two other centers stated that they have not obtained reimbursements or they had no documentation showing the extent to which reimbursements from nonofficial passengers on NASA flights were identified and obtained. In addition, we identified over 100 other travelers that NASA classified as dependents flying on NASA passenger aircraft that may have been nonofficial travelers. These passengers may have been required to reimburse NASA for a portion of the costs of their transportation. As NASA strives to carry out its new vision for the future of the agency, using its resources as efficiently as possible will be a growing fiscal challenge. Operating what is essentially its own small passenger airline service, while potentially providing certain benefits to the agency and its employees, costs an estimated five times more than if commercial airlines were used to provide these services. Further, NASA’s ownership of aircraft to support essentially routine business operations is in direct conflict with OMB’s policy prohibition on such uses and passenger interviews which showed that in almost all cases, the travel could have been accomplished using commercial airlines. NASA management has disagreed with, and taken only limited action with respect to similar prior audit recommendations in this area and insufficient management attention and agencywide oversight has allowed NASA to continue this costly program for decades. The cumulative effect has been failures in effectively justifying the extent to which such passenger aircraft services are needed to address critical, time-sensitive mission requirements, as well as effectively determining the extent to which these services could be accomplished without incurring the substantial, fixed operation and maintenance costs associated with aircraft ownership. Immediate actions to dispose of all aircraft not needed to address mission requirements and adoption of more flexible, less costly alternatives to satisfy future mission requirements would best position NASA to meet its stewardship responsibilities for taxpayer funds it receives, and better enable it to meet its current fiscal challenges. Congress should consider whether legislation is necessary to ensure that (1) NASA disposes of all of its passenger aircraft not used in accordance with OMB’s explicit policy prohibition against owning aircraft to support travel to routine site visits, meetings, speeches, and conferences; and (2) funding for future NASA passenger aircraft purchases and operations is restricted to those necessary to meet mission requirements consistent with OMB guidance. To the extent that Congress determines that NASA should continue to retain aircraft or passenger aircraft charter services to provide passenger transportation, we recommend that the Administrator of NASA take the following six actions: Establish policies and procedures for accumulating and reporting on its passenger aircraft services to provide complete and accurate agencywide cost and utilization data to support oversight and decision making on operating and retaining such aircraft services. Clarify policies and procedures applicable to aircraft acquisition and retention to limit the number and type of aircraft owned and chartered for passenger transportation to those necessary to meet the “mission- required” criteria in OMB guidance. Periodically assess the extent to which NASA has a continuing need to own aircraft to provide passenger transportation in support of mission requirements in accordance with OMB guidance. Maximize the use of flexible, cost-effective arrangements to meet mission-required passenger air transportation service needs in lieu of aircraft ownership. Revise existing policies and procedures used to determine if individual flights are justified to include use of up-to-date variable costs and limit commercial cost estimates to include airfare, in-transit salaries and fringe benefits, and other costs directly related to reasonable estimates of delays incurred in meeting commercial airline flight schedules in accordance with OMB and GSA guidance. Establish agencywide policies and procedures for identifying and recovering applicable costs associated with nonofficial personnel traveling using NASA passenger aircraft services on a reimbursable basis. In its written comments, the NASA Administrator concurred with our recommendations and set out several actions to address identified deficiencies. Specifically, he said NASA would review its policies and procedures related to aircraft management to ensure they are aligned with OMB requirements and conduct a comprehensive study of the agency’s passenger aircraft operations to be completed by October 31, 2005. These actions are consistent with the intent of our recommendations to NASA and if carried out fully and effectively will help address the deficiencies we found. If NASA's study referred to above is carried out effectively and fully considers the various matters discussed in this report, it should provide the Congress valuable information for deciding whether legislation may be needed on this matter. NASA’s comments on a draft of this report are reprinted in appendix II. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the report date. At that time, we will send copies of the report to interested congressional committees. We will also send copies of this report to the Office of Management and Budget and the General Services Administration. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions regarding this report, please contact me at (202) 512-7455 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To assess reasonableness of costs, use, and agency oversight and management of the National Aeronautics and Space Administration’s (NASA) passenger aircraft services, we met with officials of NASA’s Office of Infrastructure and Administration Aircraft Management Office and appropriate officials at the Johnson Space Center, Houston, Texas; Marshall Space Flight Center, Huntsville, Alabama; Kennedy Space Center, Cape Canaveral, Florida; Wallops Flight Facility, Wallops Island, Virginia; and Dryden Flight Research Center, Edwards, California. We reviewed aircraft utilization and management reports prepared by NASA and its contractor and aircraft operations budget/cost information, including annual Aviation Financial Reports for fiscal years 2003 and 2004, Annual Aviation Report: Aircraft Performance for fiscal years 2003 and 2004, and NASA’s 2004 Mission Management Aircraft Fleet Plan. At each center, we observed and assessed the process for managing passenger aircraft services and scheduling and justifying costs for individual flights. We also reviewed available documentation supporting the various cost-justification factors and multipliers NASA used to estimate the variable costs of using its passenger aircraft as well as the alternative costs of using commercial airline transportation. As part of our effort, we collected and compiled available flight-by-flight NASA passenger aircraft cost and usage data from NASA mission management aircraft request forms. These forms provided such descriptive data as dates and purpose for travel, itinerary, passengers, levels of approval, and cost justification for aircraft use. We asked for all documentation maintained at NASA centers for flights flown using NASA’s passenger aircraft services during fiscal years 2003 and 2004. We selected the most recently completed 2-year period because NASA’s regulations specify retaining source documents related to passenger aircraft usage for at least 2 years. While incomplete, we ultimately obtained some type of documentation indicating that NASA passenger aircraft services during this 2-year period included about 1,500 flights. However, because of the limited amount of supporting documentation available for several hundred flights, we included only 1,188 flights in our analysis. For example, we could not use any of the approximate 200 flights from the Dryden Flight Research Center in our analysis because few of the requested documents included all the required usage and cost data necessary for such an analysis. To independently verify the reliability and completeness of individual flight source documentation maintained at NASA centers, we compared the NASA-provided flight information with information on NASA aircraft flights maintained by the Federal Aviation Administration’s (FAA) Enhanced Traffic Management System and reconciled differences. Further, while not included in our analysis, we obtained documentation showing that 2 of NASA’s aircraft classified as program support aircraft were also used to provide passenger transportation, we did not attempt to determine if any of NASA’s other program support or research aircraft may have also been used to provide passenger transportation as part of this audit. Also, we did not review the effectiveness of safety or maintenance programs related to NASA’s passenger aircraft services. To analyze the relative costs of NASA’s passenger aircraft services compared to commercial airline costs, we relied primarily on available NASA cost data from NASA Aviation Financial Reports. We validated this data wherever feasible with comparable independent data sources including industry data. For example, we contacted the manufacturers of both types of passenger aircraft used by NASA to validate that the cost estimates used in our analysis were similar to the manufacturers’ cost metrics for operating those aircraft. We used fiscal year 2003 and 2004 cost data in annual Aviation Financial Reports reported by each center that operated one or more of NASA’s passenger aircraft and the costs NASA incurred for chartering passenger aircraft from other government agencies or contractors. At one center where reported cost data for passenger aircraft in the Aviation Financial Report were combined with data for other agency aircraft, we used annual budget data that were limited to passenger aircraft operations. At NASA headquarters, we used annual cost data provided by NASA because their annual Aviation Financial Reports did not contain costs associated with NASA’s use of Federal Aviation Administration aircraft. Finally, costs from NASA’s Report on the Fractional Aircraft Demonstration Program were used to determine the total cost of Flexjet flights. We used NASA Mission Management Aircraft Request forms to determine the estimated cost for flights taken on Department of Defense (DOD) aircraft. We then compared reported costs of NASA aircraft operations and aircraft charter costs with our estimates of travel costs that NASA would have incurred had the passengers who flew on NASA’s aircraft during our 2-year test period used commercial airline transportation instead. To estimate the commercial transportation costs of NASA employees who traveled using NASA’s passenger aircraft, we used the average commercial airline round-trip fare of $426 for all flights flown by NASA employees during this same time period as reported in a database of travel card transactions for NASA provided by NASA’s contractor, Bank of America. This average commercial round-trip air fare estimate is intended to approximate NASA’s passenger transportation costs if it had used commercial airline services instead of its own services. As such, it may reflect amounts that in some cases would exceed NASA’s actual commercial costs. For example, to the extent to which unofficial travelers were included in estimates of passengers, commercial costs would be overstated. Conversely, in other cases our estimate may have underestimated NASA’s costs. For example, costs may have been understated to the extent that such travel involved passenger aircraft services to remote locations or locations with limited commercial air service. To determine the number of travelers who flew on NASA-owned and -chartered aircraft during the 2-year period, we used the number of passengers identified on individual hard-copy flight manifest documentation NASA provided to us. During the course of our review, we became aware of additional flights flown at some centers for which we were not provided flight manifest documentation. However, we were unable to obtain and analyze documentation for these additional flights in time to complete our analysis. To the extent that the number of passengers on flights for which individual flight documentation was not provided to us, the estimate of commercial airfare costs is understated. At the Dryden Flight Research Center, where individual hard-copy flight documentation did not contain complete information, we used the number of passengers the center reported to NASA headquarters for inclusion in annual aircraft performance reports. We did not use the numbers of passengers reported for all centers because the centers reported their passenger counts inconsistently and we were unable to validate them. Although the number of passengers reported on individual flight manifests often included passengers who flew only one way or on one or more legs of the trip, we counted these partial-trip passengers as having flown round-trip for purposes of estimating the commercial costs of passengers flown on NASA’s aircraft. Consequently, in this respect, our estimated savings are likely to be understated in that including these partial-trip passengers in the total number of passengers overstated our estimate of airfare costs that NASA would have incurred had the passengers traveled on commercial airlines. Conversely, our estimated savings may be overstated because our estimated commercial travel costs did not include additional lodging and other incidental costs that travelers would periodically incur and salary costs for additional lost work time. To estimate the lost work time associated with commercial airline travel, including salary and benefit costs, per diem, rental cars, commercial tickets, and other costs, we utilized cost estimates included in NASA individual flight request forms. For the 1,188 flights for which we received data, we used NASA’s estimates for salary costs multiplied by lost work hours, number of travelers, and NASA’s benefit factor of .5. Because accounting for fringe benefit costs was recognized in OMB guidance, while unsupported, we used NASA’s estimated fringe benefits factor of .5 to increase passengers’ salary costs. In addition to salary costs, we also included available NASA estimates for additional per diem, commercial tickets, rental cars, and other travel costs associated with lost work time from using commercial airline services. For one aircraft, we did not receive any flight justification cost estimates. Instead, the location operating the aircraft had developed standard calculations for the average commercial cost for their two common flight patterns. We averaged the estimated commercial cost for the two flight patterns to determine the average cost savings per traveler for the aircraft. We then multiplied the commercial cost by the number of travelers NASA reported for the aircraft during fiscal years 2003 and 2004 to determine the total commercial cost of transportation for travelers on the aircraft. To assess whether NASA aircraft were operated and retained in accordance with applicable governmentwide guidance, we primarily reviewed the Office of Management and Budget (OMB) Circular No. A-126, Improving the Management and Use of Government Aircraft; and Circular No. A-76 (Revised), Performance of Commercial Activities. We also reviewed applicable governmentwide guidance in OMB Circular No. A-11, Preparation, Submission and Execution of the Budget Part 7: Planning, Budgeting, Acquisition and Management of Capital Assets (Revised June 2005); General Services Administration’s (GSA) Federal Property Management Regulations, 41 C.F.R. Subtitle C; and Federal Travel Regulations, 41 C.F.R. Subtitle F. We also reviewed NASA’s implementing publications, NASA Policy Directive (NPD) 7900.4B, NASA Aircraft Operations Management (April 2004); NASA Policy Regulation (NPR) 7900.3A, Aircraft Operations Management (April 1999); and center- specific implementing instructions. We held discussions regarding these policies and procedures with officials of OMB’s Office of Federal Procurement Policy, Transportation/GSA Branch, and Science and Space Branch; GSA’s Office of Government-wide Policy; and NASA’s Office of General Counsel and NASA Center and program managers. At each center, while we observed the process for managing aircraft operations and scheduling and justifying individual flights, we interviewed managers and program officials to discuss the importance to which they assessed the need and justification for owning/leasing passenger aircraft. We analyzed the purpose cited by NASA for individual flights flown during our 2-year test period to determine whether NASA’s stated purpose complied with criteria established in OMB and GSA guidance. We interviewed agency personnel who requested, approved, and/or were passengers on approximately 80 flights during our 2-year test period to ensure that we understood the purpose for the flights and the basis for utilizing NASA’s aircraft. We did not assess the adequacy of safety or maintenance programs related to NASA’s passenger aircraft. Further, we did not attempt to determine the validity or appropriateness of travel using NASA’s passenger aircraft, nor did we assess if the type and number of personnel on the NASA passenger aircraft were appropriate given the stated flight purposes. To assess the effectiveness of NASA’s oversight and management of its passenger aircraft operations, we held discussions with appropriate aircraft management officials at NASA headquarters and centers operating passenger aircraft. We also identified and assessed (1) NASA’s implementing policies and procedures with respect to OMB and GSA policy guidance, (2) the process used to approve and document passenger aircraft utilization, (3) associated aircraft management reports, (4) other recent assessments and studies done with respect to NASA passenger aircraft services, and (5) the extent to which accurate, current agencywide data were available to agency managers for day-to-day decision making on passenger aircraft usage and costs. We briefed NASA officials on the details of our audit, including findings and their implications. On June 28, 2005, we requested comments on a draft on this report. We received comments on July 28, 2005, and have summarized those comments in the Agency Comments and Our Evaluation section of this report. NASA’s comments are reprinted in appendix II. We conducted our work from November 2004 through June 2005 in accordance with U.S. generally accepted government auditing standards and quality standards for investigations as set forth by the President’s Council on Integrity and Efficiency. In addition to the contact named above, Mario L. Artesiano, James D. Berry, Fannie M. Bivins, Latasha L. Brown, Matthew S. Brown, Harold J. Brumm, Carey L. Downs, Richard T. Cambosos, Francine M. Delvechio, Francis L. Dymond, Dennis B. Fauber, Geoffrey B. Frank, Diane G. Handley, Alison A. Heafitz, Christine A. Hodakievic, Jason M. Kelly, Jonathan T. Meyer, George J. Ogilvie, James W. Pittrizzi, Kristen M. Plungas, John J. Ryan, Sidney H. Schwartz, Joan K. Vogel, and Leonard E. Zapata also made key contributions.

Since its creation, the National Aeronautics and Space Administration (NASA) has operated passenger aircraft services. These operations have been questioned in several prior audit reports. GAO was asked to perform a series of audits of NASA's controls to prevent fraud, waste, and abuse of taxpayer dollars. In this audit, GAO assessed (1) the relative cost of NASA passenger aircraft services in comparison with commercial costs, (2) whether NASA aircraft services were retained and operated in accordance with governmentwide guidance, and (3) the effectiveness of NASA's oversight and management of this program. NASA-owned and -chartered passenger aircraft services provide a perquisite to employees, but cost taxpayers an estimated five times more than flying on commercial airlines. While the majority of NASA air travel is on commercial airlines, NASA employees took at least 1,188 flights using NASA passenger aircraft services during fiscal years 2003 and 2004. Use of NASA passenger aircraft services can save time, provide more flexibility to meet senior executives' schedules, and provide other less tangible and quantifiable benefits. However, GAO's analysis of available reported data related to NASA passenger aircraft services during fiscal years 2003 and 2004 showed NASA reported costs were nearly $25 million compared with estimated commercial airline coach transportation costs of about $5 million. Further, this relative cost comparison, based on available NASA reported costs, did not take into account all applicable types of costs associated with its passenger aircraft services, including, for example, depreciation associated with the estimated $14 million NASA paid in 2001 to acquire several aircraft used for passenger transportation. Consequently, NASA's passenger air transportation services are much more costly than indicated by available data. Further, NASA is currently considering additional expenditures of about $77 million to upgrade and expand its existing passenger fleet. NASA's ownership of aircraft used to provide passenger transportation conflicts with federal policy allowing agencies to own aircraft only as needed to meet specified mission requirements, such as prisoner transportation and aeronautical research. GAO's analysis of NASA passenger aircraft flights for fiscal years 2003 and 2004 showed that an estimated 86 percent--about seven out of every eight flights--were taken to support routine business operations specifically prohibited by federal policy regarding aircraft ownership, including routine site visits, meetings, speeches, and conferences. Further, agencywide oversight and management of its passenger aircraft services was not effective. NASA's ability to make informed decisions on continued ownership of its passenger aircraft fleet and on flight-by-flight justifications was impaired by the lack of reliable agencywide data on aircraft costs and other weak management oversight practices.

You are an expert at summarizing long articles. Proceed to summarize the following text: Fiscal sustainability presents a national challenge shared by all levels of government. The federal government and state and local governments share in the responsibility of fulfilling important national goals, and these subnational governments rely on the federal government for a significant portion of their revenues. To provide Congress and the public with a broader perspective on our nation’s fiscal outlook, we developed a fiscal model of the state and local sector. This model enables us to simulate fiscal outcomes for the entire state and local government sector in the aggregate for several decades into the future. Our state and local fiscal model projects the level of receipts and expenditures for the sector in future years based on current and historical spending and revenue patterns. This model complements GAO’s long-term fiscal simulations of federal deficits and debt levels under varying policy assumptions. We have published long-term federal fiscal simulations since 1992. We first published the findings from our state and local fiscal model in 2007. Our model shows that the state and local government sector faces growing fiscal challenges. The model includes a measure of fiscal balance for the state and local government sector for each year until 2050. The operating balance net of funds for capital expenditures is a measure of the ability of the sector to cover its current expenditures out of current receipts. The operating balance measure has historically been positive most of the time, ranging from about zero to about 1 percent of gross domestic product (GDP). Thus, the sector usually has been able to cover its current expenses with incoming receipts. Our January 2008 report showed that this measure of fiscal balance was likely to remain within the historical range in the next few years, but would begin to decline thereafter and fall below the historical range within a decade. That is, the model suggested the state and local government sector would face increasing fiscal stress in just a few years. We recently updated the model to incorporate current data available as of August 2008. As shown in Figure 1, these more recent results show that the sector has begun to head out of balance. These results suggest that the sector is currently in an operating deficit. Our simulations show an operating balance measure well below the historical range and continuing to fall throughout the remainder of the simulation timeframe. Since most state and local governments are required to balance their operating budgets, the declining fiscal conditions shown in our simulations suggest the fiscal pressures the sector faces and are a foreshadowing of the extent to which these governments will need to make substantial policy changes to avoid growing fiscal imbalances. That is, absent policy changes, state and local governments would face an increasing gap between receipts and expenditures in the coming years. One way of measuring the long-term challenges faced by the state and local sector is through a measure known as the “fiscal gap.” The fiscal gap is an estimate of the action needed today and maintained for each and every year to achieve fiscal balance over a certain period. We measured the gap as the amount of spending reduction or tax increase needed to maintain debt as a share of GDP at or below today’s ratio. As shown in figure 2, we calculated that closing the fiscal gap would require action today equal to a 7.6 percent reduction in state and local government current expenditures. Closing the fiscal gap through revenue increases would require action of the same magnitude to increase state and local tax receipts. Growth in health-related costs serves as the primary driver of the fiscal challenges facing the state and local sector over the long term. Medicaid is a key component of their health-related costs. CBO’s projections show federal Medicaid grants to states per recipient rising substantially more than GDP per capita in the coming years. Since Medicaid is a federal and state program with federal Medicaid grants based on a matching formula, these estimates indicate that expenditures for Medicaid by state governments will rise quickly as well. We also estimated future expenditures for health insurance for state and local employees and retirees. Specifically, we assumed that the excess cost factor—the growth in these health care costs per capita above GDP per capita—will average 2.0 percentage points per year through 2035 and then begin to decline, reaching 1.0 percent by 2050. The result is a rapidly growing burden from health-related activities in state and local budgets. Our simulations show that other types of state and local government expenditures—such as wages and salaries of state and local workers, pension contributions, and investments in infrastructure—are expected to grow slightly less than GDP. At the same time, most revenue growth is expected to be approximately flat as a percentage of GDP. The projected rise in health- related costs is the root of the long-term fiscal difficulties these simulations suggest will occur. Figure 3 shows our simulations for expenditure growth for state and local government health-related and other expenditures. On the receipt side, our model suggests that most of these tax receipts will show modest growth in the future—and some are projected to experience a modest decline—relative to GDP. We found that state personal income taxes show a small rise relative to GDP in coming years. This likely reflects that some state governments have a small degree of progressivity in their income tax structures. Sales taxes of the sector are expected to experience a slight decline as a percentage of GDP in the coming years, reflecting trends in the sector’s tax base. While historical data indicate that property taxes—which are mostly levied by local governments—could rise slightly as a share of GDP in the future, recent events in the housing market suggest that the long-term outlook for property tax revenue could also shift downward. These differential tax growth projections indicate that any given jurisdiction’s tax revenue prospects are uniquely tied to the composition of taxes it imposes. The only source of revenue expected to grow rapidly under current policy is federal grants to state governments for Medicaid. That is, we assume that current policy remains in place and the shares of Medicaid expenditures borne by the federal government and the states remain unchanged. Since Medicaid is a matching formula grant program, the projected escalation in federal Medicaid grants simply reflects expected increased Medicaid expenditures that will be shared by state governments. These long-term simulations do not attempt to assume how recent actions to stabilize the financial system and economy will be incorporated into the federal budget estimates in January 2009. The outlook presented by our state and local model is exacerbated by current economic conditions. During economic downturns, states can experience difficulties financing programs such as Medicaid. Economic downturns result in rising unemployment, which can lead to increases in the number of individuals who are eligible for Medicaid coverage, and in declining tax revenues, which can lead to less available revenue with which to fund coverage of additional enrollees. For example, during the most recent period of economic downturn prior to 2008, Medicaid enrollment rose 8.6 percent between 2001 and 2002, which was largely attributed to states’ increases in unemployment. During this same time period, state tax revenues fell 7.5 percent. According to the Kaiser Commission on Medicaid and the Uninsured, in 2008, most states have made policy changes aimed at controlling Medicaid costs. Recognizing the complex combination of factors affecting states during economic downturns—increased unemployment, declining state revenues, and increased downturn-related Medicaid costs—this Committee and several others asked us to assist them as they considered a legislative response that would help states cope with Medicaid cost increases. In response to this request, our 2006 report on Medicaid and economic downturns explored the design considerations and possible effects of targeting supplemental assistance to states when they are most affected by a downturn. We constructed a simulation model that adjusts the amount of funding a state could receive on the basis of each state’s percentage increase in unemployment and per person spending on Medicaid services. Such a supplemental assistance strategy would leave the existing Medicaid formula unchanged and add a new, separate assistance formula that would operate only during times of economic downturn and use variables and a distribution mechanism that differ from those used for calculating matching rates. This concept is embodied in the health reform plan released by Chairman Baucus last week. Using data from the past three recessions, we simulated the provision of such targeted supplemental assistance to states. To determine the amount of supplemental federal assistance needed to help states address increased Medicaid expenditures during a downturn, we relied on research that estimated a relationship between changes in unemployment and changes in Medicaid spending. Our model incorporated a retrospective assessment which involved assessing the increase in each state’s unemployment rate for a particular quarter compared to the same quarter of the previous year. Our simulation included an economic trigger turned on when 23 or more states had an increase in the unemployment rate of 10 percent or more compared to the unemployment rate that existed for the same quarter 1 year earlier (such as a given state’s unemployment rate increasing from 5 percent to 5.5 percent). We chose these two threshold values—23 or more states and increased unemployment of 10 percent or more—to work in tandem to ensure that the national economy had entered a downturn and that the majority of states were not yet in recovery from the downturn. These parameters were based on our quantitative analysis of prior recessions. As shown in figure 4, for the 1990-1991 downturn, 6 quarters of assistance would have been provided beginning with the third quarter of 1991 and ending after the fourth quarter of 1992. Analysis of recent unemployment data indicate that such a strategy would already be triggered based on changes in unemployment for 2007 and 2008. In other words, current data confirm the economic pressures currently facing the states. Considerations involved in such a strategy include: Timing assistance so that it is delivered as soon as it is needed, Targeting assistance according to the extent of each state’s downturn, Temporarily increasing federal funding so that it turns off when states’ economic circumstances sufficiently improve, and Triggering so the starting and ending points of assistance respond to indicators of states’ economic distress. Any potential legislative response would need to be considered within the context of broader health care and fiscal challenges—including continually rising health care costs, a growing elderly population, and Medicare and Medicaid’s increasing share of the federal budget. Additional criteria could be established to accomplish other policy objectives, such as controlling federal spending by limiting the number of quarters of payments or stopping payments after predetermined spending caps are reached. The federal government depends on states and localities to provide critical services including health care for low-income populations. States and localities depend on the federal government to help fund these services. As the largest share of federal grant funding and a large and growing share of state budgets, Medicaid is a critical component of this intergovernmental partnership. The long-term structural fiscal challenges facing the state and local sector further complicate the provision of Medicaid services. These challenges are exacerbated during periods of economic downturn when increased unemployment leads to increased eligibility for the Medicaid program. The current economic downturn presents additional challenges as states struggle to meet the needs of eligible residents in the midst of a credit crisis. Our work on the long-term fiscal outlook for state and local governments and strategies for providing Medicaid-related fiscal assistance is intended to offer the Committee a useful starting point for considering strategic evidence-based approaches to addressing these daunting intergovernmental fiscal issues. For information about this statement for the record, please contact Stanley J. Czerwinski, 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 and related products include: Kathryn G. Allen, Director, Quality and Continuous Improvement; Thomas J. McCool, Director, Center for Economics; Amy Abramowitz, Meghana Acharya, Romonda McKinney Bumpus, Robert Dinkelmeyer, Greg Dybalski, Nancy Fasciano, Jerry Fastrup, Carol Henn, Richard Krashevski, Summer Lingard, James McTigue, Donna Miller, Elizabeth T. Morrison, Michelle Sager, Michael Springer, Jeremy Schwartz, Melissa Wolf, and Carolyn L. Yocom. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

GAO was asked to provide its views on projected trends in health care costs and their effect on the long-term outlook for state and local governments in the context of the current economic environment. This statement addresses three key points: (1) the state and local government sector's long-term fiscal challenges; (2) rapidly rising health care costs which drive the sector's long-term fiscal difficulties, and (3) the considerations involved in targeting supplemental funds to states through the Medicaid program during economic downturns. To provide Congress and the public with a broader perspective on our nation's fiscal outlook, GAO previously developed a fiscal model of the state and local sector. This model enables GAO to simulate fiscal outcomes for the sector in the aggregate for several decades into the future. GAO first published the findings from the state and local fiscal model in 2007. This statement includes August 2008 data to update the simulations. This Committee and others also asked GAO to analyze strategies to help states address increased Medicaid expenditures during economic downturns. GAO simulated the provision of such supplemental assistance to states. As we previously reported, the simulation model adjusts the amount of funding states would receive based on changes in unemployment and spending on Medicaid services. Rapidly rising health care costs are not simply a federal budget problem. Growth in health-related spending also drives the fiscal challenges facing state and local governments. The magnitude of these challenges presents long-term sustainability challenges for all levels of government. The current financial sector turmoil and broader economic conditions add to fiscal and budgetary challenges for these governments as they attempt to remain in balance. States and localities are facing increased demand for services during a period of declining revenues and reduced access to capital. In the midst of these challenges, the federal government continues to rely on this sector for delivery of services such as Medicaid, the joint federal-state health care financing program for certain categories of low-income individuals. Our model shows that in the aggregate the state and local government sector faces growing fiscal challenges. Incorporation of August 2008 data shows that the position of the sector has worsened since our January 2008 report. The long-term outlook presented by our state and local model is exacerbated by current economic conditions. During economic downturns, states can experience difficulties financing programs such as Medicaid. Downturns result in rising unemployment, which can increase the number of individuals eligible for Medicaid, and declining tax revenues, which can decrease revenue available to fund coverage of additional enrollees. GAO's simulation model to help states respond to these circumstances is based on assumptions under which the existing Medicaid formula would remain unchanged and add a new, separate assistance formula that would operate only during times of economic downturn. Considerations involved in such a strategy could include: (1) timing assistance so that it is delivered as soon as it is needed, (2) targeting assistance according to the extent of each state's downturn, (3) temporarily increasing federal funding so that it turns off when states' economic circumstances sufficiently improve, and (4) triggering so the starting and ending points of assistance respond to indicators of economic distress.

You are an expert at summarizing long articles. Proceed to summarize the following text: In implementing decimal pricing, regulators hoped to improve the quality of U.S. stock and option markets. The quality of a market can be assessed using various characteristics, but the trading costs that investors incur when they execute orders are a key aspect of market quality. Trading costs are generally measured differently for retail and institutional investors. In addition to the commission charges to paid broker-dealers that execute trades, the other primary trading cost for retail investors, who typically trade no more than a few hundred shares at a time, is measured by the spread, which is the difference between the best quoted “bid” and “ask” prices that prevail at the time the order is executed. The bid price is the best price at which market participants are willing to buy shares, and the ask price is the best price at which market participants are willing to sell shares. The spread represents the cost of trading for small orders because if an investor buys shares at the ask price and then immediately sells them at the bid price, the resulting loss or cost is represented by the size of the spread. Because institutional orders are generally much larger than retail orders and completing one order can require multiple trades executed at varying prices, spreads are not generally used to measure institutional investors’ trading costs. Instead, the components of trading costs for large institutional investors, who often seek to buy or sell large blocks of shares such as 50,000 or 1 million shares, include the order’s market impact, broker commissions paid, and exchange fees incurred, among other things. An order’s market impact is the extent to which the security changes in price after the investor begins trading. For example, if the price of a stock begins to rise in reaction to the increased demand after an investor begins executing trades to complete a large order, the average price at which the investor’s total order is executed will be higher than the stock’s price would have been without the order. In addition to trading costs, decimal pricing may have affected several other aspects of market quality, including liquidity, transparency, and price volatility. Liquidity. Liquid markets have many buyers and sellers willing to trade and have sufficient shares to execute trades quickly without markedly affecting share prices. Generally, the more liquid the overall market or markets for particular stocks are, the lower the market impact of any individual orders. Small orders for very liquid stocks will have minimal market impact and lower trading costs. However, larger orders, particularly for less liquid stocks, can affect prices more and thus have greater market impact and higher trading costs. Transparency. When markets are transparent, the number and prices of available shares are readily disclosed to all market participants, and prices and volumes of executed trades are promptly disseminated. A key factor that can affect market participants’ perceptions of market transparency is the volume of shares publicly displayed as available at the best quoted bid and ask prices, as well as at points around these prices—known as market depth. Markets with small numbers of shares displayed in comparison to the size of investors’ typical orders seem less transparent to investors because they have less information that can help them specify the price and size of their own orders so as to execute trades with minimal trading costs. Price volatility. Price volatility is a measure of the frequency of price changes as well as a measure of the amount by which prices change over a period of time. Highly volatile markets typically disadvantage investors that execute trades with less certainty of the prices they will receive. Conversely, market intermediaries, such as broker-dealers, can benefit from highly volatile markets because they may be able to earn more revenue from trading more frequently as prices rise and fall. The trading that occurs on U.S. securities markets is facilitated by broker- dealers that act as market intermediaries. These intermediaries perform different functions depending on the type of trading that occurs in each market. On markets that use centrally located trading floors to conduct trading, such as the New York Stock Exchange (NYSE), trading occurs primarily through certain broker-dealer firms that have been designated as specialists for particular stocks. These specialists are obligated to maintain fair and orderly markets by buying shares from or selling shares to the other broker-dealers who present orders from customers on the trading floor or through the electronic order routing systems used by the exchange. Interacting with the specialists on the trading floor are employees from large broker-dealer firms that receive orders routed from these firms’ offices around the country. In addition, specialists receive orders from staff from small, independent broker-dealer firms who work only on the floor. In contrast, trading of the stocks listed on the NASDAQ Stock Market (NASDAQ), which does not have a central physical trading location, is conducted through electronic systems operated by broker-dealers acting as market makers or by alternative trading venues. For particular stocks, market makers enter quotes indicating the prices at which these firms are simultaneously willing to buy from or sell shares to other broker-dealers into NASDAQ’s electronic system. The NASDAQ system displays these quotes to all other broker-dealers that are registered to trade on that market. Much of the trading in NASDAQ stocks now also takes place in alternative trading venues, including electronic communication networks (ECN), which are registered as broker-dealers and electronically match the orders they receive from their customers, much like an exchange. At the same time that decimal pricing was being implemented, other changes were also occurring in the marketplace. For example, in 1997, SEC enacted new rules regarding how market makers and specialists must handle the orders they received from their customers, including requiring firms to display these orders to the market when their prices are better than those currently offered by that broker. These rules facilitated the growth of additional trading venues such as the ECNs, which compete with the established markets, such as NYSE and NASDAQ, for trading volumes. The increased use of computerized trading has also provided alternative mechanisms for trading and reduced the role of specialists, market makers, and other intermediaries in the trading process. In addition, after rising significantly during the late 1990s, U.S. stock prices experienced several years of declines, affecting trading costs and market intermediary profits. Facing lower investment returns, institutional investors and professional traders have focused more on reducing trading costs to improve those returns. Regulators also began placing greater emphasis on institutional investors’ duty to obtain the best execution for their trades, further increasing the pressure on these firms to better manage their trading costs. Trading costs for both retail and institutional investors fell after the implementation of decimal pricing and the corresponding reduction in tick size. While decimalization appears to have helped to lower these costs, other factors—such as the multiyear downturn in stock prices—also likely contributed to these cost reductions. Although trading costs and other market quality measures improved after decimal pricing’s implementation, another measure—the transparency of U.S. stock markets—declined following the reduction in tick size in 2001 because fewer shares were displayed as available for trading. However, most market participants we interviewed reported they have been able to continue to execute large orders by using electronic trading tools to submit a larger volume of smaller orders and making greater use of alternative trading venues. In ordering U.S. markets to convert to decimal pricing, SEC had several goals. These included making securities pricing easier for investors to understand and aligning U.S. markets’ pricing conventions with those of foreign securities markets. Decimalization appears to have succeeded in meeting these goals. In addition, SEC hoped that decimal pricing would result in lower investor trading costs, as lower tick sizes would spur competition that would lead to reduced spreads. Narrower spreads benefit retail investors because retail size orders generally execute in one trade at one price. Prior to being ordered to implement decimal pricing, U.S. stock markets had voluntarily reduced their minimum ticks from 1/8 to 1/16 of a dollar, and studies of these actions found that spreads declined as a result. Following decimalization and the implementation of the 1-cent tick in 2001, retail investor trading costs declined further as spreads were narrowed even more substantially. To analyze the effects of decimal pricing, we selected a sample of 300 pairs of NYSE-listed and NASDAQ stocks with similar characteristics (like share price and trading activity). We examined several weeks before and after the implementation of decimal pricing and found that spreads declined after decimal prices were implemented and remained low through 2004. Our study considered 12 weeklong sample periods from February 2000 to January 2001 (our predecimalization period) and 12 weeklong sample periods from April 2001 through November 2004 (our postdecimalization period). As shown in figure 1, quoted spreads continued a steady decline on both NYSE and NASDAQ following the implementation of decimal pricing, falling to levels well below those that existed before the conversion to decimal pricing. Our analysis of the TAQ data also found that quoted spreads declined for stocks with varying levels of trading volume. As shown in table 1, quoted spreads declined significantly after decimal pricing began for the most actively traded stocks, those with medium levels of trading volume, and also for those with the lowest amount of daily trading activity, with the average quoted spread falling 73 percent for NYSE stocks and 68 percent for NASDAQ stocks. While the quoted spread measure is useful for illustrative purposes, a better measure of the cost associated with the bid-ask spread is the effective spread, which is twice the difference between the price at which an investor’s trade is executed and the midpoint between the quoted bid and ask prices that prevailed at the time the order was executed. Thus, the effective spread measures the actual costs of trades occurring rather than just the difference between the best quoted prices at the time of the trade. As shown in table 2, effective spreads declined by 62 percent for our NYSE sample stocks and 59 percent for our NASDAQ sample stocks between the periods after decimal pricing was implemented. In addition, several academic and industry studies found similar results. For example, one academic study examined differences in trade execution cost and market quality measures in 300 NYSE stocks and 300 NASDAQ stocks (matched on market capitalization) for several weeks before decimal pricing was fully implemented on NYSE stocks and after both markets converted to decimal pricing. As shown in table 3, the study found that average effective spreads declined by 41 percent for the NYSE stocks and by 54 percent for the NASDAQ stocks from the predecimalization sample period (January 8–26, 2001) to the postdecimalization sample period (April 9–August 31, 2001). As the table also shows, the study found that spreads declined the most for NYSE stocks with the largest market capitalizations and for NASDAQ stocks with the smallest market capitalizations. Similar declines in spreads were also reported in studies that SEC required the various markets to conduct as part of its order directing them to implement decimal pricing. For example, in its impact study, NYSE reported that share-weighted average effective spreads declined 43 percent for all 2,466 NYSE-listed securities trading in the pre- and postdecimalization sample periods the exchange selected. NASDAQ’s study found that effective spreads declined between its sample periods by an average of 46 percent for the 4,766 NASDAQ securities that converted to penny increments on April 9, 2001. In addition, an official at a major U.S. stock market told us that all the research studies that he reviewed on the impact of decimal pricing concluded that spreads narrowed overall in response to the reduction in tick size. Many market participants we interviewed also indicated that retail investors benefited from the narrower spreads that followed decimalization and the adoption of 1-cent ticks. For example, a representative of a firm that analyzes trading activities of large investors told us that investors trading 100 shares are better off following decimalization because small trades can be executed at the now lower best quoted prices. Representatives from two broker-dealers stated that the narrower spreads that prevailed following decimalization meant that more money stayed with the buyers and sellers of stock rather than going to market intermediaries such as brokers-dealers and market makers. Furthermore, the chief financial officer of a small broker-dealer told us that retail investors had benefited from the adoption of the 1-cent tick because their orders can generally be executed with one transaction at a single price unlike those of institutional investors, which are typically larger than the number of shares displayed as available at the best prices. Analysis of the multiple sources of data that we collected generally indicated that institutional investors’ trading costs had declined since decimal prices were implemented. We obtained data from three leading firms that collect and analyze information about institutional investors’ trading costs. These trade analytics firms (Abel/Noser, Elkins/McSherry, and Plexus Group) obtain trade data directly from institutional investors and brokerage firms and then calculate trading costs, including market impact costs, typically for the purpose of helping investors and traders limit costs of trading. These firms also aggregate client data in order to approximate total average trading costs for all their institutional investor clients. Generally, the client base represented in these firms’ aggregate trade cost data is broad enough to be sufficiently representative of all institutional investors. For example, officials at one firm told us that its data captured 80 to 90 percent of all institutional investors and covers trading for every stock listed on the major U.S. stock markets. An official of a major U.S. stock market told us that these firms are well regarded and that their information is particularly informative because these firms measure costs from the point the customer makes the decision to trade by using the price at which stocks are trading at that time, which is data that exchanges and markets generally do not have. Although these firms use different methodologies, their data uniformly showed that costs had declined since decimal pricing was implemented. Our analysis of data from the Plexus Group showed that costs declined on both NYSE and NASDAQ in the 2 years after these markets converted to decimal pricing. Plexus Group analyzes various components of institutional investor trading costs, including the market impact of investors’ trading. Total trading costs declined by about 53 percent for NYSE stocks, falling from about 33 cents per share in early 2001 to about 15.5 cents (fig. 2). For NASDAQ stocks, the decline was about 44 percent, from about 25.7 cents to about 14.4 cents. The decline in trading costs, shown in figure 2, began before both markets implemented decimal pricing, indicating that causes other than decimal pricing were also affecting institutional investors’ trading during this period. An official from a trade analytics firm told us that the spike in costs that preceded the decimalization of NASDAQ stocks correlated to the pricing bubble that technology sector stocks experienced in the late 1990s and early 2000s. An official from another trade analytics firm explained that trading costs increased during this time because when some stocks’ prices would begin to rise, other investors—called momentum investors—would also begin making purchases and drive prices for these stocks up even faster. As a result, other investors faced greater than usual market impact costs when also trading these stocks. In general, trading during periods when stock prices are either rapidly rising or falling can make trading very costly. According to our analysis of the Plexus Group data, market impact and delays in submitting orders accounted for the majority of the decline in trading costs for NYSE stocks and NASDAQ stocks. Together, the reduction in these two cost components accounted for nearly 17 cents per share (or about 96 percent) out of a total decline of about 17.6 cents per share on NYSE. Delay costs declined about 11.2 cents per share in the 2 years following the implementation of decimal pricing and 1-cent ticks on NYSE and market impact costs declining by about 5.8 cents (fig. 3). An SEC economist noted that declines in delay costs may reflect increased efficiency on the part of institutional investors in trading rather than changes in the markets themselves. Figure 3 also shows that market impact and delay costs accounted for all declines to total NASDAQ trading costs. For example, market impact and delay costs declined about 14.1 cents per share between the second quarter of 2001 and the second quarter of 2003. However, at the same time that these cost components were improving, commission charges for NASDAQ stocks were rising. As shown in figure 3, commissions that market intermediaries charged for trading NASDAQ stocks increased about 2.8 cents per share from second quarter of 2001 to second quarter of 2003. Industry representatives told us these increases were the result of the broker-dealers that made markets in NASDAQ stocks transitioning from trading as a principal, in which a portion of the trade’s final price included some compensation for the market maker, to trading as an agent for the customer and charging an explicit commission. Analysis of data from the other two trade analytics firms from whom we obtained data, Elkins/McSherry and Abel/Noser, also indicated that institutional investor trading costs declined following the decimalization of U.S. stock markets in 2001. Because these two firms’ methodologies do not include measures of delay, which the Plexus Group data shows can be significant, analysis of data from these two firms results in trading cost declines of a lower magnitude than those indicated by the Plexus Group data analysis. Nevertheless, the data we analyzed from Elkins/McSherry showed total costs for NYSE stocks declined about 40 percent between the first quarter of 2001 and year-end 2004 from about 11.5 cents per share to about 6.9 cents per share. Analysis of Abel/Noser data indicated that total trading costs for NYSE stocks declined about 30 percent, from 6.9 cents per share to 4.8 cents per share between year-end 2000 and 2004 (fig. 4). Our analysis of these firms’ data also indicated that total trading costs declined for NASDAQ stocks, which appeared to have declined even more significantly than they did for NYSE stocks. For example, our analysis of the Elkins/McSherry data showed that total trading costs for NASDAQ stocks dropped by nearly 50 percent, from about 14.6 cents per share to about 7.4 cents per share, between the second quarter of 2001 when that market decimalized and the end of 2004. Analysis of the Abel/Noser data indicated that total trading costs declined about 46 percent for NASDAQ stocks between the end of 2000 and 2004, falling from 8.7 cents per share to 4.7 cents per share (fig. 5). As our analysis of the Plexus Group data showed, the Elkins/McSherry and Abel/Noser data also indicated that reductions to market impact costs accounted for a vast proportion of overall reductions for NYSE stocks (fig. 6). Analysis of the Elkins/McSherry data indicated that these costs declined by 3.7 cents per share, accounting for about 80 percent of the total fall in trading costs during this period. The 1.1 cent per share reduction in market impact costs identified in the Abel/Noser data represented over half of the total trading cost reductions of 2.1 cents per share for NYSE stocks. Reductions to market impact costs explained the entire decline to total trading costs captured by the Elkins/McSherry and Abel/Noser data for NASDAQ stocks, and the total declines would have been even larger had commissions for these stocks not increased after 2001. Market impact costs declined about 10.6 cents per share (about 78 percent) according to our analysis of the Elkins/McSherry data, and 6.7 cents per share (about 87 percent) according to our analysis of the Abel/Noser data (fig. 7). However, during this period, commissions charged on NASDAQ stock trades included in these firms’ data increased by more than 3 cents per share, representing a more than threefold increase in commissions as measured by Elkins/McSherry and a more than sixfold rise according to Abel/Noser. Data from a fourth firm, ITG, which recently began measuring institutional trading costs, also indicates that such costs have declined. This firm began collecting data from its institutional clients in January 2003. Like the other trade analytics firms, its data is similarly broad based, representing about 100 large institutional investors and about $2 trillion worth of U.S. stock trades. ITG’s measure of institutional investor trading cost is solely composed of market impact costs and does not include explicit costs, such as commissions and fees, in its calculations. Although changes in ITG’s client base for its trade cost analysis service prevented direct period to period comparisons, an ITG official told us that its institutional investor clients’ trading costs have been trending lower since 2003. In attempting to identify all relevant research relating to the impact of decimal pricing on institutional investors, we found 15 academic studies that discussed the impact of decimalization but only 3 that specifically examined institutional investors’ trading costs. As of May 2005, none of these three studies had been published in an academic journal. Two of these studies used direct measures of trading costs, and the other used an indirect measure. Those that relied on more direct measures of these costs found that these costs had declined since the implementation of decimal pricing and 1-cent ticks. The first of these studies analyzed more than 80,000 orders in over 1,600 NYSE-listed stocks that were traded by 32 institutional investors. To measure the change in trading costs after decimal pricing was implemented, this study used data from one of the leading trade analytics firms and computed trading costs over the period from November 28, 2000, to January 26, 2001 (before the change to decimal pricing), and the period from January 30 to March 31, 2001 (after decimal pricing). The study found that institutional trading costs appeared to have declined by about 5 cents per share (or about 11 percent), falling from 44 cents per share to 39 cents per share after NYSE switched to 1-cent ticks. The other study that used direct measures of institutional trading costs examined the trading of over 1,400 NASDAQ stocks. The author of this study obtained data on over 120,000 orders for NASDAQ stocks submitted by institutional investors, which allowed her to calculate the costs of trading orders of more than 9,999 shares before and after NASDAQ’s adoption of 1-cent ticks. Given the potentially large volume of order data, the author studied three sample periods, each consisting of 5 trading days: February 1 through 8, 2001 (before decimalization), and June 18 through 22 and November 26 through 30, 2001 (after decimalization). Trading costs in this study are measured as the difference between an order’s volume- weighted average execution price and a pre-execution benchmark price, the opening midquote (the midpoint between the quoted bid and ask prices). Using the opening midquote benchmark, the author found that average trading costs for orders of 10,000 shares and above fell about 19 cents per share (or about 49 percent), from about 39 cents per share to about 20 cents per share during the 9 months or so after NASDAQ’s adoption of 1-cent ticks. Unlike the other two studies we identified, the third study reported that costs for institutional investors had increased. However, this study relied on an indirect measure of these costs for its analysis. To assess the change in trading costs, the authors of this study examined a sample of 265 mutual funds chosen from a database of mutual funds compiled by Morningstar, an independent investment research firm. These firms were selected using two criteria—investing predominantly in U.S. stocks and having at least 90 percent of assets invested in stocks. However, the study did not obtain these mutual funds’ actual trading data but instead attempted to identify costs by comparing the funds’ daily returns (gain or loss from the prior day’s closing price) to the daily returns of a synthetic benchmark for the periods before and after decimalization, from April 17 through August 25, 2000, and from April 16 through August 24, 2001. After finding that the returns of actively managed mutual funds were generally lower than the returns of the benchmark in the period after decimals were introduced, the authors attributed the lower returns to increases in the trading costs for these funds. Although this is a plausible explanation for these funds’ lower returns, some of the market participants that we spoke with indicated that other factors could also account for the results. For example, officials from a large mutual fund company that had reviewed the study told us that the lower returns may have resulted from the 3-year decline in stock prices in the market. As the value of their assets decline, funds can report higher expenses because their fixed operating costs correspondingly represent a larger portion of a mutual fund’s total costs, which would reduce reported returns. In addition, an academic regarded as an expert in applying technology to the financial markets noted that the lower returns could be the result of many of the funds in the study’s sample having similar holdings that all performed more poorly than those in the benchmark portfolio in the months following decimalization. In addition to analyzing data from trade analytics firms and academic studies, we interviewed 23 institutional investors that represented nearly one-third of assets managed by a ranking of the 300 largest money managers. Representatives for 20 of these firms said that their trading costs had fallen or stayed about the same since decimals were implemented (table 4). As shown in table 4, fifteen of these firms said that their trading costs had declined since decimals were introduced. These firms included large mutual fund companies, pension fund administrators, a hedge fund, and smaller asset management firms, indicating that cost declines in our sample were not limited solely to just larger firms with greater trading resources. For example, a representative of a small money management firm not ranked as one of the 300 largest noted that trading costs had decreased since decimalization. In addition, the president of a hedge fund that was ranked in the lower half of the rankings told us that his firm’s trading costs had declined significantly since 2001. As shown in the table above, 5 of the 23 firms we interviewed said that their costs had remained about the same since decimal pricing was implemented. For example, representatives of one large mutual fund firm that measures its trading costs internally as well as through a trade analytics firm told us that their firm’s transaction costs had not increased since decimal pricing was introduced, but had trended down to flat. Three institutional investors reported higher trading costs. One of these firms, a large mutual fund manager, attributed the increases to heightened levels of volatility following the reduction in tick size. For example, in his view, stock prices tended to trade in a wider daily range since decimals were implemented than they had before. The other two firms included a mutual fund firm and a mid-size asset management firm, with officials from the mutual fund noting that trading had become more involved and that completing trades of similarly sized orders takes longer since the conversion to decimal pricing. In discussing institutional investors’ views on their trading costs since decimal pricing began, we found that the precision with which these firms measured their trading costs varied. Many firms told us that they used outside trade analytics firms, such as Abel/Noser, Elkins/McSherry, ITG, and Plexus Group, to measure their transaction costs. Representatives of some firms and a state pension plan administrator noted that their firms used trade cost analysis tools from more than one trade analytics firm. The head of trading for one firm said that his firm had been using a trade analytics firm to measure their trading costs for 10 years. Some firms said that they had developed in-house capabilities to measure their own transaction costs. These systems appeared to vary in their levels of sophistication. For example, representatives of a large money management firm told us that they had developed a sophisticated cost measurement system that shows them what a trade should cost before it is executed. The system takes into account factors such as the executing broker and the market venue where the trade executes. A managing partner of another firm noted that it measures costs of completed trades in-house, including the bid-ask spreads and the execution prices, and compares them to the volume-weighted average price for trades it executes. Some money managers told us that their firms did not measure their costs for trading. For example, officials from one firm said that while not formally measuring costs on their own, they sometimes were provided with data on the costs of their trades from their own clients who use trade analytics firms to evaluate the costs of using various money managers. Also, another state pension plan administrator told us that while his organization does not currently measure its trading costs, it plans to do so within the next 2 years. In addition to lower spreads and reduced market impact costs, some market participants noted that another measure of market quality—price volatility—had also improved since decimal pricing was implemented. According to some market participants, the smaller 1-cent ticks generally slowed price movement in the markets and narrowed the range of prices at which stocks trade over the course of time, such as a day. For example, a noted expert on market microstructure told us that price volatility has declined since the reduction in tick size because price changes occur in smaller increments. Our own study of NYSE and NASDAQ stocks using TAQ data showed that price volatility has declined since decimal pricing was implemented. To assess the change in volatility for the stocks in our sample, we calculated the percentage change in price for each one hour increment (between 10 a.m. and 4 p.m.) each trading day. We also calculated the percentage change in price for each stock that occurred between 10 a.m. and 4 p.m. For each stock, we also calculated the standard deviation of these percentage changes, which measures how widely the individual price changes are dispersed around the average change, and reported the median (that is the middle) standard deviation. As shown in table 5, the volatility of the price changes in the stocks in our sample decreased for both the hourly percentage change between 10 a.m. and 4 p.m. each trading day and the percentage change from 10 a.m. to 4 p.m. each trading day after decimal prices were implemented. These findings were in agreement with a recently published academic study. However, not all participants attributed the reduced price volatility to decimal pricing. For example, a representative of a trade analytics firm noted that with the Internet boom, investors increased their positions in technology-sector stocks in a hurry and when the prices of these stocks fell—which was coincident with the change to decimal pricing—investors quickly reversed their positions. By selling quickly, these investors incurred greater market impact costs. With the subsiding of this type of trading activity in ensuing years, markets have become calmer, which has made trading less costly. Although some major elements of market quality—trading costs and volatility—have improved since decimal pricing began, another market quality element—transparency—appears to have been negatively affected. The transparency of a market can depend on whether large numbers of shares are publicly quoted as available to buy or sell. The various sources of data we collected and analyzed indicated that after decimal pricing and the 1-cent tick were implemented in 2001, the volume of shares shown as available for sale—or displayed depth—on U.S. stock markets declined significantly. For example, studies required by SEC on the impact of decimal pricing on trading, among other things, on U.S. markets showed that the average number of shares displayed for trading on NYSE and NASDAQ at the best quoted prices declined by about two-thirds between a sample period before the markets converted to decimal pricing and a period soon after the conversion took place (table 6). In addition, our own study of 300 matched pairs of NYSE and NASDAQ stocks found that the liquidity at the best quoted prices declined significantly. According to our analysis, the average number of shares displayed at the best quoted prices fell by 60 percent on NYSE and 34 percent on NASDAQ over the nearly 5-year period between February 2000 and November 2004 (fig. 8). The greatest declines occurred around the time that the markets converted to decimal pricing and 1-cent ticks. In its impact study, NASDAQ attributed declines in the volume of shares displayed at the best prices to the conversion to decimal pricing. The amount of shares displayed as available for trading also declined at prices away from the best quoted prices. For example, the SEC-mandated NYSE impact study shows that the amount of shares displayed for trading within about a dollar of the midpoint between the best quoted prices generally declined to well under half of what it was when the tick size was 1/16 of a dollar. NASDAQ’s own impact study reported that the cumulative amount of shares displayed for trading declined by about 37 percent within a fixed distance equal to twice the size of the average quoted spread from the midpoint between the best quoted prices. This decline in the volume of shares displayed across all prices—called market depth—is particularly significant for institutional investors because they are often executing large orders over multiple price points that are sometimes inferior to the best quoted prices. Various reasons can explain the reduced number of shares displayed at the best prices. First, the amount of shares displayed for trading at the best price likely declined because the decrease in the minimum tick size created more prices at which orders could be displayed. The reduction in tick size increased the number of price points per dollar at which shares could be quoted from 16, under the previous minimum tick size of 1/16 of a dollar, to 100. With more price points available to enter orders, some traders that may have previously priced their orders in multiples of 1/16 to match the best quoted price may now instead be sending orders priced 1, 2, or 3 cents away from the best price, depending on their own trading strategy. As a result, the volume of shares displayed as available at the best price is lower as more shares are now distributed over nearby prices. In addition to fewer shares displayed at the best price, displayed market depth may also have declined because the reduction in tick size reduced incentives to large-order investors to display their trading interest. Since the implementation of penny ticks, market participants said that displaying large orders is less advantageous than before because other traders could now submit orders priced one penny better and execute these orders ahead of the larger orders. This trading strategy, called “penny jumping” or “stepping ahead,” harms institutional investors that display large orders and can increase their trading costs. For example, an investor wants to purchase a large quantity of shares of a stock (e.g., 15,000 shares) and submits an order to buy at a price of $10.00 (a limit order). Another trader, seeing this large trading interest, submits a smaller limit order (e.g., 100 shares) to buy the same stock at $10.01. This smaller order will be executed against the first market order (which are orders executed at the best price currently prevailing at the time they are presented for execution) that arrives. As a result, the investor’s larger order will go unexecuted until that investor cancels its existing order at $10.00 and resubmits it at a higher price. In this case, the investor’s trading costs increase due to price movements that occur in the process of completing a large order (i.e., market impact). The potential for stepping ahead has increased because in a 1-cent tick environment the financial risk to traders stepping ahead of larger displayed orders has been greatly reduced. For example, assume a trader who steps ahead of a larger order offering to buy shares at $10.00 by entering a limit order to buy 100 shares at a price of $10.01 is executed against an incoming market order. However, if the price of the stock appears to be ready to decline, such as when additional orders to sell are entered with prices lower than $10.00, the trader who previously stepped ahead can quickly enter an order to sell the 100 shares back to the large investor whose order is displayed at $10.00. In such situations, the trader’s loss is only one penny per share, whereas in the past, traders stepping ahead would have risked at least 1/16 of a dollar per share. Many market participants we spoke to acknowledged that institutional investors are reluctant to display large orders in the markets following the switch to 1-cent ticks for fear that competing traders would improve the best quoted prices by one penny and drive up prices to execute large orders. The potential that the reduced tick size would increase the prevalence of stepping ahead was acknowledged prior to decimal pricing’s implementation. For example, in 1997 a prominent academic researcher predicted that problems with stepping ahead would increase following decimalization because smaller price increments would make it easier (i.e., cheaper) for professional traders to step in front of displayed orders and that this would result in fewer shares being quoted and less transparency in the markets. However, some market participants we interviewed acknowledged that stepping ahead had been a problem before decimal pricing was implemented. For example, representatives of a hedge fund told us they were worried about getting stepped ahead of if they revealed their interest to trade large amounts of a stock by entering limit orders with large numbers of shares even when ticks were 1/8 and 1/16. An SEC staff person told us that instances of orders being stepped ahead of has increased since the penny tick was implemented, but he did not think that it negated the benefits of decimal pricing overall. Although markets became less transparent following decimalization, institutional investors and traders appear to be able to execute large orders at a lower cost by adapting their trading strategies and technologies. For example, the academic study that studied around 120,000 large orders submitted for NASDAQ stocks found that the average proportion of total order size that was executed (filled) increased slightly from 78 percent before the change to decimal pricing to about 81 percent about 6 months following the change. Similarly, the study found the length of time required to fill orders—measured from the time the order arrived at a NASDAQ dealer to the time of the last completed trade—decreased from about 81 minutes before decimal pricing to about 78 minutes 6 months after. Eight of the institutional investment firms we contacted for this report also provided information about their experiences in completing trades. Of these, officials from seven of the eight told us that their fill rates had either stayed about the same or had increased. An official at one firm noted that the proportion of orders that were completely executed had risen by as much as 10 percent in the period following decimal pricing’s introduction. One of the ways that institutional investors have adapted their trading strategies to continue trading large orders is to break up these orders into a number of smaller lots. These smaller orders can more easily be executed against the smaller number of shares displayed at the best prices. In addition, not displaying their larger orders all at once prevents other traders from stepping ahead. Evidence of this change in investors’ trading strategy is illustrated by the decline in the average executed trade size on NYSE and NASDAQ. As table 7 shows, the average size of trades executed on these markets has declined about 67 percent since 1999 on NYSE and by about 41 percent on NASDAQ. With average trade size down, some market participants noted that at least 4 to 5 times as many trades are required to fill some large orders since decimalization. For example, a representative of a large mutual fund company said that his traders have always broken their funds’ large orders up into smaller lots so that they could trade without revealing their activity to others in the marketplace. Before decimalization, completing an order may have required 10 trades, but following the change to decimal pricing a similar order might require as many as 200 smaller trades. Referring to the increased difficulty of locating large blocks of shares available for trading, one representative of a money management firm stated that “decimalization changed the trading game from hunting elephants to catching mice.” In fact, the number of trades that NYSE reported being executed on its market increased more than fourfold between 1999 and 2004, rising from about 169 million trades to about 933 million trades. To facilitate the trading of large orders while minimizing market impact costs, many market participants said that they had increased their use of electronic trading techniques. Many of these techniques involve algorithmic execution strategies, which are computer-driven models that segment larger orders into smaller ones and transmit these over specified periods of time and trading venues. The simplest algorithms may just break a large order into smaller pieces and route these to whichever exchange or alternative trading system offers the best price. Institutional investors often obtain these algorithms as part of systems offered by broker-dealers and third-party vendors. They may also develop them using their own staff and integrate them into the desktop order management systems they use to help conduct their trading. One of the primary purposes of using these algorithmic trading systems is to conduct trading in a way that prevents other traders from learning that a large buyer or seller is active in the market. Institutional investors want tools that allow them to trade more anonymously to reduce the extent to which others can profit at their expense, such as when other traders, realizing that a large buyer is active, also buy shares, which quickly causes prices to rise, in hopes of selling these now more expensive shares to this large buyer. Several market participants told us that the anonymity that algorithms provide reduces the potential for other traders to learn that a large buyer or seller is active in the market (known as information leakage), thus reducing the likely market impact of executing the entire order. The use of these tools is growing. A 2004 survey conducted by The Tabb Group, a financial markets’ consulting firm, of more than 50 head and senior traders at institutional investor firms reported that over 60 percent of these firms were using algorithmic trading vehicles. The report noted that this widespread adoption rate was higher than anticipated. Many of the market participants we contacted also told us they were actively using algorithms in their trading activities and those that were not currently using algorithms generally indicated that they planned to begin using them in their trading strategies in the near future. In its report, The Tabb Group predicted that algorithmic trading will grow by almost 150 percent over the next 2 years. To locate the additional shares available for trading that are otherwise not displayed, institutional investors are also increasingly using alternative trading venues outside the primary markets, such as NYSE and NASDAQ, to execute their large orders at lower cost. For example, institutional investors are conducting increasing portions of their trading on ECNs. Originally, ECNs were broker-dealers that operated as real-time electronic trading markets by allowing their customers to enter orders for stocks and obtain executions automatically when the prices of the orders entered matched those of orders entered by other customers. Recently, ECNs have entered into formal associations with existing stock exchanges. Use of ECNS has been a growing trend. According to The Tabb Group, 88 percent of the institutional investor firms it surveyed responded that they traded using ECNs. Furthermore, a 2004 survey by Institutional Investor magazine asked the trading staff of institutional investor firms to identify their preferred venues for executing stock trades. The survey reported that three of the top five trading venues for institutional stock trade execution were ECNs. According to data we obtained from a financial markets consulting firm, the share of ECN trading in NASDAQ and NYSE stocks has increased between 1996 and 2003. For example, ECN trading volume increased from about 9 percent of all NASDAQ trading in 1996 to about 40 percent of total NASDAQ trading volume in 2003 (fig. 9). The percent of trading volume for NYSE stocks conducted through ECNs has also increased, though to a much lesser degree than has these organizations’ trading in NASDAQ stocks. According to some market participants, ECNs have been less successful in gaining greater market share in NYSE stocks because of rules that result in most orders being sent to that exchange. For example, one regulation—the trade through rule— requires that broker-dealers send orders to the venue offering the best price, and in most cases NYSE has the best quoted price for its listed stocks. However, in a report issued by a financial market consulting firm, ECN officials called the trade through rule anticompetitive because the rule fails to acknowledge that some investors value the certainty and speed of execution more than they do price. They noted that under current rules, the NYSE specialists have as long as 30 seconds to decide whether to execute an order sent to them or take other actions. During this time, market participants told us that the price of the stock can change and their order may not be executed or will be executed at an undesirable price. On April 6, 2005, SEC approved Regulation NMS (National Market System) which, among other things, limits the applicability of trade through requirements to quotes that are immediately accessible. Institutional investors we spoke with highlighted anonymity, speed, and the quality of the prices they receive as reasons for their increased use of ECNs. The respondents to The Tabb Group survey indicated that their firms used ECNs to reduce market impact costs and to take advantage of lower fee structures. Many market participants we interviewed and studies we reviewed also indicated that trading using ECNs lowered institutional trading costs. According to market participants we interviewed, decimalization accelerated technology innovation, which they believe has been significant in reducing trading costs primarily by providing a means for investors to directly access the markets and reducing the need for intermediation. However, many acknowledged that increasing use of ECNs has been a growing trend since 1997, when SEC implemented rule changes that allowed ECNs to better compete against NASDAQ market makers. Other alternative trading venues that institutional investors are increasingly using to execute their large orders are block trading platforms operated by broker-dealers called crossing networks. These networks are operated by brokers such as ITG, Liquidnet, and Pipeline Trading Systems. Crossing networks generally provide an anonymous venue for institutional investors to trade large blocks of stock (including orders involving tens or hundreds of thousands of shares) directly with other institutional investors. For example, one crossing network integrates its software with the investor’s desktop order management system so that all of the investor’s orders are automatically submitted to this crossing network in an effort to identify a match with another institutional investor. Once a match is identified, the potential buyer and seller are notified, at which time they negotiate the number of shares and price at which a trade would occur. The heads of stock trading for two large money management firms told us an advantage of using crossing networks is that they minimize market impact costs by allowing investors to trade in large blocks without disclosing their trading interests to others in the markets. Also, the chief executive officer of a crossing network noted that the absence of market intermediaries in the negotiation of trades on crossing networks provides the customers’ traders with the ability to control the price and quantity of their executions. However, we were told that crossing networks may not be the preferred strategy for all kinds of institutional orders because orders remain unexecuted if a natural match cannot be found. Crossing networks are gaining in prominence among institutional investors as a destination of choice for trading large quantities of stock. According to The Tabb Group’s survey of head and senior traders, 70 percent of all firms reported using crossing networks. In Institutional Investor’s 2004 survey, Liquidnet, a crossing network established in 2002, ranked second on the list of institutional investors’ favorite venues for trade executions. Despite advances in electronic trading technologies that give institutional investors increased access to markets, some institutional investors continue to use full-service brokers to locate natural sources of liquidity as they did before decimal pricing began. According to institutional investor officials we interviewed, with fewer shares displayed as available for trading and reductions in average trade size, they are more patient about the time required to completely execute (fill) large orders using brokers in this way. In addition, some noted they increasingly use NYSE floor brokers to facilitate the trading of large orders in less-liquid stocks, explaining that floor brokers have information advantages in the current market structure that help to minimize adverse price changes. In addition to increased use of electronic trading, overall market conditions also likely helped lower trading costs for institutional investors. For example, prices on U.S. stock markets began a multiyear downturn around 2000. As stock prices declined, asset managers faced increased pressure to manage costs and boost investment returns. Representatives of all four leading firms we interviewed that analyze institutional investors’ trading activity noted that the declining market that persisted after the implementation of decimal pricing also had led to reduced costs. Representatives of two of these trade analytics firms noted specifically that institutional buyers and sellers appeared more cost sensitive as a result of the 3-year declining stock market, which caused investment returns to decline substantially. This increased the incentive for institutional investors to take actions to lower their trading costs as a way to offset some of the reduced market returns. Although overall securities industry profits have returned to levels similar to those in the past, some market intermediaries, particularly those broker- dealers acting as exchange specialists and NASDAQ market makers, have been significantly affected by the implementation of decimal pricing. Between 2000 and 2004, exchange specialists and NASDAQ market makers generally saw their revenues and profits from stock trading fall, forcing some smaller market intermediaries out of the market. Decimal pricing was not the only force behind these declines, however. Sharp declines in the overall level of prices in the stock market, the growing use of trading strategies that bypass active intermediary involvement, and heightened competition from ECNs and other electronic trading venues have affected revenues and profits. We found that intermediaries were adapting to the new conditions by changing their business practices—for example, by investing in electronic trading devices and data management systems, reducing the size of their trading staffs, or changing how they priced their services. In response to the negative conditions that some believe exist in U.S. stock markets, a proposal has been made to conduct a pilot test of the use of a higher minimum tick for trading. Many of the market intermediaries but fewer than half of the institutional investors we contacted favored this move. The business environment for the securities industry as a whole, which saw reduced revenues after 2000, appears to be improving. The Securities Industry Association (SIA), which represents the broker-dealers holding the majority of assets in the securities industry, has compiled data on all of its member broker-dealers that have conducted business with public customers in the United States over the last 25 years. As shown in figure 10, the data SIA compiles are derived from filings broker-dealers are required to make with the SEC and detail, among other things, revenues and expenses for market activities such as trading in stocks, debt securities, and options and managing assets. SIA’s 2004 data show that industry revenues of $237 billion, while down from the height of the bull market in 2000, are now similar to revenues earned before the unprecedented gains of 2000. In addition, the industry’s total pretax net income of $24.0 billion in 2003 and $20.7 billion in 2004 represent some of the highest levels of pretax industry profits of the past 25 years. Further, our review indicated these improved industry conditions are not only the result of improved performance among the largest firms. By examining the trend in this data after excluding the results for the 25 largest broker-dealers, the revenue and net-income trend for the remaining firms revealed the same pattern of improvement. Despite these improvements, some market intermediaries, such as stock exchange specialists, have been negatively affected by the shift to decimal pricing. Stock exchange specialists buy or sell shares from their own accounts when insufficient demand exists to match orders from public customers directly. The lower spreads that have prevailed since decimal pricing have reduced the income that exchange specialists can earn from this activity. In addition, the number of shares displayed as being available for purchase or sale has declined, leaving specialist firms with less information about market trends and thus less ability to trade profitably. According to NYSE data, between 2000 and 2004 aggregate NYSE specialist revenues declined by more than 50 percent, falling from $2.1 billion to $902 million (table 8). Further, since decimal pricing began, the extent to which specialist firms participate in trades on their own exchanges has been low, falling below predecimalization levels. The participation rate shows the percentage of the total shares traded represented by trades conducted by specialists as part of their obligation to purchase shares when insufficient demand exists or sell shares when insufficient numbers of shares are being offered. After climbing during the first year decimal pricing was implemented, the percentage of trades on NYSE in which NYSE specialists participated declined from 15.1 percent in 2001 to 10.2 percent in 2004 (fig. 11). The trend toward smaller order sizes and more trade executions that have accelerated since the introduction of decimal pricing (as discussed earlier in this report) has also impacted the operating expenses of exchange specialists. The average trade execution size on the NYSE dropped from 1,205 shares per execution in 1999 to 393 shares per execution in 2004, so that specialists now generally process more trades to execute orders than they did before decimal pricing began. This trend toward greater numbers of executions, which many market participants indicated was exacerbated by decimal pricing, has required exchange specialists to absorb additional processing costs and make related investments in more robust data management and financial reporting tools. For example, each trade that is submitted for clearance and settlement carries a fee, paid to the National Securities Clearing Corporation, of between $0.0075 to $0.15 per trade. Several smaller regional exchange specialist firms we spoke with highlighted these kinds of increased operating costs as significant to their ability to continue profitable operations. Additionally, a floor brokerage firm we spoke with said that other charges had contributed to its declining operating performance. These charges included those from clearing firms, which typically charge in the range of $0.20 cents per 100 shares to process trades, and execution fees from exchange specialists related to the processing of more trades and typically paid by floor brokers. As shown in table 9 below, average trade size has declined over the past 6 years as the number of executions on NYSE has risen. As the table shows, volumes have remained relatively consistent since 2002, even though exchange specialists and floor brokers have seen their revenue and profits decline during this period. Decimal pricing has also generally negatively affected the profitability of firms that make markets in NASDAQ stocks. Traditionally, these firms earned revenue by profitably managing their inventories of shares and earning the spread between the prices at which they bought and sold shares. With the reduced bid-ask spreads and declines in displayed liquidity that have accompanied decimal pricing, the ability of broker-dealers to profitably make markets in NASDAQ stocks has been significantly adversely affected. For example, an official from one firm said that penny spreads had severely curtailed the amount of revenues that market makers could earn from their traditional principal trading. Table 10 presents SIA data on all NYSE members, which SIA indicates is often used as a proxy for the entire industry. As the table shows, these firms’ revenues from NASDAQ market making activities, after rising between 1999 and 2000, declined about 73 percent between 2000 and 2004, falling from nearly $9 billion to about $2.5 billion. Firms acting as NASDAQ market makers have also seen their operating expenses rise since decimal pricing began. Officials at one broker-dealer said that because the average trade size is smaller, market makers now generally process more trades to execute the same volume. This increase in the number of executions has required NASDAQ market makers to absorb additional processing and clearing costs. Additionally, the increased number of executions associated with decimal pricing has required some NASDAQ market makers to increase their investments in information technology systems. Table 11 shows the reduced average order size on the NASDAQ market over the past 6 years. Declining revenues and increased operating expenses since the implementation of decimal pricing have encouraged some firms to merge with other entities and forced other smaller market intermediaries out of the market, accelerating a trend toward consolidation among stock exchange specialists and NASDAQ market makers. Generally, to date, two developments have contributed to the decline in the number of specialists: acquisitions of smaller firms by larger entities and, on the regional exchanges, smaller specialist firms and proprietorships leaving the business. As shown in table 12, the number of specialist firms operating on various floor-based stock exchanges has declined significantly in recent years. The number of firms that make markets on NASDAQ has similarly declined. Between 2000, when 491 firms were acting as NASDAQ market makers, and 2004, the number of firms making markets in NASDAQ stocks declined to 258—a drop of more than 47 percent. According to an industry association official, NASDAQ market-making activity is increasingly not a stand-alone profitable business activity with firms but instead is conducted to support other lines of business. For example, an official of a broker- dealer that makes markets in NASDAQ stocks told us that his firm has made no profits on its market-making operations in the last 3 years but continues the activity in order to present itself as a full-service firm to customers. Although fewer firms are now acting as market makers, the overall NASDAQ market has not necessarily been affected. Since 2000, the number of stocks traded on NASDAQ has declined from 4,831 to 3,295, potentially reducing the need for market makers. In addition, some firms that continue to make markets have expanded the number of stocks in which they are active. For example, one large broker-dealer expanded its market-making activities from 500 stocks to more than 1,500. A NASDAQ official told us that with reduced numbers of stocks being traded, the average number of market makers per stock has increased since decimal pricing began. As shown in table 13, our analysis of data from NASDAQ indicated that although the number of NASDAQ market makers has declined, the number of firms making markets in the top 100 most active NASDAQ stocks actually grew between 1999 and 2004. Improved technology has likely helped market makers increase their ability to make markets in more stocks. An official at one market maker we spoke with explained that his firm had invested in systems that automatically update the firm’s price quotes across multiple stocks when overall market prices change, allowing the firm to manage the trading of more stocks with the same or fewer staff. The use of such technology helps explain why the number of market makers per stock has not fallen as the overall number of market-making firms has declined. Although decimal pricing affected market intermediaries’ operations, the changes in these firms’ revenues, profits, and viability are not exclusively related to the reduction in the minimum tick size. One major impact on firms’ revenues since 2000 has been the sharp multiyear decline in overall stock market prices. Securities industry revenues have historically been correlated with the performance of U.S. stock markets (fig. 12). After 5 consecutive years of returns exceeding 10 percent, prices on U.S. stock markets began declining in March 2000, and these losses continued until January 2003. The performance record for U.S. stocks during this period represents some of the poorest investment returns for U.S. stocks over the last 75 years. Because intermediary revenues tend to be correlated with broader stock market returns, as measured by the Standard & Poor’s 500 (S&P 500) Stock Index, many market observers we spoke with told us that the 3-year down market, which coincided with the transition to decimal pricing, contributed to reduced intermediary revenues and profits. The widespread emergence of technology-driven trading techniques, such as algorithmic trading models, has also reportedly affected market intermediaries negatively. These new techniques allow institutional investors, which account for the bulk of stock trading volume, to execute trades with less active intermediary involvement. Although only broker- dealers can legally submit trades for execution on U.S. stock markets, broker-dealers are reportedly only charging around 1 cent per share to transmit orders sent electronically as part of algorithmic trading models, an amount that represents much less revenue than the standard commission of around 5 cents per share for orders broker-dealers execute using their own trading systems and staff. Market intermediaries’ revenues are also reduced by institutional investors increasing use of alternative execution venues such as crossing networks to execute trades. The commissions these venues charge are less than those of traditional broker-dealers, specialists, and market makers. Several market observers said that because crossing networks and algorithmic trading solutions divert order flow from and create price competition for traditional broker-dealers, their increased use is a probable factor in the reduced profitability of exchange specialists, floor brokers, and NASDAQ market makers. The increasing use of ECNs also has also likely reduced the revenues earned by market intermediaries. Several market participants we spoke with told us that the increased number of executions on ECNs, such as Bloomberg Tradebook, Brut, and INET, has reduced the profits of exchange specialists, floor brokers, and NASDAQ market makers. ECN executions are done on an agency/commission basis, typically in the range of 1 to 3 cents per share, compared with traditional broker-dealer execution fees of approximately 5 cents per share. As a result, the activities that lower investors trading costs can result in lower revenues for market intermediaries. However, market participants noted that institutional investors’ use of electronic trading technologies and ECNs had been increasing even before decimal pricing was implemented. We found that in response to the changes brought about by decimal pricing and particularly to changes in institutional investors’ trading behavior, many stock market intermediaries had adapted their business operations by making investments in technology to improve trading tools and data management systems, reducing the size of their trading staffs, and changing the pricing and mix of services they offer. Most exchange specialists, floor brokers, NASDAQ market makers, and the broker-dealer staff that trade stocks listed on the exchanges we spoke with had made investments in new technology since the implementation of decimal pricing. For example, some NASDAQ market makers and listed traders were increasingly using aggregation software to locate pools of liquidity instead of relying on telephone contacts with other broker-dealers as they had in the past. Several intermediaries were also using algorithmic trading solutions more frequently to execute routine customer orders, allowing more time for their staff to work on more complex transactions or the trading of less liquid stocks. Other intermediary firms have responded to the more challenging business environment since 2000 by reducing the size of their trading staffs. Most stock broker-dealer firms we spoke with employed fewer human traders in 2004 than they had before 2001. Senior traders at the firms we spoke with cited reduced profits and the increased number of electronic and automated executions as the primary reasons for the reductions in the number of traders they employed. Consequently, although trades executed by broker-dealers using computer-generated algorithms typically generated lower revenues from commissions than traditional executions, the reduced salary and overhead costs associated with employing fewer traders, we were told, had made it easier for some broker-dealers to maintain viable stock trading operations. We also found that market intermediaries were adapting to the new business environment by modifying the pricing and mix of the services they offered. For example, instead of trading as principals, using their own capital to purchase or sell shares for customers, many NASDAQ market makers have begun acting as agents that match such orders to other orders in the market. Like ECNs, these market makers charge commissions to match buy and sell orders. The agency/commission model provides the benefit of reduced risk for NASDAQ market makers because they were using less of their own capital to conduct trading activity. However, market participants told us that this activity may not generally be as profitable for market makers as traditional principal/dealer trading operations. Other firms had attempted to diversify or broaden their service offerings. For example, a NYSE floor brokerage firm we spoke with was attempting to make up for lost revenues by developing a NASDAQ market-making function. Some firms were also expanding into other product lines. For example, one large NASDAQ market maker we spoke with was attempting to make up for declining stock trading revenue by becoming a more active market maker in other over-the-counter stocks outside those traded on NASDAQ’s National Market System, including those sold on the Over-the-Counter Bulletin Board (OTCBB) market, which trades stocks of companies whose market valuations, earnings, or revenues are not large enough to qualify them for listing on a national securities market like NYSE or NASDAQ. These stocks often trade with higher spreads on a percentage basis than do the stocks listed on the national exchanges. Finally, other firms had moved staff and other resources formerly used to trade stocks to support the trading of other instruments, such as corporate bonds, credit derivatives, or energy futures. The willingness and ability of broker-dealers to assist companies with raising capital in U.S. markets also does not appear to have diminished as a result of decimal pricing. Broker-dealers, acting as investment banks, help American businesses raise funds for operations through sales of stock and bonds and other securities to investors. After the initial public offering (IPO), such securities can be traded among investors in the secondary markets on the stock exchanges and other trading venues. Several market observers had voiced concerns that the reduced displayed liquidity and declining ability of market makers to profit from trading could reduce the liquidity for newly issued and less active stocks. In turn, this loss of liquidity could make it more difficult for firms to raise capital. We found that in 2002 and 2003, U.S. stock underwriting activity was down significantly from recent years (fig. 13). However, as figure 13 shows, although stock IPOs are down from record levels of the bull market of the late 1990s, 247 companies offered stock to the public for the first time in 2004—up from the 2002 and 2003 levels of 86 and 85 companies, respectively. Additionally, stock underwriting activity measured in dollars rose to $47.9 billion in 2004, a level consistent with activity in the late 1990s. Of the market participants that we spoke with, most did not believe that decimal pricing had affected companies’ ability to raise capital in U.S markets, noting that underwriting activity is primarily related to investors’ overall demand for stocks. More IPOs generally occur during periods with strong economic growth and good stock market performance. Institutional investors we spoke with noted that the poor growth of the U.S. economy after 2000 and the associated uncertainty about future business conditions had contributed more than decimal pricing to the reduced level of new stock issues in 2002 and 2003. Others cited the new Sarbanes-Oxley Act corporate governance and disclosure requirements, which can increase the costs of being a public company, as a factor that may be discouraging some firms that otherwise would have to sought to raise capital from filing an IPO. However, one broker-dealer official said that his firm was less willing to help small companies raise capital because of its reduced ability since decimal pricing began to profitably make a market in the new firm’s stock after its IPO. In response to the drop in displayed liquidity and other negative conditions that some believe to exist in the U.S. stock markets, a proposal has been made to conduct a pilot that would test the use of a higher minimum tick for trading, but opinions among the various market participants we spoke with were mixed. The proposal, which was put forth by a senior official at one NYSE specialist firm, calls on SEC to oversee a pilot program that would test a 5-cent tick on 200 to 300 NYSE stocks across all markets. The purpose of the pilot program would be to provide SEC with information it could use to decide whether larger-sized ticks improve market quality in U.S. stock markets. Proponents believe that larger ticks would address some of the perceived negative conditions such as the reduction in displayed liquidity brought about with the change to penny ticks. For example, some proponents anticipate that investors would be more willing to display large orders because larger tick sizes would increase the financial risk of stepping ahead for other traders. Some also expected that market intermediaries would be more willing to trade in less liquid stocks because of the increased potential to profit from larger spreads. Some proponents of a pilot program believed 5-cent ticks would also increase the cost efficiency, speed, and simplicity of execution for large-order investors, especially in less liquid stocks. Most of the market intermediaries we spoke with supported the proposed 5-cent pilot for stocks. Opinions from the representatives of the markets we spoke with were more mixed, with officials from floor-based exchanges supporting the pilot, while officials from two of the electronic markets we spoke with did not support a change and officials from two others supporting the pilot under the belief that larger ticks would benefit less liquid stocks. Of the 23 institutional investors we talked with, 10 indicated support for a proposed 5-cent pilot, 9 did not see a need for such a pilot, and 4 were indifferent or had no opinion. Of those institutional investors who did not see the need to conduct a pilot, most indicated that 5-cent ticks would not increase liquidity in the markets because the negative conditions that are attributed to decimal pricing are more the result of the inefficiencies they believed existed in markets that rely on executing trades manually rather than using technology to execute them automatically. In addition, officials at several firms noted that such a pilot is unnecessary because institutional investors have already adjusted to penny ticks. For example, an official of a very large institutional investment firm noted that the challenges of locating sufficient numbers of shares for trading large orders had already been solved with advances in electronic trading and crossing networks. Some of these investors were also concerned that conducting such a pilot could have negative consequences. For example, one firm noted that having different ticks for different stocks could potentially confuse investors. Also, a trade association official noted that mandating that some stocks trade only in 5-cent ticks could be viewed as a form of price fixing, particularly for highly liquid stocks that were already trading efficiently using a 1-cent tick. An official from a financial markets consulting and research firm noted that if a pilot program were to occur, NASDAQ stocks should be included; this would better isolate the effects of a larger tick size on market quality factors since NYSE appears to be undergoing changes towards a more electronic marketplace, potentially making it more difficult to interpret the study’s results. In addition, some of the 10 institutional investors that supported a pilot of nickel-sized ticks indicated that they saw such ticks as being useful primarily for less-liquid stocks that generally have fewer shares displayed for trading, including smaller capitalized stocks. These proponents told us that 5-cent ticks might increase displayed liquidity for such stocks. In addition, they stated that 5-cent ticks could provide financial incentive for intermediaries to increase their participation in the trading of such stocks, including providing greater compensation for market makers and specialists to commit more capital to facilitate large-order trades. Many also anticipated a reduction in stepping ahead since it would become more costly to do so. SEC staff that we asked about the pilot told us that conducting such a test did not appear to be warranted because, to date, the benefits of penny pricing—most notably the reduction in trading costs through narrower spreads—seem clearly to justify the costs. They also noted that penny pricing does not, and is not designed to, establish the optimal spread in a particular security, which will be driven by market forces. Decimal pricing in U.S. options markets has generally had a more limited impact on the options market than it has on the stock market. Although various measures of market quality, including trading costs and liquidity, have improved in U.S. options markets, factors other than decimal pricing are believed to be the primary contributors. First, the tick size reductions adopted for options trading were less dramatic than those adopted in the stock markets. Second, other factors, including increased competition among exchanges to list the same options, the growing use of electronic trading, and a new system that electronically links the various markets, were seen as being more responsible for improvement in U.S. options markets. Options market intermediaries such as market makers and specialists have had mixed experiences since decimal pricing began, with floor-based firms facing declining revenues and profitability and electronic- based firms seeing increased trading revenues and profitability. As part of a concept release on a range of issues pertaining to the options markets, SEC has sought views on reducing tick sizes further in the options markets by lowering them from the current 5 and 10 cents to one penny. Options market participants were generally strongly opposed to such a move for a variety of reasons, including the possibility that the number of quotes could increase dramatically, overwhelming information systems, and the potential for reduced displayed liquidity. One reason that decimal pricing’s impact on options markets was not seen as significant was that the tick size reductions for options market were not as large as those adopted for the stock markets. Options markets had previously used a minimum tick size of 1/8 of a dollar (12.5 cents) for options contracts priced at $3 and more and a tick size of 1/16 of a dollar (6.25 cents) for options priced at less than $3. After decimal pricing came into effect, these tick sizes fell to 10 cents and 5 cents, respectively—a decrease of 20 percent. This decline was far less than the 84 percent reduction in tick size in the stock market, where the bid-ask spread dropped from 1/16 of a dollar to 1 cent. Studies done by four options exchanges in 2001 to assess the impact of decimal prices on, among other factors, options contract bid-ask spreads did not find that decimal pricing had any significant effect on the spreads for options. Most market participants shared this view. For example, an official of a large market-making firm stated that decimalization in the options market was “a small ripple in a huge pond.” Although decimal pricing’s impact was not seen as significant, various measures used to assess market quality have shown improvements in U.S. options markets in recent years. Unlike for stocks, data on trading costs in options markets was not generally available. For example, we could not identify any trade analytics or other firms that collected and analyzed data for options trading. However, some market participants we interviewed indicated that bid-ask spreads, which represent a measure of cost of trading in options markets, have narrowed since the 1990s. In addition, the studies done by SEC and others also indicated that spreads have declined for options markets. In addition to lower trading costs, liquidity, which is another measure that could be used to assess the quality of the options market, has improved since decimal pricing was implemented. According to industry participants we interviewed, liquidity in the options market has increased since 2001. They noted that trading volumes (which can be an indicator of liquidity) had reached historic levels and that many new liquidity providers, such as hedge funds and major securities firms, had entered the market. As shown in figure 14, options trading volumes have grown significantly (61 percent) since 2000, rising from about 673 million contracts to an all-time high of 1.08 billion contracts in 2004. However, some market participants noted that the implementation of decimal pricing in the stock markets had negatively affected options traders. According to these participants, the reduced number of shares displayed in the underlying stock markets and quote flickering in stock prices had made buying and selling shares in the stock markets and determining an accurate price for the underlying stocks more difficult. As a result, options traders’ and market makers’ attempts to hedge the risks of their options positions by trading in the stock markets had become more challenging and costly. Market participants attributed the improvements in market quality for U.S. options markets not to decimal pricing but to other developments, including the practice of listing options contracts on more than one exchange (multilisting), the growing use of electronic exchanges, and the development of electronic linkages among markets. These developments have increased competition in these markets. Multilisting, one of the most significant changes, created intense competition among U.S. options markets. Although SEC had permitted multilistings since the early 1990s, the options exchanges had generally tended not to list options already being actively traded on another exchange, but began doing so more frequently in August 1999. According to an SEC study, in August 1999, 32 percent of stock options were traded on more than one exchange, and that percentage rose steadily to 45 percent in September 2000. The study also showed that the percentage of total options volume traded on only one exchange fell from 61 percent to 15 percent during the same period. Almost all actively traded stock options are now listed on more than one U.S. options exchange. Multilisting has been credited with increasing price competition among exchanges and market participants. The SEC study examined, among other things, how multiple listings impacted pricing and spreads in the options market and found that the heightened competition had produced significant economic benefits to investors in the form of lower quoted and effective spreads. The study looked at 1-week periods, beginning with August 9 through 13, 1999 (a benchmark period prior to widespread multilisting of actively traded options), and ending with October 23 through 27, 2000 (a benchmark period during which the actively traded options in the study were listed on more than one exchange). During this period, the average quoted spreads for the most actively traded stock options declined 8 percent. Quoted spreads across all options exchanges over this same period showed a much more dramatic change, declining approximately 38 percent. The actual transaction costs that investors paid for their options executions, as measured by effective spreads, also declined, falling 19 percent for options priced below $20 and 35 percent for retail orders of 50 contracts or less. Several academic studies also showed results consistent with SEC’s findings that bid-ask spreads had declined since the widespread multiple listing of the most active options. The introduction of the first all-electronic options exchange in 2000 also increased competition in the options markets. Traditionally, trading on U.S. options markets had occurred on the floors of the various exchanges. On the new International Securities Exchange (ISE), which began operations in May 2000, multiple (i.e., competing) market makers and specialists can submit separate quotes on a single options contract electronically. The quotes are then displayed on the screens of other market makers and at the facilities of broker-dealers with customers interested in trading options, enhancing competition for customer orders. ISE also introduced the practice of including with its quotes the number of contracts available at the quoted price. According to market participants, the additional information benefited retail and institutional investors by providing them with better information on the depth of the market and the price at which an order was likely to be executed. Finally, ISE allowed customers to execute trades in complete anonymity and attracted additional sources of liquidity by allowing market makers to access its market remotely. In response, the four floor-based options exchanges—the American Stock Exchange, Chicago Board Options Exchange (CBOE), the Pacific Exchange (PCX), and the Philadelphia Stock Exchange—also began including the number of available contracts with their quotations and offering electronic trading systems in addition to their existing floor-based trading model. Another new entrant, the Boston Options Exchange (BOX) (an affiliate of the Boston Stock Exchange) also began all-electronic operations in 2004. The result has been increased quote competition among markets and their participants that has helped to further narrow spreads and has opened markets to a wide range of new liquidity providers, including broker-dealers, institutional firms, and hedge funds. Electronic linkages were first introduced to U.S. options markets in 2003, offering the previously unavailable opportunity to route orders among all the registered options exchanges. In January 2003, SEC announced that the options markets had implemented the intermarket linkage plan, so that U.S. options exchanges could electronically route orders and messages to one another. The new linkages further increased competition in the options industry and made the markets more efficient, largely by giving brokers, dealers, and investors’ better access to displayed market information. According to SEC and others, as a result of this development investors can now receive the best available prices across all options exchanges, regardless of the exchange to which an order was initially sent. Intermarket linkages are as essential to the effective functioning of the options markets as they are to the functioning of the stock markets and will further assist in establishing a national options market system. Decimal pricing and other changes in options markets appear to have affected the various types of market intermediaries differently. Representatives of firms that trade primarily on floor-based exchanges told us that their revenues and profits from market making had fallen while their expenses had increased. For example, one options specialist said that his firm’s profitability had declined on a per-option basis and was now back to pre-1995 levels. However, he noted that the cost of technology to operate in today’s market had increased substantially and that adverse market conditions and increased competition were more responsible for his firm’s financial conditions than were decimal prices. The increasingly competitive and challenging environment has also led to continued consolidation among firms that trade on the various options exchange floors. According to data from one floor-based options exchange, the number of market intermediaries active on its market declined approximately 22 percent between 2000 and 2004. Market intermediaries and exchange officials we spoke with noted in particular that the smaller broker-dealer firms that trade options and sometimes have just one or two employees had been the most affected, with many either merging with other firms or going out of business because of their inability to compete in the new trading environment. In contrast, the introduction of electronic exchanges and expanded opportunities for electronic trading at other exchanges has been beneficial for some market intermediaries. Officials of some broker-dealers that trade options electronically told us that their firms’ operations had benefited from the increased trading volume and the efficiency of electronic trading. The officials added that other firms, such as large financial institutions, had increased their participation in the options marketplace. They also noted that the availability of electronic trading systems and the inherent economies of scale associated with operating such systems had attracted new marketplace entrants, including some hedge funds and major securities firms. For example, representatives of ISE and several broker- dealers told us that the ability to trade electronically had encouraged several large broker-dealers that were not previously active in options markets to begin acting as market makers on that exchange. These firms, they explained, were able to enter into the options markets because making markets electronically is less expensive than investing in the infrastructure and staff needed to support such operations on a trading floor. According to market participants we spoke with, these new entrants appeared to have provided increased competition and positively affected spreads, product innovation, and liquidity in the options industry. In 2004, SEC issued a concept release that sought public comments on options-related issues that have emerged since the multiple listing of options began in 1999, including whether the markets should reduce the minimum tick sizes for options from 5 and 10 cents to 1-cent increments. According to the release, SEC staff believed that penny pricing in the options market would improve the efficiency and competitiveness of options trading, as it has in the markets for stocks, primarily by tightening spreads. If lower ticks did lead to narrower spreads for options prices, investors trading costs would likely similarly decline. As of May 2004, SEC has received and reviewed comments on the concept release but has taken no further action. All of the options exchanges and virtually all of the options firms we spoke with, as well as 15 of the 16 organizations and individuals that submitted public comments on SEC’s 1-cent tick size proposal, were opposed to quoting options prices in increments lower than those currently in use (10 and 5 cents, depending on the price of an options contract). One of the primary reasons for this opposition was that trading options contracts in 1- cent increments would significantly increase quotation message traffic, potentially overwhelming the capacity of the existing systems that process options quotes and disrupting the dissemination of market data. For any given stock, hundreds of different individual options contracts can be simultaneously trading, with each having a different strike price (the specified price at which the holder can buy or sell underlying stock) and different expiration date. Because options are contracts that provide their holders with the right to either buy or sell a particular stock at the specified strike price, an option’s value and therefore its price also changes as the underlying stock’s price changes. If options were priced in pennies, market participants said that thousands of new option price quotes could be generated because prices would need to adjust more rapidly to remain accurate than they do using nickel or dime increments. Markets and market participants also expressed concerns that penny pricing would exacerbate an already existing problem for the industry— ensuring that the information systems used to process and transmit price quotations to market participants have adequate capacity. The quotes generated by market makers on the various markets are transmitted by the systems overseen by the Options Price Reporting Authority (OPRA). The OPRA system has been experiencing message capacity issues for several years. In terms of the number of messages per second (mps) that can be processed, the OPRA system had a maximum mps of 3,000 in January 2000. Since then, the processing and transmission capacity of the system has had to be expanded significantly to accommodate the growth in options’ quoting volumes, and as of April 2005, the OPRA system was capable of processing approximately 160,000 mps. Prior to the implementation of decimal pricing in 2001, similar concerns about the impact on message traffic volumes were also raised for stocks, but the magnitude of the anticipated increases were much larger for options. To address the capacity constraints in the options market systems thus far, the administrators of the OPRA system have tried to reduce quotation traffic by having the options exchanges engage in quote mitigation. Quote mitigation requires the exchanges to agree to prioritize their own quotes and trade report message volumes so that the amount of traffic submitted does not exceed a specified percentage of the system’s total capacity. As of April 2005, the OPRA administrators were limiting the volume of messages that exchanges were able to transmit to just 88,000 mps based on requests from the six options exchanges. Two market participants that commented on SEC’s proposal noted that with options market data continuing to grow at a phenomenal rate each year, OPRA would have to continue increasing its current message capacity to meet ongoing demand. If penny quoting were to create even faster growth in the total number of price quotes generated, market participants indicated that options exchanges, market data vendors, and broker-dealers would need to spend substantial sums of money on operational and technological improvements to their capacity and communication systems in order to handle the increased amounts of market data. These costs, they said, would likely be passed on to investors. Another reason that market participants objected to lowering tick sizes for options trading was that doing so would likely reduce market intermediaries’ participation in the markets. Because these intermediaries make their money from the spreads between the bid and offer prices, narrower spreads that would likely accompany penny ticks would also reduce these intermediaries’ revenues and profits. This, in turn, would reduce these firms’ ability and willingness to provide liquidity, especially for options that are traded less frequently. According to the commenters on the proposal and the participants we contacted, intermediaries would likely become reluctant to provide continuous two-sided markets (e.g., offering both to buy and sell options simultaneously) to facilitate trading, since profit potential would be limited by the 80 percent or more reduction in tick size. And because the 1-cent tick could increase the chance of other traders stepping ahead of an order, such intermediaries could become reluctant to display large orders. With the options markets having hundreds of options for one underlying stock, market intermediaries would likely quote fewer numbers of contracts, which would further reduce displayed liquidity, and market transparency. Market participants also raised other concerns about trading in penny ticks for options. For example, they worried that option prices quoted in 1-cent increments would change in price too rapidly, resulting in more quote “flickering.” They also noted that the options market could experience some of the other negative effects that have occurred in the stock markets, including increasing instances of stepping ahead by other traders. SEC staff responsible for options markets oversight told us that they would like to see tick sizes reduced in the options markets as a means of lowering costs to investors. They acknowledged that the benefits of such tick size reductions would have to be balanced with the likely accompanying negative impacts. SEC staff responsible for options markets oversight told us that they would like to see tick sizes reduced in the options markets as a means of lowering costs to investors. They acknowledged that the benefits of such tick size reductions would have to be balanced with the likely accompanying negative impacts. They noted that recent innovations permit a small amount of trading in pennies and that continued innovation and technological advances may lead to approaches more favorable to investors without substantial negative effects. In advocating decimal pricing, Congress and SEC expected to make stock and options pricing easier for the average investor to understand and reduce trading costs, particularly for retail investors, from narrower bid- ask spreads. These goals appear to have been met. Securities priced in dollars and cents are clearly more understandable, and the narrower spreads that have accompanied this change have made trading less costly for retail investors. Although the resulting trading environment has become more challenging for institutional investors, they too appear to have benefited from generally lower trading costs since decimal pricing was implemented. In response to the reduced displayed market depth, institutional investors are splitting larger orders into smaller lots to reduce the market impact of their trading and accelerating their adoption of electronic trading technologies and alternative trading venues. As a result of these adaptations, institutional investors have been able to continue to trade large numbers of shares and at even less total cost than before. However, since decimal pricing was introduced, the activities performed by some market intermediaries have become less profitable. Decimal prices have adversely affected broker-dealers’ ability to earn revenues and profits from their stock trading activities. But one of the goals of decimal pricing was to lower the artificially established tick size, and thus the loss of revenue for market intermediaries that had benefited from this price constraint was a natural outcome. Various other factors, including institutional investors’ adoption of electronic technologies that reduce the need for direct intermediation, can also explain some of market intermediaries’ reduced revenues. Nevertheless, the depressed financial condition of some intermediaries would be of more concern if conditions were also similarly negative for investors, which we found was not the case. In response to the changes since decimal pricing began, a proposal has been made to conduct a pilot program to test higher tick sizes. This program would provide regulators with data on the impacts, both positive and negative, of such trading. However, given that many investors and market intermediaries have made considerable efforts to adapt their trading strategies and invest in technologies that allow them to be successful in the penny tick trading environment, the need for increased tick sizes appears questionable. Although decimal pricing has been a less significant development in U.S. options markets, other factors, such as new entrants and the increased use of electronic trading and linkages, have served to improve the quality of these markets. SEC’s proposal to further reduce tick sizes in the options markets has been met with widespread opposition from industry participants, and many of the concerns market participants raised, including the potential for significant increases in quote traffic and less displayed liquidity, appear to have merit. The magnitude of these potential impacts appears larger than those that accompanied the implementation of penny ticks for stocks. As a result, it is not clear that additional benefits of the narrower spreads that could accompany mandated tick size reductions would be greater than the potentially negative impacts and increased costs arising from greatly increased quote processing traffic. We provided a draft of this report to SEC for comments and we received oral comments from staff in SEC’s Division of Market Regulation and Office of Economic Analysis. Overall, these staff said that our report accurately depicted conditions in the markets after the implementation of decimal pricing. They also provided various technical comments that we incorporated where appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this report. At that time, we will send copies of this report to the Chairman and Ranking Minority Member, Subcommittee on Securities and Investments, Senate Committee on Banking, Housing, and Urban Affairs. We will also send copies of this report to the Chairman, SEC. We will make copies available to others upon request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. Please contact me at (202) 512-8678 if you or your staff have any questions concerning this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix V. To determine the impact of decimal pricing on retail investors, we analyzed data from a database of trades and quotes from U.S. stock markets between February 2000 and November 2004. Appendix II contains a detailed methodology of this analysis. Using this data, we selected a sample of stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ Stock Market (NASDAQ) and calculated how the trading in these stocks had changed between a 1-year period before and an almost 4-year period after decimal pricing began. As part of this analysis, we examined the changes in spreads on these stocks (the relevant measure of trading costs for retail investors). We also undertook steps to assess the reliability of the data in the TAQ database by performing a variety of error checks on the data and using widely accepted methods for removing potential errors from data to ensure its reliability. Based on these discussions, we determined that these data were sufficiently reliable for our purposes. We also reviewed market and academic studies of decimal pricing’s impact on spreads. In addition, we interviewed officials from over 30 broker-dealers, the Securities and Exchange Commission (SEC), NASD, two academics, and five alternative trading venues, eight stock markets, four trade analytics firms, a financial markets consulting and research firm, and four industry trade groups. To analyze the impact of decimal pricing on institutional investors, we obtained and analyzed institutional trading cost data from three leading trade analytics firms—Plexus Group, Elkins/McSherry, and Abel/Noser— spanning from the first quarter of 1999 through second quarter of 2003 from the Plexus Group and from the fourth quarter of 1998 to the end of 2004 from Elkins/McSherry and Abel/Noser—to determine how trading costs for institutional investors responded to decimalization. These firms’ data do not include costs for trades that do not fully execute. To address this issue, we interviewed institutional investors on their experiences in filling large orders. We also undertook steps to assess the reliability of the trade analytics firms’ data by interviewing their staffs about the steps the firms follow to ensure the accuracy of their data. Based on these discussions, we determined that these data were sufficiently reliable for our purposes. To identify all relevant research that had been conducted on the impact of decimal pricing on institutional investors’ trading costs, we searched public and private academic and general Internet databases and spoke with academics, regulators, and market participants. We identified 15 academic studies that met our criteria for scope and methodological considerations. Of these, 3 addressed trading costs for institutional investors and 12 addressed trading costs for retail investors. To determine the impact of pricing on investors’ ability to trade, we interviewed roughly 70 judgmentally selected agencies and firms, including representatives of 23 institutional investors with assets under management ranging from $2 billion to more than $1 trillion. The assets being managed by these 23 firms represented 31 percent of the assets under management by the largest 300 money managers in 2003. In addition, we also discussed the impact on intuitional investors during our interviews with broker- dealers, securities regulators, academics, and alternative trading venues, stock exchanges, trade analytics firms, a financial market consulting and research firm, and industry trade groups. To assess the impact of decimal pricing on stock market intermediaries, we obtained data on the revenues of the overall securities industry from the Securities Industry Association (SIA). SIA’s revenue data come from the reports that each broker-dealer conducting business with public customers is required to file with SEC—the Financial and Operational Combined Uniform Single (FOCUS) reports. We used these data to analyze the trend in revenues for the industry as a whole as well as to identify the revenues associated with making markets in NASDAQ stocks. In addition, we obtained data on the specialist broker-dealer revenues and participation rates and on executed trade sizes from NYSE. For the number of specialist firms participating on U.S. markets, we sought data from NYSE and the other exchanges, including the American Stock Exchange (Amex), the Boston Stock Exchange, the Chicago Stock Exchange, the Pacific Exchange (PCX), and the Philadelphia Stock Exchange (Phlx). We obtained data on the number of market makers and the trend in executed trade size from NASDAQ. We discussed how these organizations ensure the reliability of their data with officials from the organizations where relevant and determined that their data were sufficiently reliable for our purposes. We also discussed the impact of decimals on market intermediaries during our interviews with officials from broker-dealers, securities regulators, alternative trading venues, stock exchanges, trade analytics firms, a financial market consulting and research firm, and industry trade groups, as well as experts from academia. To determine the impact of decimal pricing on the options markets, both investors and intermediaries, we reviewed studies that four U.S. options exchanges, including Amex, Chicago Board Options Exchange (CBOE), PCX, and Phlx, submitted to SEC in 2001 on the impact of decimalization on their markets. We also performed literature searches on the Internet for academic and other studies that examined the impact of decimal pricing on options markets. In addition, we also attempted to identify any sources or organizations that collected and analyzed options trading costs. To determine the impact on intermediaries, we interviewed officials of all six U.S. options exchanges, including Amex, Boston Options Exchange, CBOE, International Securities Exchange, PCX, and Phlx, and various market participants (an independent market maker, designated primary market makers, specialists, a floor broker, hedge funds and a retail investor firm) to ascertain their perspectives on the impact of the conversion to decimalization on them, investors, and the markets. To determine the potential impact of reducing the minimum price tick in the options markets to a penny, we interviewed officials from the option exchanges and market participants. We also reviewed all comment letters that SEC had received on its concept release discussing potential changes in options market regulation, including lowering the minimum tick size in the options markets to a penny. We reviewed those letters posted on SEC’s Web site as of May 4, 2005. Sixteen of these letters specifically commented on the penny-pricing proposal. To assess the impact of decimal pricing, one of the activities we performed was to analyze data from the New York Stock Exchange (NYSE) Trade and Quote (TAQ) database spanning the 5-year period between February 2000 (before the conversion to decimal pricing) and November 2004 (after the adoption of decimal pricing) to determine how trading costs for retail investors changed and how various market statistics changed, such as the average number of shares displayed at the best prices before and after decimalization. Although maintained by NYSE, this database includes all trades and quotes that occurred on the various exchanges and the NASDAQ Stock Market (NASDAQ). Using this database, we performed an event-type study analyzing the behavior of trading cost and market quality variables for NYSE and NASDAQ stocks in pre- and postdecimalization environments. For each of our sample stocks, we used information on each recorded trade and quote (that is, intraday trade and quote data) for each trading day in our sample period. We generally followed the methods found in two recently published academic studies that examined the impact of decimalization on market quality and trade execution costs. In particular, we analyzed the pre- and postdecimalization behavior of several trading cost and market quality variables, including various bid-ask spread measures and price volatility, and we also analyzed quote and trade execution price clustering across NYSE and NASDAQ environments. We generally presented our results on an average basis for sample stocks in a given market in the pre- and postdecimalization periods; in some cases we separated sample stocks into groups based on their average daily trading volume and reported our results so that any differences across stock characteristics could be observed. Our analysis was based on intraday trade and quote data from the TAQ database, which includes all trade and quote data (but not order information) for all NYSE-listed and NASDAQ stocks, among others. TAQ data allowed us to study variables that are based on trades and quotes but did not allow us to study any specific effects on or make any inferences regarding orders or institutional trading costs. Our data consisted of trade and quote activity for all stocks listed on NYSE, NASDAQ, and the American Stock Exchange (Amex) from February 1, 2000, through November 30, 2004, excluding the month of September 2001. We focused on NYSE-listed and NASDAQ issues, as is typical in the literature, since the potential sample size from eligible Amex stocks tends to be much smaller. Our analysis compared 300 matched NYSE and NASDAQ stock pairs over the 12 months prior to decimalization and 12 months selected from the period spanning April 2001 through November 2004. In constructing our sample period, we omitted the months of February and March 2001 from consideration, because not all stocks were trading using decimal prices during the transition period. Because there were a host of concurrent factors impacting the equities markets around the time of and since the transition to decimal pricing, it is unlikely that any of our results can be attributed solely to decimalization. Any determination of statistically significant differences in pre- and postdecimalization trading cost and market quality variables was likely due to the confluence of decimalization and these other factors. Determining the best sample period presented a challenge because decimalization was implemented at different times on NYSE and NASDAQ. The transition to decimal pricing was completed on NYSE on January 29, 2001, while on NASDAQ it was completed on April 9, 2001. In addition, there were selected decimalization pilots on NYSE and NASDAQ prior to full decimalization on each. Researchers who have analyzed the transition to decimal pricing have generally divided up the pre- and postdecimalization sample periods differently depending on the particular focus of their research. Relatively short sample periods too close to the transition might suffer from unnatural transitory effects related to the learning process in a new trading environment, while sample periods farther from the implementation date or longer in scope might suffer from the influence of confounding factors. Analyses comparing different months before and after decimalization (e.g., December 2000 versus May 2001) might suffer from seasonal influences. We extended the current body of research, which includes studies by academic and industry researchers, exchanges and markets, and regulators, by including more recent time periods in our analysis, providing an expanded view of the trend in trade execution cost and market quality variables since 2000. However, to the extent that the influence of other factors introduced by expanding the sample window outweighed any influence of decimalization on trade cost and market quality measures, our results should be interpreted with caution. Our sample period spanned February 2000 through November 2004 (table 14). The predecimalization period included February 1, 2000, through January 19, 2001, and the postdecimalization period included April 23, 2001, through November 5, 2004, excluding September 2001 (due to the effects of the September 11 terrorist attacks). We selected one week from each month, allowing for monthly five-trading day comparisons that avoided holidays and options expiration days as well controlling for seasonality issues. Our predecimalization period consisted of a 1-week sample from each of the 12 months and our postdecimalization period consisted of twelve 1-week sample periods excerpted from April 2001 through November 2004, excluding the month of September 2001. Generally following the methods used by other researchers, we generated our list by including only common shares of domestic companies that were active over our period of interest and that were not part of decimalization pilot programs in effect before January 29, 2001. Specifically, we excluded preferred stocks, warrants, lower class common shares (for example, Class B and Class C shares), as well as NASDAQ stocks with five-letter symbols not representing Class A shares. We then eliminated from consideration stocks with average share prices that were below $5 or above $150 over the February 2000 through December 2000 period. We also eliminated stocks for which there were no recorded trades on 10 percent or more of the trading days, to ensure sufficient data, leaving us with 981 NYSE-listed and 1,361 NASDAQ stocks in the potential sample universe. Our stock samples for the analysis ultimately consisted of 300 matched pairs of NYSE-listed and NASDAQ stocks. The NYSE-listed and NASDAQ stocks were matched on variables that are generally thought to help explain interstock differences in spreads. To the extent that our matching samples of NYSE-listed and NASDAQ stocks had similar attributes, any differences in spreads between the groups should have been due to reasons other than these attributes. The attributes we considered were (1) share price, (2) share price volatility, (3) number of trades, and (4) trade size. For the matching procedure, daily data from February 2000 through December 2000 were used and averages were taken over this sample period. Share price was measured by the mean value of the daily closing price and volatility by the average of the logarithm of the high-low intraday price range. The number of trades was measured by the average daily number of trades, and average trade size was measured as the average daily trading volume. These factors have different measurement units, implying that they could not be directly converted into a single measure of similarity. To develop a combined measure of similarity we first had to standardize the measures of all factors so that their average values and differences in their averages were measured on comparable scales. Once standardized measures of averages and differences were developed, we were able to sum the four measurements into a total measure of similarity and identify matched pairs of stocks. Comparability was assured because all averages and differences were divided by the standard deviation of the measure of each factor on the NYSE. in which the superscripts respectively, and Yfor each—in which stock being matched. In the matching algorithm, each of the attributes was weighted equally. Unlike the matching algorithms in the two aforementioned papers, we divided each stock attribute difference by the sample standard deviation of that attribute for the entire NYSE sample— denoted as normalized relative to the overall NYSE attributes. refer to NYSE and NASDAQ, and denotes the NYSE stock and represent one of the four stock attributes —in order to create unit less measures that were Ultimately, for each NYSE stock we selected the NASDAQ stock with the smallest CMS. Chung et al. (2004) used a sequential matching algorithm as is common in the literature. To start, they considered an NYSE stock and computed its CMS with all NASDAQ stocks; they matched that NYSE stock to the NASDAQ stock with the lowest CMS. Then they considered the next NYSE stock, but the NASDAQ stock that matched the prior NYSE stock was no longer considered among the possible universe of matches for this or any subsequent NYSE stock. The outcome of this type of algorithm is path dependent—the order in which the NYSE stocks are taken influences the ultimate list of unique matches. We employed another method that avoided this path dependence—ensuring an optimal match for each stock—but also allowed for the possibility of duplicate, nonunique NASDAQ matches. For the 981 NYSE-listed stocks, there were 293 NASDAQ stocks that provided the best matches. We chose the 300 best CMS matched pairs, which consisted of 300 NYSE and 186 unique NASDAQ stocks. Of these 186 NASDAQ stocks, 114 were best matches for one NYSE-listed stock, 45 were best matches for two NYSE-listed stocks, 19 were best matches for three NYSE-listed stocks, 5 were best matches for four NYSE-listed stocks, 1 was a best match for five NYSE-listed stocks, and 2 were best matches for seven NYSE-listed stocks. In the subsequent analysis, each NASDAQ stock was weighted according to the number of best matches it yielded. For example, if a NASDAQ stock provided the best match for two NYSE-listed stocks, it was counted twice in the overall averages for NASDAQ. The pairings resulting from the CMS minimization algorithm were well matched. The average share price for the 300 NYSE-listed (NASDAQ matching) stocks was $19.66 ($19.56), the average daily volume was 132,404 (127,107), the average number of trades per day was 121 (125), and the measure of daily volatility was 0.018 (0.018). In terms of average share price, the 300 matching-pair stocks were fairly representative of the full sample of matching stocks, as well as of the potential sample universe of stocks, as illustrated in table 15 and figure 15. However, the resulting matched-pairs sample tended to have more lower-priced stocks. In terms of average daily trading volume, the matched-pairs sample underrepresented higher-volume stocks, which likely biased our results toward reporting larger spreads (see table 16 and fig. 16). Once we had defined our stock sample, to undertake the subsequent analysis we first had to filter the trades and quotes data for each sample stock, which involved discarding records with TAQ-labeled errors (such as canceled trade records and quote records identified with trading halts), identifying and removing other potentially erroneous quotation and trade records (such as stale quotes or trade or quote prices that appeared aberrant), as well as simply confining the data to records between 9:30 a.m. and 4 p.m. We also had to determine the national best bid and offer quotes in effect at any given moment from all quoting market venues—the NBBO quotation. In general, for a given stock the best bid (offer) represents the highest (lowest) price available from all market venues providing quotes to sellers (buyers) of the stock. The NBBO quotes data for a given stock were used to compute quoted bid- ask spreads, quote sizes, and share prices, as well as intraday price volatility for that stock on a daily basis. They were also used independently to document any quote clustering activity in that stock. The trades’ data for a particular stock were used to analyze daily price ranges and trade execution price clustering. For each stock, the trades and NBBO quotes data were used to compute effective bid-ask spreads, which rely on both quotes and trades data. The TAQ Consolidated Quotes (CQ) file covers most activity in major U.S. market centers but does not include foreign market centers. A record in the CQ file represents a quote update originating in one of the included market centers: Amex, the Boston Stock Exchange, the Chicago Stock Exchange, electronic communication networks (ECN) and alternative trading systems (ATS), NASDAQ, the National Stock Exchange, NYSE, the Pacific Stock Exchange, and the Philadelphia Stock Exchange. It does not per se establish a comprehensive marketwide NBBO quote, however. A quote update consists of a bid price and the number of shares for which that price is valid and an offer price and the number of shares for which that price is valid. In general, a quote update reflects quote additions or cancellations. The record generally establishes the best bid and offer prevailing in a given market center. Normally, a quote from a market center is regarded as firm and valid until it is superseded by a new quote from that center—that is, a quote update from a market center supersedes that market center’s previous quotes and establishes its latest, binding quotes. Specifying the NBBO involved determining the best bid and offer quotes available—at a particular instant, the most recent valid bids and offers posted by all market centers were compared and the highest bid and the lowest offer were selected as the NBBO quotes. The national best bid (NBB) and national best offer (NBO) are not necessarily from the same market center or posted concurrently, and the bid and offer sizes can be different. Bessimbinder (2003) outlined a general method for determining the NBBO. First, the best bid and offer in effect for NYSE-listed stocks among individual NASDAQ dealers (as indicated by the MMID data field) was assessed and designated as the NASDAQ bid and offer. Then, the best bid and offer in effect across the NYSE, the five regional exchanges, and NASDAQ were determined and designated as the NBBO quotations for NYSE-listed stocks. For NASDAQ stocks, quote records from NASDAQ market makers reflect the best bid and offer across these participants (collectively classified as “T” in the TAQ data). Competing quotes are issued from other markets (e.g., the Pacific Stock Exchange) as well as NASDAQ’s SuperMontage Automated Display Facility, which reflects the quotes from most ECNs. We required additional details in constructing the NBBO, since quote records from competing market makers and market centers can have concurrent time stamps and there can be multiple quotes from the same market center recorded with the same time stamp. Moreover, identical bid or offer prices can be quoted by multiple market makers. To address these complications, we relied on language offered in SEC’s Regulation NMS proposal, which defined the NBBO by ranking all such identical bids or offers first by size (giving the highest ranking to the bid or offer associated with the largest size) and then by time (giving the highest ranking to the bid or offer received first in time). In our algorithm, the NBB (NBO) is located by comparing the existing bids (offers) from all venues. The NBBO is updated with each instance of a change in the NBB or NBO. Each NBBO quotation was weighted by its duration (i.e., the time for which it was effective) and used to compute a sample week time-weighted average NBBO quotation for the relevant market, which was reported on a volume-weighted (relative to total sample market trading volume) basis. Ultimately, these averages were compared across markets and across pre and postdecimalization periods. The same general techniques were used in computing effective spreads, which were determined by comparing trade executions with NBBO quotations. For analysis of trades data (e.g., in computing price ranges), a simple average over all stocks in a given market was computed. In analyzing volatility, intraday returns were measured for each stock based on continuously compounded percentage changes in quotation midpoints, which were recorded between 10 a.m. and 4 p.m. The standard deviation of the intraday returns was then computed for each stock, and the cross-sectional median across all stocks was taken. In assessing clustering, the frequencies of trades and quotes at pennies, nickels, dimes, and quarters were determined for each market on an aggregate basis. In reporting any differences between the pre- and postdecimalization sample periods in the trade execution cost and market quality measures that we analyzed, statistical significance was assessed based on cross- sectional variation in the stock-specific means. With the exception of volatility measures, statistical significance was assessed using a standard t- test for equality of means. Since average volatility measures do not conform well to the t-distribution, median volatility was reported for each market and the Wilcoxon rank sum test used to assess equality. TAQ data allowed us to study variables that are based on trades and quotes but did not allow us to study any specific effects on or make any inferences regarding orders or institutional trading costs. This is an important limitation because the transition to decimal pricing may have impacted retail traders, whose generally smaller orders tend to be executed in a single trade, differently than institutional traders. Use of TAQ data implicitly assumes that each trade record reflects a unique order that is filled, so our analysis failed to address any impact of a change in how orders are filled and the costs associated with this. We reported the pre- and postdecimalization behavior of quoted bid-ask spreads and effective spreads. Beyond measures of trade execution cost, market quality is multidimensional. Possible adverse effects of decimalization on market quality included increased trade execution costs for large traders, increased commissions to offset smaller bid-ask spreads, slower order handling and trade executions, decreased market depth, and increased price volatility. The TAQ data allowed measurement of quotation sizes and price volatility, which we reported. We also analyzed quote clustering, which reflects any unusual frequency with which prices tend to bunch at multiples of nickels, for example. We generally presented our results on an average basis for a given market in the pre- and postdecimalization periods; we also reported the results for sample stocks grouped by average daily trading volume. Average pre- and postdecimalization bid-ask spreads were calculated in cents per share and basis points (that is, the spread in cents relative to the NBBO midpoint) using the NBBO quote prices. The average spread was obtained in the following way. First, each NBBO quote for a given stock was weighted by the elapsed time before it was updated—its duration—on a given day of a sample week relative to the total duration of all NBBO quotes for that stock in that sample week. Next, the duration-weighted average over the five trading days in that sample period for that stock was used to compute the average across all stocks in a given market for that week; ultimately, a volume-weighted average was computed. For the twelve-sample week period, a volume-weighted average was also computed. The effective bid-ask spread—how close the execution price of a trade is relative to the quote midpoint—is generally considered to be the most relevant measure of trade execution cost, as it allows measurement of trades that execute at prices not equal to the bid or ask. In keeping with standard practice, we measured the effective spread for a trade as twice the absolute difference between the price at which a trade was executed and the midpoint of the contemporaneous NBBO quote. Suppose for example that the NBB is $20.00 and the NBO is $20.10, so that the NBBO midpoint is $20.05. If a trade executes at a price of $20.05 then the effective spread is zero because the trade executed at the midpoint of the spread— the buyer of the stock paid $0.05 per share less than the ask price, while the seller received $0.05 per share more than the bid price. If a trade executes at $20.02 with the same NBBO prices, the effective spread is $0.06—the buyer of the stock paid $0.08 per share less than the ask price, while the seller received $0.02 per share more than the bid price. Effective spreads were computed in cents per share and in basis points. Smaller quote sizes could reflect a decrease in liquidity supply, which in turn could be associated with increased volatility. The size of each NBBO quote was weighted by its duration and used to compute a volume- weighted average over each sample week as well as across all sample weeks. A reduction in the tick size could lead to a decline in liquidity supply, which in turn could create more volatile prices. Intraday returns were measured for each stock based on continuously compounded percentage changes in quotation midpoints, which were recorded on an hourly basis between 10 a.m. and 4 p.m. The continuously compounded return over 6 hours, from 10 a.m. to 4 p.m., was also computed. The standard deviation (a measure of dispersion around the average) of the intraday returns was then computed for each stock, and the cross-sectional median (the middle of the distribution) was taken over all stocks in a given market. As another measure of price volatility, we also considered how a stock’s daily price range (i.e., the highest and lowest prices at which trades were executed) may have changed following the implementation of decimal pricing, as the claim has been made that prices have been moving to a greater degree during the day after decimalization. We computed the equal- weighted average of each stock’s daily price range and then computed the average over all stocks in a given market. To account for potentially varying price levels across the pre and postdecimalization sample periods, we computed the price range in both cents per share as well as relative to the midpoint of the first NBBO quote for each day. Decimalization provides a natural experiment to test whether market participants prefer to trade or quote at certain prices when their choices are unconstrained by regulation. Theory suggests that if price discovery is uniform, realized trades should not cluster at particular prices. The existence of price clustering following decimalization could suggest a fundamental psychological bias by investors for round numbers and that there may be only minor differences between the transactions prices that would prevail under a tick size of 5 cents relative to those observed under decimal pricing. For quotes, according to competing hypotheses in the literature, clustering may be due to dealer collusion, or it may simply be a natural phenomenon—as protection against informed traders, as compensation for holding inventory, or to minimize negotiation costs. For our analysis, we computed the frequency of trade executions and quotes across the range of price points, but we did not attempt to determine the causes of any clustering. Consistent with generally accepted government auditing standards, we assessed the reliability of computer-processed data that support our findings. To assess the reliability of TAQ data, we performed a variety of error checks on data from a random sample of stocks and dates. This involved comparing aggregated intraday data with summary daily data, scanning for outliers and missing data. In addition, since the TAQ database is in widespread use by researchers and has been for several years, we were able to employ additional methods for discarding potentially erroneous data records following widely accepted methods (e.g., we discarded quotation information in which a price or size was reported as negative). We assessed the reliability of our analysis of the TAQ data by performing several executions of the programs using identical and slight modifications of the program coding. Program logs were also generated and reviewed for errors. As discussed in the body of this report, institutional investors’ trading costs are commonly measured in cents per share and basis points (bps). Cents per share is an absolute measure of cost based on executing a single share. Basis points—measured in hundredths of a percentage point—show the absolute costs relative to the stock’s average share price. For example, for a stock with a share price of $20, a transaction cost of $.05 would be 0.25 percent or 25 bps. Costs reported in terms of basis points can show changes resulting solely from changes in the level of stock prices—if the price of the $20 stock falls to $18, the $.05 transaction cost would now be almost 0.28 percent or 28 bps. However, many organizations track costs using basis points, and in this appendix we present the results of our institutional trading cost analysis in basis points. Analysis of the multiple sources of data that we collected generally indicated that institutional investors’ trading costs had declined since decimal prices were implemented. Specifically, NYSE converted to decimal pricing on January 29, 2001, and NASDAQ completed its conversion on April 9, 2001. We obtained data from three leading firms that collect and analyze information about institutional investors’ trading costs. These trade analytics firms (Abel/Noser, Elkins/McSherry, and Plexus Group) obtain trade data directly from institutional investors and brokerage firms and calculate trading costs, including market impact costs (the extent to which the security changes in price after the investor begins trading), typically for the purpose of helping investors and traders limit costs of trading. These firms also aggregate client data so as to approximate total average trading costs for all institutional investors. Generally, the client base represented in aggregate trade cost data is sufficiently broad based that the firm’s aggregate cost data can be used to make generalizations about the institutional investor industry. Although utilizing different methodologies, the data from the firms that analyze institutional investor trading costs uniformly showed that costs had declined since decimal pricing was implemented. Our analysis of data from the Plexus Group showed that costs declined on both NYSE and NASDAQ during the 2 year period after these markets converted to decimal pricing. Plexus Group uses a methodology that analyzes various components of institutional investor trading costs, including the market impact of investors’ trading. Total trading costs declined by about 32 percent for NYSE stocks, falling from about 82 bps to 56 bps (fig. 17). For NASDAQ stocks, the decline was about 25 percent, from about 102 bps to about 77 bps. As can be seen in figure 17, the decline in trading costs began before both markets implemented decimal pricing, which indicates that other causes, such as the 3-year declining stock market, in addition to decimal pricing, were also affecting institutional investors’ trading during this period. An official from a trade analytics firm told us that the spike in costs that preceded the decimalization of NASDAQ stocks correlated to the pricing bubble that technology sector stocks experienced in the late 1990s and early 2000s. An official from another trade analytics firm explained that trading costs increased during this time because when some stocks’ prices would begin to rise, other investors—called momentum investors—would begin making purchases and cause prices for these stocks to move up even faster. As a result, other investors faced greater than usual market impact costs when also trading these stocks. In general, trading during periods when stock prices are either rapidly rising or falling can make trading very costly. According to our analysis of the Plexus Group data, all of the decline in trading costs for NYSE stocks and NASDAQ stocks were caused by decreases in the costs resulting from market impact and delay for orders. Together, the reduction in these two components accounted for 29.1 bps or all of total decline, with delay costs representing 20.6 bps (or about 71 percent) in the approximately 2 years following the implementation of decimal pricing and 1-cent ticks on the NYSE. However, commissions increased 3 bps, which led total trading costs to decline 26.1 bps (fig. 18). Figure 18 also shows that market impact and delay costs account for all declines to total NASDAQ trading costs. For example, market impact and delay costs declined 40.9 bps between the second quarter of 2001 and the second quarter of 2003. However, overall trading costs declined by only 24.4 bps, which is 16.5 bps less than declines in market impact and delay costs. According to Plexus Group data, overall costs would have declined further if not for increases to commission costs for NASDAQ stocks, the only cost component that increased after NASDAQ converted to decimal pricing and 1-cent ticks. As shown in figure 18, commissions that market intermediaries charged for trading NASDAQ stocks increased 16.5 bps from the second quarter of 2001 to the second quarter of 2003. Industry representatives told us these increases reflect the evolution of the NASDAQ brokerage industry from trading as principals, in which the compensation earned by market makers was embedded in the final trade price, to that of an agency brokerage model, in which broker-dealers charge explicit commissions to represent customer orders in the marketplace. Analysis of data from the other two trade analytics firms from which we obtained data, Elkins/McSherry and Abel/Noser, also indicated that institutional investor trading costs varied but declined following the decimalization of U.S. stock markets in 2001. Because these two firms’ methodologies do not include measures of delay, which the Plexus Group data shows can be significant, analysis of data from these two firms results in trading cost declines of a lower magnitude than those indicated by the Plexus Group data analysis. Nevertheless, the data we analyzed from Elkins/McSherry showed total costs for NYSE stocks declined about 20 percent between the first quarter of 2001 and year-end 2004 from about 29 bps to about 24 bps. Analysis of Abel/Noser data indicated that total trading costs for NYSE stocks declined 25 percent from 20 bps to 15 bps between year-end 2000 and 2004 (fig. 19). Our analysis of these firms’ data also indicated that total trading costs declined in basis points for NASDAQ stocks or were flat. For example, our analysis of the Elkins/McSherry data showed that total trading costs for NASDAQ stocks dropped by roughly 13 percent, from about 38 bps to about 32 bps between the second quarter of 2001 when that market decimalized to year-end 2004. Analysis of the Abel/Noser data indicated that total trading costs increased nearly 5 percent for NASDAQ stocks during that period, increasing from 21 bps to 22 bps (fig. 20). This increase in trading cost can possibly be explained by the approximately 50 percent decline in average share price over the period. Similar to Plexus Group data analysis, our analysis of the Elkins/McSherry and Abel/Noser data also indicated that reductions to market impact costs accounted for a vast proportion of overall reductions for NYSE stocks (fig. 21). Analysis of the Elkins/McSherry data indicated that by declining 7.6 bps during this period, reduced market impact accounted for 95 percent of total cost trading declines. The 3 bps reduction in market impact costs identified in the Abel/Noser data represented the entire total trading cost reductions for NYSE stocks. Reductions to market impact costs explain virtually the entire decline to total trading costs captured by the Elkins/McSherry data for NASDAQ stocks and all of the Abel/Noser data for NASDAQ stocks. For Elkins/McSherry and Abel/Noser, such costs would have produced even larger total declines had commissions for such stocks not increased since 2001. Market impact costs declined 22.3 bps (about 64 percent) according to our analysis of the Elkins/McSherry data and 14 bps (about 74 percent) according to analysis of the Abel/Noser data (fig. 22). However, during this period, commissions charged on NASDAQ stock trades included in these firms’ data increased by 16.9 bps, marking approximately a sixfold increase in commissions as measured by Elkins/McSherry and by 15 bps or about a fifteenfold increase according to Abel/Noser. Data from a fourth firm, ITG, which recently began measuring institutional trading costs, also indicates that such costs have declined. This firm began collecting data from its institutional clients in January 2003. Like the other trade analytics firms, its data is similarly broad based, representing about 100 large institutional investors and about $2 trillion worth of U.S. stock trades. ITG’s measure of institutional investor trading cost is solely composed of market impact costs and does not include explicit costs, such as commissions and fees, in its calculations. Although changes in ITG’s client base for its trade cost analysis service prevented direct period to period comparisons, an ITG official told us that its institutional investor clients’ trading costs have been trending lower since 2003. As part of our analysis of the Trade and Quotes database, we also examined how quoted and effective spreads changed as a percentage of stock prices and also examined whether the extent to which quotes clustered on particular prices changed since decimal pricing began. In addition to measuring spreads in cents per share, spreads are also frequently measured in basis points, which are 1/100 of a percent. We found that spreads generally declined when measured in basis points similar to our analysis measured in cents. Reporting spreads in basis points potentially accounts for changes in the general price level of our sample stocks, which could impact our results reported in cents per share. We found that both quoted and effective spreads generally declined when measured relative to quote midpoints as they did when measured simply in cents (see tables 17 and 18). We also analyzed the extent to which quote and trade execution prices cluster at particular price points, a phenomenon known as clustering. Clustering, particularly on multiples of nickels, dimes, and quarters, has been well documented by various researchers, and various reasons are cited to explain why all possible price points are not used with equal frequency. We extended the general body of research to include how clustering may have changed after decimalization, but we do not attempt to explain its causes. We generally found that prices tend to cluster on certain price points—especially on nickel, dime, and quarter multiples—but this tendency has been lessening over time. We provide examples of clustering in national best bid quote prices recorded for our sample of NYSE-listed stocks, but the same general features were found in national best offer quote and trade execution prices for both NYSE-listed and Nasdaq stocks. Figure 23 illustrates quote price clustering (using national best bid prices) over our entire postdecimalization sample period, which included 12 sample weeks from April 2001 through November 2004. Prices are observed generally clustering at nickel increments. We also analyzed how clustering may have changed over time. Using the same data as above, we separated the data by sample week. Our results, displayed in figure 24, depict a general decline in the use of price increment multiples of a nickel. This may suggest that traders have been adapting their strategies to the penny environment and are becoming increasingly comfortable with using various price points, which may be a result of the increased use of electronic trading. It may also be the case that traders are making use of the finer price grid to gain execution priority. In addition to the individuals named above, Cody Goebel, Emily Chalmers, Jordan Corey, Joe Hunter, Austin Kelly, Mitchell Rachlis, Carl Ramirez, Omyra Ramsingh, Kathryn Supinski, and Richard Vagnoni made key contributions to this report. The lowest price at which someone is willing to sell a security at a given time. A basis point is equal to 1/100 of 1 percent. A market in which stock prices decline over a sustained period of time. The obligation of broker-dealers to seek to obtain the best terms reasonably available under the circumstances for customer orders. The difference between the price at which a market maker is willing to buy a security (bid) and the price at which the firm is willing to sell it (ask). The spread narrows or widens according to the supply and demand for the security being traded. The spread is what the market maker retains as compensation (or income) for his/her effort and risk. The highest price at which someone is willing to buy a security at a given time. Represents the purchase or sale of (1) a large quantity of stock, generally 10,000 shares or more or (2) shares valued at $200,000 or more in total market value. An individual or firm who acts as an intermediary (agent) between a buyer and seller and who usually charges a commission. A market in which stock prices rise over a sustained period of time. A contract granting the right to buy a fixed amount of a given security at a specified price within a limited period of time. A fee paid to a broker for executing a trade based on the number of shares traded or the dollar amount of the trade. An individual or firm in the business of buying and selling securities for his or her own account (principal) through a broker or otherwise. The quoting and trading of securities in dollars and cents ($2.25) instead of fractions ($8 1/8). A type of market impact cost that occurs as the result of changes in the price of the stock being traded during the time institutional investors’ portfolio mangers direct their traders to buy and sell stock and the moment these orders are released to brokers. Measures the trading costs relative to the midpoint of the quoted spread at the time the trade occurred. It is defined as twice (to reflect the implied roundtrip cost) the difference between the trade price and the midpoint of the most recent bid and ask quotes. It reflects the price actually paid or received by customers. It is considered a better measure of execution costs than quoted spreads because orders do not always execute exactly at the bid or offer price. An electronic trading system that automatically matches buy and sell orders at specified prices. It is a type of alternative trading system—an automated market in which orders are centralized, displayed, matched, and otherwise executed. An organized marketplace (stock exchange) in which members of the exchange, acting both as brokers and dealers, trade securities. Through exchanges, brokers and dealers meet to execute orders from individual and institutional investors and to buy and sell securities. Is a stock exchange (like the American Stock Exchange and the New York Stock Exchange) where buyers and sellers meet through an intermediary— called a specialist. A specialist operates in a centralized location or “floor” and primarily matches incoming orders to buy and sell each stock. There is only one specialist designated for a firm or several firms who is assigned to oversee the market for those stocks. A member of an exchange who is an employee of a member firm and executes orders, as agent, on the floor of the exchange for their clients. The highest bid and lowest offer being quoted among all the market makers competing in a security. An electronic trading linkage between the major exchanges (stock and option) and other trading centers. The system allows brokers to seek best execution in any market within the system. An organization whose primary purpose is to invest its own assets or those held in trust by it for others and typically buys and sells large volumes of securities. Examples of such organizations include mutual funds, pension funds, insurance companies, and charitable organizations. An order to buy or sell a specified number of shares of a security at or better than a customer-specified price. Limit orders supply additional liquidity to the marketplace. A limit order book is a specialist’s record of unexecuted limit orders. The ease with which the market can accommodate large volumes of securities trading without significant price changes. The stock of a company that is listed on a securities exchange. The numbers of shares available for trading around the best bid and ask prices. The degree to which an order affects the price of a security. A dealer that maintains a market in a given security by buying or selling securities at quoted prices. An order to buy or sell a stated amount of a security at the best price available when the order reaches the marketplace. A market for securities traded “over-the-counter” through a network of computers and telephones, rather than on a stock exchange floor. NASDAQ is an electronic communications system in which certain NASD member broker-dealers act as market makers by quoting prices at which they are willing to buy or sell securities for their own accounts or for their customers. NASDAQ traditionally has been a “dealer” market in which prices are set by the interaction of dealer quotes. Defined as the highest bid and lowest ask across all U.S. markets providing quotes for an individual stock. SEC rules that require (1) the display of customer limit orders that improve certain over-the-counter (OTC) market makers’ and specialists’ quotes or add to the size associated with such quotes (Rule 11Ac1-4 (Display Rule)); (2) OTC market makers and specialists who place priced orders with ECNs to reflect those orders in their published quotes (Quote Rule); and (3) OTC market makers and specialists that account for more than 1 percent of the volume in any listed security to publish their quotations for that security (Mandatory Quote Rule). The cost from delaying execution to lessen market impact, or not be able to make the execution at all, or abandoning part of it because the market has turned against the strategy. Occurs when an order is executed at better than the quoted price. A contract granting the right to sell a fixed amount of a given stock at a specified price within a limited period of time. The highest bid to buy and the lowest offer to sell any stock at a given time. Where a given price quote is only visible for a brief moment on the display screen. Measures the cost of executing a simultaneous buy and sell order at the quoted prices. It is the simplest measure of trade execution cost (or trading cost). One who trades securities for himself/herself or who gives money to any institution, such as a mutual fund, to invest for himself/herself. The federal regulatory agency created by the Securities Exchange Act of 1934 that is responsible for ensuring investor protection and market integrity in the U.S. securities markets. Members of an exchange who handle transactions on the trading floor for the stocks for which they are registered and who have the responsibility to maintain an orderly market in these stocks. They do this by buying or selling a stock on their own accounts when there is a temporary disparity between supply and demand for the stock. The practice of improving the best price by a penny or less in an attempt to gain execution priority. A financial instrument that signifies an ownership position in a company. The smallest price difference by which a stock price can change (up or down). The execution of a customer order in a market at a price that is inferior to a price displayed (or available) in another market. The cost for executing the trade (brokerage commission, fees, market impact). The degree to which trade and quotation information (price and volume) is available to the public on a current basis. A measure of the fluctuation in the market price of a security. The number of shares traded in a security or an entire market during a given period—generally on a daily basis. It is a measure of liquidity in a market. A trading benchmark used to evaluate the performance of institutional traders. It is the average price at which a given day’s trading in a given security took place. VWAP is calculated by adding up the dollars traded for every transaction (price times shares traded) and then dividing by the total shares traded for the day. The theory is that if the price of a buy trade is lower than the VWAP, then it is a good trade. The opposite is true if the price is higher than the VWAP. Securities Markets: Preliminary Observations on the Use of Subpenny Pricing. GAO-04-968T. Washington, D.C.: July 22, 2004. Securities Pricing: Trading Volumes and NASD System Limitations Led to Decimal-Trading Delay. GAO/GGD/AIMD-00-319. Washington, D.C.: September 20, 2000. Securities Pricing: Progress and Challenges in Converting to Decimals. GAO/T-GGD-00-96. Washington, D.C.: March 1, 2000. Securities Pricing: Actions Needed for Conversion to Decimals. GAO/T- GGD-98-121. Washington, D.C.: May 8, 1998.

In early 2001, U.S. stock and option markets began quoting prices in decimal increments rather than fractions of a dollar. At the same time, the minimum price increment, or tick size, was reduced to a penny on the stock markets and to 10 cents and 5 cents on the option markets. Although many believe that decimal pricing has benefited small individual (retail) investors, concerns have been raised that the smaller tick sizes have made trading more challenging and costly for large institutional investors, including mutual funds and pension plans. In addition, there is concern that the financial livelihood of market intermediaries, such as the broker-dealers that trade on floor-based and electronic markets, has been negatively affected by the lower ticks, potentially altering the roles these firms play in the U.S. capital market. GAO assessed the effect of decimal pricing on retail and institutional investors and on market intermediaries. Trading costs, a key measure of market quality, have declined significantly for retail and institutional investors since the implementation of decimal pricing in 2001. Retail investors now pay less when they buy and receive more when they sell stock because of the substantially reduced spreads--the difference between the best quoted prices to buy or sell. GAO's analysis of data from firms that analyze institutional investor trades indicated that trading costs for large investors have also declined, falling between 30 to 53 percent. Further, 87 percent of the 23 institutional investor firms we contacted reported that their trading costs had either declined or remained the same since decimal pricing began. Although trading is less costly, the move to the 1-cent tick has reduced market transparency. Fewer shares are now generally displayed as available for purchase or sale in U.S. markets. However, large investors have adapted by breaking up large orders into smaller lots and increasing their use of electronic trading technologies and alternative trading venues. Although conditions in the securities industry overall have improved recently, market intermediaries, particularly exchange specialists and NASDAQ market makers, have faced more challenging operating conditions since 2001. From 2000 to 2004, the revenues of the broker-dealers acting as New York Stock Exchange specialists declined over 50 percent, revenues for firms making markets on NASDAQ fell over 70 percent, and the number of firms conducting such activities shrank from almost 500 to about 260. However, factors other than decimal pricing have also contributed to these conditions, including the sharp decline in overall stock prices since 2000, increased electronic trading, and heightened competition from trading venues.

You are an expert at summarizing long articles. Proceed to summarize the following text: Newborn screening programs in the United States began in the early 1960s with the development of a screening test for PKU and a system for collecting and transporting blood specimens on filter paper. All newborn screening begins with a health care provider collecting a blood specimen during a newborn’s first few days of life. The baby’s heel is pricked to obtain a few drops of blood, which are placed on a specimen collection card and sent to a laboratory for analysis. State departments of health may use their own laboratory to test samples from the dried blood spots or may have a contract with a private laboratory, a laboratory at a university medical school, or another state’s public laboratory. Laboratories may choose among a variety of testing methods to maximize the efficiency and effectiveness of their testing. A major technical advance in newborn screening is use of the tandem mass spectrometer, an analytical instrument that can precisely measure small amounts of material and enable detection of multiple disorders from a single analysis of a blood sample. Tandem mass spectrometry (MS/MS) has greatly increased the number of disorders that can be detected, but it cannot completely replace other analysis methods because it cannot screen for all disorders included in state newborn screening programs. After initial testing, state newborn screening program staff notify health care providers of abnormal results because it may be necessary to verify the accuracy of the initial screening result by testing a sample from a second specimen or to ensure that the infant receives more extensive diagnostic testing to confirm the presence of a disorder. The infant may also need immediate treatment. Laboratories and state maternal and child health programs generally carry out the notification process. Primary care and specialty physicians are involved in various stages of the newborn screening process. They generally are responsible for notifying the family of abnormal screening results and may confirm initial results through additional testing. If necessary, they identify appropriate management and treatment options for the child. State maternal and child health program staff may follow up to ensure that these activities occur. Several HHS agencies carry out activities related to newborn screening, including collecting and sharing information about state newborn screening programs, promoting quality assurance, and funding screening services. HRSA’s Maternal and Child Health Bureau has primary responsibility for promoting and improving the health of infants and mothers. HRSA offers grants to states, including the Maternal and Child Health Services Block Grant, that state newborn screening programs may use to support their newborn screening services. HRSA also funded the development of the Council of Regional Networks for Genetic Services (CORN) in 1985 to provide a forum for information exchange among groups concerned with public health aspects of genetic services. The newborn screening committee of CORN identified several areas of importance to programs, including the process of selecting disorders for screening, communication, quality assurance, and funding. It developed guidelines in these areas to increase consistency among state newborn screening programs and also began collecting data on state programs. In 1999, CORN was disbanded, and HRSA established the National Newborn Screening and Genetics Resource Center—the Resource Center. The Resource Center is supported by a cooperative agreement between the Genetic Services Branch of HRSA’s Maternal and Child Health Bureau and the University of Texas Health Science Center at San Antonio Department of Pediatrics. The Resource Center develops annual reports on state newborn screening activities and provides technical assistance to state newborn screening programs. It also provides information and educational resources to health professionals, consumers, and the public health community. CDC’s Newborn Screening Branch, in partnership with the Association of Public Health Laboratories (APHL), operates NSQAP. NSQAP is a voluntary, nonregulatory program that is designed to help state health departments and their laboratories maintain and enhance the quality of their newborn screening test results. In addition, CDC’s National Center on Birth Defects and Developmental Disabilities funds research related to newborn screening. The Centers for Medicare & Medicaid Services’ (CMS) involvement in newborn screening relates to its Medicaid and CLIA programs. CMS administers Medicaid, a jointly funded, federal-state health insurance program for certain low-income individuals, which covers newborn screening for eligible infants. Nationwide, Medicaid finances services for one in three births each year. Through the CLIA program, CMS also regulates laboratory testing performed on specimens obtained from humans, including the dried blood spots used for newborn screening. CLIA’s purpose is to ensure the accuracy, reliability, and timeliness of laboratory test results. CLIA requires that laboratories comply with quality requirements in five major areas: personnel qualifications and responsibilities, quality control, patient test management, quality assurance, and proficiency testing. Laboratories that fail to meet CLIA’s quality requirements are subject to sanctions, including denial of Medicaid payments. Through the CLIA program, laboratories that test dried blood spots in connection with newborn screening must have a process for verifying the accuracy of their tests at least two times each year. State newborn screening laboratories can meet this requirement through participation in the proficiency testing program offered by NSQAP. The National Institutes of Health’s (NIH) National Institute of Child Health and Human Development has sponsored research on disorders identified through newborn screening, including PKU, congenital hypothyroidism, and galactosemia. Research has addressed issues such as the effectiveness of screening and treatments and the application of new technologies for identifying additional disorders. The Children’s Health Act of 2000 authorized HHS to award grants to improve or expand the ability of states and localities to provide screening, counseling, or health care services for newborns and children who have, or are at risk for, heritable disorders and to evaluate the effectiveness of these services. As of February 2003, funds had not been appropriated to fund these grants. The act also authorized the establishment of a committee to advise the Secretary of HHS on reducing the mortality and morbidity of newborns born with disorders. The Secretary of HHS signed the charter for this committee in February 2003. Under the Health Insurance Portability and Accountability Act of 1996, HHS developed regulations to protect the privacy of health information, which as defined in the regulations, would include the results of testing of newborns. The regulations give individuals the right, in most cases, to inspect and obtain copies of health information about themselves. In addition, the regulations generally restrict health plans and certain health care providers from disclosing such information to others without the patient’s consent, except for purposes of treatment, payment, or healthcare operations. While the federal regulations preempt state requirements that conflict with them, states are free to enact and enforce more stringent privacy protections. Most entities and individuals that are covered by the regulations must be in compliance by April 14, 2003. Although state newborn screening programs vary in the number of disorders for which they screen, states generally follow similar practices and criteria in selecting disorders for their programs. States also conduct most other aspects of their programs in similar ways. Almost all state programs provide information for parents and conduct provider education, but fewer than one-fourth of the states provide information for parents on their option to test for additional disorders not included in the state’s program. All state programs notify health care providers—and some also notify parents—about abnormal screening results, and all states reported following up on abnormal results. Most state newborn screening programs screen for 8 disorders or fewer. The number of disorders included in state programs ranges from 4 to 36. (See app. II for the number of disorders screened for by each state.) Programs are implemented through state statutes and/or regulations, which often require screening for certain disorders. According to the Resource Center, all states require screening for PKU and congenital hypothyroidism, and 50 states require screening for galactosemia. Table 1 lists the disorders most commonly included in state newborn screening programs. (See app. III for information on these disorders.) Some states provide screening for certain disorders to selected populations, through pilot programs, or by request. For example, in addition to the 44 states that require screening for sickle cell diseases for all newborns, 6 states provide screening for sickle cell diseases to selected populations or through pilot programs. Some states are taking steps that could expand the number of disorders included in their programs. The criteria that state newborn screening programs reported they consider in selecting disorders to include in their programs are generally consistent across states. For example, they generally include how often the disorder occurs in the population, whether an effective screening test exists to identify the disorder, and whether the disorder is treatable. These criteria are also consistent with recommendations of the American Academy of Pediatrics (AAP) newborn screening task force. Neither the criteria states use nor AAP’s recommendations include benchmarks, such as the lowest incidence or prevalence rate that would be acceptable for population- based newborn screening or measurements of treatment effectiveness or screening reliability. Some states reported that they are considering revising their criteria because MS/MS can identify disorders for which treatment is not currently available. Because MS/MS technology can be used for screening multiple disorders in a single analysis, states may choose to include such disorders in their testing along with disorders that can be treated. Twenty-one states use MS/MS in their screening programs (see app. II); the number of disorders for which screening is conducted using MS/MS ranges from 1 to 28. (See app. IV for a list of selected disorders for which screening is conducted using MS/MS.) Many states consider cost when selecting disorders to include in their newborn screening program. In addition, several states told us that they would need additional funding to expand the number of disorders in their program. The costs associated with adding disorders include costs of additional testing, educating parents and providers, and following up on abnormal results. Additional costs may also be associated with acquiring and implementing new technology, such as purchasing MS/MS technology and training staff in its use. With the exception of federal recommendations that newborns be screened for three specific disorders, there are no federal guidelines on the set of disorders that should be included in state screening programs. The U.S. Preventive Services Task Force, which is supported by HHS’s Agency for Healthcare Research and Quality, has recommended screening for sickle cell diseases, PKU, and congenital hypothyroidism. In addition, NIH issued a consensus statement recommending that all newborns be screened for sickle cell diseases, as well as a consensus statement concluding that genetic testing for PKU has been very successful in the prevention of severe mental retardation. AAP’s newborn screening task force reported that infants born anywhere in the U.S. should have access to screening tests and procedures that meet accepted national standards and guidelines. The task force recommended that federal and state public health agencies, in partnership with health professionals and consumers, develop and disseminate model state regulations to guide implementation of state newborn screening systems, including the development of criteria for selecting disorders. In 2001, HRSA awarded a contract to the American College of Medical Genetics to convene an expert group to assist it in developing a recommended set of disorders for which all states should screen and criteria that states should consider when adding to or revising the disorders in their newborn screening programs. The expert group is expected to make recommendations to HRSA in spring 2004. Some state officials told us they have concerns about the development of a uniform set of disorders because states differ in incidence rates for disorders and capacity for providing follow-up and treatment. Most states reported that the state health department or board of health has authority to select the disorders included in newborn screening programs. Six states reported that they could not modify the disorders included in their newborn screening programs without legislation. Forty- five states reported that they have an advisory committee that is involved in selecting disorders; such a committee generally makes recommendations to the state health department or board of health. Most states reported that their advisory committee is not required by state statute or regulation. We found that most newborn screening advisory committees are multidisciplinary and include physicians, other health workers, and individuals with disorders or parents of children with disorders. (See table 2.) Almost all states reported they offer information for parents and education for providers on their newborn screening program. Eleven states have newborn screening statutes requiring that parents of newborns be informed of the program at the time of screening. In most states, information for parents includes how the blood specimen is obtained, the disorders included in the state program, and how parents will be notified of testing results. Seven states reported they include information for parents on their option to obtain testing for additional disorders that are not included in the state’s program, but that may be available to them through other laboratories. Provider education offered by states includes information on the collection and submission of specimens, the management of the disorders, and medical specialists available to treat the disorders. While state newborn screening programs produce or compile materials for parents, they generally do not provide them directly to parents and are unable to say when, or if, parents actually receive them. Rather, the state provides materials to other individuals, including hospital staff, midwives, pediatricians, primary care providers, and local health department staff, who are expected to share them with parents. Over half the states reported that their materials for parents are available in English and one or more other languages. The parties states notify about newborn screening results vary, depending on whether the result is abnormal or normal. (See table 3.) All states reported that for abnormal results, they notify the physician of record or the birth or submitting hospital. The physician or hospital, in turn, is generally responsible for notifying parents. Most states reported they notify physicians and hospitals by telephone; many states reported also notifying them by letter, fax, or E-mail. While the AAP newborn screening task force recommended that programs notify parents or guardians, fewer than half the states routinely notify parents directly of abnormal results, and no state routinely notifies parents directly of normal results. States that notify parents generally said that notification of parents was by letter. States also reported that they take other actions in response to abnormal screening results. About three-fourths of states reported testing samples from second specimens when the initial specimen is abnormal or unsatisfactory. All states reported conducting follow-up activities. Over 90 percent of states said that their follow-up activities include obtaining additional laboratory information to confirm the presence of a disorder, which could include obtaining the results of diagnostic tests performed by other laboratories. Almost all states reported that they refer infants with disorders for treatment and most follow up to confirm that treatment has begun. About two-thirds of the states reported that they conduct or fund periodic follow-up of newborns diagnosed with a disorder, which could include ensuring that they continue to receive treatment and monitoring their health status. According to Resource Center data on state newborn screening programs, the length of the follow-up period varies among disorders and across states. States reported that they spent over $120 million on newborn screening in state fiscal year 2001, with individual states’ expenditures ranging from $87,000 to about $27 million. Seventy-four percent of these expenditures supported laboratory activities. The primary funding source for most states’ newborn screening expenditures was newborn screening fees. The fees are generally paid by health care providers submitting specimens; they in turn may receive payments from Medicaid and other third-party payers, including private insurers. Other funding sources that states identified included the Maternal and Child Health Services Block Grant, direct payments from Medicaid, and other state and federal funds. States reported they spent over $120 million on laboratory and program administration/follow-up activities in state fiscal year 2001.23, 24 Individual states’ expenditures ranged from $87,000 to about $27 million. Based on information provided by 46 states, we found that, on average, states spent $29.44 for each infant screened in state fiscal year 2001. Two-thirds of these states spent from $20 to $40 per infant. (See app. V for expenditures per infant screened in each state.) Laboratory expenditures accounted for 74 percent of states’ expenditures; program administration/follow-up expenditures accounted for 26 percent. States reported that laboratory expenditures generally supported activities such as processing and analyzing specimens, notifying health care providers and parents of screening test results, and evaluating the quality of laboratory activities. Program administration/follow-up expenditures generally supported activities such as notifying appropriate parties of test results, confirming that infants received additional laboratory testing, confirming that infants diagnosed with disorders received treatment, and providing education to parents and health care providers. In addition, almost half the states reported that laboratory expenditures supported education of parents and health care providers. We asked states to provide us expenditure information for laboratory and program administration/follow-up; we instructed states to include only those follow-up activities that are conducted through confirmation of diagnosis and referral for treatment. We did not ask for expenditure information for disease management and treatment services. Expenditure calculations were based on responses from 50 states; South Dakota reported that expenditure information was not available for state fiscal year 2001. Six states reported that their expenditures included significant, nonrecurring expenses in state fiscal year 2001, such as for the purchase of MS/MS equipment or computer software. These expenditures ranged from $22,645 to $415,835, totaling about $1 million. In addition, one state told us that the program administration/follow-up expenditures it reported included approximately $50,000 to $75,000 for disease management and treatment services. Fees are the largest funding source for most states’ newborn screening programs. Forty-three states reported they charge a newborn screening fee to support all or part of program expenditures. The fees are generally paid by health care providers submitting specimens; they in turn may receive payments from Medicaid and other third-party payers, including private insurers. Some states collect the fees through the sale of specimen collection kits to hospitals and birthing centers. Other states may bill hospitals, patients, physicians, Medicaid, or other third-party payers for the fee. Nationwide, newborn screening fees funded 64 percent of newborn screening program expenditures in state fiscal year 2001.28, 29 (See table 4.) Thirteen state programs reported that fees were their sole source of funding in fiscal year 2001, and 19 additional states reported that fees funded at least 60 percent of their newborn screening expenditures. The average fee in the states that charged a fee was about $31, with fees ranging from $10 to $60. Seven state newborn screening programs identified Medicaid as a direct funding source in state fiscal year 2001. These screening programs bill the state Medicaid agency directly for laboratory services or receive a transfer of funds from the state Medicaid agency for screening services provided to Medicaid-enrolled infants. The percentage of expenditures the states reported as directly funded by Medicaid does not include Medicaid payments to hospitals for services provided to newborns. Other funding sources that states identified for newborn screening program expenditures include state funds and the Maternal and Child Health Services Block Grant. About half the states reported that state funds supported laboratory or program administration/follow-up expenditures. In addition, about half the states reported that they rely on the Maternal and Child Health Services Block Grant as a funding source for laboratory or program administration/follow-up expenditures. Seven states identified other funding sources, such as the Preventive Health and Health Services Block Grant. CDC and HRSA offer services to assist states in evaluating the quality of their newborn screening programs. For example, CDC’s NSQAP provides proficiency testing for almost all disorders included in state newborn screening programs, enabling states to meet the CLIA regulatory requirement that laboratories have a process for verifying the accuracy of tests they perform. Through the Resource Center, HRSA supports technical reviews of state newborn screening programs. These voluntary programwide reviews are conducted at the request of state health officials and focus primarily on areas of concern identified by state officials. In addition to these federally supported efforts, most state newborn screening programs reported that they evaluate the quality of the laboratory testing and/or program administration/follow-up components of their newborn screening programs. CDC’s NSQAP is the only program in the country that conducts proficiency testing on the dried blood spots used in newborn screening. While NSQAP is voluntary, as of January 2003, all laboratories that perform testing for state newborn screening programs participated in the proficiency testing program. Participation in NSQAP allows laboratories to meet the CLIA regulatory requirement that they have a process for verifying the accuracy of tests they perform. NSQAP offers proficiency testing for over 30 disorders, including the disorders most commonly included in state newborn screening programs. When a laboratory misclassifies a specimen during proficiency testing, NSQAP notifies the laboratory of the problem. When an abnormal specimen is classified as normal, NSQAP officials work with the laboratory to identify and solve the problem that led to the misclassification. NSQAP provides information on the specimen that was misclassified, gives supplemental specimens to the laboratory to test, and may visit the laboratory, if necessary, to provide additional assistance. In addition to proficiency testing, NSQAP provides other types of quality assurance assistance, including training, guidelines, and consultation to laboratories that participate in the program. For example, in September 2001, NSQAP cosponsored a meeting of laboratory and medical scientists to discuss issues related to the use of MS/MS in newborn screening. In addition, NSQAP provides state newborn screening programs with quality control specimens—test specimens designed to be run over a period of time to ensure the stability of the testing methods—and works with the manufacturers of the filter papers used in the collection of dried blood spots to ensure their quality. NSQAP also publishes quarterly and annual reports on the aggregate performance of participating laboratories. These reports include information on the results of the proficiency testing program. The annual reports also include information on NSQAP’s quality control effort and describe other activities undertaken during the year. HRSA’s Resource Center offers technical reviews to states at their request to help them refine and improve their newborn screening activities. The team that visits the state program typically includes a representative of the Resource Center, a representative from CDC’s NSQAP to focus on laboratory quality assurance, a health care provider to focus on medical and genetic issues, a follow-up coordinator from another state program to focus on the follow-up component of the program, and a representative from HRSA to focus on financial and administrative issues. The Resource Center’s reviews concentrate primarily on areas state officials ask the team to review. For example, states have asked the review team to look at whether or how the set of disorders included in their programs should be expanded, how to incorporate MS/MS into a program, and whether current program staffing levels are appropriate. The review team also assesses the degree to which the state program follows the 1992 CORN guidelines in areas such as public, professional, and patient education, laboratory proficiency testing, and consumer representation on advisory committees. After reviewing a state newborn screening program, the team provides the state with a final report that includes its findings and recommendations to improve the program. Recent findings have included newborn screening advisory committees that were not sufficiently multidisciplinary and programs that did not have a systemwide quality assurance program. Review teams have also identified the need for additional program administration/follow-up staff and for provider education programs to include information on collecting and submitting specimens and reporting screening results. The state newborn screening program is not obligated to accept or implement the team’s recommendations, and HRSA and the Resource Center have no authority to require states to make changes to their program. However, according to the Resource Center, most participating states have made some modifications to their program in response to recommendations. State officials told us, for example, that they have expanded or diversified the membership of their advisory committees, revised practitioner manuals, developed a programwide quality assurance system, and hired additional program administration/follow-up staff. In addition, state newborn screening program staff told us that the recommendations of the review teams helped inform program staff, state legislators, and health department staff as they assessed program needs. HRSA has funded 26 technical reviews in 22 states since the program began in 1987; 9 of these reviews have occurred since January 2000. Every state that has requested a review has been able to receive one. Most states reported evaluating the quality of the laboratory testing and/or program administration/follow-up components of their newborn screening programs. For example, laboratories monitor performance by defining criteria for achieving quality results and designing a monitoring program to evaluate whether they are meeting these criteria. One state told us that it has criteria related to calibration of equipment, personnel training and education, and recordkeeping and documentation. Other measures that programs may monitor include percentage of births screened, number of unusable specimens, demographic information missing from specimen collection cards, and number of children lost to follow-up. Several state officials told us that they use some of these measures to monitor quality of specimens received from hospitals and to identify hospitals that may need education regarding the newborn screening process. In addition, states voluntarily report many of these measures to the Resource Center for inclusion in its annual National Newborn Screening Report, enabling states to compare their program over time with other states’ programs. Moreover, all states report annually to HRSA on the percentage of newborns in the state who are screened for selected disorders, including PKU and congenital hypothyroidism, as part of the Maternal and Child Health Services Block Grant reporting requirements. About half the states reported to us that they have a mechanism for learning of abnormal cases that were misclassified as normal, information that can alert a state to problems with its program. According to experts in the field of newborn screening, these cases occur infrequently but can have serious results when children develop a life-threatening condition that might have been prevented if treated early. Most of these states learn about these cases through their communications with the specialists in their state who manage and treat the disorders identified by newborn screening. If a child is referred to one of these specialists from a source other than the newborn screening program, the specialist will usually contact program officials, who then determine whether the screening program misclassified the child’s screening result as normal. Four states reported that they can learn of abnormal cases misclassified as normal through reports made to state birth defects or disease registries. For example, one state reported that staff at the state birth defects registry notify the newborn screening program of children reported to them, and the newborn screening program then checks whether or not these children were identified through the screening process. State newborn screening statutes usually do not require that parental consent be obtained before screening occurs. However, most state newborn screening statutes or regulations allow exemptions from screening for religious reasons, and several states allow exemptions for any reason. Provisions regarding the confidentiality of screening results are included in state newborn screening statutes and regulations and state genetic privacy laws, but are often subject to exceptions, which vary across states. The most common exceptions allow disclosure of information for research purposes, for use in law enforcement, and for establishing paternity. While few newborn screening statutes provide penalties for violation of confidentiality provisions, many states’ genetic privacy statutes provide criminal sanctions and penalties for violating their provisions, including those related to confidentiality. All states require newborn screening, and state newborn screening statutes usually do not require consent for screening. Only Wyoming’s newborn screening statute expressly requires that persons responsible for collecting the blood specimen obtain consent prior to screening. In addition, of the three states with only regulations requiring newborn screening, Maryland’s regulations on newborn screening require consent for screening. While all states require newborn screening, most newborn screening statutes or regulations provide exemptions in certain situations. In 33 states, newborn screening statutes or regulations provide an exemption from screening if it is contrary to parents’ religious beliefs or practices. Thirteen additional states provide an exemption for any reason. (See table 5.) In over half the states, newborn screening statutes and regulations have provisions that indicate that information collected from newborn screening is confidential.40, 41 However, they permit information to be released without authorization from the child’s legal representative in some circumstances. The most common provision for release of screening information is for use in statistical analysis or research, generally with a requirement that the identity of the subject is not revealed and/or that the researchers comply with applicable state and federal laws for the protection of humans in research activities. Some state screening statutes have additional provisions that allow screening information to be released. Wisconsin’s screening statute, for example, allows the information to be released for use by health care facilities staff and accreditation organizations for audit, evaluation, and accreditation activities; and for billing, collection, or payment of claims. A few states have more restrictive provisions. South Carolina’s screening statute, for example, limits disclosure of the information obtained from screening to the physician, the parents of the child, and the child when he or she reaches age 18. State statutes that govern the collection, use, or disclosure of genetic information may also apply to genetic information obtained from newborn screening. Twenty-five states have laws that prohibit disclosure of genetic information without the consent of the individual; in 23 of these states, the statutes have exceptions that permit disclosure without consent. (See table 6.) For example, 14 states’ genetic privacy laws permit disclosure of genetic information without consent for the purpose of research, provided that individuals’ identities are not revealed and/or the research complies with applicable state and federal laws for the protection of humans in research activities. We found no limitation on the ability of laboratories or state agencies to inform health care providers attending newborns with abnormal screening results. On the contrary, many statutes and regulations require laboratories and state agencies to inform providers of abnormal screening results. As defined in federal regulations implementing the Health Insurance Portability and Accountability Act of 1996, the term health information would also include newborn screening information. Most state newborn screening statutes and genetic privacy laws do not include penalties for lack of compliance. According to the National Conference of State Legislatures, 17 states have laws that provide specific penalties for violating genetic privacy laws. In 6 of these states, violations of genetic privacy statutes are punishable by fine and/or imprisonment. In addition, the statutes authorize civil lawsuits to obtain damages and, in most instances, court costs and attorneys’ fees. In 10 of these states, the statutes provide for civil liability only. In 1 state, violation is punishable only as a crime. We provided a draft of this report to HHS for comment. Overall, HHS said that the report presents a thorough summary of state newborn screening programs’ current practices. (HHS’s comments are reprinted in app. VI.) HHS said that the report needed to reflect that newborn screening is a system that, in addition to testing, includes follow-up, diagnosis, disease management and treatment, evaluation, and education. However, the draft report did identify the various components of the newborn screening system. HHS said that there is a need to more comprehensively address components of the system beyond testing. For example, HHS commented that there is a need for a coordinated effort in states to train and educate health professionals and state newborn screening program directors in the use of newer technologies. In addition, it stated that there is a need to provide information to families and parents about the screening their state provides and the screening options available to them outside of their state’s program. HHS said that it anticipated that the report would, among other things, include recommendations to improve state newborn screening programs. As we noted in the draft report, HRSA has initiated a process to develop recommendations for state newborn screening programs. The scope of our review focused on providing the Congress with descriptive information about state programs. HHS supported the development of benchmarks to help states evaluate the quality of the various components of the newborn screening system. It added that one of the most effective ways the federal government can support state newborn screening programs is by strengthening the scientific basis for newborn screening through funding of systematic evaluation of outcomes and the quality of all components of the newborn screening system. In its comments, HHS provided information on its efforts related to newborn screening. For example, HHS described demonstration projects it funded to examine the use of new technology and initiatives to improve family and provider education. In addition, HHS indicated that all of its programs address the recommendations of the AAP newborn screening task force and encourage the integration of various newborn screening and genetics services into systems of care. HHS provided technical comments. We incorporated the technical comments and other information HHS provided on its programs where appropriate. As arranged with your offices, unless you publicly announce its contents earlier, we will not distribute this report until 30 days after its issue date. We will then send copies of this report to the Secretary of Health and Human Services, the Administrators of the Health Resources and Services Administration and the Centers for Medicare & Medicaid Services, the Directors of the Centers for Disease Control and Prevention and the National Institutes of Health, appropriate congressional committees, and others who are interested. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions, please contact me at (202) 512- 7119. An additional contact and the names of other staff members who made contributions to this report are listed in appendix VII. To do our work, we surveyed the health officers in all the states during October and November 2002 about their newborn screening programs. We asked each state health officer to work with laboratory and program administration/follow-up staff in responding to the questions. The survey asked for information on the process for selecting disorders to include in newborn screening programs; laboratory and follow-up activities; parent and provider education efforts; expenditures and funding sources; efforts to evaluate the quality of laboratory testing and program administration/follow-up; and states’ retention and sharing of screening results. The survey focused only on screening for metabolic and genetic disorders. We did not ask for information on disease management and treatment services provided by state newborn screening programs, and the survey did not collect information on newborn screening for hearing and infectious diseases. We pretested the survey in person with laboratory and program administration/follow-up staff from the Virginia and Delaware newborn screening programs. In addition, the survey instrument was reviewed by staff at the Department of Health and Human Services’ (HHS) Centers for Disease Control and Prevention (CDC), National Center for Environmental Health, Newborn Screening Branch, and the National Newborn Screening and Genetics Resource Center, a project funded by HHS’s Health Resources and Services Administration (HRSA). We refined the questionnaire in response to their comments. We received responses from all the states. After reviewing the completed questionnaires and checking the data for consistency, we contacted certain states to clarify responses and edited survey responses as appropriate. In addition, we followed up with four states to obtain more detailed information on their processes for selecting disorders, evaluations of parent and provider education, evaluations of the quality of laboratory testing and program administration/follow-up, and mechanisms for identifying abnormal cases misclassified as normal. To identify which genetic and metabolic disorders are included in states’ newborn screening programs, we reviewed the Resource Center’s U.S. National Screening Status Reports. These reports provide information on the disorders for which states require screening and the disorders for which screening is provided to selected populations, through pilot programs, or by request. To report on efforts by HHS and states to monitor and evaluate the quality of state newborn screening programs, we reviewed annual summary reports, proficiency testing results, and other documents from the Newborn Screening Quality Assurance Program (NSQAP), which CDC operates with the Association of Public Health Laboratories, and interviewed CDC staff on states’ participation. We also reviewed report findings from the seven technical reviews of state newborn screening programs that HRSA, CDC, and the Resource Center conducted from 1999 to 2001. We interviewed Resource Center staff about the content and findings of these reviews and interviewed officials in five states about actions taken in response to the review staff’s findings and recommendations. To determine how state laws address consent and privacy issues related to newborn screening, we analyzed state statutes that provide for newborn screening for genetic and metabolic disorders and state statutes that relate to privacy of genetic information generally. We also reviewed state newborn screening regulations as appropriate. The information on states that require consent for newborn screening is based on our analysis of state newborn screening and genetic privacy statutes and the newborn screening regulations in states that do not have newborn screening statutes. The information on exemptions from screening is based on our review of state newborn screening statutes and newborn screening regulations. Information on privacy is based on our analysis of confidentiality provisions in state newborn screening statutes and, for those states that do not have confidentiality provisions in their newborn screening statutes, on confidentiality provisions in newborn screening regulations. We also analyzed confidentiality provisions in state genetic privacy statutes. To identify the newborn screening statutes and regulations that were within the scope of our review, we relied on research provided by the National Conference of State Legislatures (NCSL) in fall 2002 and analyzed only those newborn screening statutes and regulations identified through that research. With regard to genetic privacy statutes, we analyzed only those statutes identified by NCSL in an April 2002 report identifying state genetic privacy laws. We contacted state officials as appropriate to obtain assistance in locating and interpreting statutory authorities. We also relied on NCSL’s determination of the number of states that provide penalties for the violation of those statutes. Newborn screening programs are governed by a variety of legal authorities. We did not research or analyze any case law interpreting state newborn screening statutes and regulations or genetic privacy statutes, and we did not research or analyze any written interpretive guidance issued by states. We also reviewed relevant literature and obtained information from individual experts, newborn screening laboratory and maternal and child health staff in several states, and representatives of organizations interested in newborn screening, including the American Academy of Pediatrics, American College of Medical Genetics, American College of Obstetricians and Gynecologists, American Medical Association, Association of Maternal and Child Health Programs, Association of Public Health Laboratories, Association of State and Territorial Health Officials, and the March of Dimes. We conducted our work from June 2002 through March 2003 in accordance with generally accepted government auditing standards. Number of disorders for which screening is conducted using tandem mass spectrometry (MS/MS) Number of disorders for which screening is conducted using tandem mass spectrometry (MS/MS) Expenditure per infant screened not calculated because state did not report number of infants screened. Expenditure information not available for state fiscal year 2001. In addition to the person named above, key contributors to this report were Janina Austin, Emily Gamble Gardiner, Ann Tynan, Ariel Hill, Kevin Milne, Cindy Moon, and Susan Lawes.

Each year state newborn screening programs test 4 million newborns for disorders that require early detection and treatment to prevent serious illness or death. GAO was asked to provide the Congress with information on the variations among state newborn screening programs, including information on criteria considered in selecting disorders to include in state programs, education for parents and providers about newborn screening programs, and programs' expenditures and funding sources. To collect this information, GAO surveyed newborn screening programs for genetic and metabolic disorders in all 50 states and the District of Columbia. GAO was also asked to provide information on efforts by the Department of Health and Human Services (HHS) and states to evaluate the quality of newborn screening programs, state laws and regulations that address parental consent for newborn screening, and state laws and regulations that address confidentiality issues. While the number of genetic and metabolic disorders included in state newborn screening programs ranges from 4 to 36, most states screen for 8 or fewer disorders. In deciding which disorders to include, states generally consider similar criteria, such as whether the disorder is treatable. States also consider the cost of screening for additional disorders. HHS's Health Resources and Services Administration is funding an expert group to assist it in developing a recommended set of disorders for which all states should screen and criteria for selecting disorders. Most state newborn screening programs have similar practices for administering and funding their programs. Almost all states provide education on their newborn screening program for parents and providers, but fewer than one-fourth inform parents of their option to obtain tests for additional disorders not included in the state's program. State programs are primarily funded through fees collected from health care providers, who may receive payments from Medicaid and other third-party payers. Nationwide, fees funded 64 percent of states' 2001 fiscal year program expenditures of over $120 million. All newborn screening laboratories participate in a quality assurance program offered by HHS's Centers for Disease Control and Prevention, which assists programs in evaluating the quality of their laboratories. All states require newborn screening, and state statutes that govern screening usually do not require parental consent. However, 33 states' newborn screening statutes or regulations allow exemptions from screening for religious reasons, and 13 additional states' newborn screening statutes or regulations allow exemptions for any reason. Newborn screening statutes and regulations in over half the states contain confidentiality provisions, but these provisions are often subject to exceptions. HHS said that the report presents a thorough summary of state newborn screening programs' current practices.

You are an expert at summarizing long articles. Proceed to summarize the following text: IAEA, an autonomous international organization affiliated with the United Nations, was established in Vienna, Austria, in 1957. The Agency has the dual role of promoting the peaceful uses of nuclear energy through its nuclear safety and technical cooperation programs, and verifying, through its safeguards program, that nuclear materials subject to safeguards are not diverted to nuclear weapons or other proscribed purposes. IAEA’s governing bodies include the General Conference, composed of representatives of the 127 IAEA member states; and the 35-member Board of Governors, which provides overall policy direction and oversight to IAEA. A Secretariat, headed by the Director General, is responsible for implementing the policies and programs of the General Conference and Board of Governors. IAEA derives its authority to establish and administer safeguards from its statute, the NPT and regional nonproliferation treaties, bilateral commitments between states, and project agreements with states. Article III of the NPT binds each of the treaty’s 180 signatory states that had not manufactured and detonated a nuclear device prior to January 1, 1967, (referred to in the treaty as non-nuclear weapon states) to conclude an agreement with IAEA that applies safeguards to all source and special nuclear material in all peaceful nuclear activities within the state (known as comprehensive safeguards agreements). The regional treaties contain similar obligations. As of March 1998, all but four of the non-nuclear weapons states with significant nuclear activities had comprehensive safeguards agreements with IAEA. India, Pakistan, Israel, and Cuba, because they are not parties to the NPT or other regional nonproliferation treaties, do not have comprehensive safeguards agreements with IAEA, thus, they are not required to declare all of their nuclear material to the Agency. Instead, these four states have IAEA safeguards agreements that limit the scope of the Agency’s safeguards activities to monitoring only specific material, equipment, and facilities. India and Pakistan are known to have nuclear weapons programs and detonated several nuclear devices during May 1998. Israel is also believed to have produced nuclear weapons. The five nuclear weapon states that are parties to the NPT—China, France, the Russian Federation, the United Kingdom, and the United States—are not obligated by the NPT to accept IAEA safeguards but have voluntarily submitted designated materials and facilities to IAEA safeguards inspections to signal to the non-nuclear weapon states their willingness to share in the administrative and commercial costs of safeguards. (App. I lists states that are subject to safeguards inspections, as of February 1998.) IAEA safeguards are a set of technical measures and activities by which IAEA seeks to verify that nuclear material subject to safeguards is not diverted to nuclear weapons or other proscribed purposes. Material-accounting measures verify quantities of nuclear material declared to the Agency and any changes in the quantity over time. Containment measures use physical barriers, such as walls and seals, to control the access to and the movement of nuclear material, while surveillance devices, such as cameras, detect the movements of nuclear material and any tampering with IAEA’s containment measures. Finally, IAEA uses on-site inspections, among other things, to help ensure that a state has reported all of the material it is required to report. In 1997, IAEA’s total expenditures were $313 million, of which about $93 million was spent on the safeguards program. IAEA funds its programs through its regular budget, for which all members are assessed, and by voluntary extrabudgetary contributions from the United States and other member states. In 1997, IAEA spent about $82 million for safeguards through its regular budget and almost $11 million from extrabudgetary contributions. Since 1985, IAEA’s member states have generally limited the Agency’s regular budget to zero real growth, allowing only nominal increases for inflation and staff salaries. Also, IAEA endeavors to meet the demands of less developed member states to maintain a balance in funding between its technical cooperation program and its safeguards program. IAEA safeguards play a vital role in seeking to prevent nuclear weapons proliferation by verifying the peaceful use of nuclear materials. According to a State Department official, prior to the discovery of Iraq’s secret nuclear weapons program, states had been reluctant to accept a more intrusive safeguards regime. However, events in Iraq clearly demonstrated the need for expanding the scope of safeguards. Following revelations about Iraq in 1991, IAEA adopted several measures to strengthen certain reporting requirements and to improve the Agency’s access to information. The Agency and its member states also launched a thorough study of its safeguards system, known as Programme 93 plus 2, which resulted in the development of a new, two-part, strengthened safeguards system. IAEA expects that changes to strengthen its safeguards program will enhance its capability to detect clandestine or undeclared nuclear activities in non-nuclear weapon states. Following the revelations about Iraq’s clandestine nuclear program in 1991, IAEA adopted three measures to strengthen reporting and access to information. In 1992 and 1993, IAEA’s Board of Governors reiterated the Agency’s right to exercise authority to conduct special inspections at locations other than those declared to the Agency, based on all information available to it, including that provided by member states. The Board also adopted changes requiring more timely reporting by states of certain design information for new facilities that will handle safeguarded materials. Furthermore, the Board also adopted a voluntary reporting system for exports of certain nuclear materials and equipment on the Nuclear Suppliers Group Trigger List. Currently 52 states and Taiwan have agreed to participate in the reporting system. IAEA’s Board of Governors approved part 1 of the new strengthened safeguards system in 1995. Part 1 measures being implemented through existing safeguards agreements include obtaining additional information from states regarding facilities that once contained, or will contain, nuclear material subject to safeguards; the expanded use of unannounced inspections; the collection of environmental samples at locations where inspectors now have access; and the use of advanced technology to remotely monitor the movements of nuclear material. Part 1 measures include the following: Non-nuclear weapons states are now required to provide IAEA with additional information about nuclear activities undertaken prior to entry into force of their safeguards agreements. IAEA’s inspectors are now allowed to perform environmental sampling at facilities and locations where they currently have access. Environmental samples taken from the surfaces of equipment and buildings and the air, water, vegetation, and soil at declared nuclear facilities can help IAEA detect the presence of certain types of undeclared activities, including uranium enrichment and plutonium reprocessing. IAEA is increasing its access to all declared nuclear and nuclear-related locations and will employ the use of unannounced inspections. IAEA is testing new safeguards measurement and surveillance systems that can operate unattended and can transmit safeguards data remotely. Remote monitoring technology—including electronic seals, radiation and motion detectors, and video surveillance—is intended to make IAEA’s traditional safeguards program effective, and at the same time more efficient, by reducing many of the regular safeguards inspections, particularly at light water nuclear power reactors and storage facilities. IAEA is increasing its cooperation with state and regional systems of accounting and control, including those in the European Union, performed by the European Atomic Energy Community (EURATOM) inspectorate of the European Commission and those between Brazil and Argentina carried out by their Agency for Accounting and Control of Nuclear Material in the conduct of inspections. In May 1997, IAEA’s Board of Governors approved part 2 of its strengthened safeguards measures in the form of a model agreement known as the Model (or Additional) Protocol. This new protocol supplements member states’ safeguards agreements and will give the Agency new authority to collect information and conduct inspections. Part 2 measures are designed to more quickly and effectively alert the international community to the possible production or diversion of nuclear material for nuclear weapons or other proscribed purposes. Implementing part 2 measures will require each state to adopt an Additional Protocol as a supplement to its existing safeguards agreement that will give IAEA the additional legal authority the Agency believes it needs to implement the new measures. Part 2 measures include the following: IAEA will gather information about all aspects of a state’s nuclear fuel cycle, including information about research and development on the nuclear fuel cycle, the manufacture and export of sensitive and other key nuclear-related equipment, and all buildings on a nuclear site. IAEA inspectors will be provided access (also referred to as “complementary access”) to all aspects of a state’s nuclear fuel cycle including; facilities at which nuclear fuel-cycle research and development is carried out; manufacturing and import locations and all buildings on a nuclear site, including undeclared or suspect sites. This is intended to provide, among other things, a deterrent to the co-location of clandestine and peaceful activities. IAEA may exercise this right through short notice inspections on sites where nuclear material is located and at other locations. This access will include the right to take environmental samples. IAEA inspectors will be provided access to conduct “wide-area” environmental monitoring, that is, collecting environmental samples beyond declared locations when deemed necessary. States will improve their administrative arrangements for designating inspectors and issuing multiple-entry visas to facilitate unannounced/short notice inspections and permit access to modern means of communication. Since 1995, IAEA has tested and started to implement some of the strengthened safeguards measures. For example, IAEA is conducting field tests of remote monitoring systems in Switzerland, South Africa, and the United States. IAEA has also held unannounced inspections in Sweden, South Africa, and Canada. By the end of 1998, IAEA expects that seven facilities in Switzerland will be remotely monitored and IAEA will begin using this technology at light water nuclear power plants in Japan. IAEA has collected environmental samples at 64 facilities (enrichment plants and hot-cell installations that could be used to reprocess plutonium) in 34 countries in preparation for incorporating this technique into its routine safeguards inspections. IAEA has also begun the collection of information from states on decommissioned and closed-down facilities and information provided on a voluntary basis on the imports and exports of nuclear related equipment and material. IAEA has been developing a broad-based information analysis system that will help it assess the expanded declarations of nuclear activities provided by inspected states. The new system will also include the results of ad hoc, routine, and special inspections; information provided by other member states; data from public sources; and results of environmental sampling. This information will be incorporated into country profiles. As of March 1998, seven of IAEA’s non-nuclear weapons states had signed Additional Protocols to their safeguards agreement based on the Model Protocol: Armenia, Australia, Georgia, Lithuania, the Philippines, Poland, and Uruguay. Australia has also ratified the Protocol and Armenia is implementing it provisionally. Other states with significant nuclear programs, including Canada, France, the United Kingdom, the United States, and the 13 non-nuclear weapon states of EURATOM, have submitted drafts of Additional Protocols for IAEA’s Board of Governors approval in June 1998. Japan and the Republic of Korea are expected to follow later this year or early in 1999. India’s representative to IAEA told us that India has no plans for ratifying the Additional Protocol. Pakistan’s representative was unable to meet with us or answer our written questions on the matter. Although IAEA recognizes that some new costs will be incurred in implementing the Strengthened Safeguards System, it expects to offset increased annual implementation costs with future savings from greater efficiencies in safeguards operations, thereby maintaining current funding levels in the safeguards program. However, IAEA does not know whether anticipated cost savings through efficiencies can be achieved. Moreover, IAEA does not know whether, or to what extent, the new safeguards measures will allow a reduction in current inspection levels, and the savings in cost and inspector effort of some measures such as remote monitoring and environmental sampling at declared sites, may not be fully realized. While IAEA has conducted some preliminary planning for implementing certain aspects of the new system, IAEA does not know whether in the long run it can implement the new system with existing resources because it has not developed a long-term plan that (1) identifies the total resource requirements for implementing the new measures, (2) provides an implementation schedule with milestones for equipment and estimated projections for adoption of the Additional Protocol, or (3) establishes criteria for assessing the effectiveness of the new measures and whether they could be used to reduce inspection efforts. In a May 1996 report, IAEA’s Director General outlined to IAEA’s Board of Governors how the new system might be implemented to meet the goal of eventual cost neutrality and provided some notional cost estimates for implementing the new system. The report anticipates that implementation would follow a step-by-step approach, with part 1 measures being implemented first, followed by part 2 measures. As IAEA gains experience with the new measures, the report stated that costs savings could be achieved by reducing inspections at nuclear power plants. IAEA expects that the implementation of part 1 and 2 measures would likely cost $34 million over 6 years starting in 1997. The estimated annual implementation costs range from $5.3 million to $6.5 millon a year. IAEA projects that cost savings, resulting from a two-thirds reduction of interim safeguards inspections at nuclear power reactors, starting in 1999, would lead to cost neutrality by 2002. The representatives of member states we spoke to generally expect that the implementation of the overall Strengthened Safeguards System will be cost neutral. For example, the representatives to IAEA from China, Germany, Japan, and the United Kingdom told us that IAEA may need additional short-term funding increases to implement the new system, but they expected that the savings resulting from increased efficiency will offset implementation costs at a later date. The Canadian representative also stated that cost increases resulting from the implementation of the new system are not inevitable and that it is possible that IAEA can find the necessary resources within the Safeguards Department by re-evaluating existing programs and priorities. IAEA hopes that by implementing the new measures it will be able to achieve future cost savings through a reduction in inspections and an increase in efficiency. However, IAEA’s assumptions about the extent of cost savings may not materialize. Our discussions with IAEA officials indicate that the amount of cost savings that can be expected during implementation is uncertain because (1) IAEA does not have experience in implementing the new measures, and there is no consensus among member states to determine when and to what extent the new system will allow for a reduction in existing inspections; (2) the savings in cost and inspector effort of some measures, such as remote monitoring and environmental sampling, may not be fully realized; and (3) the need to analyze new information provided by member states under comprehensive safeguards agreements and the Additional Protocols may require more inspectors or other staff. IAEA intends to reduce routine inspections if it can provide to its member states a credible assurance regarding the absence of undeclared nuclear activities, such as uranium enrichment and plutonium reprocessing, in non-nuclear weapon states. However, our discussions with IAEA officials indicate that there are many uncertainties about the effectiveness of the new measures and the means by which the Agency will develop the findings that could support such assurances. For example, according to an IAEA Safeguards Division Director, the Agency’s new rights to inspect suspected undeclared sites could be limited by the amount of access provided to IAEA inspectors and the degree to which a country can conceal information through deception and distraction, as was the case in Iraq. In addition, while environmental sampling of the air, water, vegetation, and soil has been demonstrated to be a powerful new tool to detect undeclared activities such as plutonium reprocessing, the absence of data showing enrichment or reprocessing may not be sufficiently credible to reduce inspections. According to an IAEA official, the absence of such data does not necessarily prove that the activities did not occur, but only that the Agency did not find evidence of such activities. Moreover, Department of Defense (DOD) officials told us that, in general, wide-area environmental sampling, the feasibility of which is still under study, could be extremely costly and vulnerable to countermeasures deployed by a safeguarded state, that can undermine its effectiveness. According to IAEA’s former Director General, member states should not expect that the new measures will be 100 percent accurate and should expect that they will not detect proliferators 100 percent of the time. He warned that no inspection regime is perfect. IAEA’s member states are not in agreement on when and to what extent IAEA can reduce inspections based on credible assurances of the absence of undeclared nuclear activities. According to the Canadian representative, IAEA should start planning now for how it will integrate new safeguards measures with the current system. Once IAEA can arrive at credible assurances, it should be in a position to reduce inspections at nuclear power reactors and concentrate its traditional safeguards measures on nuclear materials, such as highly enriched uranium and reprocessed plutonium, which can be directly used in building a nuclear weapon. In contrast, U.S. officials believe that it is unwise to drop existing measures, such as interim inspections that have proven effective, and replace them with the untested new measures. U.S. officials stated that IAEA should implement and assess the new system over a period of years and replace existing measures as it builds confidence in the system. IAEA hopes to reduce the costs of safeguards by implementing advanced safeguards technologies that reduce inspector effort. These technologies include remote monitoring and environmental sampling. However, the extent of potential savings from implementing these new technologies is not fully certain. For example, in 1995 IAEA estimated that the use of remote monitoring, for containment and surveillance of material at 79 nuclear facilities located in Canada, Japan, South Korea, Switzerland, and Taiwan, could save $2.3 million a year by reducing IAEA’s inspection effort by two-thirds at these facilities. In addition, the use of unattended monitoring systems to verify the nondiversion of nuclear material at on-load reactors could save $2.9 million a year in inspection effort. However, according to IAEA, several factors could reduce the amount of savings derived from remote monitoring. IAEA noted that any failures of equipment would jeopardize the potential savings in the inspection effort, since additional inspections would be required to reestablish the inventories of nuclear materials in the facilities. Also, according to an IAEA Safeguards Division Director, while remote monitoring would reduce the number of costly site visits, it may not significantly reduce the number of inspectors (whose salaries accounted for 58 percent of the direct safeguards inspection costs in 1996, according to our calculations) because they would be needed to analyze the data transmitted to Agency headquarters and regional offices. In addition, IAEA has stated that it may have to use short notice inspections to provide additional assurances that the remote monitoring equipment has not been tampered with. The costs of analyzing environmental samples also may reduce potential savings. For example, according to U.S. officials, the average costs of analyzing environmental samples is about $2,700 and $4,000 per sample, depending on the type of analysis performed. IAEA has not determined the number or frequency of samples that will be taken during routine inspections at enrichment facilities and hot cells. While IAEA plans to reimburse, on a limited basis, member states participating in its network of analytical labs, a large percentage of the costs of analyzing environmental samples is being borne by the United States. In addition, IAEA has not yet fully determined the impact that environmental sampling at declared sites will have on reducing inspection efforts at the sites. According to State and Department of Energy (DOE) officials, the United States is currently studying alternative sample analyses techniques for IAEA which may reduce these costs. Moreover, analyzing new information available to the Agency from safeguards agreements and the new protocol will increase inspector efforts. According to IAEA, the analysis of the new information is a fundamental part of the Strengthened Safeguards System. When the evaluation indicates possible inconsistences in state declarations, IAEA intends to take certain follow-up actions, including, where appropriate, requesting access to sites or other locations to increase its confidence that there are no undeclared materials or activities. According to an IAEA safeguards official, this analysis is being performed by IAEA’s three safeguards operations divisions and the new system is expected to produce an influx of information to the Agency. According to IAEA’s Safeguards Division Director of Concepts and Planning, IAEA will need more inspectors because of the increase in information flowing into the Agency and the increase in material placed under safeguards. In its draft 1999-2000 program and budget, IAEA estimates that information analysis will require the equivalent of six staff, although this is absorbed within existing staff levels. In total, five new inspectors were added in the draft 1999-2000 program and budget to handle protocol related activities. Although IAEA is beginning to implement some parts of the strengthened safeguards system, such as installing remote monitoring equipment, it has not yet developed a plan or a total resource estimate for implementing the full system. While some planning documents exist, the Agency has not developed a long-term plan that (1) identifies the total resources needed to implement the new measures, (2) provides an implementation schedule with milestones for equipment, and estimated projections for adoption of the Additional Protocol and (3) provides criteria for assessing the effectiveness of the new measures and the ways they may contribute to reducing inspection efforts. A long-term plan would allow IAEA and its member states to better manage cost uncertainties and funding limitations. According to the Deputy Director General for Safeguards, IAEA has not developed a plan or a cost estimate because of the uncertainties involving the implementation of the new Strengthened Safeguards System and because they have concentrated their efforts on gaining adoption by the Board of the Model Protocol and conclusion by individual member states of their Additional Protocols. In IAEA’s draft program and budget for 1999 and 2000, the Agency states that it is difficult to estimate the cost of activities resulting from the implementation of the part 2 measures under the Model Protocol, because there is no certainty about the number of member states that will adhere to the Protocol through the year 2000 or the volume of activities in each member state. In November 1997, we discussed the lack of a plan with the U.S. Ambassador to the U.S. Mission to the U.N. System Organizations in Vienna. He told us that the United States should not be alarmed that IAEA did not have a plan for the early implementation of the Strengthened Safeguards System because it was more important for the United States to push for the early ratification of the Additional Protocols by a large number of IAEA’s member states. According to the Ambassador, early ratification is important to encourage the limited number of countries of proliferation concern to accept the Additional Protocol. IAEA is beginning to implement elements of part 1 of the new system, which will require large initial expenditures for equipment and is beginning to develop information that can be used as the basis for establishing a long-term plan. During their review of IAEA’s draft 1999-2000 program and budget, the Geneva Group of major donors states posed questions to the IAEA Secretariat concerning the uncertainties involving implementation of the new, Strengthened Safeguards System. They expressed their concern about the lack of a plan and a cost estimate, including costs and time frames for implementing remote monitoring, and the lack of details on the Agency’s assumption that costs for activities related to the model protocol can be absorbed within existing resource levels. They also expressed concerns about how projected funding increases for safeguards in the draft 1999-2000 program and budget related to the increased costs for implementing the new system. In response to their questions, IAEA provided information that could be used as the basis for developing a long-term plan. IAEA indicated that by the end of 2000 it expects that (1) remote monitoring will be implemented at as many as 100 sites, (2) as many as 50 states with nuclear programs will have adopted an Additional Protocol, and (3) activities related to the Protocol will account for about 10 percent of staff costs in the field for countries where the Additional Protocol is being implemented. IAEA’s Standing Advisory Group on Safeguards Implementation (SAGSI), a group of safeguards experts that advise IAEA’s Director General, has called on IAEA’s Secretariat to develop a work plan, with milestones and cost estimates, so that the Agency can evaluate different approaches to efficiency, effectiveness, and costs during its implementation of the new system. According to the IAEA Deputy Director General for Safeguards, in early 1998, SAGSI and the Agency embarked on a project called “Integration of Safeguards” to assess the relative effectiveness of the new measures in comparison with traditional verification activities and to seek potential reductions in inspection efforts in states that have adopted the Additional Protocol. IAEA is heavily dependent on U.S. financial support to meet its safeguards obligations. For 1997, the U.S. contribution to IAEA’s safeguards budget grew to almost 40 percent of the Agency’s total safeguards budget when extrabudgetary contributions are included. IAEA has limited options for funding the new, Strengthened Safeguards System as long as its regular budget is held to zero real growth and competing funding priorities and political constraints inhibit reallocation of resources. U.S. and IAEA officials agree that IAEA will continue to seek increased U.S. financial support as the Agency implements its new safeguards measures. The United States has historically been a primary supporter of IAEA and its largest contributor. It considers the NPT and IAEA safeguards to be key elements of international efforts to prevent nuclear weapons proliferation. In 1997, the United States spent over $53 million for IAEA’s safeguards program: about $22 million from assessed contributions; almost $17 million from extrabudgetary contributions; and almost $16.5 million from various U.S. agencies’ in-kind contributions, such as the use of laboratory facilities and personnel. These in-kind contributions are not reflected in IAEA’s total safeguards budget. As shown in table 1, the U.S. contribution to IAEA’s safeguards budget through its regular and extrabudgetary contributions has grown since 1989 to almost 40 percent of IAEA’s total safeguards budget in 1997, making the United States the largest financial contributor to IAEA’s safeguards program. In 1997, the United States contributed nearly $22 million to IAEA’s regular safeguards budget that funded core inspection activities, such as staff salaries, travel, training, and other direct costs in IAEA’s safeguards program operations and other program areas. The United States also contributed almost $17 million in extrabudgetary cash contributions to IAEA from funds provided by the Department of State. This includes over $7 million to assist the Agency in funding activities essential to implementing the strengthened safeguards system through the U.S. Program of Technical Assistance to IAEA Safeguards (POTAS), and over $7 million through the Nonproliferation and Disarmament Fund (NDF) for the purchase of new safeguards equipment. In addition to the United States’ regular safeguards and extrabudgetary contributions to IAEA, we estimated that, in fiscal year 1997, the Department of State, DOE, and DOD provided in-kind assistance valued at $16.5 million to support IAEA’s safeguards program. Of this amount, DOE’s Office of Arms Control and Nonproliferation, International Safeguards Division, provided about $10 million from its international safeguards program to support high-priority projects at IAEA and DOE laboratories for the strengthened safeguards program. In addition, during 1997, State and DOD spent about $2.5 million to analyze environmental samples for IAEA. The remaining $4 million in funds supported POTAS research and development at DOE laboratories and management of the POTAS program at Brookhaven National Laboratory. (App. II discusses U.S. extrabudgetary contributions and in-kind assistance to IAEA’s safeguards program in 1997.) Increases in the amount of nuclear materials subject to safeguards, and new initiatives for verifying that excess nuclear weapons material in the United States will not be used for nuclear explosive purposes, have caused IAEA’s safeguards requirements to grow. According to IAEA, IAEA’s requirements to safeguard nuclear materials exceed, and will continue to exceed, the resources provided to the safeguards program under the regular budget. (App. III discusses the growth in the amount of nuclear materials subject to IAEA’s safeguards since 1989.) Since IAEA’s regular budget is subject to zero-real growth, IAEA has only been able to meet its safeguards requirements because of its heavy reliance on extrabudgetary support from its member states, which is not subject to zero-real growth limitations. Our analysis shows that IAEA’s total safeguards budget (regular and extrabudgetary contributions) grew 37 percent from 1989 to 1997.While IAEA’s regular safeguards budget grew at an average annual real rate of 2.28 percent, extrabudgetary contributions, which are not subject to zero-real growth limitations, grew at an average annual rate of 10.2 percent since 1989, or almost four times the rate of annual real growth in regular budget expenditures. As a result, extrabudgetary expenditures in the safeguards program have almost doubled since 1989 (see app. IV for our analysis of real growth in IAEA’s safeguards program from 1989 to 1997). Further, IAEA’s draft 1999 and 2000 program and budget shows that the Agency will continue to require substantial extrabudgetary contributions from its member states for initial equipment purchases for the new safeguards measures. (See app. V for more details on IAEA’s proposed safeguards budget for 1999 and 2000.) IAEA’s draft program and budget for 1999 and 2000 states that the cost of upgrading and replacing obsolete equipment with new technology, including the majority of remote monitoring components, will depend heavily on extrabudgetary resources—$15.2 million and $12.4 million for 1999 and 2000, respectively. IAEA’s Deputy Director General for Safeguards has stated that without strong U.S. extrabudgetary support, IAEA could not afford to replace its obsolete surveillance equipment with new systems, which must occur before remote monitoring can be widely used. According to an IAEA official, approximately 300 to 400 obsolete surveillance systems will need to be replaced over the next 5 years. (See app. V for IAEA resources spent and required for purchasing new safeguards equipment for 1994 to 2000.) IAEA’s Secretariat warns that if there is a shortfall in extrabudgetary contributions, they will have to modify the Agency’s strategy for replacing equipment. The inability to replace obsolete and unreliable equipment may have a negative effect on IAEA’s ability to attain its safeguards goals, thus providing a lower level of assurance to member states that nuclear material has not been diverted to military purposes. According to IAEA’s Secretariat, its overall programmatic requirements will continue to exceed the resources available with zero real growth. In addition, the Secretariat stated that the overreliance on extrabudgetary resources should not continue. However, the Secretariat further stated that unless IAEA member states seek alternative funding sources or reduce or eliminate specific activities, the Agency will have to continue to rely on extrabudgetary contributions to achieve its objectives in the safeguards program. To ensure the implementation of IAEA’s Strengthened Safeguards System, officials from the State Department and the U.S. Mission to the U.N. System Organizations in Vienna have stated that the United States is prepared to provide the Agency with additional extrabudgetary funding. However, this is subject to the availability of appropriated funds. State Department and DOE officials also hope to continue to rely on the use of alternative funding sources, like the NDF, to help finance the high priority needs of IAEA’s strengthened safeguards program, such as acquiring new safeguards equipment. For example, for 1998, IAEA has already requested funds from State Department appropriations, including the NDF, to purchase high priority safeguards equipment not funded under the regular budget. IAEA’s equipment requirements, totaling $10.7 million, include new radiation monitoring equipment and 76 units for a new digital surveillance system. In addition to the limitations of zero real growth in IAEA’s regular budget, IAEA’s safeguards budget is affected by other considerations, specifically the need to maintain a funding balance between safeguards and the technical cooperation program. Since 1958, in promoting the peaceful uses of nuclear energy through its technical cooperation program, IAEA has provided technical assistance to its member states by supplying equipment, expert services, and training that support the establishment or upgrading of nuclear techniques and facilities. Although the United States does not receive technical assistance, it has been the leading financial donor to IAEA’s technical cooperation program. Furthermore, the United States is effectively paying a disproportionate share of the technical cooperation fund, a voluntary fund that finances technical assistance projects, because many member states are not paying their designated shares. Yet, many of these states are receiving the benefits of IAEA’s technical assistance. While the United States and other major donors to IAEA believe that applying safeguards is IAEA’s most important function, most developing countries believe that receiving technical assistance through the technical cooperation program is just as important and participate in IAEA for the technical assistance it provides. The United States and other major donors principally participate in the program to help ensure that member states fully support IAEA’s safeguards and the NPT. Accordingly, IAEA has endeavored to maintain a balance in funding between its dual statutory responsibilities of providing technical assistance and ensuring compliance with safeguards agreements. As seen in figure 1, in 1997 IAEA spent about 29 percent and 30 percent of its overall budget resources on technical assistance and safeguards activities, respectively. Technical assistance ($90.2) Other programs ($63.8) IAEA’s draft program and budget for 1999 continues to maintain this funding balance in the regular budget. However, in November 1997, IAEA’s Director General stated that there should not be a dollar-for-dollar balance between the technical cooperation and safeguards programs and that developing countries should realize that IAEA’s safeguards are also important to their well-being. In February 1998, the Geneva Group of major donor countries asked IAEA to set priorities for its programs more strategically, and some wanted to break the one-for-one balancing of IAEA resources for technical cooperation and safeguards. In March 1998, IAEA’s Director General began a review of IAEA’s overall program priorities to ensure that, in view of budgetary constraints, IAEA’s program activities meet the priorities of its member states. According to executive branch officials, pressures for balance remain, compounded by the recent failure of several major donors to pay their share of the technical cooperation fund. IAEA’s safeguards program plays a vital role in seeking to prevent nuclear proliferation by verifying that non-nuclear weapon states are adhering to their treaty obligations not to acquire nuclear weapons. However, for those countries that are not subject to comprehensive safeguards such as India and Pakistan, the Strengthened Safeguards System will have little effect. The future effectiveness of IAEA’s safeguards depends on whether IAEA will receive sufficient legal and financial support from its member states to permit full implementation of the new safeguards measures and how well the Agency implements changes to strengthen its ability to detect clandestine nuclear activities in countries with treaty obligations not to develop nuclear weapons. We believe that without a long-term plan, IAEA may not be able to effectively and efficiently implement these changes. A long-term plan, that includes cost estimates for implementing the new measures, an implementation schedule and milestones, and criteria for assessing the effectiveness of the new measures could help IAEA and its member states better manage the uncertainty facing the Agency as implementation of the new measures begins. In addition, we concur with the position of U.S. officials who told us that they believe that it would be unwise to drop existing safeguards measures until the new measures are proven effective. IAEA is heavily dependent on U.S. financial support to meet its safeguards obligations, with U.S. contributions now accounting for almost 40 percent of the Agency’s total safeguards budget. IAEA’s mandated requirements to safeguard nuclear materials will continue to exceed resources in its regular budget because IAEA’s member states are continuing their practice of zero real growth and their practice of maintaining a one-for-one balance between its safeguards and technical cooperation programs. IAEA’s draft budget for 1999 continues the one-for-one funding balance and requests strong extrabudgetary support from its member states, including the United States, to replace obsolete equipment and otherwise support the implementation of the strengthened safeguards system. The Director General’s effort to review IAEA’s overall program priorities presents member states with an opportunity to reevaluate the budget policies of zero real growth and the need to maintain a funding balance between the safeguards and technical cooperation programs, in light of IAEA’s increasing safeguards workload. Reprogramming funds into the safeguards budget, at least during the transition to a new strengthened system, and removing the budget limitations of zero real growth could reduce IAEA’s reliance on extrabudgetary contributions from the United States. We recommend that the Secretary of State, working with other IAEA member states, request the Director General to develop and circulate a plan for implementing parts 1 and 2 of the Strengthened Safeguards System. Such a plan should include (1) an estimate of the total cost of program implementation; (2) a schedule, with milestones, for implementing the strengthened safeguards measures, and (3) criteria for assessing the effectiveness of the new measures. This plan should be used by IAEA and its member states to determine when the new measures can replace existing safeguards measures. Furthermore, IAEA should periodically revise and update the plan as it implements the strengthened safeguards measures and use the plan to develop its budgetary requirements for the program. To reduce reliance on U.S. extrabudgetary contributions, we also recommend that the Secretary of State reevaluate the United States’ policy of supporting zero real growth for IAEA’s regular budget and the need to maintain a one-for-one funding balance between the safeguards and technical cooperations programs. The Department of State, in coordination with the Departments of Energy and Defense, the Arms Control and Disarmament Agency; the Nuclear Regulatory Commission, and the U.S. Mission to the United Nations System Organizations in Vienna, Austria, provided oral comments on a draft of this report. These agency officials generally agreed with the facts presented in the report. However, these officials raised a concern about our recommendation that the members require the IAEA Secretariat to develop a strategic plan for the implementation of the Strengthened Safeguards System. The officials were concerned that by using such a plan, IAEA’s Secretariat could be pressured by the Board of Governors to meet arbitrary target deadlines for phasing out old measures for cost reasons even through the effectiveness of the new measures had not yet been established. According to the officials, the United States has emphasized to IAEA that the effectiveness of the Strengthened Safeguards System must be established before some of the current measures can be phased out. We agree that it would be unwise to drop existing safeguards measures until the new measures are proven effective. However, we believe that a long-term implementation plan that establishes criteria for assessing the effectiveness of the new measures so that IAEA and its member states can determine when the new measures can replace existing measures is consistent with the U.S. position and would not require IAEA to phase out existing measures before the new measures are in place and working. Such a plan is important because it would establish the basis for making any decision on phasing out some of the existing measures and would provide IAEA and its member states a clearer understanding of implementation costs for the new system. In commenting on this report, IAEA’s Deputy Director General for Safeguards also expressed some doubts about the utility of a long-term implementation plan. He has stated that a long-term plan with milestones fails to recognize the unique and special nature of the Additional Protocol and that while existing safeguards are implemented with rigid quantitative requirements, the Additional Protocol will be implemented more qualitatively. The Deputy Director General said that implementation of inspection activities under the new Protocol will be on a case-by-case basis, subject to overall budgetary appropriations for the implementation of safeguards. As a result, the Agency’s management will have flexibility in deciding how, where, and when to engage resources in order to provide greater assurances of nonproliferation. He also said that IAEA has attempted to derive cost estimates based on general assumptions about the number of states joining the Additional Protocol and a projection of the level of effort required in implementation. We recognize that the Additional Protocol will be implemented differently than the existing safeguards system. However, the Additional Protocol is only one of two parts to the new Strengthened Safeguards System. We believe that a long-term implementation plan for the Strengthened Safeguards System is valuable for several reasons. First, the Strengthened Safeguards System involves potentially large expenditures for equipment and services (such as environmental sampling). A flexible long-term plan, updated periodically, would allow member states to better forecast their contributions. Second, while there is uncertainty regarding the level of activity under the Additional Protocol, we noted in our report that IAEA has started to estimate some costs associated with its implementation. By incorporating these costs and the assumptions used to derive them into a long-term implementation plan, IAEA’s Secretariat and member states will be in a better position to adjust resources as needed and respond to any unforeseen needs. Third, while the Deputy Director General commented that IAEA will only spend the money it has to implement the new system, a plan would allow IAEA to better focus its resources as it gains experience and maximize the potential benefits of the new system. The State Department agreed with our recommendation that the budget policy of supporting zero real growth in IAEA’s regular budget and the need for maintaining the one-for-one balance between safeguards and technical cooperation be reevaluated, but it raised several concerns. First, the United States, as one of the founding members of the Geneva Group of major donors, has traditionally been a staunch supporter of the Group’s zero real growth approach to U.N. budgets, and changes in this policy for IAEA might undermine the U.S. budget positions in other international organizations. Second, given limited resources and congressional interest in “capping” the amount of money made available for assessed contributions, funding increases at IAEA would force the United States to seek reductions in other international organizations’ budgets. Third, with respect to the one-for-one balance between safeguards and technical cooperation programs, a State Department official noted that without a decision to alter this balance, not only are reallocations within existing budget levels hampered, but any budget increase to fund the safeguards program would politically need to be matched by an equal increase in other areas of IAEA’s budget, effectively doubling the cost. We recognize that State’s concerns need to be addressed, but we believe that reevaluating the zero-real growth policy for IAEA and the one-for-one balance between IAEA’s safeguards and technical cooperation programs could (1) provide a more stable funding basis for the safeguards program while the Agency is implementing the Strengthened Safeguards System and (2) reduce IAEA’s reliance on extrabudgetary contributions from the United States. The Executive Branch also provided several technical corrections that have been incorporated as appropriate into the report. To describe changes IAEA is undertaking to strengthen its safeguards program and to assess the reasonableness of IAEA’s assumptions regarding the impact of these changes on program costs and efficiency, we visited IAEA headquarters in Vienna, Austria, in October and November 1997. In Vienna, we met with various IAEA officials, including the Director General, the Deputy Director General for Administration, the Director of the Division of Budget and Finance, the Deputy Director General for Safeguards, and other IAEA staff in the departments of Administration and Safeguards. We also analyzed financial and programmatic data from IAEA on its safeguards program, including documents from meetings of IAEA’s General Conference and its Board of Governors. In general, we reported IAEA’s annual expenditure data, except in the cases where budget data were most appropriate, such as table 1 which demonstrated the share of the U.S. contributions to IAEA’s safeguards budget from 1989 to 1997. Differences between IAEA’s budget and expenditure data are due to the use of a fixed UN budgetary exchange rate of 12.70 Austrian schillings to 1 U.S. dollar to express the budget in dollars, while dollar expenditures are calculated using the average annual exchange rates. Although we could not independently verify the quality or accuracy of IAEA’s financial data, we analyzed the data to determine whether it supported IAEA’s assumptions about cost neutrality. While in Vienna, we also observed a demonstration of remote monitoring and other surveillance equipment at IAEA headquarters. We met with the representatives from the following 13 IAEA member states—Argentina, Australia, Canada, China, France, Germany, India, Israel, Japan, the Russian Federation, South Africa, the United Kingdom, and the United States—to obtain their perspectives on the Agency’s Strengthened Safeguards System. We obtained a written response to our questions from Brazil. We toured IAEA’s Siebersdorf Analytical Laboratory and the Clean Laboratory, which were financed by U.S. extrabudgetary contributions. In addition, we met with officials and obtained documents from the U.S. Mission to the United Nations System Organizations in Vienna. To comment on the extent of IAEA’s reliance on the United States to finance safeguards activities, we met with officials and gathered data from the Arms Control and Disarmament Agency, The Department of Energy, DOD, the Department of State, DOD’s Air Force Technical Application Center, and the Nuclear Regulatory Commission. We compared this information with information we had obtained from IAEA. In October 1997, we attended the second annual U.S.-IAEA Safeguards Policy Review Meeting and the semiannual U.S. Support Program meeting with U.S. and IAEA officials held in Washington, D.C. We also visited Los Alamos and Sandia National Laboratories in New Mexico to discuss U.S. technical support to IAEA’s safeguards program. We performed our work from June 1997 through June 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to other appropriate congressional committees; the Secretaries of Defense, Energy, and State; the Director, Arms Control and Disarmament Agency; the Nuclear Regulatory Commission; and other interested parties. Copies will be made available to others upon request. St. Vincent and the Grenadines The Former Yugoslva Republic of Macedonia (continued) Federal Republic of Yugoslavia (Serbia and Montenegro) For 1997, the United States contributed almost $17 million of the total extrabudgetary contributions to the International Atomic Energy Agency’s (IAEA) safeguards budget of nearly $20 million from funds provided by the Department of State. Specifically, the United States contributed $7.1 million to IAEA through the U.S. Program of Technical Assistance to IAEA Safeguards (POTAS). POTAS is assisting the Agency in funding activities essential to implementing the strengthened safeguards system by providing cost-free experts to the safeguards program, evaluating environmental monitoring techniques, and field-testing new digital surveillance systems. To purchase safeguards equipment for IAEA, the United States provided $7.2 million through the Nonproliferation and Disarmament Fund (NDF). For example, these funds were used to replace obsolete surveillance equipment and analytical equipment for the Clean Laboratory at the Siebersdorf Analytical Laboratory in Austria, where environmental samples are collected and screened for IAEA. The United States also paid $1.4 million to IAEA for its verification of nuclear fissile material that had been declared excess to U.S. defense needs. The remaining $1.2 million was provided to IAEA to assist member states to account for and protect nuclear materials. In addition to the U.S. contribution to IAEA’s extrabudgetary resources, we estimated that in fiscal year 1997 the Departments of State, Energy (DOE), and Defense (DOD) provided in-kind assistance valued at $16.5 million in support of IAEA’s safeguards program. DOE’s Office of Arms Control and Nonproliferation, International Safeguards Division, made $10 million in funds available from its international safeguards program to support high-priority projects at IAEA and at DOE laboratories for IAEA’s strengthened safeguards program. In addition, about $2.5 million was provided during fiscal year 1997 by DOD and State for conducting environmental sample analysis to assist IAEA in establishing its baseline samples. Specifically, DOD’s Air Force Technical Applications Center and several DOE (at State Department expense) laboratories perform environmental sample analysis in the United States for IAEA. Although IAEA plans to begin reimbursing the United States in part for future analyses on a limited basis, the United States has financed almost all of IAEA’s environmental sampling studies to date. The remaining $4 million in assistance helped fund POTAS supported research and development activities at DOE laboratories, and management of the POTAS program at Brookhaven National Laboratory. From 1989 through 1996, the amount of nuclear material under IAEA safeguards has increased by 80 percent, from 52,413 significant quantities of nuclear material in 1989 to 94,294 significant quantities in 1996. IAEA attributes this growth to (1) the increase in the number of states with significant nuclear programs that now have safeguards agreements with the Agency, including Argentina, Brazil, South Africa, and the newly independent states of the former Soviet Union; (2) the continued growth in the amount of nuclear material in civilian nuclear fuel cycles; and (3) the inclusion by the United States of excess nuclear material from its nuclear weapons program under its voluntary safeguards agreement with the Agency. IAEA has been able to manage the increase in its safeguards responsibilities by increasing the efficiency of its safeguards operations and reducing costs. From 1989 through 1996, the cost, in real terms, for safeguarding one significant quantity of nuclear material decreased by 28 percent, from $1,359 to $978. According to IAEA, the increased efficiency is the result of improvements in safeguards approaches and technology, direct technical support from member states, and greater cooperation and resource sharing with state and international organizations with safeguards responsibilities. For example, IAEA has implemented a more efficient working relationship with the European Atomic Energy Community (EURATOM)—known as the New Partnership Approach—which resulted in better coordination of inspections and a sharing of costs for common safeguards equipment in EURATOM member states. According to IAEA’s Deputy Director General for Safeguards, the New Partnership Approach has resulted in a reduction of more than 1,500 person days of inspection at EURATOM facilities in the non-nuclear weapons states of the European Union. Despite the improvements in safeguards efficiency, U.S. officials are concerned about IAEA’s safeguards goal attainment for unirradiated direct use material, which, according to a June 1997 State Department cable, has not kept pace with IAEA’s increasing workload. According to IAEA, the primary reason for its inability to attain its safeguards goals has been failures in the camera equipment used for surveillance of safeguarded nuclear material. According to IAEA, the inability to attain safeguards goals for some types of material has not affected IAEA’s safeguards conclusions that, based on all information available, material under safeguards has not been diverted. However, it has reduced the level of confidence in the conclusions. IAEA warned member states in May 1997 that it does not have the resources to continue to meet its expanding workload. Table IV.1 provides the results of GAO’s analysis of annual real growth in IAEA’s safeguards program budget and expenditures from 1989 through 1997. To calculate annual real growth in IAEA’s safeguards program from 1989 through 1997, we took into account the share of IAEA’s safeguards program budget and expenditures that were made in Austrian schillings and in U.S. dollars, and converted IAEA’s annual safeguards budget and expenditures for both the regular budget and extrabudgetary contributions into 1997 dollars. Based on IAEA’s 1999 budget estimates, we assumed that about 83 percent of its regular budget was in Austrian schillings. Based on the U.S. average share of IAEA’s total extrabudgetary contributions to the safeguards program from 1989 through 1997, which is made in U.S. dollars, we also assumed that about 32 percent of the extrabudgetary contributions was in Austrian schillings. These percentages were then used to estimate the schilling-to-dollar shares of the regular and extrabudgetary budgets and expenditures during this period. A fixed exchange rate of 12.70 Austrian schillings to the U.S. dollar and average annual U.N. exchange rates, that were provided to us by IAEA, were used to convert the share of the budget and expenditures, respectively, that were in Austrian schillings to the current year figures. The Austrian gross domestic product (GDP) deflator and official Austrian exchange rates from the International Monetary Fund’s International Financial Statistical Yearbook, 1997 were then used to convert these figures back into 1997 dollars. The U.S. GDP deflator was used to convert the share of IAEA’s safeguards budget and expenditures that were in U.S. dollars into 1997 dollars. According to IAEA’s draft program and budget for 1999 and 2000, the Agency will require a total of about $160 million in funds through its regular budget and $40 million in extrabudgetary resources in 1999 and 2000 to fund its existing safeguards program and to begin implementing part 1 of its strengthened safeguards measures, as demonstrated in figure V.1. Although IAEA has not developed detailed cost estimates for implementing the strengthened safeguards measures over the next several years, it has estimated the costs of replacing obsolete surveillance equipment and installing some remote monitoring equipment. The installation of safeguards equipment will depend heavily on extrabudgetary resources—$15.2 million and $12.4 million for 1999 and 2000, respectively, as seen in figure V.2. Gene Aloise, Assistant Director Sarah E. Veale, Evaluator-in-Charge The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed: (1) changes the International Atomic Energy Agency (IAEA) is undertaking to strengthen its safeguards program; (2) the reasonableness of IAEA's assumptions regarding the impact of these changes on program costs and efficiency; and (3) comments on the extent of IAEA's reliance on the United States to finance the Agency's safeguards activities. GAO noted that: (1) in response to Iraq's secret nuclear weapons program, the international community, led by the United States, launched an intensive effort to create a new capability within the IAEA's safeguards system to detect secret or undeclared activities; (2) IAEA is beginning to implement a strengthened safeguards system by introducing advanced safeguards techniques under its existing safeguards agreements; (3) it is also seeking additional rights to conduct more intrusive inspections and collect information on nuclear activities through an Additional Protocol that supplements the existing safeguards agreements; (4) IAEA's changes to its safeguards systems are intended to give its inspectors greater ability to detect clandestine nuclear activities in non-nuclear weapons states that are signatories to the Non-Proliferation of Nuclear Weapons or other regional nonproliferation treaties; (5) under existing safeguards agreements with states and regional organizations, IAEA has increased its access to information on all nuclear activities at declared facilities in non-nuclear weapons states; (6) IAEA's member states expect that the Agency will implement the strengthened safeguards system through cost neutrality, that is, through savings from expected future efficiency gains and cutbacks on certain types of inspections that on an annual basis offset the cost increases resulting from implementation; (7) while IAEA has performed some preliminary planning, it does not have a long-term implementation plan that: (a) identifies the total resource requirements for implementing the new measures; (b) provides an implementation schedule with milestones for equipment and estimated projections of adoption of the Additional Protocol; and (c) provides criteria for assessing the effectiveness of the new measures and their usefulness for reducing inspection efforts; (8) IAEA has limited options for funding the new Strengthened Safeguard System because of the practice, imposed by its major contributors, that limits the Agency's regular budget to zero-real growth, and by the Agency's practice, insisted on by IAEA's less developed member states, of maintaining a balance between IAEA's technical cooperation and its safeguards programs; and (9) as a result, if these constraints continue and IAEA's assumptions about cost neutrality for the new program are not borne out by experience, IAEA will likely turn to the United States for substantial voluntary extrabudgetary contributions to implement the Strengthened Safeguards System.

You are an expert at summarizing long articles. Proceed to summarize the following text: Mr. Chairman and Members of the Subcommittee: I am pleased to be here today to discuss the Office of National Drug Control Policy (ONDCP). My testimony focuses on (1) our recent work on federal drug control efforts; (2) ONDCP’s efforts to implement performance measures; (3) ONDCP’s anticipated actions to lead the development of a centralized lessons-learned data system for drug control activities; and (4) whether ONDCP, which is scheduled to expire in September of this year, should be reauthorized. In 1988, Congress created ONDCP to better plan the federal drug control effort and assist it in overseeing that effort. ONDCP was initially authorized for 5 years—until November 1993. With the enactment of the Violent Crime Control and Law Enforcement Act of 1994 (P.L. 103-322 (1994)), ONDCP was reauthorized until September 30, 1997. ONDCP is responsible for overseeing and coordinating the drug control efforts of over 50 federal agencies and programs. ONDCP is also charged with coordinating and reviewing the drug control activities of hundreds of state and local governments as well as private organizations to ensure that the drug control effort is well coordinated and effective at all levels. Under the 1988 act, ONDCP is to (1) develop a national drug control strategy with short- and long-term objectives and annually revise and issue a new strategy to take into account what has been learned and accomplished during the previous year, (2) develop an annual consolidated budget providing funding estimates for implementing the strategy, and (3) oversee and coordinate implementation of the strategy by federal agencies. Since its inception, ONDCP has published nine annual national drug control strategies. “1. Educate and enable America’s youth to reject illegal drugs as well as the use of alcohol and tobacco. “2. Increase the safety of America’s citizens by substantially reducing drug-related crime and violence. “3. Reduce health and social costs to the public of illegal drug use. “4. Shield America’s air, land, and sea frontiers from the drug threat. “5. Break foreign and domestic sources of supply.” The administration’s drug control budget request for fiscal year 1998 is approximately $16 billion, an increase of $818 million over the 1997 budget. Approximately $5.5 billion is targeted for demand reduction, an increase of 10 percent over the 1997 budget and $10.5 billion for supply reduction, an increase of 3.2 percent over the 1997 budget. At the request of the Chairman, Subcommittee on Transportation and Related Agencies and the Chairman, Subcommittee on Labor, Health and Human Services, and Education, House Committee on Appropriations, on the demand reduction side we recently identified findings of current research on promising approaches in drug abuse prevention targeted at school-age youth and described promising drug treatment strategies for cocaine addiction. On the supply reduction side, we summarized our recent work assessing the effectiveness of international efforts, including interdiction, to reduce illegal drug availability. demonstrated that both approaches have shown some success in reducing student drug use as well as strengthened individuals’ ability to resist drugs in both short- and longer-term programs. Three approaches have been found to be potentially promising in the treatment of cocaine use. These approaches include (1) avoidance or better management of drug-triggering situations (relapse prevention therapy); (2) exposure to community support programs, drug sanctions, and necessary employment counseling (community reinforcement/contingency management); and (3) use of a coordinated behavioral, emotional, and cognitive treatment approach (neurobehavioral therapy). Research shows that many drug dependent clients using these approaches have maintained extended periods of cocaine abstinence and greater retention in treatment programs. While these prevention and treatment approaches have shown promising outcomes in some programs, further evaluative research would have to be conducted to determine their effectiveness and their applicability among different populations in varied settings. Such research should help policymakers better focus efforts and resources in an overall drug control strategy. Regarding international drug control efforts, our work has shown that, despite some successes, efforts have not materially reduced the availability of drugs in the United States for several reasons. First, international drug trafficking organizations have become sophisticated, multibillion dollar industries that quickly adapt to new U.S. drug control efforts. Second, the United States faces other significant and long-standing obstacles, such as inconsistent funding, competing foreign policy objectives, organizational and operational limitations, and a lack of ways to tell whether or how well counternarcotics efforts are contributing to the goals and objectives of the national drug control strategy, and the resulting inability to prioritize the use of limited resources. Third, in drug-producing and transit countries, counternarcotics efforts are constrained by competing economic and political policies, inadequate laws, limited resources and institutional capabilities, and internal problems such as terrorism and civil unrest. the Government Performance and Results Act (GPRA), we recently made several recommendations to the Director of ONDCP to better comply with the 1988 Anti Drug Abuse Act’s requirements. We recommended that ONDCP complete the development of a long-term plan with meaningful performance measures and multiyear funding needs that are linked to the goals and objectives of the international drug control strategy. In particular, such a plan would permit ONDCP to better carry out its responsibility to at least annually review the progress made and adjust its plan, as appropriate. Further, we recommended that ONDCP enhance support for the increased use of intelligence and technology to (1) improve U.S. and other nations’ efforts to reduce supplies of and interdict illegal drugs and (2) take the lead in developing a centralized lessons-learned data system to aid agency planners and operators in developing more effective counterdrug efforts. We have acknowledged for many years that performance measurement in the area of drug control has been difficult. In 1988 and again in 1990, we reported that (1) it was difficult to isolate the full impact and effectiveness of a single program, such as drug interdiction, on reducing drug use without considering the impact of prevention and treatment efforts; (2) the clandestine nature of drug production, trafficking, and use had limited the quality and quantity of data that could be collected to measure program success; and (3) the data that were collected—for example, the data used to prepare estimates of drug availability and consumption—were generally not designed to measure program effectiveness. In a 1993 report, we concluded that although difficulties, such as the interrelated nature of programs, may have precluded the development of “perfect” or “precise” performance measures, these difficulties should not have stopped antidrug policymakers from developing the best alternative measures—measures that could provide general indicators of what was being accomplished over the long term. We also reported in 1993 that ONDCP’s national strategies did not contain adequate measures for assessing the contributions of component programs for reducing the nation’s drug problems. In addition, we found little information on which to assess the contributions made by individual drug control agencies. As a result, we recommended that, as part of its reauthorization of ONDCP, Congress direct the agency to develop additional performance measures. In reauthorizing ONDCP in 1994, Congress specified that ONDCP’s performance measurement system should assess changes in drug use, drug availability, the consequences of drug use, drug treatment capacity, and the adequacy of drug treatment systems. Similarly, in our most recent report, we found it still difficult to assess the performance of individual drug control agencies. For example, increased Customs Service inspections and use of technology to detect drugs being smuggled through ports of entry may cause smugglers to seek other routes; this would put more pressure on drug interdiction activities of other agencies, such as the Coast Guard. We concluded that it was important to consider both ONDCP and operational agency data together because results achieved by one agency in reducing the use of drugs may be offset by less favorable results by another agency. According to ONDCP officials, around January 1994, they, in collaboration with the Department of Defense, entered into a contract with a private contractor to develop “measures of effectiveness” in the international arena. According to ONDCP officials, overall the results of the contractor’s efforts did not prove useful in developing performance measures for ONDCP. The efforts of the contractor were eventually abandoned, and in the summer of 1996 ONDCP began a new effort to develop performance measures for all drug control operations. The new effort relies on working groups, which consist of representatives from federal drug control agencies and state, local, and private organizations, to develop national drug control performance measures. According to ONDCP officials, early in 1997, the ONDCP working groups began developing performance targets (measurable milestones to track progress) and performance measures (the data used to track each target) for each of the objectives. As of April 1997, the plans for one of its five goals—“shield America’s air, land, and sea frontiers from the drug threat”—were ready for the Director’s approval, and they will be distributed to the affected agencies for agreement. ONDCP officials told us they are not yet that far along on the other four goals. As previously mentioned, we recently recommended in our report on international antidrug activities that ONDCP strengthen its planning and implementation of antidrug activities through the development of an after-action reporting system similar to the Department of Defense’s (DOD) system. Under DOD’s system, operations reports describe an operation’s strengths and weaknesses and contain recommendations for consideration in future operations. A governmentwide after-action system for reporting international antidrug activities should allow agencies to learn from the problems and impediments encountered internally and by other federal agencies in implementing past operations. With such information, the agencies would be in a better position to develop plans that avoid past problems or contingencies in known problem areas. This governmentwide after-action system should go a long way toward meeting ONDCP’s basic responsibility of taking into account what has been learned and accomplished during the previous year and adjusting its plan accordingly. As of April 15, 1997, ONDCP officials said they had not yet implemented this recommendation. According to these officials, ONDCP is currently preparing a formal response to the Subcommittee on National Security, International Affairs, and Criminal Justice, Committee on Government Reform and Oversight, explaining how it plans to implement this recommendation. Over the years, we have concluded there is a continuing need for a central planning agency, such as ONDCP, to coordinate the nation’s drug control efforts. Before ONDCP existed, we recommended in 1983 that the President make a clear delegation of responsibility to one individual to oversee federal drug enforcement programs to strengthen central oversight of the federal drug enforcement program. Again in 1988, we reported problems caused by the fragmentation of federal antidrug efforts among cabinet departments and agencies, and the resulting lack of coordination of federal drug abuse control policies and programs. In 1993, we concluded that given the severity of the drug problem and the large number of federal, state, and local agencies working on the problem, there was a continuing need for a central planning agency, such as ONDCP, to provide leadership and coordination for the nation’s drug control efforts. We recommended that Congress reauthorize ONDCP for an additional finite period of time. Coordinating the 5 goals of the national drug control strategy among more than 50 federal agencies is a complex process. Our analysis of federal agencies that contribute to the implementation of each of the 5 strategy goals showed an average of 21 agencies were committing resources to address specific strategy goals. For example, Goal 1 involves 18 agencies, Goals 2 and 3 involve 24, Goal 4 involves 13, and Goal 5 involves 28. Further, we found that more than 30 agencies are committing resources to implement two or more of the five strategy goals. Given the complexity of the issues and the fragmentation of the approach to the national drug control strategy among more than 50 agencies, we continue to believe there is a need for a central planning agency, such as ONDCP, to coordinate the nation’s drug control efforts. In addition, we have found no compelling evidence to lead us to advise against ONDCP’s reauthorization for a finite period of time. Mr. Chairman, this completes my statement. I would be pleased to answer any questions you or the other Subcommittee members might have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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 Office of National Drug Control Policy (ONDCP), focusing on: (1) its recent work on federal drug control efforts; (2) ONDCP's efforts to implement performance measures; (3) ONDCP's anticipated actions to lead the development of a centralized lessons-learned data system for drug control activities; and (4) whether ONDCP, which is scheduled to expire in September 1997, should be reauthorized. GAO noted that: (1) its recent work shows that there are some promising initial research results in the area of demand reduction but that international supply reduction efforts have not reduced the availability of drugs; (2) GAO's work also shows that the nation still lacks meaningful performance measures to help guide decisionmaking; (3) GAO has acknowledged that performance measurement in the area of drug control is particularly difficult for a variety of reasons; (4) notwithstanding, GAO has concluded over the years that better performance measures than the ones in place were needed; (5) in 1993, GAO recommended that Congress, as part of its reauthorization of ONDCP, direct the agency to develop additional performance measures; (6) in reauthorizing ONDCP in 1994, Congress specified that ONDCP's performance measurement system should assess changes in drug use, drug availability, the consequences of drug use, drug treatment capacity, and the adequacy of drug treatment systems; (7) ONDCP's initial effort, with a private contractor, did not prove fruitful, and, in the summer of 1996, it began a new effort involving working groups composed of representatives from federal drug control agencies and state, local, and private organizations; (8) the working groups have been tasked with establishing performance measures for the goals set forth in the 1997 national strategy articulated by ONDCP; (9) as of April 15, 1997, no new measures had been approved by the ONDCP Director; (10) given the complexity of the issues and the fragmentation of the approach to the national drug strategy among more than 50 federal agencies, GAO continues to believe that there is a need for a central planning agency, such as ONDCP, to coordinate the nation's efforts; and (11) while it is difficult to gauge ONDCP's effectiveness given the absence of good performance measures, GAO has found no compelling evidence that would lead it to advise against ONDCP's reauthorization for a finite period of time.

You are an expert at summarizing long articles. Proceed to summarize the following text: Medicaid funds most publicly supported long-term care services for persons with developmental disabilities. In 1995, Medicaid provided more than $13.2 billion to support over 275,000 individuals with these services. To be eligible for Medicaid, individuals must generally meet federal and state income and asset thresholds. To be considered developmentally disabled, individuals must also have a mental or physical impairment, with onset before they are 22 years old, that is likely to continue indefinitely and they must be unable to carry out some everyday activities, such as making basic decisions, communicating, taking transportation, keeping track of money, keeping out of danger, eating, and going to the bathroom, without substantial assistance from others. Until recently, states provided the bulk of services for this population through the Medicaid ICF/MR program. The ICF/MR program funds large institutions and smaller settings of 4 to 15 beds, and both sizes of settings are subject to the same regulatory standards. ICF/MR program services are available and provided as needed on a 24-hour basis. These services include medical and nursing services, physical and occupational therapy, psychological services, recreational and social services, and speech and audiology services. ICF/MR program services also include room and board. Providers of ICF/MR program services must adhere to an extensive set of regulations and are subject to annual on-site inspections as mandated by Medicaid. In 1981, the Congress enacted the 1915(c) waiver allowing states to apply to HCFA for a waiver of certain Medicaid rules to offer home and community-based services. By 1995, 49 states had 1915(c) home and community-based waiver programs for persons with developmental disabilities. Waiver program services vary by state, but include primarily nonmedical services such as chore services, respite care, and habilitation services, which are all intended to help people live more independently and learn to take care of themselves. (See apps. II and III for a list of waiver program services and definitions in the three states we visited). Unlike ICF/MR program services, waiver program services do not include room and board and are often provided on less than a 24-hour basis. HCFA carries out its waiver program oversight responsibilities through review of applications and renewals and monitoring of implementation through on-site compliance reviews. In approving waivers, HCFA reviews applications to ensure that (1) services are offered to individuals who, “but for the provision of such services . . . would require the level of care provided” in an institutional setting such as an ICF/MR; (2) total Medicaid per capita costs for waiver program recipients are not greater than total Medicaid per capita costs for persons receiving institutional care; and (3) states properly assure quality. The waiver program enables states to control utilization and costs in ways not permitted under the regular Medicaid program. The waiver program has a cap for the number of persons served at HCFA-approved levels. It also allows states, with HCFA permission, to target services to distinct geographic areas or populations, such as persons with developmental disabilities or the elderly; offer a broader range of services; and serve persons with incomes somewhat higher than normal eligibility thresholds. In contrast, the regular Medicaid program generally requires that each state provide eligible beneficiaries with all federally mandated services and any optional services it chooses to offer. States, however, provide some community-based services to developmentally disabled individuals through the regular Medicaid program. These services include federally mandated services, such as home health care, and other services that states may elect to provide, which are called optional services. Some of the more important optional services for the population with developmental disabilities are rehabilitative services, case management, and personal care. Because the regular Medicaid program operates as an entitlement—that is, all eligible individuals in a state are entitled to receive all services offered by the state—states have less control over utilization and the cost of services than in waiver programs. Through the use of waivers, states have changed long-term care nationally for persons with developmental disabilities in two ways. First, states have significantly expanded the number of individuals being served. Second, states have shifted the program balance from serving most people through the ICF/MR program to serving most through the waiver program. Generally the shift to the waiver program has been part of an evolution of services away from large and more restrictive settings to providing services in small and less restrictive settings, which are preferred by recipients and their families. Some state waiver programs are continuing to evolve from their earlier approach of providing services primarily in group home settings to one of serving people at home. From 1990 to 1995 the number of persons served by the waiver and ICF/MR programs combined rose at an average annual rate of 8 percent (see table 1). The number served by the waiver program more than tripled to over 142,000 persons during this period and accounted for the entire increase in the number of persons served by both programs. States dramatically increased the number of people who received waiver program services using a variety of strategies, including substituting waiver program for ICF/MR program services, services provided under state-only programs, and services to persons who were not being served before. More people are now served through the waiver program than the ICF/MR program. Although the percentage of persons served through the waiver program varies by state, 30 states provide services to more people through the waiver program than the ICF/MR program (see fig. 1). With the support of recipients and their families, state officials have made changes to serve more people through the waiver program. All three groups have come to believe that the alternatives possible through the waiver can better serve persons with developmental disabilities. They believe that in many cases individuals can have a higher quality of life through greater community participation, including relationships with neighbors, activities in social organizations, attendance at public events, and shopping for food and other items. This can result in expanded social networks, enhanced family involvement, more living space and privacy, and improvements in communication, self-care, and other skills of daily living. States believed that they could use the waiver program to expand services while simultaneously reducing or limiting access to ICF/MR program care as a means to control growth in expenditures. As a result, many states have closed large institutions or held steady ICF/MR capacity even as the population in need has grown. Some states have also reduced smaller ICF/MR settings by converting them to waiver programs. The number of people in ICF/MR settings has dropped 7 percent from 1990 to 1995. These actions have been part of an overall strategy to change the way services are provided and financed. States have used the flexibility of the waiver program to pursue distinct strategies and achieve different program results as shown in the three states we visited (see table 2). These states used the waiver program to substitute for ICFs/MR that were being closed, expand the number of persons being served, or both. Rhode Island targeted waiver program services as a substitute for ICF/MR program care with little change in the number of persons served. The state began the 1990s with short waiting lists for services and a goal of closing all large institutions of 16 or more beds. Providing waiver program services to many of its former residents, the state closed the Ladd Center, its last large institution, in 1994 to become one of only two states along with the District of Columbia to close all its large institutions. Rhode Island also substantially reduced the number of recipients of services in smaller ICFs/MR by converting the ICFs/MR to the waiver program. As a result, a substantial number of persons who had been supported through the state’s ICF/MR program are now supported by its waiver program. The number of developmentally disabled persons served through the waiver and ICF/MR programs in Rhode Island, however, did not expand significantly. In contrast, Florida’s strategy for the waiver program was to expand services to a much broader population rather than using the waiver program to close ICF/MR settings. Florida began the 1990s with substantial waiting lists for services and fewer ICF/MR beds than most of the country relative to the size of the population with developmental disabilities. Florida chose to greatly expand the number of persons with developmental disabilities served to include people who had not been served or who needed more services. The overwhelming source of growth has been from the large increase in waiver program recipients, although Florida has also experienced modest growth in the number of ICF/MR recipients. The state’s increase in waiver program recipients includes persons who were receiving services from state-only programs and persons who were not previously served. Michigan used the waiver program in the 1990s to continue pursuing its goals of closing large institutions, offering placements for persons leaving small ICFs/MR, and expanding services to those with unmet needs. Michigan, like Florida, began the 1990s with many persons who needed but had not received services. Michigan, however, had more ICF/MR capacity than Florida. Most of Michigan’s ICF/MR capacity was in smaller settings, many of which had been developed to help the state close some of its large institutions. As a result, Michigan has closed all but about 400 beds in large institutions and significantly increased the number of persons served. State officials told us that by 1995, Michigan was serving more individuals in the waiver program than in its ICF/MR program. In the continuing evolution of services for persons with developmental disabilities, some states, such as Florida, Michigan, and Rhode Island, are changing the focus of waiver program services from group home care to more tailored services to meet individuals’ unique needs and preferences at home. These states and most others began their waiver programs by providing services primarily in group homes. Recently, state officials have come to believe that for many persons, services are best provided on a more individualized basis in a recipient’s home—his or her family’s home or own home or an adult foster care home—rather than in group home settings. The three states we visited became convinced that this was possible even for persons with severe disabilities, in part, because of their success in using this approach in the recently concluded Community Supported Living Arrangements (CSLA) program. Slightly more than one-half of all waiver program recipients nationally are estimated to have been living in settings other than group homes in 1995.In each of the three states we visited, many 1915(c) waiver recipients now live in their family’s home or their own home. In Florida, more than one-half of all waiver recipients live in settings other than group homes, including nearly 50 percent who live in their family’s homes. The majority of Michigan’s waiver program recipients live in small settings other than licensed group homes. Just under one-half of Rhode Island’s recipients live in settings other than group homes. Each state expects the percentage of waiver program recipients living in nongroup home settings to increase. Officials in the states we visited and other experts told us that serving individuals with developmental disabilities who live in their own or their family’s home and receive less than 24-hour support often requires changes in the service delivery model. For example, these settings may need environmental changes and supports to make them suitable for persons with developmental disabilities. Such changes could include the installation of ramps for persons with physical disabilities or emergency communication technology and other equipment for persons with communication or cognitive impairments or a history of seizures who may need quick assistance. Paid assistance may also be needed to provide a variety of other services, such as supervision of or assistance in toileting, dressing, bathing, carrying out routine chores, managing money, or accessing public transportation and other community services. Assistance for such services is often provided on an individual basis rather than for several persons in a group home. Respite care may also be provided for family caregivers. Although the three states we visited have made major commitments to convert their waiver programs to individualized supports at home, these changes will require significant change on the part of everyone involved and could take years to fully implement. For example, some public agencies own or have long-term contracts for the use of group homes or have encouraged the development of private group homes. In addition, state officials told us that public agencies and other service providers may find it difficult to adapt to designing services for each individual living at home rather than offering services in the more familiar group home program setting. In addition, some family members and advocates have expressed concern that the level of funding available for and the range of services offered under the waiver program may not be sufficient for individuals who require constant supervision and care. Nationwide, Medicaid costs for long-term care services for persons with developmental disability rose at an average annual rate of 9 percent between 1990 and 1995 as states implemented their planned increases in the number of persons served. Costs rose from $8.5 billion in 1990 to $13.2 billion in 1995. (See table 3.) Most of the increase reflected increased costs for waiver program services, but increased ICF/MR program costs also were a factor. Waiver program costs grew primarily because more people were served as per capita waiver costs increased slightly less than inflation. ICF/MR program cost increases resulted solely from growth in per capita ICF/MR program costs, which rose somewhat faster than inflation, as the number of residents declined. In 1995, per capita waiver program costs ($24,970) remained significantly lower than per capita ICF/MR spending ($71,992). In the three states we visited, average per capita costs and average increases in per capita costs varied according to each state’s waiver program strategy and other factors (see table 4). Florida per capita waiver costs, for example, were among the lowest in the nation, in part, as a result of the state’s strategy to expand services to more persons. According to state officials, limited resources were stretched to cover as many people as possible by providing each individual with the level of services required to prevent institutionalization rather than providing all the services from which an individual might benefit. By contrast, from 1990 to 1994 Rhode Island’s per capita costs under the waiver and ICF/MR programs were much higher than the national average.The large increase in per capita waiver program costs resulted because unlike Florida and Michigan, Rhode Island substituted waiver program services for persons receiving high-cost ICF/MR care and closed its last large institution. As a result, Rhode Island was serving a substantial number of persons through the waiver program who had previously received expensive ICF/MR care. At the same time, ICF/MR per capita costs were also higher, in part, because as the number of people in ICF/MR settings declined, the fixed costs were spread over a smaller population. In addition, the population that remained in ICF/MR settings was substantially disabled and required intensive services. Cost growth has been limited by two factors. First is a cap on the number of program recipients. Second, states have employed a variety of management practices to control per capita spending. Fundamental to waiver program cost control has been the federal Medicaid rule which, in effect, capped the number of recipients who could have been served each year. HCFA approves each state’s cap, and states are allowed to deny admission for services to otherwise qualified individuals when the cap is reached. By contrast, under the regular Medicaid program, all eligible recipients must be served and no limits exist on the number of recipients. As a result, waiver caps have given states a greater ability to control access and thereby cost growth than would have been possible if they had expanded services through the regular Medicaid program. States have also used several management practices to help contain costs. In the three states we visited, these management practices include fixed agency budgets for waiver services and linking management of care plan and use of non-Medicaid services to individual budgets for each person served. States have developed fixed agency budgets within limits established under waiver rules. In Florida, Michigan, and Rhode Island, appropriations for waiver program and other services are in the budgets of developmental disability agencies. In Florida, budgets are allocated among 15 state district offices. In Michigan, budgets for serving persons with developmental disabilities are allocated among 52 local government community mental health boards and three state-operated agencies, each responsible for serving a local area. State or local agencies are responsible for approving individual service plans, authorizing budgets for the costs of these services, and monitoring program expenditures on an ongoing basis to ensure that total expenditures are within appropriated budgetary amounts as the three states transition to a person-centered planning basis in their waiver programs. The three states we visited require that case managers or service providers in consultation with case managers develop a plan of care linked to an individual budget for each person being served in the person-centered planning approach. This care plan and its costs must be approved by the state developmental disability agency, state district office, or community mental health board, depending upon the state. Upon agency approval, the case manager oversees the implementation of the care plan and monitors it on an ongoing basis. Significant variation from the plan requires agency approval and changes in service and budget authorizations. This process provides more stability for the budget process and allows state agencies to monitor their overall spending on an ongoing basis and plan for contingencies to remain within budget levels. State developmental disability agencies in the three states we visited also require that case managers build into the care planning process and individual budget determination the use of non-Medicaid services, both paid and unpaid. State officials told us that this is a part of better integration of persons with developmental disabilities into the community and making it possible to extend available waiver dollars to serve as many people as possible. When paid services are needed, states try to take advantage of services funded for broader populations, such as recreation or socialization in senior citizen centers or the use of public transportation. States also attempt to use unpaid services when possible by increasing assistance from families, friends, and volunteers. State officials told us that use of these paid and unpaid services reduces the need for Medicaid-financed supervision and care. A change in federal rules could result in high waiver caps on enrollment and therefore higher costs. Until August 24, 1994, HCFA limited the number of waiver recipients in a state under the so-called cold bed rule. This rule required that each state document for HCFA approval that it either had an unoccupied Medicaid-certified institutional bed—or a bed that would be built or converted—for each individual waiver recipient the state requested to serve in its application. However, in 1994, HCFA eased waiver restrictions by eliminating the cold bed rule so that states were no longer required to demonstrate to HCFA that they had “cold beds.” HCFA took this action because it believed that the cold bed rule placed an unreasonable burden on states by requiring them to project estimates of additional institutional capacity. HCFA now accepts a state’s assurance that absent the waiver the people served in the waiver program would receive appropriate Medicaid-funded institutional services. As HCFA recognized when it eliminated the cold bed rule, this change could result in higher waiver costs if states elect to increase the number of waiver recipients more rapidly than before. HCFA, however, recognized that the state budget constraints could play a restrictive role in waiver growth. State officials told us that elimination of the cold bed rule allows them to expand waiver services more rapidly than in the past, both to persons not currently receiving services and to others receiving services from state-only programs. State officials told us that converting state program recipients to the waiver was particularly advantageous given the federal Medicaid match. Officials in Florida and Michigan told us that they are planning to expand the number of people served in the waiver program more rapidly than they could have under the cold bed rule. This could increase costs more rapidly than in the past. Officials in Florida and Michigan said that they will phase in increases in the number of waiver recipients to stay within state budget constraints and to allow for a more orderly expansion of services to the larger numbers of new recipients. To increase quality for recipients and families, states are introducing promising quality assurance innovations while simultaneously building in more flexibility in traditional quality assurance mechanisms. These changes are intended to provide recipients and families with a greater choice of services within appropriate budget and safety limits. However, until states more comprehensively develop and test these approaches, some recipients may face health and safety risks and others may not have access to the range of choices state programs seek to provide. One of the most important mechanisms that states use to assure adequate quality is service standards. Each state, as required by HCFA guidelines, adopts or develops standards for each waiver service. Waiver standards are specified in state and local laws, regulations, or operating guidelines and are enforced by specific agencies. As a result, waiver standards reflect specific state processes and choices in how states assure quality, and are not uniform across the nation as are ICF/MR standards. (For example, see app. IV for a summary of how Florida meets HCFA requirements for specifying waiver standards.) Waiver standards may include professional licensing standards, minimum training requirements for staff, and criminal background checks for providers. The standards may also include requirements for certification of group home or other facilities and compliance with local building codes and fire and safety requirements. States review providers and services on an ongoing basis and have abuse and neglect reporting procedures in place. Florida, Michigan, and Rhode Island, for example, conduct routine and unannounced reviews of providers. As a result of these reviews, providers can be required to provide plans of correction for identified problems and implement improvements. In some cases, providers have lost their certification to participate in the program. These states also have formal grievance procedures and a grievance unit, such as a state agency or human rights committee, to investigate complaints on a statewide, regional, or agency basis. Through these processes, the states have also identified problems in quality and taken steps to ensure corrective action. In addition to state quality assurance efforts, HCFA regional staff conduct a compliance review of each state’s waiver program before its renewal. HCFA uses a compliance review document for this process. HCFA reviews involve random selections of recipients for interviews and visits to their homes. The reviews also involve interviews with and visits to service providers and advocates. If HCFA determines that quality is not satisfactory, it can require that a state take corrective action before a waiver can be renewed. States are taking steps to develop or enhance existing mechanisms to promote better quality in waiver program services. Many of these mechanisms were used in the recently concluded CSLA program to provide individualized services to people at home and are now being incorporated into the home and community-based waiver program even for persons with substantial disabilities. Advocates, family members, and recipients have been generally positive about this shift to support individuals in more integrated community settings. Person-centered planning is a key element of providing better quality in waiver services, according to officials in the three states we visited and national experts. The planning process and the resulting plans are individualized to incorporate substantial recipient and family input on how the individual will live and what assistance the individual will need. The case manager, called support coordinator in some states, has primary responsibility in person-centered planning, which includes working with the recipient to develop the plan, arranging for needed services, monitoring service delivery and quality, and revising the plan as necessary. A budget for the individual is established to provide the services identified as appropriate and cost-effective. Recipients and case managers choose providers on the basis of their satisfaction with services. State officials told us that this approach not only gives recipients more say in how they are served but that the resulting competition motivates providers to increase service quality. Linking persons living in the community with volunteers who can provide assistance and serve as advocates is seen as another important mechanism for promoting quality. For example, some states, including the three we visited, have a circle of friends or similar process for individual recipients. A circle of friends is a group of volunteers, which can include family, friends, community members, and others, who meet regularly to help persons with disabilities reach their goals. These volunteers help plan how to obtain needed supports; help persons participate in community, work, or leisure activities they choose; and try to help find solutions to problems. By integrating recipients in the community, recipients have more choice and can get better quality services, according to national experts and state officials we interviewed. This community integration increases the number of persons who can observe and identify problems in service quality and notify appropriate officials when there are deficiencies. Because program quality depends on the active participation of recipients, families, and service providers, states are also providing substantial training to these groups to encourage and strengthen their participation. Training can include informing recipients and families of available service providers, procedures for providing feedback about services, and steps to take if quality is not improved. Training for service providers may focus on reinforcing the fact that the recipient and family have the right to make choices about services and that staff must be responsive to those choices unless they are inappropriate for safety concerns or for other compelling reasons, such as available financial resources. States are also modifying how they monitor quality. Traditionally, they emphasized compliance with certain criteria, such as maintaining a minimum level of staff resources and implementing standard care processes. Some states are focusing their quality monitoring more on outcome measures for each individual while still assessing providers’ compliance with program standards. For example, states, including the three we visited, are trying to determine whether the recipients are living where and with whom they chose, whether they are safe in this environment, and whether they are satisfied with their environment and the services they receive. States are also attempting to make their oversight less intrusive for the recipients. For example, some states use trained volunteers to interview recipients at their homes on a periodic basis to check the quality of services received. In other instances, although case managers are required to meet recipients on a regular basis, meetings can be arranged at the recipient’s convenience, including in the evening or on weekends or at a place the recipient likes to meet at, such as at his or her home or local park or library. Case managers talk with the recipients and their families about the quality of the services they receive and take any actions necessary to correct deficiencies. While officials in the three states we visited and other experts agree that many persons prefer services provided at home to services provided in institutions or other group settings, they also note that providing services at home presents unique problems in ensuring quality. Because the new focus is on providing individual choice, the types of services that are offered and the means for providing these services can vary greatly. To promote quality and ensure that minimum standards are met requires a broad range of approaches. Although states continue to develop quality assurance mechanisms, state officials acknowledge that these are not yet comprehensive enough to assure recipient satisfaction and safety. In the three states we visited, state officials and provider agencies told us that they are still developing guidance and oversight in a number of key areas. Michigan, for example, is revising its case management standards and statewide quality assurance approaches. Rhode Island is developing a more systematic monitoring approach statewide, and Florida is continuing to implement and evaluate its independent service coordinator approach. One of the greatest difficulties in developing quality mechanisms for services in alternative settings is balancing individual choice and risks.Where greater choice is encouraged and risks are higher, more frequent monitoring and contingency planning need to be built into the process. Yet some professional staff and agency providers in the states we visited believe that they do not have sufficient guidance on where to draw the line between their assessment of what is appropriate for the disabled person and the individual’s choice. For example, some persons with mental retardation cannot speak clearly enough to be understood by people who do not know them; cannot manage household chores, such as cooking in a safe manner; or have no family member to perform overall supervision to keep them from danger. Yet these people express a desire to live independently, without 24-hour staff supervision. Florida, Michigan, and Rhode Island each attempt to customize supports to reduce risks for individuals who live in these situations. They may arrange for roommates, encourage frequent visits and telephone contact by neighbors and friends, enroll individuals in supervised day activities, install in-home electronic access to emergency help, and provide paid meal preparation and chore services. As this new process evolves, states and providers seek to develop a better understanding of how to manage risks and reduce them where possible. This should lead to improved guidance for balancing risks and choices for each recipient’s unique circumstances. Determining what recipients’ choices are can be difficult for a number of reasons. First, many of these individuals have had little experience in making decisions and may also have difficulty in communicating. In addition, some recipients have complained that they are not being provided the range of choices to which they should have access and that quality monitoring is too frequent or intrusive despite the changes states have introduced. However, concern has been expressed that quality assurance is not rigorous enough to reduce all health or safety risks and that the range of choices is too great for some individuals. State officials and other experts we interviewed have emphasized the need for vigilance to protect recipients and ensure their rights. They have been especially concerned with assuring quality for recipients who are unable to communicate well and for those who do not have family members to assist them. The states we visited are taking special precautions to try to assure quality in these cases—such as recruiting volunteers to assist and asking recipient groups to suggest how to assure quality for this vulnerable population. However, state officials and HCFA agree that more development of quality assurance approaches is needed. Officials from the Office of Long-Term Care Services in HCFA’s Medicaid Bureau and from Florida, Michigan, and Rhode Island reviewed a draft of this report. They generally agreed with its contents and provided technical comments that we incorporated as appropriate. We are sending copies of this report to the Secretary of Health and Human Services; the Administrator, Health Care Financing Administration; and other interested parties. Copies of this report will also be made available to others upon request. If you or your staff have any questions, please call me at (202) 512-7119; Bruce D. Layton, Assistant Director, at (202) 512-6837; or James C. Musselwhite, Senior Social Science Analyst, at (202) 512-7259. Other major contributors to this report include Carla Brown, Eric Anderson, and Martha Grove Hipskind. We focused our work on Medicaid 1915(c) waivers for adults with developmental disabilities. We also examined related aspects of institutional care provided through ICF/MR, state plan optional services, and the CSLA program, all under Medicaid. To address our study objectives we (1) conducted a literature review, (2) interviewed national experts on mental retardation and other developmental disabilities, (3) collected national data on expenditures and the number of individuals served, and (4) collected and analyzed data from three states. National experts interviewed included officials at HCFA; the Office of the Assistant Secretary for Planning and Evaluation (ASPE) in the Department of Health and Human Services; the Administration on Developmental Disabilities; the President’s Committee on Mental Retardation; the National Association of Developmental Disabilities Councils; the Administration on Aging; the National Association of State Directors of Developmental Disabilities Services, Inc. (NASDDDS); and the ARC, formerly known as the Association for Retarded Citizens. We also interviewed researchers at University Affiliated Programs (UAP) on developmental disabilities at the Universities of Illinois and Minnesota and Wayne State University. We conducted our case studies in Florida, Michigan, and Rhode Island. We chose these states for several reasons. The three states provide a range of state size and geographic representation. Each state has a substantial developmental disability waiver program that serves more people than its ICF/MR program. Experts told us that these states would provide examples of different state strategies for utilizing the Medicaid waiver. This included their policies regarding large and small institutions as well as the design and implementation of their waiver programs. The three states also have important differences in the administrative structure of their developmental disability programs. Rhode Island administers its waiver program statewide through the Division of Developmental Disabilities in the Department of Mental Health, Retardation and Hospitals. Florida places statewide administration and oversight responsibility for its waiver program in Developmental Services, the Department of Health and Rehabilitative Services, but operational responsibility rests with its 15 district offices of Developmental Services. Michigan places statewide administration and oversight responsibility for its waiver programs in the state Department of Mental Health, but operating responsibilities rest with 52 Community Mental Health Boards (CMHB), which are local government entities covering one or more counties and three state-operated agencies each responsible for serving a local area. Florida district offices and Michigan CMHBs have discretion in the design and implementation of waiver program and other services within the broad outlines of state policy. We visited each state to conduct interviews with state and local officials, researchers, service providers, advocates, families, and recipients. These interviews included state Medicaid officials and developmental services officials and officials in agencies on aging and developmental disability councils. In Florida, we also visited state district offices in Pensacola and Tallahassee to conduct interviews with district government and nongovernment representatives. In Michigan, we visited the Detroit-Wayne and Midland/Gladwin CMHBs to conduct interviews with government and nongovernment representatives. We followed up with state agencies to collect additional information. The national waiver and ICF/MR program expenditure and recipient data used in this report are from the UAP on developmental disabilities at the Research and Training Center on Community Living, Institute on Community Integration, at the University of Minnesota. The Institute collects these data, with the exception of ICF/MR expenditures, directly from state agencies. The Institute uses ICF/MR expenditure data, compiled by the Medstat Group under contract to HCFA. National data from the Institute were available through 1995. The expenditure and recipient data we report for Florida, Michigan, and Rhode Island were provided to us by the state agencies responsible for developmental services and the Medicaid agencies. The latest complete data available from these three states were for 1994. We therefore used 1994 national data for comparison purposes. Some differences occur in the recipient counts among the national data we used from the Institute and data we collected from agencies in Florida, Michigan, and Rhode Island. These differences could affect some aspects of our comparisons of national trends and trends in the three states. Institute data on recipients show the total number of persons receiving services on a given date—June 30 of each year—whereas data for the three states show the cumulative number of persons receiving services over a 12-month period. Therefore, data supplied by the states could result in a larger count of program recipients than the methodology used by the Institute. This could have the impact of making per capita expenditure calculations smaller for the state data than for the national data. Our comparisons of data from the two sources, however, showed few substantial differences in the data for the three states. We excluded children from our analysis because (1) their needs are different in many respects from those of adults, (2) family responsibilities for the care of children are more comprehensive than for adults, and (3) the educational system has the lead public responsibility for services for children. Recipient and expenditure data in this report, however, include some children because it was not possible to systematically exclude them. However, the percentage of children in these services is small. In 1992, for example, about 11 percent of ICF/MR service recipients were less than 21 years old. We conducted our review from May 1995 through May 1996 in accordance with generally accepted government auditing standards. States, with HCFA’s approval, choose which services they offer through waiver programs and how the services are defined. States can choose from a list of standard services and definitions in the HCFA waiver application or design their own services. In designing their own services, states can add new services or redefine standard services. States can also extend optional services to offer more units of these services to waiver program recipients than are available to other recipients under the regular Medicaid program. The three states we visited chose to offer a number of standard services under their waiver program. Each state also modified the definition of some standard services that it provides or offered services not on the standard waiver list. (See fig II.1.) For example, Florida modified the definition of case management to include helping individuals and families identify preferences for services. Florida also added several nonstandard, state-defined services such as behavior analysis and assessments and supported living coaching. Rhode Island’s modified definition of homemaker services includes a bundle of services often offered separately, including standard homemaker services, personal care services, and licensed practical nursing services. Rhode Island also added nonstandard services to provide minor assistive devices and support of family living arrangements. Michigan modified the standard definition of environmental accessibility adaptations to include not only physical adaptations to the home, but to the work environment as well. Michigan also recently added a new state-defined service, community living supports, which is a consolidation of four services—in-home habilitation, enhanced personal care, personal assistance, and transportation— previously provided separately. Florida and Michigan also chose to offer several optional services in their waiver programs. Rhode Island’s definition of homemaker includes not only homemaker services as typically defined, but personal care and licensed practical nursing services as well. The HCFA definition for each standard waiver service offered in Florida, Michigan, and Rhode Island is shown in appendix III. This appendix shows HCFA’s definition for each standard waiver service offered in Florida, Michigan, and Rhode Island. These service names and definitions are written as they appear in the latest version of the HCFA 1915(c) waiver application format, dated June 1995. Because states have the flexibility to modify these definitions, the definitions and how services are implemented vary among the states. Adult Companion Services: socialization, provided to a functionally impaired adult. Companions may assist or supervise the individual with such tasks as meal preparation, laundry and shopping, but do not perform these activities as discrete services. The provision of companion services does not entail hands-on nursing care. Providers may also perform light housekeeping tasks which are incidental to the care and supervision of the individual. This service is provided in accordance with a therapeutic goal in the plan of care, and is not purely diversional in nature. Non-medical care, supervision and Case Management: Services which will assist individuals who receive waiver services in gaining access to needed waiver and other State plan services, as well as needed medical, social, educational and other services, regardless of the funding source for the services to which access is gained. Chore Services: Services needed to maintain the home in a clean, sanitary and safe environment. This service includes heavy household chores such as washing floors, windows and walls, tacking down loose rugs and tiles, moving heavy items of furniture in order to provide safe access and egress. These services will be provided only in cases where neither the individual, nor anyone else in the household, is capable of performing or financially providing for them, and where no other relative, caregiver, landlord, community/volunteer agency, or third party payor is capable of or responsible for their provision. In the case of rental property, the responsibility of the landlord, pursuant to the lease agreement, will be examined prior to any authorization of service. Environmental accessibility adaptations: Those physical adaptations to the home, required by the individual’s plan of care, which are necessary to ensure the health, welfare and safety of the individual, or which enable the individual to function with greater independence in the home, and without which, the individual would require institutionalization. Such adaptations may include the installation of ramps and grab-bars, widening of doorways, modification of bathroom facilities, or installation of specialized electric and plumbing systems which are necessary to accommodate the medical equipment and supplies which are necessary for the welfare of the individual. Excluded are those adaptations or improvements to the home which are of general utility, and are not of direct medical or remedial benefit to the individual, such as carpeting, roof repair, central air conditioning, etc. Adaptations which add to the total square footage of the home are excluded from this benefit. All services shall be provided in accordance with applicable State or local building codes. Family Training: Training and counseling services for the families of individuals served on this waiver. For purposes of this service, "family" is defined as the persons who live with or provide care to a person served on the waiver, and may include a parent, spouse, children, relatives, foster family, or in-laws. "Family" does not include individuals who are employed to care for the consumer. Training includes instruction about treatment regimens and use of equipment specified in the plan of care, and shall include updates as necessary to safely maintain the individual at home. All family training must be included in the individual’s written plan of care. Habilitation: Services designed to assist individuals in acquiring, retaining and improving the self-help, socialization and adaptive skills necessary to reside successfully in home and community-based settings.This service includes: retention, or improvement in skills related to activities of daily living, such as personal grooming and cleanliness, bed making and household chores, eating and the preparation of food, and the social and adaptive skills necessary to enable the individual to reside in a non-institutional setting. Payments for residential habilitation are not made for room and board, the cost of facility maintenance, upkeep and improvement, other than such costs for modifications or adaptations to a facility required to assure the health and safety of residents, or to meet the requirements of the applicable life safety code. Payment for residential habilitation does not include payments made, directly or indirectly, to members of the individual’s immediate family. Payments will not be made for the routine care and supervision which would be expected to be provided by a family or group home provider, or for activities or supervision for which a payment is made by a source other than Medicaid. -- Day habilitation: Assistance with acquisition, retention, or improvement in self-help, socialization and adaptive skills which takes place in a non-residential setting, separate from the home or facility in which the individual resides. shall normally be furnished 4 or more hours per day on a regularly scheduled basis, for 1 or more days per week unless provided as an adjunct to other day activities included in an individual’s plan of care. Day habilitation services shall focus on enabling the individual to attain or maintain his or her maximum functional level and shall be coordinated with any physical, occupational, or speech therapies listed in the plan of care. In addition, they may serve to reinforce skills or lessons taught in school, therapy, or other settings. -- Prevocational services not available under a program funded under section 110 of the Rehabilitation Act of 1973 or section 602(16) and (17) of the Individuals with Disabilities Education Act (20 U.S.C. 1401 (16 and 17)). Services are aimed at preparing an individual for paid or unpaid employment, but are not job-task oriented. Services include teaching such concepts as compliance, attendance, task completion, problem solving and safety. Prevocational services are provided to persons not expected to be able to join the general work force or participate in a transitional sheltered workshop within one year (excluding supported employment programs). Prevocational services are available only to individuals who have previously been discharged from a SNF , ICF [intermediate care facility], NF or ICF/MR [intermediate care facility for mental retardation]. Activities included in this service are not primarily directed at teaching specific job skills, but at underlying habilitative goals, such as attention span and motor skills. All prevocational services will be reflected in the individual’s plan of care as directed to habilitative, rather than explicit employment objectives. -- Educational services, which consist of special education and related services as defined in sections (15) and (17) of the Individuals with Disabilities Education Act, to the extent to which they are not available under a program funded by IDEA. -- Supported employment services, which consist of paid employment for persons for whom competitive employment at or above the minimum wage is unlikely, and who, because of their disabilities, need intensive ongoing support to perform in a work setting. Supported employment is conducted in a variety of settings, particularly work sites in which persons without disabilities are employed. Supported employment includes activities needed to sustain paid work by individuals receiving waiver services, including supervision and training. When supported employment services are provided at a work site in which persons without disabilities are employed, payment will be made only for the adaptations, supervision and training required by individuals receiving waiver services as a result of their disabilities, and will not include payment for the supervisory activities rendered as a normal part of the business setting. Supported employment services furnished under the waiver are not available under a program funded by either the Rehabilitation Act of 1973 or P.L. 94-142. Homemaker: Services consisting of general household activities (meal reparation and routine household care) provided by a trained homemaker, when the individual regularly responsible for these activities is temporarily absent or unable to manage the home and care for him or herself or others in the home. Homemakers shall meet such standards of education and training as are established by the State for the provision of these activities. Personal care services: Assistance with eating, bathing, dressing, personal hygiene, activities of daily living. This service may include assistance with preparation of meals, but does not include the cost of the meals themselves. When specified in the plan of care, this service may also include such housekeeping chores as bedmaking, dusting, and vacuuming, which are incidental to the care furnished, or which are essential to the health and welfare of the individual, rather than the individual’s family. Personal care providers must meet State standards for this service. Personal Emergency Response Systems (PERS): PERS is an electronic device which enables certain individuals at high risk of institutionalization to secure help in an emergency. The individual may also wear a portable "help" button to allow for mobility.The system is connected to the person’s phone and programmed to signal a response center once a "help" button is activated. The response center is staffed by trained professionals. PERS services are limited to those individuals who live alone, or who are alone for significant parts of the day, and have no regular caregiver for extended periods of time, and who would otherwise require extensive routine supervision. Private duty nursing: Individual and continuous care (in contrast to part time or intermittent care) provided by licensed nurses within the scope of State law. These services are provided to an individual at home. Respite care: Services provided to individuals unable to care for themselves; furnished on a short-term basis because of the absence or need for relief of those persons normally providing the care. Skilled nursing: Services listed in the plan of care which are within the scope of the State’s Nurse Practice Act and are provided by a registered professional nurse, or licensed practical or vocational nurse under the supervision of a registered nurse, licensed to practice in the State. Specialized Medical Equipment and Supplies: Specialized medical equipment and supplies include devices, controls, or appliances, specified in the plan of care, which enable individuals to increase their abilities to perform activities of daily living, or to perceive, control, or communicate with the environment in which they live. This service also includes items necessary for life support, ancillary supplies and equipment necessary to the proper functioning of such items, and durable and non-durable medical equipment not available under the Medicaid State plan. Items reimbursed with waiver funds shall be in addition to any medical equipment and supplies furnished under the State plan and shall exclude those items which are not of direct medical or remedial benefit to the individual. All items shall meet applicable standards of manufacture, design, and installation. Transportation: Service offered in order to enable individuals served on the waiver to gain access to waiver and other community services, activities and resources, specified by the plan of care. This service is offered in addition to medical transportation required under 42 CFR 431.53 and transportation services under the State plan, defined at 42 440.170(a) (if applicable), and shall not replace them. Transportation services under the waiver shall be offered in accordance with individual’s plan of care.Whenever possible, family neighbors, friends, or community agencies which can provide this service without charge will be utilized. HCFA requires that each state specify licensure, certification, or other standards for each service in its waiver application. These requirements are detailed in state and local laws, regulations, or operating guidelines and enforced by state and local agencies. Such requirements may include professional standards for individuals providing services, minimum training requirements, criminal background checks, certification for facilities, local building codes, and fire and health requirements. For example, the information below shows how Florida addresses HCFA requirements for licensure, certification, and other standards for each of its waiver program services. The information, unless otherwise noted, was obtained from Florida’s Department of Health and Rehabilitative Services’ July 1995 Services Directory, which provides the details of service standards in Florida’s approved waiver. Psychologists, clinical social workers, marriage and family therapists, mental health counselors, or providers certified by the Department of Health and Rehabilitative Services (HRS) Developmental Services (DS) Behavior Analysis Certification program. Psychologists shall be licensed by the Department of Business and Professional Regulation in accordance with Chapter 490, Florida statutes (F.S.). Clinical social workers, marriage and family therapists, and mental health counselors shall be licensed in accordance with Chapter 491, F.S. Others must be certified under the HRS Behavior Analysis Certification program. Background screening is required for those certified under the HRS Developmental Services Behavior Analysis Certification program. Home health agencies, hospice agencies, and independent vendors. Home health and hospice agencies must be licensed by the Agency for Health Care Administration. In accordance with Chapter 400, Part IV or Part VI, F.S. Independent vendors are not required to be licensed or registered. Independent vendors must have at least 1 year of experience working in a medical, psychiatric, nursing, or child care setting or working with developmentally disabled persons. College or vocational/technical training, equal to 30 semester hours, 45 quarter hours, or 720 classroom hours can substitute for the required experience. Background screening required of independent vendors. Home health agencies, hospice agencies, and independent vendors. Home health and hospice agencies shall be licensed by the Agency for Health Care Administration, Chapter 400, Part IV or Part VI, F.S. Independents shall be registered with the Agency for Health Care Administration as companions or sitters in accordance with Section 400.509, F.S. Background screening required for independent vendors. Centers or sites designated by the district DS office as adult day training centers. Licensure/registration is not required. Background screening required for all direct care staff. Contractors, electricians, plumbers, carpenters, handymen, medical supply companies, and other vendors. Contractors, plumbers, and electricians will be licensed by the Department of Business and Professional Regulation in accordance with Chapter 489, F.S. Medical supply companies, carpenters, handymen, and other vendors shall hold local occupational licenses or permits in accordance with Chapter 205, F.S. None. Home health agencies, hospice agencies, and independent vendors. Home health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S. Independent vendors must be registered as homemakers with the Agency for Health Care Administration in accordance with Section 400.509, F.S. Background screening required for independents. Independent vendors and agencies. Licensure/registration is not required. Independent vendors must have at least 1 year of experience working in a medical, psychiatric, nursing, or child care setting or in working with developmentally disabled persons. College or vocational/technical training that equals at least 30 semester hours, 45 quarter hours, or 720 classroom hours may substitute for the required experience. Agency employees providing this service must meet the same requirements. Background screening required of agency employees who perform this service and of independent vendors. Occupational therapists, occupational therapy aides, and occupational therapy assistants. Occupational therapists, aides, and assistants may provide this service as independent vendors or as employees of licensed home health or hospice agencies. Occupational therapists, occupational therapy aides, and occupational therapy assistants shall be licensed by the Department of Business and Professional Regulation in accordance with Chapter 468, Part III, F.S. and may perform services only within the scope of their licenses. Home health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S. None. Home health and hospice agencies and independent vendors. Home health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S. Independent vendors are not required to be licensed or registered. Independent vendors shall have at least 1 year of experience working in a medical, psychiatric, nursing, or child care setting or working with developmentally disabled persons. College or vocational/technical training that equals at least 30 semester hours, 45 quarter hours, or 720 classroom hours may substitute for the required experience. Background screening is required of independent vendors. Electrical contractors and alarm system contractors. Electrical contractors and alarm system contractors must be licensed by the Department of Business and Professional Regulation in accordance with Chapter 489, Part II, F.S. None. Physical therapist and physical therapist assistants. Physical therapist and assistants may provide this service as independent vendors or as employees of licensed home health or hospice agencies. Physical therapists and therapist assistants shall be licensed by the Department of Business and Professional Regulation in accordance with Chapter 486, F.S., and may perform services only within the scope of their licenses. Home health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S. None. Registered nurses and licensed practical nurses. Nurses may provide this service as independent vendors or as employees of licensed home health or hospice agencies. Nurses shall be registered or licensed by the Department of Business and Professional Regulation in accordance with Chapter 464, F.S. Home health or hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S. None. Psychologists. Psychologists shall be licensed by the Department of Business and Professional Regulation, Chapter 490, F.S. None. Group homes, foster homes, and adult congregate living facilities and independent vendors. Group and foster homes facilities shall be licensed by the Department of Health and Rehabilitative Services in accordance with Chapter 393, F.S. Adult congregate living facilities shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part III, F.S. Licensure or registration is not required for independent vendors. Independent vendors must possess at least an associate’s degree from an accredited college with a major in nursing; education; or a social, behavioral, or rehabilitative science. Experience in one of these fields shall substitute on a year-for-year basis for required education. Background screening required of direct care staff employed by licensed residential facilities and independent vendors. Group homes; foster homes; adult congregate living facilities; home health agencies; hospice agencies; other agencies that specialize in serving persons who have a developmental disability; and independent vendors, registered nurses, and licensed practical nurses. Group and foster homes shall be licensed by the Department of Health and Rehabilitative Services in accordance with Chapter 393, F.S. Adult congregate living facilities shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part III, F.S. Home health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S. Nurses who render the service as independent vendors shall be licensed or registered by the Department of Business and Professional Regulation in accordance with Chapter 464, F.S. Licensure or registration is not required for independent vendors who are not nurses. Background screening is required of direct care staff employed by licensed residential facilities and other agencies that serve persons who have a developmental disability and of independent vendors who are not registered or licensed practical nurses. Independent vendors who are not nurses must have at least 1 year of experience working in a medical, psychiatric, nursing, or child care setting or working with developmentally disabled persons. College or vocational/technical training that equals at least 30 semester hours, 45 quarter hours, or 720 classroom hours may substitute for the required experience. Registered nurses and licensed practical nurses. Nurses may provide this service as independent vendors or as employees of licensed home health or hospice agencies. Nurses shall be registered or licensed by the Department of Business and Professional Regulation in accordance with Chapter 464, F.S. Home health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S. None. Group homes that employ registered nurses, licensed practical nurses, or licensed nurse aides. Group homes shall be licensed by the Department of Health and Rehabilitative Services in accordance with Chapter 393, F.S. Nurses shall be registered or licensed by the Department of Business and Professional Regulation in accordance with Chapter 464, F.S. and may perform services only within the scope of their license or registration. Background screening required of direct care staff employed by licensed group homes. (See Florida’s approved waiver renewal application for 1993-98.) Medical supply companies, licensed pharmacies, and independent vendors. Pharmacies must be licensed by the Department of Business and Professional Regulation in accordance with Chapter 465, F.S. Medical supply companies and independent vendors must be licensed under Chapter 205, F.S. None. Speech-language pathologists and speech-language pathology assistants. Speech-language pathologists or assistants may provide this service as independent vendors or as employees of licensed home health or hospice agencies. Speech-language pathologists and pathology assistant shall be licensed by the Department of Business and Professional Regulation in accordance with Chapter 468, Part I, F.S. Home health and hospice agencies shall be licensed by the Agency for Health Care Administration in accordance with Chapter 400, Part IV or Part VI, F.S. None. Single practitioner vendors or agency vendors. Licensure is not required. Single practitioners and support coordinators employed by agencies shall have a bachelor’s degree from an accredited college or university and 2 years of professional experience in mental health, counseling, social work, guidance, or health and rehabilitative programs. A master’s degree shall substitute for 1 year of the required experience. Providers (single practitioners and agency directors/managers) are required to complete statewide training conducted by the Developmental Services Program Office, as well as district-specific training conducted by the district DS office. Support coordinators employed by agencies are also required to be trained on the same topics covered in the statewide and district-specific training; however, this training may be conducted by the support coordination agency if approved by the district and the agency trainer meets specific requirements described in Chapter 10F-13, Florida Administrative Code. Independent vendors and agency vendors. Licensure is not required. Independent vendors and employees of agencies who render this service shall have a bachelor’s degree from an accredited college or university with a major in nursing; education; or a social, behavioral, or rehabilitative science or shall have an associate’s degree from an accredited college or university with a major in nursing; education; or a social, behavioral, or rehabilitative science and 2 years of experience. Experience in one of these fields shall substitute on a year-for-year basis for the required college education. Agency employees are required to attend at least 12 hours of preservice training and independent vendors must attend at least one supported living-related conference or workshop before certification. All providers and employees are also required to attend human immunodeficiency virus/acquired immunodeficiency syndrome (HIV/AIDS) training. Background screening is required. Independent vendors and commercial transportation agencies. Providers shall hold applicable licenses issued by the Department of Highway Safety and Motor Vehicles and shall secure appropriate insurance. Proof of license and insurance shall be provided to the district DS office. Background screening required for independent vendors. Medicaid Long-Term Care: State Use of Assessment Instruments in Care Planning (GAO/PEMD-96-4, Apr. 2, 1996). Long-Term Care: Current Issues and Future Directions (GAO/HEHS-95-109, Apr. 13, 1995). Medicaid: Spending Pressures Drive States Toward Program Reinvention (GAO/HEHS-95-122, Apr. 4, 1995). Long-Term Care: Diverse, Growing Population Includes Millions of Americans of All Ages (GAO/HEHS-95-26, Nov. 7, 1994). Long-Term Care Reform: States’ Views on Key Elements of Well-Designed Programs for the Elderly (GAO/HEHS-94-227, Sept. 6, 1994). Long-Term Care: Other Countries Tighten Budgets While Seeking Better Access (GAO/HEHS-94-154, Aug. 30, 1994). Financial Management: Oversight of Small Facilities for the Mentally Retarded and Developmentally Disabled (GAO/AIMD-94-152, Aug. 12, 1994). Medicaid Long-Term Care: Successful State Efforts to Expand Home Services While Limiting Costs (GAO/HEHS-94-167, Aug. 11. 1994). Long-Term Care: Status of Quality Assurance and Measurement in Home and Community Based Services (GAO/PEMD-94-19, Mar. 31, 1994). Long-Term Care: Support for Elder Care Could Benefit the Government Workplace and the Elderly (GAO/HEHS-94-64, Mar. 4, 1994). Long-Term Care: Private Sector Elder Care Could Yield Multiple Benefits (GAO/HEHS-94-60, Jan. 31, 1994). Health Care Reform: Supplemental and Long-Term Care Insurance (GAO/T-HRD-94-58, Nov. 9, 1993). Long-Term Care Reform: Rethinking Service Delivery, Accountability, and Cost Control (GAO/HRD-93-1-SP, July 13, 1993). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed states' experiences in utilizing the Medicaid waiver program to provide care for developmentally disabled adults in alternative settings, focusing on: (1) expanding state use of the waiver program; (2) controlling long-term care costs for developmentally disabled individuals; and (3) the strengths and limitations in states' quality assurance approaches in community settings. GAO found that: (1) based on national data and three case studies, states' use of the waiver program has changed long-term care for developmental disabled persons by providing such persons with a broader range of services that they and their families prefer; (2) the waiver program has increased the number of persons served and the use of group home settings while allowing states to close many institutional care facilities and to expand services to persons in state-financed programs; (3) states now serve more developmentally disabled persons through the waiver program than the institutional program; (4) the waiver program has allowed states to pursue distinct strategies and achieve different program results; (5) from 1990 to 1995, Medicaid costs for long-term care for developmentally disabled persons increased an average of 9 percent annually due to increased costs for waiver and institutional program services, but per capita costs and cost increases varied by state; (6) the cap on the number of program recipients and state management practices helped contain these costs; (7) changes in the Health Care Financing Administration's (HCFA) process for setting waiver program caps could increase program costs, but HCFA believes that state budget constraints could limit program growth; and (8) although states are changing their quality assurance procedures for waiver program services, such as customizing quality assurance to individual circumstances, more needs to be done to improve quality oversight mechanisms and reduce participants' risk as these mechanisms evolve.

You are an expert at summarizing long articles. Proceed to summarize the following text: The Clean Air Act gives EPA authority to set national standards to protect human health and the environment from emissions that pollute ambient (outdoor) air. The act assigns primary responsibility for ensuring adequate air quality to the states. The pollutants regulated under the act can be grouped into two categories—“criteria” pollutants and “hazardous air” pollutants. While small in number, criteria pollutants are discharged in relatively large quantities by a variety of sources across broad regions of the country.Because of their widespread dispersion, the act requires EPA to determine national standards for these pollutants. These national standards are commonly referred to as the National Ambient Air Quality Standards (NAAQS). The NAAQS specify acceptable air pollution concentrations that should not be exceeded within a geographic area. States are required to meet these standards to control pollution and to ensure that all Americans have the same basic health and environmental protection. NAAQS are currently in place for six air pollutants: ozone, carbon monoxide, sulfur dioxide, nitrogen dioxide, lead, and particulate matter. The second category, referred to as “hazardous air pollutants” or “air toxics,” includes chemicals that cause serious health and environmental hazards. For the most part, these pollutants emanate from specific sources, such as auto paint shops, chemical factories, or incinerators. Prior to its amendment in 1990, the act required EPA to list each hazardous air pollutant that was likely to cause an increase in deaths or in serious illnesses and establish emission standards applicable to sources of the listed pollutant. By 1990, EPA had listed seven pollutants as hazardous: asbestos, beryllium, mercury, vinyl chloride, arsenic, radionuclides, and benzene. However, the agency was not able to establish emissions standards for other pollutants because EPA, industry, and environmental groups disagreed widely on the safe level of exposure to these substances. The 1990 amendments established new information gathering, storage, and reporting demands on EPA and the states. Required information ranged from that on ground-level to atmospheric pollutants. For example, states with ozone nonattainment areas must require owners or operators of stationary sources of nitrogen oxides or volatile organic compounds to submit to the state annual statements showing actual emissions of these pollutants. Also, the amendments expanded the air toxics category to include a total of 189 hazardous air pollutants that are to be controlled through technology-based emission standards, rather than health-based standards as the previous law had required. To establish technology-based standards, EPA believes that it needs to collect information on emissions of these hazardous air pollutants. In addition, the amendments initiated a national operating permit program that requires new information to be collected from sources that release large amounts of pollutants into the air. Further, the amendments require new information about acid rain, stratospheric ozone-depleting chemicals, and ecological and health problems attributed to air pollutants. Appendix I identifies titles of the act and selected additional data collection requirements imposed by the new law. EPA designed AIRS in stages during the 1980s to be a national repository of air pollution data. EPA believed that having this information would help it and the states monitor, track, and improve air quality. The system is managed by EPA’s Information Transfer and Program Integration Division in the Office of Air Quality Planning and Standards. The Office of Air Quality Planning and Standards, under the Assistant Administrator of Air and Radiation, manages the air quality program. AIRS was enhanced in response to the 1990 amendments, when additional gathering, calculating, monitoring, storing, and reporting demands were placed on the system. AIRS currently consists of four modules or subsystems: Facility Subsystem: This database, which became operational in 1990, contains emission, compliance, enforcement, and permit data on air pollution point sources that are monitored by EPA, state, and local regulatory agencies. Air Quality Subsystem: This database, which became operational in 1987, contains data on ambient air quality for criteria, air toxic, and other pollutants, as well as descriptions of each monitoring station. Area and Mobile Source Subsystem: This is a database for storing emission estimates and tracking regulatory activities for mobile air pollution sources, such as motor vehicles; small stationary pollutant emitters, such as dry cleaners; and natural sources, such as forest fires. The subsystem became operational in 1992 and is scheduled to be phased out by September 1995 due to budget cuts and low utilization. Geo-Common Subsystem: This database, which became operational in 1987, contains identification data such as code descriptions used to identify places, pollutants, and processes; populations of cities and/or counties; and numerical values that pertain to air quality standards and emission factors that are used by all the other subsystems. Information provided by EPA, which we did not independently verify, indicates that the total cost to develop and operate the system from 1984 through 1995 will be at least $52.6 million. Budgeted operating and maintenance costs for fiscal year 1996 are projected to be $2.7 million. Neither of these estimates include states’ personnel costs. The Facility Subsystem accounted for the largest portion of subsystem costs. Appendix II provides a more detailed breakdown of estimated subsystem costs for fiscal years 1984 through 1995. Budgeted subsystem costs were not available for fiscal year 1996. To determine whether EPA’s planned state emissions reporting requirements exceeded the agency’s actual program needs, we reviewed the Clean Air Act, and we analyzed various information reporting requirements of the 1990 amendments and EPA documents interpreting requirements of the amendments. We also analyzed a draft EPA emissions reporting regulation and compared its reporting requirements with an EPA emissions reporting options paper examining several alternative reporting levels. Further, we evaluated state and state air pollution association comments on the draft regulation. Finally, we reviewed other EPA emission reporting guidance documents and interviewed EPA, state, and local air pollution officials to obtain their comments on the draft regulation. EPA officials interviewed were from the Information Transfer and Program Integration Division and the Emissions, Monitoring, and Analysis Division in the Office of Air Quality Planning and Standards. State representatives interviewed were from Arizona, California, Michigan, New Hampshire, Tennessee, and Wisconsin. Local officials interviewed were from Ventura County, California, and the South Coast Air Quality District, Diamond Bar, California. To determine whether states use AIRS to monitor emissions data, we reviewed early AIRS design and development documents and examined EPA documents evaluating AIRS Facility Subsystem use by all the states. Further, we examined comments and/or analyses provided to EPA by seven states on their use of AIRS. We also evaluated original user requirements and other AIRS documents to determine the original purpose and anticipated users of AIRS. In addition, we interviewed EPA, state, and vendor information system officials on states’ use of AIRS and state information systems. Vendor representatives interviewed were from Martin Marietta Technical Services, Inc., and TRC Environmental Corporation. We performed our work at the EPA AIRS program offices in Research Triangle Park and Durham, North Carolina, and at the AIRS 7th Annual Conference in Boston, Massachusetts. Our work was performed from October 1994 through May 1995, in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Administrator of the Environmental Protection Agency. In response, on June 29, 1995, we received comments from the Acting Director for the Office of Air Quality Planning and Standards. EPA’s draft regulation on states’ reporting of air pollution emissions exceeded what was needed by EPA to meet minimum agency air pollution program needs. EPA has suspended its promulgation of the regulation and has recently begun studying alternative reporting options. EPA began work on the now suspended emissions regulation in order to consolidate and standardize several state emissions reporting requirements (i.e., emission statements, periodic emission inventories, and annual statewide point source reporting) and to align these requirements with the mandates in the 1990 amendments. Draft versions of the regulation were circulated in late 1993 and early 1994 to obtain preliminary comments from several states. Three states commented to EPA on the draft regulation and one provided written comments. This state concluded that the level of detail required by the proposed regulation was not necessary. The state also noted that the draft regulation required data on each emission point within a plant, rather than aggregate data for each facility, and on items related to a factory’s process and equipment, such as process rate units, annual process throughput, and typical daily seasonal throughput. Further, this state also asserted that annual reporting of hazardous air pollution emissions, as required by the draft regulation, is not required by the amendments. The state said that because of the additional complexity of toxic air pollutant data compared to criteria pollutant data, annual reporting to AIRS would not be feasible. In addition, in a letter to EPA addressing several AIRS issues, seven states also mentioned the draft regulation. These states said that the draft regulation would require them to submit more highly detailed data items into AIRS than called for under the amendments and other EPA mandated programs. Further, these states noted that providing the additional data sought in the draft regulation concerning hazardous air pollutant emissions would require developing more complicated toxic chemical databases, which are very costly to develop. The states noted that additional resources to develop these databases were not available. EPA acknowledged these concerns and has suspended the regulation. In December 1994, EPA issued a study that stated that minimum program needs could be met with a fraction of the data that would have been required by the suspended regulation. Our analysis of the study revealed that, in one case, EPA only needed to collect about 20 percent of the volatile organic compounds data requested in the suspended regulation to meet minimum program needs. The study showed that, in this case, an estimated 1,323,540 of these data items would have to be reported by California under the draft regulation, while only 241,574 data items would be reported under the minimum program needs option. According to representatives in EPA’s Emissions, Monitoring, and Analysis Division, most other states could reduce the amount of data submitted to EPA by a similar proportion and still meet minimum program needs. (See appendix III for additional state examples). However, officials in EPA’s Office of Air Quality and Standards noted that while the reduced level of data would meet minimum program needs, other important data that the agency believes could contribute to a more effective program would not be collected. Nevertheless, collection of these additional data would place an extra burden on the states. EPA has now begun reevaluating the information it needs from states and is considering various reporting alternatives. The use of the AIRS Facility Subsystem by heavy emission states for tracking air pollution emissions is limited. When AIRS was originally designed, states were expected to be one of its primary users; however, most heavy emission states now use their own systems because these systems are more efficient and easier to use than AIRS. The Facility Subsystem is the official repository for emission inventory, regulatory compliance, and permit data. It contains annual emissions estimates for criteria pollutants and daily emissions estimates. The subsystem was developed by EPA to track, monitor, and assess state progress in achieving and maintaining national ambient air quality standards and is also used to report the status of these efforts to the Congress. It was also developed to allow state and local air pollution control agencies to monitor and track emissions and make midcourse adjustments, as necessary, to achieve air quality standards. EPA requires that states submit data to the subsystem either in an AIRS compatible format or directly to the subsystem. The states receive these data from thousands of sources around the country. For the 1990 base year inventory, over 52,000 sources reported data through the states to the AIRS Facility Subsystem. Each state is to use these data to help prepare a plan detailing what it will do to improve the air quality in areas that do not meet national standards. While all the states must input emission and other data into the Facility Subsystem, most heavy emission states do not use the subsystem internally to monitor and analyze emissions and compliance data. In many cases, these states already had their own systems to perform these functions. Each state’s system is customized to that particular state’s program data and reporting needs. Of the 10 states that account for almost half of the combined emissions of the criteria pollutants, only one (Indiana) is a direct user of the emissions portion of the subsystem. Further, of these same 10 states, only 4 (California, Georgia, Indiana, and Pennsylvania) are direct users of the compliance portion of the subsystem. By contrast, a greater proportion of the smaller emission source states use the Facility Subsystem to manage and analyze air pollution data. These states do not have their own air pollution information systems. In his comments, the Acting Director for the Office of Air Quality Planning and Standards expressed concern that the primary evidence supporting our assertion that the proposed reporting requirements exceeded EPA minimum program needs is based primarily on the written comments provided by one state. This is incorrect. Our finding is based primarily on our analysis of EPA’s December 1994 study, which also concluded that minimum program needs could be met with a fraction of the data that would have been required by the suspended regulation. The Acting Director also commented that the report did not adequately reflect EPA’s efforts to respond to the states’ concerns. We believe that the report makes clear that EPA took action and suspended the draft regulation based on state concerns. Finally, the Acting Director stated that the draft report did not reflect the success of EPA’s regulatory review process and only focused on an interim finding that EPA addressed by suspending the regulation. We believe the report adequately reflects EPA’s process and states’ concern with the additional burden that would have been imposed on them if the draft regulation had been promulgated. For example, we note in the report that EPA has recently begun studying alternative reporting options. We are sending copies of this report to the Administrator, EPA; interested congressional committees; and the Director, Office of Management and Budget. Copies will also be made available to others upon request. Please call me at (202) 512-6253 if you or your staff have any questions concerning this report. Major contributors are listed in appendix IV. Expands several existing information collection, storage, and reporting requirements currently being met by the Aerometric Information Retrieval System (AIRS). Thousands of additional facilities in ozone nonattainment areas will be defined as “major sources” and will thus be subject to enhanced monitoring, recordkeeping, reporting, and emissions control requirements. Expands and revises emission limitations for mobile sources (automobiles and trucks) of air pollutants. New standards are established for motor vehicle engines, fuel content, alternative fueled vehicles, and other mobile sources. AIRS was not affected by these requirements. Creates a program to monitor and control the 189 hazardous air pollutants. AIRS is being enhanced to provide a tool for EPA to develop technology-based standards and, when standards have not been developed, for state pollution control agencies to make case-by-case decisions on the best demonstrated control technologies for hazardous air pollutants within an industry. Establishes a new federal program to control acid deposition. AIRS was not affected by these requirements. The separate Acid Rain Data System/Emissions Tracking System provides for recording and validating emissions data from sources emitting sulfur dioxide and nitrogen oxides, ingredients of acid rain. Establishes a new permit program that, in large part, is to be implemented by the states. AIRS is being enhanced to accommodate additional permit program data elements and to merge emissions and enforcement data. Creates a new federal program for the protection of stratospheric ozone. Each person producing, importing, or exporting certain substances that cause or contribute significantly to harmful effects on the ozone layer must report to EPA quarterly the amount of each substance produced. AIRS was not affected by this requirement. Enhances federal enforcement authority, including authority for EPA to issue field citations for minor violations. AIRS was enhanced to collect and report new data concerning administrative, field citation, and other actions. Includes various miscellaneous provisions, including provisions addressing emissions from sources on the outer continental shelf and visibility issues. AIRS was not affected by these provisions. Requires several national or regional research programs. Most of the research programs require air data that can be integrated with data from other media or from other systems. This may require system modification. Legend: n/a = not applicable. Columns and rows may not total precisely due to rounding. Allan Roberts, Assistant Director Barbara Y. House, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO reviewed selected data collection and reporting requirements of the 1990 Clean Air Act Amendments, focusing on whether: (1) the Environmental Protection Agency's (EPA) planned state emissions reporting requirements exceed its program needs; and (2) states use the EPA Aerometric Information Retrieval System (AIRS) to monitor emissions data. GAO found that: (1) EPA draft regulation would have required states to submit emissions data that exceeded its minimum air pollution program needs and to develop complicated pollutant databases that they could not afford; (2) EPA has since suspended the regulation and is considering alternative reporting options; (3) despite EPA intentions, 9 of the 10 heavy emission states use their own independently developed systems to track air pollution emissions; and (4) the state tracking systems are more efficient and easier to use than AIRS.

You are an expert at summarizing long articles. Proceed to summarize the following text: Most people with mental retardation, cerebral palsy, epilepsy, or other developmental disabilities who reside in large public institutions have many cognitive, physical, and functional impairments. Because their impairments often limit their ability to communicate concerns and many lack family members to advocate on their behalf, they are highly vulnerable to abuse, neglect, or other forms of mistreatment. As of 1994, more than 80 percent of residents in large public institutions were diagnosed as either severely or profoundly retarded. More than half of all residents cannot communicate verbally and require help with such basic activities as eating, dressing, and using the toilet. In addition, nearly half of all residents have behavioral disorders and require special staff attention, and almost one-third require the attention of psychiatric specialists. The Congress established the ICF/MR program as an optional Medicaid benefit in 1971 to respond to evidence of widespread neglect of the developmentally disabled in state institutions, many of which provided little more than custodial care. The program provides federal Medicaid funds to states in exchange for their institutions’ meeting minimum federal requirements for a safe environment, appropriate active treatment, and qualified professional staff. In 1994, more than 62,000 developmentally disabled individuals lived in 434 large public institutions certified as ICFs/MR for participation in Medicaid. States operated 392 of these institutions; county and city governments operated 42. The average number of beds in each facility was 170, though facilities range in size from 16 beds to more than 1,000 beds. These institutions provided services on a 24-hour basis as needed. Services included medical and nursing services, physical and occupational therapy, psychological services, recreational and social services, and speech and audiology services. Compared with residents in years past, those in large public institutions today are older and more medically fragile and have more complex behavioral and psychiatric disorders. In recent years, states have reduced the number of people living in these large public ICFs/MR by housing them in smaller, mostly private ICFs/MR and other community residential settings. Large public institutions generally are not accepting many new admissions, and many states have been closing or downsizing their large institutions. HCFA published final regulations for quality of care in ICFs/MR in 1974 and revised them in 1988. To be certified to participate in Medicaid, ICFs/MR must meet eight conditions of participation (CoP) contained in federal regulations. The regulations are designed to protect the health and safety of residents and ensure that they are receiving active treatment for their disability and not merely custodial care. Each CoP encompasses a broad range of discrete standards that HCFA determined were essential to a well-run facility. The CoPs cover most areas of facility operation, including administration, minimum staffing requirements, provision of active treatment services, health care services, and physical plant requirements. (See app. II for a more detailed description of the ICF/MR CoPs.) The eight CoPs comprise 378 specific standards and elements. HCFA requires that states conduct annual on-site inspections of ICFs/MR to assess the quality of care provided and to certify that they continue to meet federal standards for Medicaid participation. The state health department usually serves as the survey agency. These agencies may also conduct complaint surveys at any time during the year in response to specific allegations of unsafe conditions or deficient care. If the surveyors identify deficiencies, the institution must submit a plan of correction to the survey agency and correct—or show substantial progress toward correcting—any deficiency within a specified time period. For serious deficiencies, those cited as violating the CoPs, HCFA requires that the institution be terminated from Medicaid participation within 90 days unless corrections are made and verified by the survey agency during a follow-up visit. If a facility meets all eight CoPs but has deficiencies in one or more of the standards or elements, it may have up to 12 months to achieve compliance as long as the deficiency does not immediately jeopardize residents’ health and safety. HCFA’s 10 regional offices oversee state implementation of Medicaid ICF/MR regulations by monitoring state efforts to ensure that ICFs/MR comply with the regulations. HCFA regional office staff directly survey some ICFs/MR—primarily to monitor the performance of state survey agencies. In addition, regional office staff provide training, support, and consultation to state agency surveyors. The Department of Justice also has a role in overseeing public institutions for people with developmental disabilities. The Civil Rights of Institutionalized Persons Act (CRIPA) authorizes Justice to investigate allegations of unsafe conditions and deficient care and to file suit to protect the civil rights of individuals living in institutions operated by or on behalf of state or local governments. Justice Department investigations are conducted on site by Justice attorneys and expert consultants who interview facility staff and residents, review records, and inspect the physical environment. The Justice Department seeks to determine whether a deviation from current standards of practice exists and, if so, whether the deviation violates an individual’s civil rights. Unlike HCFA, Justice has no written standards or guidelines for its investigations. Justice Department officials told us that the standards they apply are generally accepted professional practice standards as defined in current professional literature and applied by the experts they retain to inspect these institutions. Since the enactment of CRIPA in 1980, Justice has been involved in investigations and enforcement actions in 38 cases involving large public institutions for the developmentally disabled in 20 states and Puerto Rico. As of July 1996, 13 of these investigations remained ongoing, 17 had been closed or resolved as a result of corrections being made, 7 continued to be monitored, and 1 litigated case was on appeal. State Medicaid surveys and Justice Department investigations continue to identify serious deficient care practices in large public ICFs/MR. A few of these practices have resulted in serious harm to residents, including injury, illness, physical degeneration, and death. As of August 1995, 28 of the 434 large public institutions were out of compliance with at least one CoP at the time of their most recent annual state survey. On the last four annual surveys, 122 of these institutions had at least one CoP violation. (See table 1.) These serious violations of Medicaid regulations commonly included inadequate staffing to protect individuals from harm, failure to provide residents with treatment needed to prevent degeneration, and insufficient protection of residents’ rights. Lack of adequate active treatment was the most common CoP violation cited in large public ICFs/MR. Serious active treatment deficiencies were cited 115 times in 84 institutions on the past four annual surveys. Eighteen institutions were cited for this CoP deficiency on their most recent annual survey. Serious active treatment deficiencies cited on the survey reports included, for example, staff’s failure to prevent dangerous aggressive behavior, failure to ensure that a resident with a seizure disorder and a history of injuries wore prescribed protective equipment, and failure to implement recommended therapy and treatment to maintain a resident’s ability to function and communicate. State surveyors also frequently found other CoP violations. They found, for example, residents of one state institution who had suffered severe hypothermia, pneumonia, and other serious illnesses and injuries as a consequence of physical plant deterioration, inadequate training and deployment of professional staff, failure to provide needed medical treatment, drug administration errors, and insufficient supervision of residents. Surveyors determined that the state had failed to provide sufficient management, organization, and support to meet the health care needs of residents and cited the facility for violating the governing body and management CoP. Other CoP violations found during this period include serious staffing deficiencies and client protection violations. Surveyors of one state institution reported deficiencies such as excessive turnover, insufficient staff deployment, frequent caseload changes, and lack of staff training. In this institution, surveyors also found residents vulnerable to abuse and mistreatment by staff and staff who failed to report allegations of mistreatment, abuse, and neglect in a timely manner. Other staff who were known to abuse residents in the past continued to work with residents and did not receive required human rights training. State agencies also conduct complaint surveys in large public ICFs/MR in response to alleged deficiencies reported by employees, advocates, family members, providers, or others. State agencies’ complaint surveys found 48 serious CoP violations from 1991 through 1994. The most frequently cited CoP violations were client protections, cited 22 times, and facility staffing, cited 11 times. (See table 1.) State survey agencies generally certify that facilities have sufficiently improved to come back into compliance with federal CoPs. When survey agencies find noncompliance with CoPs, they may revisit the facility several times before certifying that a violation has been corrected. On average, it takes about 60 days for this to occur. Since 1990, the Justice Department has found seriously deficient care that violated residents’ civil rights in 17 large public institutions for the mentally retarded or developmentally disabled in 10 states. Its investigations have identified instances of residents’ dying, suffering serious injury, or having been subjected to irreversible physical degeneration from abuse by staff and other residents, deficient medical and psychiatric care, inadequate supervision, and failure to evaluate and treat serious behavioral disorders. Justice found, for example, that a resident died of internal injuries in 1995 after an alleged beating by a staff member in one state institution that had a pattern of unexplained physical injuries to residents. In addition, the Department found that in the same facility a few years earlier, a moderately retarded resident suffered massive brain damage and lost the ability to walk and talk due to staff failure to provide emergency care in response to a life-threatening seizure. In another state institution, Justice found facility incident reports from 1992 and 1993 documenting that some residents were covered with ants and one resident was found with an infestation of maggots and bloody drainage from her ear. In another facility, Justice found that a resident was strangled to death in an incorrectly applied restraint in 1989. We reviewed Justice’s findings letters issued since 1990 for 15 institutions. The most common serious problems identified were deficient medical and psychiatric care practices, such as inadequate diagnosis and treatment of illness; inappropriate use of psychotropic medications; excessive or inappropriate use of restraints; inadequate staffing and supervision of residents; inadequate or insufficient training programs for residents and staff; inadequate therapy services; deficient medical record keeping; and inadequate feeding practices. States rarely contest Justice’s findings in court. Only two CRIPA cases involving large public ICFs/MR have been litigated. Department officials told us that the prospect of litigation usually prompts states to negotiate with Justice and to initiate corrective actions. The Department resolved 11 CRIPA cases without having to take legal action beyond issuing the findings letter because the states corrected the deficiencies. In another 12 cases involving large public ICFs/MR, states agreed to enter into a consent decree with the Department. About half of these latter cases required a civil contempt motion or other legal action to enforce the terms of the decree. State survey agencies may be certifying some large public ICFs/MR that do not meet federal standards. Although state survey agencies have the primary responsibility for monitoring the care in ICFs/MR on an ongoing basis, HCFA surveyors and Justice Department investigators have identified more deficiencies—and more serious deficiencies—than have state survey agencies. Federal monitoring surveys conducted by HCFA regional office staff identified more numerous or more serious problems in some large public ICFs/MR than did state agency surveys of the same institutions. According to HCFA, federal surveyors noted significant differences between their findings and those of the state survey agencies in 12 percent of federal monitoring surveys conducted in large public ICFs/MR between 1991 and 1994. HCFA surveyors determine that significant differences exist when, in their judgment, they have identified serious violations that existed at the time of the state agency survey that the state surveyors did not identify. When conducting monitoring surveys, HCFA regional office staff use the same standards and guidelines as state agency surveyors. These federal surveys are designed to assess the adequacy of state certification efforts in ensuring that ICFs/MR meet federal standards, and, for public facilities, the effectiveness of delegating to states the responsibility for surveying and monitoring the care provided in their own institutions. Justice also identified more deficiencies—and more serious deficiencies—in some large public ICFs/MR than did state survey agencies. Although some deficient care practices found by Justice were also noted on state agency surveys of the same institutions, others were not noted by state surveyors. For example, Justice found seriously deficient care that violated residents’ civil rights in 11 state institutions it investigated between 1991 and 1995. Of these 11, state agency surveys cited only 2 for a CoP deficiency even though the state surveys were conducted within a year of Justice’s inspection. The types of serious deficiencies often cited in Justice reports but not in state agency surveys of the same institution included deficiencies in medical practices and psychiatric care, inappropriate use of psychotropic medications, and excessive use of restraints. Several factors have contributed to the inability or failure of HCFA and state survey agencies to identify and prevent recurring quality-of-care deficiencies in some large public ICFs/MR. First, states have not identified all important quality-of-care concerns because of the limited approach and resources of Medicaid surveys. Second, enforcement efforts have not been sufficient to ensure that deficient care practices do not recur. Third, because states are responsible for both delivering and monitoring the care provided in most public institutions, state agency surveys of these institutions may lack the necessary independence to avoid conflicts of interest. Finally, a decline in direct HCFA oversight has reduced HCFA’s ability to monitor problems and help correct them. Although HCFA has recently begun to implement several initiatives to address some of these weaknesses, others remain unresolved. Differences between the approach and resources of Medicaid surveys and Justice Department investigations may explain why Medicaid surveys have not always identified the serious deficiencies that Justice investigations have. State surveyors examine a broad range of facility practices, environmental conditions, and client outcomes to ensure minimum compliance with HCFA standards. Surveys are generally limited to a review of the current care provided to a sample of residents in an institution, are conducted annually, and may last 1 to 2 weeks at a large public institution. In contrast, Justice Department investigations are intended to determine whether civil rights violations exist. They generally focus on deficient care practices about which Justice has received specific allegations, often related to medical and psychiatric care. Such investigations may include a review of care provided to all individuals in a facility, extend over several months, and include an examination of client and facility records covering several years to assess patterns of professional practice. The professional qualifications and expertise of individuals conducting state agency surveys and Justice’s investigations also differ. State surveyors are usually nurses, social workers, or generalists in a health or health-related field. Not all have expertise in developmental disabilities. Although HCFA recommends that at least one member of a state survey team be a qualified mental retardation professional (QMRP), 17 states had no QMRPs on their survey agency staffs as of March 1996. Justice’s investigators are usually physicians, psychiatrists, therapists, and others with special expertise in working with the developmentally disabled. According to HCFA and Justice officials, Justice Department investigators generally can better challenge the judgment of professionals in the institution regarding the care provided to individual residents than can state surveyors. HCFA officials acknowledged that the differences between Medicaid surveys and Justice investigations could explain some of the differences between their findings. They told us, however, that they have begun to implement several changes to the survey process to increase the likelihood that state surveys will identify all serious deficiencies. These include new instructions to surveyors for assessing the seriousness of deficiencies, increased training for surveyors and providers, and implementation of a new survey protocol intended to focus more attention on critical quality-of-care elements and client outcomes. The new survey protocol reduces the number of items that must be assessed each year and places greatest emphasis on client protections, active treatment, client behavior and facility practices, and health care services. The new protocol gives surveyors latitude, however, to expand the scope of a facility’s survey if they find specific problems. HCFA’s pilot test of the new protocol showed that although surveyors identified fewer deficiencies overall than with the standard protocol, they issued more citations for the most serious CoP violations. HCFA is conducting training for state surveyors and providers on this new protocol and plans to monitor certain aspects of its implementation. Even when state survey agencies identify deficiencies in large public ICFs/MR, state enforcement efforts do not always ensure that facilities’ corrections are sufficient to prevent the recurrence of the same serious deficiencies. Although state survey agencies almost always certify that serious deficiencies have been corrected, they subsequently cite many institutions for the same violations. For example, between December 1990 and May 1995, state survey agencies cited 33 large public institutions for violating the same CoP on at least one subsequent survey within the next 3 years. Moreover, 25 were cited for violating the same CoP on one or more consecutive surveys. HCFA officials told us that the sanctions available to the states under Medicaid have not always been effective in preventing recurring violations and are rarely used against large public ICFs/MR. Only two possible sanctions are available under the regulations for CoP violations: suspension—that is, denial of Medicaid reimbursement for new admissions—or termination from the program. Medicaid regulations do not contain a penalty for repeat violations that occur after corrective action. Denying reimbursement to large public institutions for new admissions is not a very relevant sanction because many of these institutions are downsizing or closing and are not generally accepting many new admissions. Furthermore, terminating a large institution from the Medicaid program is counterproductive because denying federal funds may further compromise the care of those in the institution. No large public institutions were terminated from Medicaid for reasons of deficient care and not reinstated from 1990 through 1994, the period for which data were readily available. HCFA officials told us that they were particularly concerned about institutions where surveyors found repeat violations of the same CoPs. Although the officials have not explored the usefulness of other sanctions or approaches to enforcement for large public ICFs/MR, they told us that the newly implemented survey procedure was intended to better identify the underlying causes of facility deficiencies, possibly reducing repeat violations. A potential conflict of interest exists because states both operate large public ICFs/MR and certify that these institutions meet federal standards for Medicaid participation. States can lose substantial funds if care is found to be seriously deficient and their institutions lose Medicaid certification. The state survey agency, usually a part of a state’s department of health, conducts surveys to determine whether ICFs/MR are in compliance with quality standards. It reports and makes its recommendation to the state Medicaid agency, which makes the final determination of provider certification. Medicaid rules do not require any independent federal or other outside review for a state’s ICF/MR to remain certified. HCFA officials, provider representatives, and advocates have expressed concern that this lack of independence compromises the integrity of the survey process. HCFA regional officials told us of instances in which state surveyors were pressured by officials from their own and other state agencies to overlook problems or downplay the seriousness of deficient care in large state institutions. Of concern to the state officials in these instances was the imposition of sanctions that would have cost the state federal Medicaid funds. HCFA regional office staff may mitigate the effects of potential conflicts of interest by training surveyors, accompanying state surveyors during their inspections, or directly surveying the institutions themselves. Direct federal oversight has declined dramatically in recent years despite its importance for independent monitoring of the care provided in large public institutions and the performance of state survey agencies. HCFA’s primary oversight mechanism has been the federal monitoring survey, which assesses state agency determinations of provider compliance. As shown in figure 1, the number of federal monitoring surveys conducted in large public ICFs/MR has declined from 31 in 1990 to only 5 in 1995. HCFA began surveying large public ICFs/MR in response to congressional hearings in the mid-1980s that detailed many instances of poor quality and abusive conditions in Medicaid-certified institutions for the developmentally disabled. In 1985, HCFA hired 45 employees, about half of whom had special expertise in working with persons with developmental disabilities, to conduct direct federal surveys. Officials from HCFA and Justice, providers, and experts told us that this effort helped improve the quality of care in many institutions and stimulate improvements to the state survey process. The recent decline in federal oversight, however, has increased the potential for abusive and dangerous conditions in these institutions. HCFA officials told us that regional office staff have neither conducted sufficient reviews nor acted on facility deficiencies in recent years because of competing priorities and resource constraints. According to these officials, resources previously used for federal surveys of ICFs/MR have been diverted to allow compliance with requirements for increased federal monitoring surveys of nursing facilities and for other reasons. Regional office officials report that these resource constraints have limited their current review efforts to mostly private ICFs/MR of six beds or less. HCFA regional office staff are now less able to identify deficiencies or areas of weakness and to provide targeted training or other support to state surveyors. State survey agencies have recently reported a decline in the number of serious CoP violations in large public ICFs/MR. Yet without direct monitoring, HCFA cannot determine whether this decline is due to real improvements in conditions or to decreased vigilance or competence on the part of state agency surveyors. Although HCFA officials have expressed concern about the current level of direct federal oversight of state survey agencies and large public ICFs/MR, they have no plans to increase resources for these efforts. Instead, HCFA officials told us they are examining ways to better target their limited oversight resources. While they are planning to improve their use of existing data for monitoring purposes, they also plan to develop a system of quality indicators to provide information on facility conditions on an ongoing basis. These officials told us that they expect this system of quality indicators to be operational in about 4 years. The ICF/MR program—intended to provide a safe environment with appropriate treatment by qualified professional staff—serves a particularly vulnerable population of individuals with mental retardation and other developmental disabilities in large public ICFs/MR. Most of these institutions comply with Medicaid quality-of-care standards. Serious deficiencies continue to occur, however, in some institutions despite federal standards, oversight by HCFA and state agencies, and continuing investigations by the Department of Justice. States are the key players in ensuring that ICFs/MR meet federal standards. Although their oversight includes annual on-site visits by state survey agencies to all large public ICFs/MR, these agencies have not identified all instances of seriously deficient care. HCFA reviews and Justice Department investigations have identified some instances of deficient care, including medical care, that were not reported in state surveys. Furthermore, serious deficiencies continue to recur in some of these institutions. Effective federal oversight of large public ICFs/MR and the state survey agencies that inspect them requires that the inspection process be well defined and include essential elements of health care, active treatment, and safety; that enforcement efforts prevent the recurrence of problems; that surveyors be independent; and that HCFA officials have sufficient information to monitor the performance of institutions and state survey agencies. The approach and resources of Medicaid surveys, the lack of effective enforcement mechanisms, the potential conflicts of interest occurring when states are charged with surveying the facilities they operate, and the decline in direct federal monitoring efforts have all weakened oversight of large public ICFs/MR and state survey agencies. HCFA has begun to implement changes to the structure and process of state agency surveys of ICFs/MR. The new approach to surveys may result in identifying more serious deficiencies in large public institutions. This change, and others that HCFA is implementing to more efficiently use limited federal and state resources, may also reduce the impact of some of the other weaknesses we have identified. Nonetheless, the lack of independence in state surveys coupled with little direct federal monitoring remains a particular concern. HCFA needs to strengthen the oversight of its ICF/MR program and collect sufficient information in a timely manner to assess the effectiveness of the new approach in identifying and ensuring the correction of deficient care. To improve HCFA’s oversight of large public ICFs/MR, we recommend that the Administrator of HCFA assess the effectiveness of its new survey approach in ensuring that serious deficiencies at large public ICFs/MR are identified and corrected; take steps, such as enhanced monitoring of state survey agencies or direct inspection of institutions, to address the potential conflict of interest that occurs when states are both the operators and inspectors of ICFs/MR; and determine whether the application of a wider range of enforcement mechanisms would more effectively correct serious deficiencies and prevent their recurrence. HCFA and the Justice Department reviewed a draft of this report and provided comments, which are reproduced in appendixes III and IV. Both agencies generally agreed with the information provided in this report. In their comments, HCFA and Justice recognized the need for improvements in government oversight of the ICF/MR program to ensure adequate services and safe living conditions for residents of large public institutions. HCFA also provided technical comments, which we have incorporated as appropriate. HCFA is implementing a new survey approach and in its comments agreed with our recommendation that it should assess the effectiveness of this approach. To monitor the implementation of its new approach, federal surveyors will accompany state surveyors on a sample of facility surveys, including a minimum of one large public institution in each state. HCFA plans to analyze the results of these monitoring surveys to determine, among other things, whether the new protocol, as designed, is applicable to large public institutions. These are steps in the right direction. Given the serious problems we have identified in ICFs/MR and in state survey agency performance, we believe HCFA must move quickly to determine whether the new survey process improves the identification of serious deficiencies at large public institutions and make appropriate adjustments if it does not. In its comments, HCFA did not propose specific measures to address our recommendation on the potential conflict of interest that occurs when states are both operators and inspectors of ICFs/MR. HCFA stated that resource constraints have resulted in a significant reduction of on-site federal oversight of state survey agencies and of care in large public ICFs/MR. We believe that HCFA’s plan to increase its presence in the field as part of monitoring implementation of the new survey protocol may reduce the impact of potential conflicts of interest at some institutions. However, HCFA must find a more lasting and comprehensive solution to strengthen the independence of the survey process by program improvements or reallocation of existing resources to enhanced monitoring or direct inspection of institutions. HCFA agreed with our recommendation that it determine whether a wider range of enforcement actions would bring about more effective correction of serious deficiencies and prevent their recurrence. HCFA plans to assess whether a wider range of mechanisms would be appropriate for the ICF/MR program on the basis of an evaluation of the impact of alternative enforcement mechanisms for nursing homes due to the Congress in 1997. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its date of issue. We will then send copies to the Secretary of the Department of Health and Human Services; the Administrator, Health Care Financing Administration; the U.S. Attorney General; and other interested parties. Copies of this report will be made available to others upon request. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or Bruce D. Layton, Assistant Director, at (202) 512-6837. Other GAO contacts and contributors to this report are listed in appendix V. To address our study objectives, we (1) conducted a review of the literature; (2) interviewed federal agency officials, provider and advocacy group representatives, and national experts on mental retardation and developmental disabilities; (3) analyzed national data from inspection surveys of intermediate care facilities for the mentally retarded (ICF/MR); and (4) collected and reviewed HCFA, state agency, and Justice Department reports on several state institutions. We interviewed officials or representatives from the Health Standards and Quality Bureau of HCFA; HCFA regional offices; the Administration on Developmental Disabilities; the President’s Committee on Mental Retardation in HHS; the Civil Rights Division in the Justice Department; the National Association of State Directors of Developmental Disabilities Services, Inc.; the National Association of Developmental Disabilities Councils; the National Association of Protection and Advocacy Systems; the Accreditation Council on Services for People With Disabilities; and the Association of Public Developmental Disabilities Administrators. Data reviewed at HCFA consisted of automated data and reports submitted by states and regional offices. We analyzed national data from HCFA’s Online Survey, Certification and Reporting System for state and federal ICF/MR surveys conducted between December 1990 and May 1995. Information from surveys conducted before December 1990 was not available at the time of our review. We limited our analysis of HCFA and state data on deficiencies to information about institutions participating in Medicaid as of August 1995. We also reviewed state agency survey reports for 12 large public ICFs/MR, 5 of which were also the subject of Justice investigations between 1991 and 1995. We reviewed Justice’s records since 1990, including findings letters, consent decrees, court filings and actions, and other supporting documentation and analyses related to enforcement of the Civil Rights of Institutionalized Persons Act. We conducted our work between May 1995 and July 1996 in accordance with generally accepted government auditing standards. Following are the eight conditions of participation for intermediate care facilities for the mentally retarded (ICF/MR), as prescribed by the Secretary and contained in federal regulations. The standards that must be addressed under this condition include the following: the facility must (1) have a governing body that exercises general control over operations; (2) be in compliance with federal, state, and local laws pertaining to health, safety, and sanitation; (3) develop and maintain a comprehensive record keeping system that safeguards client confidentiality; (4) enter into written agreements with outside resources, as necessary, to provide needed services to residents; and (5) be licensed under applicable state and local laws. To comply with this condition, the facility must (1) undertake certain actions and provide mechanisms to protect the rights of residents; (2) adequately account for and safeguard residents’ funds; (3) communicate with and promote the participation of residents’ parents or legal guardians in treatment plans and decisions; and (4) have and implement policies and procedures that prohibit mistreatment, neglect, or abuse of residents. Standards for facility staffing include requirements that (1) each individual’s active treatment program be coordinated, integrated, and monitored by a qualified mental retardation professional; (2) sufficient qualified professional staff be available to implement and monitor individual treatment programs; (3) the facility not rely upon residents or volunteers to provide direct care services; (4) minimum direct care staffing ratios be adhered to; and (5) adequate initial and continuing training be provided to staff. Regulations specify that each resident receive a continuous active treatment program that includes training, treatment, and health and related services for the resident to function with as much self-determination and independence as possible. Standards under this condition include (1) procedures for admission, transfer, and discharge; (2) requirements that each resident receive appropriate health and developmental assessments and have an individual program plan developed by an interdisciplinary team; (3) requirements for program plan implementation; (4) adequate documentation of resident performance in meeting program plan objectives; and (5) proper monitoring and revision of individual program plans by qualified professional staff. Standards under this condition specify that the facility (1) develop and implement written policies and procedures on the interaction between staff and residents and (2) develop and implement policies and procedures for managing inappropriate resident behavior, including those on the use of restrictive environments, physical restraints, and drugs to control behavior. To meet the requirements of this condition, the facility must (1) provide preventive and general medical care and ensure adequate physician availability; (2) ensure physician participation in developing and updating each individual’s program plan; (3) provide adequate licensed nursing staff to meet the needs of residents; (4) provide or make arrangement for comprehensive dental care services; (5) ensure that a pharmacist regularly reviews each resident’s drug regimen; (6) ensure proper administration, record keeping, storage, and labeling of drugs; and (7) ensure that laboratory services meet federal requirements. Requirements under this condition include those governing (1) residents’ living environment, (2) size and furnishing of resident bedrooms, (3) storage space for resident belongings, (4) bathrooms, (5) heating and ventilation systems, (6) floors, (7) space and equipment, (8) emergency plans and procedures, (9) evacuation drills, (10) fire protection, (11) paint, and (12) infection control. Standards under this condition are designed to ensure that (1) each resident receives a nourishing, well-balanced, and varied diet, modified as necessary; (2) dietary services are overseen by appropriately qualified staff; and (3) dining areas be appropriately staffed and equipped to meet the developmental and assistance needs of residents. In addition to those named above, the following team members made important contributions to this report: James Musselwhite and Anita Roth, evaluators; Paula Bonin, computer specialist; Karen Sloan, communications analyst; George Bogart, attorney-advisor; and Leigh Thurmond and Jamerson Pender, interns. Medicaid: Waiver Program for Developmentally Disabled Is Promising But Poses Some Risks (GAO/HEHS-96-120, July 22, 1996). Financial Management: Oversight of Small Facilities for the Mentally Retarded and Developmentally Disabled (GAO/AIMD-94-152, Aug. 12, 1994). Medicaid: Federal Oversight of Kansas Facility for the Retarded Inadequate (GAO/HRD-89-85, Sept. 29, 1989). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Pursuant to a congressional request, GAO reviewed the role of the Health Care Financing Administration (HCFA), state agencies, and the Department of Justice (DOJ) in overseeing quality of care in intermediate care facilities for the mentally retarded (ICF/MR), focusing on: (1) deficient care practices occurring in large ICF/MR; (2) whether state agencies identify all serious deficiencies in these institutions; and (3) weaknesses in HCFA and state oversight of ICF/MR care. GAO found that: (1) despite federal standards, HCFA and state agency oversight, and continuing Justice Department investigations, serious quality-of-care deficiencies continue to occur in some large public ICFs/MR; (2) insufficient staffing, lack of active treatment needed to enhance independence and prevent loss of functional ability, and deficient medical and psychiatric care are among those deficiencies that have been frequently cited; (3) in a few instances, these practices have led to serious harm to residents, including injury, illness, physical degeneration, and death; (4) states, which are the key players in ensuring that these institutions meet federal standards, do not always identify all serious deficiencies nor use sufficient enforcement actions to prevent the recurrence of deficient care; (5) direct federal surveys conducted by HCFA and Justice Department investigations have identified more numerous and more serious deficiencies in public institutions than have state surveys; (6) furthermore, even when serious deficiencies have been identified, state agencies' enforcement actions have not always been sufficient to ensure that these problems did not recur; (7) some institutions have been cited repeatedly for the same serious violations; (8) although HCFA has recently taken steps to improve the process for identifying serious deficiencies in these institutions and to more efficiently use limited federal and state resources, several oversight weaknesses remain; (9) moreover, state surveys may lack independence because states are responsible for surveying their own institutions; and (10) the effects of this potential conflict of interest raise concern given the decline in direct federal oversight of both the care in these facilities and the performance of state survey agencies.

You are an expert at summarizing long articles. Proceed to summarize the following text: In recent years, automobiles have been associated with nearly 29,000 traffic fatalities annually in the United States, including the deaths of both automobile occupants and others involved in collisions with automobiles.The National Highway Traffic Safety Administration (NHTSA), a unit of the Department of Transportation (DOT), has the lead role in federal government efforts to reduce the number of traffic crashes and to minimize their consequences. Some types of automobiles have higher fatality rates than others. (For example, small cars generally have higher rates than large cars.) In addition, some categories of drivers are more likely to be involved in serious crashes than others. (Young drivers, for example, have higher involvement rates than other drivers.) However, as we previously reported, one cannot conclude from differences in fatality rates that some types of cars, or some types of drivers, are in fact more dangerous than others, because driver and automobile characteristics are highly related (GAO, 1991). For example, since small cars have a disproportionate percentage of young drivers, do the high fatality rates for those cars stem from vehicle characteristics or the recklessness with which they are operated? The goal of this report is to isolate the independent effects of important crash-related factors on the likelihood of injury in a collision. The report focuses on the most important predictors of occupant injury in a collision: crash type and crash severity, automobile size, safety belt use, and occupant age and gender. The report is concerned with both crashworthiness (protecting automobile occupants) and aggressivity (protecting other roadway users struck by automobiles). The report also considers prospects for improving the safety of automobile occupants. This report is one of three GAO reports examining automobile safety. One of these, Highway Safety: Factors Affecting Involvement in Vehicle Crashes (GAO, 1994), examines the independent effects of driver characteristics and automobile size on crash involvement. Another, Highway Safety: Reliability and Validity of DOT Crash Tests (GAO/PEMD-95-5), looks at the extent to which results from the crash test programs conducted by NHTSA accurately predict injury in actual automobile crashes. Since the mid-1960’s, both the number of traffic fatalities and the fatality rate per registered vehicle have sharply decreased in the United States. The fatality rate for automobile occupants has declined by 36 percent since 1975. The continued emphases on reducing drunk driving and increasing safety belt use, along with the introduction of antilock brakes, air bags, and other safety enhancing features, have increased the chances that this favorable trend will continue. Nonetheless, in 1991 automobiles were associated with nearly 29,000 traffic deaths in the United States.About 22,000 of the automobile-related fatalities were automobile occupants (about 10,000 killed in single-car collisions and 12,000 in multiple-vehicle collisions), about 2,500 were occupants of other types of vehicles (for example, light trucks, vans, or motorcycles) involved in collisions with automobiles, and approximately 4,000 were pedestrians or cyclists hit by automobiles. (See table 1.1.) Different models of automobiles appear to make very different contributions to this fatality toll. For instance, the Insurance Institute for Highway Safety (IIHS) has reported that the most “dangerous” automobile models have occupant fatality rates more than nine times higher than the “safest” models. Further, some of the automobile characteristics associated with this variation in fatality rates are well known. For instance, sports cars have higher fatality rates than station wagons, and small cars have higher fatality rates than large cars. However, this does not mean that types of automobiles with high fatality rates are necessarily more dangerous than those with low fatality rates. This is because different types of drivers prefer particular types of automobiles, affecting both the number of collisions involving particular autos and, perhaps, the probability of serious injury in the event of a collision. For example, young drivers are much more likely to be involved in fatal accidents than others—drivers age 16 to 20 are involved in fatal accidents at a rate three times higher than that for drivers age 45 to 54—thereby inflating the fatality rate for types of cars preferred by young drivers. Similarly, some types of automobile occupants are more likely to be seriously injured in a collision than others. For example, in collisions in which at least one vehicle was towed from the accident scene, NHTSA (1992a) recently estimated that women automobile occupants are about 36 percent more likely to be hurt than men occupants in similar collisions. This suggests that types of cars with a disproportionate number of women occupants may have higher fatality rates than other cars. As automobiles abruptly stop or change direction in a collision, occupants continue moving in the original direction of travel. This independent movement of an occupant within a rigid vehicle that is decelerating more quickly than its occupant provides several opportunities for injury. First, some occupants are injured by being ejected (either partially or totally) from the vehicle. Ejection substantially increases the risk of serious injury—ejected occupants are three to four times more likely to be killed in a collision than occupants who do not leave the vehicle. Second, occupants can collide with the interior of the vehicle or other objects intruding into the passenger compartment. This “second collision” (following the “first collision” of the automobile striking an object) is understandably worse if it occurs at high speed, involves impact with a sharp or unyielding portion of the car’s interior, or involves contact with part of another vehicle or a roadside object that has penetrated the passenger compartment. Finally, because different portions of an occupant’s body decelerate at different rates, internal injuries can be caused by the “third collision” of soft tissues against hard, bony structures. For example, in high-speed collisions, the skull decelerates more quickly than the brain, potentially causing injury to the brain as it strikes the hard skull. Automobiles, and federal automobile safety regulations, are designed to protect their occupants from these dangers in several ways. One way is to attempt to reduce the deceleration forces acting on occupants. Deceleration forces can be reduced by designing the structure of a vehicle to absorb as much energy as possible before the crash forces are transmitted to the passenger compartment or by giving the occupant more time to slow down, thereby reducing the maximum force level the occupant is subjected to. The latter can be accomplished by starting the deceleration period more quickly (for example, by designing safety belts that begin holding back the occupant sooner) or by increasing the total deceleration period (for example, by lengthening the front end of the vehicle). Another way cars may protect their occupants is by encasing them in a protective compartment that preserves a living space and prevents the intrusion into the passenger compartment of striking vehicles or other objects (such as light posts or trees) that a car hits. Third, automobiles are designed to keep their occupants both in the vehicle and away from interior surfaces. This is most obviously accomplished through the use of safety belts, but a number of other components are also intended to keep the occupant in the vehicle, including door latches and windshields that are reinforced to eliminate potential ejection routes. In addition, automobile interiors are designed to absorb energy from the occupant and to limit the occupant’s movement rather than serve as a rigid barrier. Energy absorbing steering columns are one example. There is little doubt that cars from recent model years, as a group, are safer than automobiles from past model years and that some of this improvement can be attributed to federal government safety regulations. For instance, in comparing the crash test results of cars from model years 1980 and 1991, NHTSA researchers found that one set of scores measuring injury potential had declined about 30 percent during the intervening years (Hackney, 1991). Similarly, Evans (1991b) estimated that the total effect of nine federal motor vehicle safety standards enacted by 1989 had been to reduce the occupant fatality rate by about 11 percent. The objective of this report is to examine the independent effects of a number of factors—crash type, crash severity, automobile weight and size, safety belt use, and occupant age and gender—on the risk of injury in an automobile crash. We are concerned with both crashworthiness and aggressivity. Crashworthiness refers to the extent to which automobiles protect their occupants in a collision, and aggressivity refers to automobile characteristics that affect the safety of the occupants of the other vehicles in a collision. We restricted the scope of the study in several ways in order to obtain a clear picture of the most important phenomena. First, we looked only at the safety of automobile occupants and the dangers automobiles pose to occupants of other vehicles. We were not directly concerned with factors affecting the safety of occupants of other types of passenger vehicles, such as pickup trucks, vans, minivans, and multipurpose vehicles; we considered these vehicles only as they affect the safety of automobile drivers in two-vehicle collisions. In our judgment, concerns about the safety of light trucks and other passenger vehicles differ significantly from that of automobiles. Light trucks and other passenger vehicles are less stable and thus roll over more frequently than automobiles, and they have been subject to less stringent safety regulations than automobiles. Second, our statistical analysis focused on model year 1987 and later cars, because the safety experiences of those cars are more likely to apply to today’s new cars than are the safety experiences of older ones. Finally, we considered in our analysis only the injury experiences of drivers, not those of automobile passengers or factors specifically affecting the safety of child occupants. (Roughly half of the automobiles on the road have no occupants other than the driver.) To meet our objective, we reviewed technical reports from NHTSA and other sources and consulted auto safety experts and representatives of automobile manufacturers. We also conducted our own statistical analyses of traffic safety databases obtained from NHTSA. Our primary data set was compiled from the National Accident Sampling System—Crashworthiness Data System (NASS) for 1988 through 1991. NASS is a nationally representative probability sample of all police-reported crashes involving a passenger car, light truck, or van in which at least one vehicle was towed from the scene. In addition, all the automobiles included in NASS were towed from the crash site. Thus, the automobiles in NASS, as a whole, are much more likely to have injured occupants than are cars involved in typical crashes. Not only are police-reported crashes more severe than those not reported to the police, but tow-away crashes on the whole are also more severe than those not involving tow-aways. Indeed, almost all serious occupant injuries occur in police-reported tow-away collisions. For our analysis, we selected a subset of cases from the NASS data for 1988 through 1991. We included all one-car collisions involving a 1987 or newer model year automobile and all collisions between a model year 1987 or later automobile and any other car, van, pickup truck, or other light truck. These crash types, taken together, accounted for about 81 percent of all automobile occupant fatalities in 1991. The remaining 19 percent occurred in types of crashes that we did not include in our data set because of a lack of cases, principally collisions with medium and heavy trucks (about 10 percent of the 1991 total). In our statistical analyses, we used logistic regression to look at the independent contributions of a variety of factors on the probability of driver injury. Driver injury was indexed with a dichotomous outcome variable coded “1” if the driver was hospitalized or killed in the crash and “0” otherwise. The regression analysis allowed us to isolate the effects of one factor (for example, automobile weight) while statistically holding constant the other factors (for example, collision severity as well as driver age and gender). Regression analysis answers the question: If there were no differences among these drivers except for the factor of automobile weight, for example, how would that factor predict the probability of driver injury? (The data sets and analyses are described in appendix I.) The studies that we reviewed from the traffic safety literature differed in several ways that increase the difficulty of comparing their results and of relating their conclusions to our own findings. For instance, some studies focused on injuries to automobile drivers, as we did, while others examined injuries to all automobile occupants, not just drivers. Similarly, different studies looked at slightly different sets of automobile crashes—at tow-away crashes (as we did) or at all police-reported crashes or only at crashes in which a fatality occurred. In addition, the studies employed different outcome measures. Our analysis concerned driver hospitalizations or deaths, while other studies looked only at fatalities or at injuries considered serious or worse or at injuries categorized as moderately severe or worse, for example. While these and other differences mean that the studies we cite rarely produced precisely equivalent findings, in most the findings were roughly the same. In particular, the direction of the findings was almost always the same (that is, whether a factor increases or decreases the risk of injury), and there was usually approximate agreement about the size of the effect (that is, whether a factor has a large effect on injury risk or only a minor influence). Our work was performed in accordance with generally accepted government auditing standards. Chapter 2 looks at the effects of crash type and crash severity. It also discusses the effects of automobile size and safety belt use in three different configurations: one-car rollover crashes, one-car nonrollover crashes, and collisions between cars and other light vehicles. Chapter 3 examines the influence of driver age and gender on injury probability. Chapter 4 discusses the relative contributions of driver and automobile factors to driver injury. Chapter 5 discusses the potential for improving automobile safety. Appendix I describes our data set and statistical analyses. This chapter discusses the safety consequences of crash characteristics, automobile weight and size, and safety belts and air bags. The chapter begins with a discussion of crash characteristics that are related to occupant injury, including the injury risk associated with one-car rollover crashes, one-car nonrollover crashes, and collisions with an automobile, a van, or a light truck. It then examines the safety consequences of automobile weight and size as well as of safety belt use in the different crashes. Each section summarizes relevant findings from the literature and then presents the results of our analyses of the NASS data. The chapter ends with a look at the effects of air bags. The great majority of traffic crashes do not involve serious injury. A large proportion of all traffic crashes are not reported to the police (Evans, 1991b). And NHTSA has estimated that about one third of crashes reported to the police involve personal injury (two thirds having property damage only) and that just 6 percent involve a severe or fatal injury (NHTSA, 1991b). Nonetheless, some crashes are much more likely to lead to serious injury than others. First, some types of crashes are more severe than others. Overall, single-car crashes are more likely to seriously injure occupants than are multiple-vehicle collisions. Single-vehicle crashes account for about 30 percent of police-reported crashes annually, yet in 1991 about 45 percent of all automobile occupant fatalities were in these collisions. Single-car rollover crashes are particularly dangerous, accounting for only about 2 percent of all police-reported accidents but about 20 percent of occupant fatalities (NHTSA, 1991b). A major reason for the relative severity of single-car crashes is that most crashes involving drunk drivers are single-car incidents, and crashes involving drunk drivers tend to be more severe than other collisions. For example, NHTSA reported that 53 percent of drivers killed in single-vehicle crashes in 1991 were intoxicated, compared with only 21 percent of the drivers killed in multiple-vehicle collisions (NHTSA, 1993b). Second, for nonrollover crashes, some points of impact on the automobile are more dangerous than others. The preponderance of fatal crashes other than rollovers involve frontal impacts, followed at a distance by left- and right-side impacts. For example, table 2.1 indicates that 43 percent of all automobile occupant fatalities in 1991 occurred in frontal impacts, or more than half of all fatalities that did not occur in single-car rollovers. Third, crashes at high speeds are more dangerous than others. For example, Joksch (1993) estimated that the risk to drivers of fatal injury in two-car collisions was about 1 percent for a 20 mph collision, 10 percent for a 35 mph collision, and 44 percent for a collision involving a change in velocity of 50 mph. NHTSA (1993e) recently reported similar findings for restrained vehicle occupants, noting, for instance, that the probability of fatal injury is about nine times as great in frontal collisions with a change of velocity of 40 mph as in those with a change of 30 mph. That the probability of death increases sharply with impact speed is one reason for the predominance of frontal impacts in fatal crashes, since frontal impacts are likely to involve cars that are moving forward. Here we report how injury risk and driver and automobile characteristics vary by crash type. Our data, from NASS, were for model year 1987 and later cars in three types of police-reported tow-away crashes in 1988-91: one-car rollovers, one-car nonrollovers, and collisions with other cars, vans, and light trucks. The pattern of injury risk by crash type that we found in the NASS data set reflects the pattern described in the literature. As table 2.2 indicates, one-car crashes are more dangerous than multivehicle collisions. One-car rollover crashes, in particular, are much more dangerous than other crash types, with a rate of driver hospitalization or death that is double that of one-car nonrollover crashes and four times that of collisions with cars and light trucks. In addition to having a higher rate of driver injury, one-car crashes are disproportionately likely to involve men drivers and young drivers. (See table 2.2.) We found that about 60 percent of the drivers in one-car crashes were men, compared with approximately 46 percent in two-vehicle collisions. In addition, while close to half of the drivers in one-car crashes were 16 to 24 years of age, only about one third of the drivers in collisions with other cars or light trucks were that young. These findings are consistent with those of our companion report, Highway Safety: Factors Affecting Involvement in Vehicle Crashes (GAO, 1994), in which we found that driver age and gender are more strongly related to involvement in single-vehicle crashes than they are to involvement in two-vehicle collisions. In addition, as table 2.2 indicates, the average curb weight of automobiles in one-car rollover crashes was somewhat lower than that of cars involved in other crashes. As we noted in Highway Safety: Factors Affecting Involvement in Vehicle Crashes, involvement in rollover crashes increases as automobile weight decreases. Just as the literature suggests, we found that the risk of injury to drivers is significantly affected by impact point. In particular, we found that two-vehicle collisions involving head-on impacts between vehicles moving in opposite directions are much more dangerous than other two-vehicle crashes. The risk of driver injury or death is about five times as great in head-on collisions as in other two-vehicle collisions. For crashes other than head-on collisions, frontal impacts and left-side impacts had higher rates of driver hospitalization or death than others. Finally, we found that high impact speeds are, not surprisingly, more dangerous than low impact speeds. Considering the three crash types together, we estimated that each increase of 10 mph in the change of velocity at impact increases the probability of driver hospitalization or death nearly sevenfold. As we have previously reported, safety experts agree that, in general, heavier and larger cars are both more crashworthy and more aggressive than lighter and smaller automobiles (GAO, 1991). Thus, in the event of a collision, occupants are less likely to be hurt when they are in heavier and larger cars and when they are struck by lighter and smaller cars. However, there is some disagreement in the literature about which is the more important dimension for occupant safety, weight or exterior size (that is, overall length and width). Proponents of weight as the important dimension argue that automobile mass protects occupants from injury because it is aggressive—that is, heavier cars knock down objects and push other vehicles back, thereby transferring momentum and energy to the struck object, including other vehicles, that could otherwise affect occupants of the striking vehicle (see, for example, Evans and Frick, 1992). In contrast, proponents of exterior size as the more important dimension maintain that large vehicles protect their occupants by absorbing crash energy without increasing the injury risk of other roadway users (for example, see Robertson, 1991). In most cases, this debate is of little practical significance now, since weight and exterior size are very highly correlated—that is, heavy cars are almost invariably also long and wide—but it has important implications for the design of future automobiles. If exterior size is the more important dimension, using lighter weight materials could make future automobiles lighter without decreasing exterior size, thus increasing fuel efficiency without exacting a safety cost. Conversely, using lighter weight materials would involve a safety cost if weight is the more important dimension. In addition, estimates of the amount of additional protection offered by a given increase in automobile weight vary considerably. For example, consider the effects of a 500-pound increase in the weight of one automobile in a collision with another, assuming no change in the weight of the latter. Klein, Hertz, and Borener (1991) used data from two states to generate two different estimates of the decreased risk of serious driver injury from that automobile weight increase—13 percent and 20 percent. Other estimates are higher. For example, Evans (1982) concluded that this increase in automobile weight would reduce a driver’s risk of fatal injury by about 29 percent. Further, the protective effect of automobile size appears to differ by crash type. First, it is likely that this effect is somewhat less pronounced in one-car nonrollover crashes than in multivehicle collisions (Evans, 1991b). For example, in the 1991 paper by Klein and colleagues, NHTSA researchers estimated that a 500-pound increase in automobile weight reduces the risk of driver fatality by not quite 5 percent in one-car nonrollover crashes, somewhat less than the estimates of 13 percent and 20 percent for two-car collisions. Second, although it is well documented that small cars are much more likely to be involved in one-car rollover crashes than are large cars (see, for example, GAO, 1994), the literature is less clear about the safety consequences of automobile size once a rollover has occurred. On the one hand, in examining the effects of reduced automobile weight and size on safety in rollover crashes, some researchers have focused on the increased number of rollover crashes among light and small cars (Evans, 1991b; Kahane, 1990; NHTSA, 1991a). The implication of these studies is that automobile weight and size do not affect crashworthiness in rollovers; otherwise, these researchers would have included weight and size as factors in their calculations. On the other hand, some direct studies of crashworthiness in rollovers have found that drivers of larger cars are more likely to be injured than drivers of smaller cars in rollovers (see, for example, Partyka and Boehly, 1989). One explanation for this finding is that it takes more energy to roll over a heavy automobile than a light one, meaning that the typical rollover crash involving heavy autos is more severe (that is, occurs at a higher speed) than the typical rollover involving light cars (see, for example, Terhune, 1991). After combining all the crashes in our database (one-car rollovers, one-car nonrollovers, and collisions with cars and light trucks), we found that the risk of injury to drivers was significantly reduced as car weight and wheelbase increased in our sample. (See figure 2.1.) We estimated that the risk of driver hospitalization or death decreases about 14 percent for every additional 500 pounds of automobile weight and about 13 percent for each additional 5 inches of wheelbase. (See tables I.1 and I.2.) Further, considering all crash types taken together, we could not statistically differentiate the injury reduction effects of curb weight and wheelbase. That is, the benefits of increasing weight and wheelbase were roughly equivalent in reducing injuries, and we were unable to establish that one had a stronger influence than the other. The nearly equivalent slopes of the lines for weight and wheelbase in figure 2.1 demonstrate this. The endpoints of the lines in figure 2.1 represent approximately the 5th and 95th percentiles of automobile weight and wheelbase in this data set. Thus, 2,000-pound cars are among the lightest and 3,600-pound cars are among the heaviest in this database of cars involved in serious crashes; similarly, cars with a wheelbase of 93 inches are among the shortest, 113 inches among the longest. Figure 2.1 shows that, for all three crash types taken together, whether measured by weight or wheelbase, drivers in the heaviest and largest cars had a risk of hospitalization or death about 40 percent less than the drivers of the lightest and smallest cars. However, these overall effects mask the fact that automobile weight and wheelbase have very different safety consequences in different types of crashes. Figure 2.2 shows the estimated effects of curb weight separately for the three crash types (see also tables I.3-I.5); figure 2.3, the estimated effects of wheelbase (see also tables I.6-I.8). Most importantly, although increasing weight and wheelbase reduces the risk of driver injury in one-car nonrollover crashes and in collisions with other cars or light trucks, drivers in heavier cars were much more likely to be hospitalized or killed in one-car rollover crashes than were drivers of lighter automobiles. For one-car rollover crashes, we estimated that each 500 pounds of additional automobile weight increases the risk of driver hospitalization or death by about 59 percent. This effect is solely a function of automobile weight, not of wheelbase; we found that the relationship between wheelbase and driver injury was not statistically significant in one-car rollovers. This finding agrees with the report of Partyka and Boehly (1989) that drivers of heavier and larger cars are more likely to be injured in rollovers than drivers of lighter and smaller cars. This finding is also consistent with the explanation that it takes more energy to roll over a heavy automobile than a light one, meaning that rollover crashes involving heavy autos occur at higher speeds than rollovers involving light cars. However, it is important to keep in mind that the rate of involvement in one-car rollover crashes is much greater for light cars than for heavy ones, so this finding does not necessarily mean that, considering both involvement and crashworthiness, drivers of heavy cars are more likely to suffer injuries in one-car rollovers. Figures 2.2 and 2.3 also show that we found a tendency for the risk of driver hospitalization or death to decrease with increasing car weight and size in one-car nonrollover crashes, but neither curb weight nor wheelbase was a statistically significant predictor of driver injury in those crashes. In contrast, we found that in collisions with other cars and light trucks, both automobile weight and wheelbase were statistically significant predictors of driver injury. In those crashes, we estimate that each additional 500 pounds of automobile weight decreased the risk of driver hospitalization or death by about 23 percent and each 5 inches of additional wheelbase lowered the risk of driver injury approximately 19 percent. These findings reflect the pattern, described in the literature, that the protective effects of automobile weight and wheelbase are somewhat greater in multivehicle collisions than in single-car nonrollover crashes. In two-vehicle collisions, the injury risk of an automobile occupant is affected not only by the characteristics of his or her own automobile but also by the characteristics of the other vehicle. We looked at the effects of the weight and vehicle type of the other vehicle on the probability of injury for the first driver: both factors affect the aggressivity of the other vehicle. First, not surprisingly, heavier vehicles pose more of a risk than lighter vehicles. (See figure 2.4.) In our analysis, each increase of 500 pounds in the weight of the other vehicle increased the probability of hospitalization or death by about 13 percent, holding other factors constant. (See table I.5.) It is important to note that the magnitude of this aggressive effect of vehicle weight is less than that of the protective effect of weight described earlier. (We estimated that each additional 500 pounds of automobile weight reduces the probability of injury by about 23 percent.) After statistically controlling for the influence of other factors, we found that this ratio of the protective effect to the aggressive effect of automobile weight of 1.77 to 1 is roughly consistent with the findings of other researchers. For example, Klein, Hertz, and Borener (1991), analyzing data from two different states, generated two estimates of the size of this ratio in two-car collisions: 1.54 to 1 and 1.30 to 1. Second, figure 2.5 shows that driver injury risk is strongly influenced by the body type of the other vehicle. We found that while pickup trucks do not pose more danger than automobiles, vans and other light trucks are more aggressive than automobiles. Indeed, statistically controlling for the weight of the driver’s car and of the other vehicle, we estimate that the risk of hospitalization or death for the driver is more than twice as great in collisions with vans and light trucks than with other cars or light vehicles. (See also table I.5.) This finding reflects two characteristics of vans and light trucks. One is that because vans and light trucks can carry heavy cargo loads, these vehicles may be, in reality, heavier than the curb weight measurements available to us indicate. The second characteristic is that the structure and design of vans and other light trucks make those vehicles especially dangerous for automobile occupants in two-vehicle collisions (National Research Council, 1992; Terhune and Ranney, 1984). Safety belts greatly reduce the risk of injury and death in roadway crashes. In a recent review of studies of safety belt effectiveness, we concluded that most studies show that belted vehicle occupants have a risk of serious injury or death that is approximately 50 to 75 percent less than that of unrestrained occupants (GAO, 1992). Other researchers have found safety belts to have slightly smaller effects. For example, NHTSA (1993d) estimated that when manual lap and shoulder safety belts are used in serious crashes, they reduce fatality risk by 45 percent. Similarly, Evans (1986) estimated that three-point lap and shoulder safety belts reduce a driver’s risk of fatality by about 43 percent, with about half of that benefit the result of eliminating or attenuating impacts with the interior of the vehicle and about half the result of preventing occupant ejection. There are three other important points about safety belt effectiveness. First, the effectiveness of safety belts varies by crash type. Belts are most effective in rollover crashes because they largely prevent occupant ejection (Evans, 1990; Partyka, 1988). They are also more effective in one-car crashes than in multivehicle collisions. For example, Evans and Frick (1986) estimated that safety belts reduce the risk of driver fatality in one-car crashes by 62 percent but by only 30 percent in two-car crashes. Second, belt effectiveness also varies by point of impact. Belts are most effective in frontal impacts and least effective in left-side impacts (Evans, 1990). Since one-car crashes are more likely to involve frontal impacts than are two-car collisions, this offers one possible explanation for the greater efficacy of safety belts in one-car crashes. Third, it is likely that manual lap and shoulder belts are somewhat more effective than other safety belt configurations. For example, Evans (1991a) estimated that lap and shoulder belts reduce fatality risk in serious collisions by about 41 percent, compared with estimated risk reductions of 18 percent for lap belts only and 29 percent for shoulder belts only. Evans speculated that these two components have somewhat different functions, with lap belts primarily preventing ejection and shoulder belts mitigating contact with the interior of the vehicle. Comparing manual lap and shoulder belts to automatic belts, NHTSA (1993d) estimated that automatic safety belts, when used in serious crashes, reduce the risk of fatality by 42.5 percent, compared with an estimated fatality reduction of 45 percent for manual lap and shoulder belts. Considering all three crash types together, NASS researchers categorized 73 percent of the drivers in the NASS data set as using a safety belt at the time of collision, with those involved in one-car rollovers slightly less likely to be belted than others. This figure is higher than might be expected from the results of other estimates of safety belt use among the general driving population, particularly given that drivers involved in crashes are less likely to wear safety belts than others and that all the drivers included in our analysis had been involved in a crash. In one point of comparison, NHTSA estimated a 51-percent safety belt usage rate for all passenger cars in 1991 (NHTSA, 1992a). Further, it is well established that unbelted drivers are more reckless than belted drivers (Evans and Wasielewski, 1983; Evans, 1987; Preusser, Williams, and Lund, 1991; Stewart, 1993). As a result, unbelted drivers have much higher crash involvement rates than belted drivers: NHTSA (1992a) estimated that unbelted drivers have an involvement rate in potentially fatal crashes that is more than double that of belted drivers. We cannot determine with certainty if, or to what degree, the safety belt use figures reported in NASS are incorrect, nor can we determine with certainty the extent to which any potential bias in those figures affected our analyses. For that reason, our results should be interpreted with caution. Nonetheless, because the results of our analyses concerning the relative effectiveness of different safety belt configurations in different types of crashes are consistent with the findings from the traffic safety literature, we believe that any potential bias has not seriously affected our findings. For each of the three categories of crashes, we examined the performance of three safety belt configurations: (1) manual lap and shoulder belts, (2) automatic and manual belts combined (most commonly automatic shoulder belts and manual lap belts), and (3) automatic belts without manual components. Other safety belt configurations, including manual lap belts alone, had too few cases in the data set for us to estimate their effectiveness. Statistically controlling for crash severity, driver characteristics, and other background factors, we found that, compared with unbelted drivers, drivers using any of the three safety belt configurations had greatly reduced risks of injury. We also found that, looking at the three types of crashes together, manual lap and shoulder belts were somewhat more effective in preventing driver injury than the other configurations. (See figure 2.6.) Compared with unbelted drivers, the estimated risk of hospitalization or death was reduced about 70 percent for those using manual lap and shoulder belts, about 63 percent for those using automatic and manual belts combined, and about 54 percent for those using automatic belts without manual components. (See also table I.1.) We also found small variations in safety belt performance among the different types of crashes. Safety belts were somewhat less effective in collisions with other cars or light trucks than they were in single-car crashes. For example, in our analysis, manual lap and shoulder belts reduced the risk of driver hospitalization or death by 83 percent in one-car rollover crashes and by 80 percent in one-car nonrollover crashes but by only 64 percent in collisions with other cars or light trucks. (See tables I.3-I.5.) Evaluations of the effectiveness of air bags are hampered by the relatively small number of cars now equipped with them (although all passenger cars, vans, and light trucks will be required to have both driver- and passenger-side air bags by the 1998 model year). There were too few automobiles with air bags in the NASS data set for us to conduct our own analysis of air bag effectiveness. Nonetheless, some of the characteristics of air bag performance have already been established. First, air bags are effective only in frontal impacts; they do not protect drivers in side impacts or other nonfrontal collisions (see, for example, Zador and Ciccone, 1993). While frontal impacts account for by far the greatest proportion of automobile occupant fatalities, more than half of occupant fatalities do not involve frontal impacts. (See table 2.1.) Second, air bags offer additional protection to drivers already wearing safety belts. Researchers have found that belted drivers with air bags are about 10 percent less likely to be fatally injured than are belted drivers without air bags (Evans, 1991b; Zador and Ciccone, 1993). For example, NHTSA (1993d) estimated that lap and shoulder safety belts alone reduce automobile driver fatality risk by about 45 percent. In that paper, NHTSA also estimated that drivers with lap and shoulder belts and air bags are about 50 percent less likely to be killed than unbelted drivers, for a safety increment of close to 10 percent (50/45 = 1.11, or about 10 percent). Finally, safety belts alone are much more effective than air bags alone. Estimates of the effectiveness of air bags for drivers who do not wear safety belts indicate that those drivers are approximately 20 to 30 percent less likely to be killed in a collision than are unbelted drivers without air bags (NHTSA, 1993d; Zador and Ciccone, 1993). In contrast, as noted previously, drivers wearing lap and shoulder safety belts are, by the most conservative estimate, 41 percent less likely to be killed than unbelted drivers. DOT had one general comment concerning the topics presented in this chapter: it maintained that the subset of the NASS data we used in the report is inappropriate for studying the effect of car size on safety and, more particularly, that the sample size is inadequate for assessing the consequences of changing the weight of both vehicles in a two-vehicle collision. We disagree. As the findings presented in this chapter demonstrate, the NASS data set we constructed clearly was adequate for uncovering a number of statistically significant relationships (the analyses are described in appendix I). In addition, our findings are similar to NHTSA’s findings from statistical analyses of state accident databases (particularly concerning the effects of the weights of both vehicles in two-car collisions; see Klein, Hertz, and Borener, 1991) and to NHTSA’s findings from statistical analyses of a slightly different NASS database (see table I.1 and NHTSA, 1992a, p. 72). Safety researchers have consistently found that women automobile occupants have a greater risk of injury in a collision than men and that the risk of injury increases with occupant age. For example, NHTSA (1992a) found that women vehicle occupants involved in tow-away crashes are 36 percent more likely than men to suffer an injury categorized as moderately severe or worse. NHTSA also found that the risk of moderate injury increases about 2 percent for each year of age, meaning that, compared with 20-year-olds, 30-year-olds have a 21-percent greater risk of injury and 60-year-olds are more than twice as likely to be injured. Similarly, Evans (1988b) reported that 30-year-old women have a fatality risk in traffic crashes about 31-percent higher than 30-year-old men and that the risk of fatality increases about 2 percent for each year of age. Our analysis of the NASS data set of police-reported tow-away crashes produced similar findings. For statistically equivalent crashes, we found that women drivers are about 29 percent more likely to be hospitalized or killed than men drivers. We also found that drivers 65 and older are about 4.5 times more likely to be seriously hurt than drivers 16 to 24 years old in equivalent crashes. (See table I.1.) One explanation for the greater vulnerability of women drivers and older drivers emphasizes their inherent physical frailty. This view postulates that the same degree of physical trauma is more likely to produce injury in women than in men and in older automobile occupants than in younger ones, because women and older people are physically less resilient than men and younger people. Indeed, there is some support for the view that women are physically more vulnerable than men (Evans, 1988b), and that older people are more fragile than younger ones is well documented (for example, Mackay, 1988; Pike, 1989). The implication of this view is that the greater vulnerability of women and older persons is not amenable to correction through automobile design changes, because weaker individuals will be hurt more often than stronger ones no matter what. Other possible explanations have not been carefully developed in the literature, but they tend to involve speculation that some characteristic of the vulnerable group interacts with automobile design to cause a safety problem. For example, because women are shorter than men, on the average, they may sit closer to the steering wheel, causing them to hit the steering column more quickly in a crash. Similarly, the interaction of lower height and safety belts designed for average-sized drivers may oblige women, for reasons of comfort, to wear safety belts incorrectly more than men do, thereby increasing the injury risk of ostensibly belted women drivers relative to that of belted men drivers (see, for example, National Transportation Safety Board, 1988). Here, we discuss whether the factors we examined in chapter 2 differentially affect the probability of injury of women and men and of older and younger drivers. If the “inherent frailty” view is correct, women should be injured more than men, and older drivers more than younger drivers, regardless of crash type, automobile weight, or safety belt use. If any of these factors affect the relationship between gender or age and injury risk, the credibility of this view would be called into question, as this would mean that something other than frailty also makes an important difference. It would also indicate that the safety of women and older drivers could be at least somewhat improved by automobile design changes. Crash Type. The pattern of injury by crash type varies for women drivers and men drivers. Multivehicle collisions are a greater source of injury for women than they are for men. Figure 3.1 shows our finding that 67 percent of the women drivers hospitalized or killed were injured in collisions with cars and light trucks, with only one third injured in one-car crashes (11 percent in rollovers, 22 percent in nonrollovers). In contrast, only 45 percent of the men drivers hospitalized or killed were injured in collisions with cars and light trucks; most of the men drivers were hurt in one-car crashes (20 percent of the total in rollovers, 35 percent in nonrollovers). One reason for these differences in the pattern of injury is that men and women drivers tend to be involved in different types of crashes, as described in chapter 2. Men drivers are involved in one-car crashes more often than women drivers. In our analysis, 69 percent of the crash involvements of men drivers were in collisions with cars and light trucks, with about 31 percent in one-car crashes. In contrast, about 79 percent of the crash involvements of women drivers were in collisions with cars and light trucks, with only about 21 percent in one-car crashes. However, another reason is that women drivers are much more likely than men drivers to be hospitalized or killed in collisions with cars and light trucks. That is, women drivers are especially likely to be hurt in the type of crash that they are also particularly likely to experience. In statistically equivalent crashes, women drivers are 52 percent more likely than men drivers to be hospitalized or killed in collisions with other cars or light trucks, but injury risks for women drivers are roughly the same as those for men drivers in one-car crashes—4 percent higher in one-car rollovers and 6 percent lower in other one-car crashes. (See tables I.3-1.5.) Automobile Weight. In our data set, women drove lighter and smaller cars than men. The automobiles women drove had an average curb weight of 2,615 pounds and a mean wheelbase of 100.7 inches; for men drivers, the figures were 2,715 pounds and 101.5 inches. We also found that the protective effect of increasing automobile weight was less evident for women drivers than for men drivers. Since increasing weight generally offers protection in a crash, the average automobile weight for drivers who were hospitalized or killed should be lower than the average weight for those who were not injured. This was true for men but not for women. The average curb weight of the cars driven by men who were hospitalized or killed was 2,626 pounds, compared with a greater average curb weight of 2,719 pounds for men who were not injured. In contrast, the average automobile curb weight for women drivers who were hospitalized or killed was 2,611 pounds, compared with an equivalent average curb weight of 2,615 pounds for women drivers who were not injured. Safety Belts. Each of the safety belt configurations that we examined (manual lap and shoulder belts, automatic and manual belts, and automatic belts only) significantly reduced the injury risk of both men and women drivers. However, we also uncovered evidence that, in this data set, safety belts were somewhat less effective for women drivers than for men drivers. Table 3.1 compares men and women automobile drivers hospitalized as the result of a crash by safety belt use. For all three types of crashes, the table separates the percentage of drivers who were hospitalized or killed from those not hospitalized as well as separating men and women in each group. Safety belt use did not differ by gender for drivers who were not hospitalized: about three quarters of both the men and women drivers in that group were belted. If safety belts offered equivalent protection to men and women drivers, the belt use percentages among hospitalized or killed drivers should reflect the same pattern—in this case, rough equivalence for men and women. However, the table shows that among drivers who were hospitalized or killed, women were more likely to have been wearing safety belts than men. In particular, injured women drivers were about 50 percent more likely to have been wearing manual lap and shoulder belts than were injured men (36 percent to 24 percent). Crash Type. The patterns of injury by crash type are very different for drivers 65 and older and for younger drivers. Figure 3.2 shows that, in our analysis, nearly four fifths of the drivers 65 or older who were hospitalized or killed were injured in collisions with cars or light trucks, while only about one fifth were injured in one-car crashes (and almost none were hurt in one-car rollovers—just 3 percent). Conversely, just over half of the drivers 16 to 64 who were hospitalized or killed were injured in collisions with cars or light trucks, while about 29 percent were hurt in one-car nonrollovers and 17 percent were in one-car rollovers. The primary reason for this difference between the age categories is that drivers in the two groups are involved in different types of crashes. Drivers younger than 65 are involved in collisions with cars and light trucks less often, and in one-car crashes more often, than are drivers 65 and older. In our analysis, 73 percent of the crash involvements of drivers 16 to 64 were in collisions with cars and light trucks, about 22 percent in one-car nonrollover crashes, and about 5 percent in one-car rollover crashes. In contrast, about 86 percent of the crash involvements of drivers 65 and older were collisions with cars and light trucks, with only about 11 percent one-car nonrollover crashes and just 3 percent one-car rollovers. Older drivers are much more likely to be hurt in crashes than younger drivers in almost all circumstances. For one-car nonrollover crashes, we found that, in statistically equivalent crashes, drivers 65 and older were hospitalized or killed about 6.6 times more often than the youngest drivers, those 16 to 24. Similarly, for collisions with cars and light trucks, drivers 65 and older had a probability of injury more than four times as great as drivers 16 to 24. Automobile Weight. Drivers 65 and older operated heavier and larger cars than younger drivers. The automobiles of drivers 65 and older had an average curb weight of 2,874 pounds and a mean wheelbase of 104.9 inches. The automobiles of drivers 16 to 64 had an average curb weight of 2,649 pounds and a mean wheelbase of 100.8 inches. We also found that the protective effect of increasing automobile weight was only slightly less strong for drivers 65 and older than for younger drivers. Thus, the average curb weight of the cars driven by those 16 to 64 who were hospitalized or killed was 2,590 pounds, compared with a larger average curb weight of 2,652 pounds for those who were not hospitalized. The average automobile curb weight for drivers 65 and older who were hospitalized or killed was 2,836 pounds, compared with an average curb weight of 2,878 pounds for drivers who were not hospitalized. Safety Belts. Although the safety belt use figures in the NASS data set may be inflated, as we discussed earlier, we found that safety belts reduced the risk of injury for drivers in both age categories. We also found that the effectiveness of safety belts was roughly equivalent for drivers 16 to 64 and for drivers 65 and older in this data set. For example, table 3.2 shows the percentage of belted drivers separately for those hospitalized or killed and for those not hospitalized, as well as separating these categories by age. The table shows that drivers 65 and older used safety belts more often than drivers 16 to 64 and that this pattern holds both among those who were hospitalized or killed and among those who were not hospitalized. Thus, while older drivers use safety belts more frequently, this difference from younger drivers is found across the board, rather than only among the hospitalized and killed, as it was for the comparison between women drivers and men drivers. Taken as a whole, the evidence indicates that the “inherent frailty” hypothesis does not accurately describe the injury experience of women drivers in automobile crashes but is consistent with that of older drivers. This is because the relative injury risk of women drivers compared with men drivers differs as a function of crash type, automobile size, and safety belt use, while the relative injury risk of drivers 65 and older compared with younger drivers is largely unaffected by those three factors. Women drivers are more likely than men drivers to be hospitalized or killed in collisions with cars and light trucks but not in one-car crashes, and women drivers may be protected less well by heavier cars and by safety belts than are men drivers. In contrast, drivers 65 and older have a greater risk of hospitalization or death than younger drivers in one-car as well as multivehicle crashes, and they are afforded roughly the same degree of protection as drivers 16 to 64 by greater automobile weight and safety belt use. The NASS data set did not allow us to pursue more specific explanations for differences stemming from gender and age. For example, men and women differ in many ways—on the average, women are shorter than men, weigh less than men, and have bones that are less strong than men’s, among other potentially relevant differences. It is difficult to identify the key difference that accounts for women’s greater injury risk. Our findings about the applicability of the inherent frailty hypothesis suggest that the concerns of women drivers are more likely to be ameliorated by automobile design changes than are those of older drivers. This means not that it is impossible to reduce the injury risk of drivers 65 and older but only that it may be difficult to close the gap between older and younger drivers. The implications of our findings for future automobile safety are discussed in chapter 5. Three other points are worthy of mention. First, it is not surprising that the injury risk in one-car rollover crashes is similar both for women and men drivers and for drivers older and younger than 65. One-car rollover crashes are very severe events, meaning that differences between individual drivers are likely to be overwhelmed by the magnitude of the crash. Further, few of the drivers in one-car rollover crashes were either women or 65 or older. Second, while our finding that safety belts may not protect women drivers as well as men drivers is far from definitive, other researchers examining data from other sources have also reported that the benefits of safety belts are not as great for women as they are for men. (See, for example, Hill, Mackay, and Morris, 1994; Mercier et al., 1993.) Third, the types of crashes experienced by drivers 65 and older reduce the protective influence of automobile weight for them. Not only are older drivers much more likely to have multivehicle than one-car crashes; also, those multivehicle collisions occur disproportionately in intersections and, therefore, disproportionately involve side impacts. (See Viano et al., 1990.) Automobile weight offers less protection in side-impact collisions than in frontal impacts. As we demonstrated in chapters 2 and 3, crash severity, crash type, automobile weight and wheelbase, safety belt use, and driver age and gender, taken separately, each significantly influences the probability of driver hospitalization or death. For this chapter, we also assessed the relative importance of these factors simultaneously to see which ones are the most important predictors of injury in a crash and which ones have relatively little influence. We found that crash severity is the most important predictor of driver hospitalization or death, followed by crash type, safety belt use, driver age and gender, and automobile weight. Crash severity refers to the speed of impact, while crash type refers to the number of vehicles in a crash, whether the car rolled over, and its points of impact. If information about only one of these several factors were available for predicting whether the driver would be seriously injured, having access to crash severity information would lead to the greatest number of accurate predictions. If crash severity information could not be obtained, information about the crash type would give the best chance of accurately predicting whether or not the driver would be injured. And so on down the list of factors. Table 4.1 documents this finding. It shows a statistical measure of the “explanatory power” of each factor. The table shows that the largest value for this measure is for crash severity, followed by crash type, and then the other factors in the order previously noted. The “explanatory power” of automobile weight is substantially less than that of all the other factors. Another way to illustrate the great importance of the crash severity and crash type factors is presented in figure 4.1. Each column in the figure shows the estimated increment in risk of injury associated with a change in the associated crash-related factor, combining the three types of crashes in our analysis. Thus, the “crash severity” bar in the figure shows that crashes involving a change in velocity of 23 mph have an estimated risk of driver injury 25 times as great as crashes with a change in velocity of only 6 mph. The bar for crash type shows our estimate that drivers involved in one-car rollover crashes are about nine times more likely to be hurt than drivers involved in collisions with cars and light trucks that are not head-on crashes. Similarly, figure 4.1 shows that drivers 65 and older are about 4.5 times more likely to be hospitalized or killed than drivers 16 to 24 and that unbelted drivers have an injury risk more than three times as great as drivers wearing manual lap and shoulder safety belts. Drivers of 2,000-pound automobiles have an estimated injury risk in a crash that is about 1.63 times (or 63 percent greater than) that of drivers of 3,600-pound cars. Finally, the estimated injury risk for women drivers is about 1.29 times (or 29 percent greater than) that of men drivers. Here we discuss the implications of our findings for future automobile safety. The first section below reviews the safety initiatives from NHTSA that have the greatest importance for automobile crashworthiness. The next section discusses ways to reduce the injury risk for particular categories of automobile drivers. The last section discusses the most effective uses of available safety technologies. It is important to keep two points in mind when considering alternative approaches to automobile crashworthiness. First, crashworthy automobiles must offer as much protection as possible for a broad matrix of crash types, crash speeds, and occupant characteristics that pose very different occupant protection problems. For example, we found that one-car crashes, particularly rollovers, are much more dangerous than collisions with cars and light trucks. We also found that men drivers and young drivers are disproportionately involved in one-car crashes, while women drivers and older drivers are more likely to be involved in collisions with cars and light trucks. Protecting young men in severe one-car crashes is very different from protecting women and older drivers in multivehicle collisions. Second, individual safety features often affect only one portion of the matrix of crash types and occupant characteristics. For example, air bags clearly help protect occupants in frontal collisions, but they do not contribute to occupant safety in side-impact collisions or rollover crashes. Starting with the 1990 model year, all automobiles sold in the United States have had to demonstrate driver and right-front-seat passenger safety with passive restraints in a full-frontal crash at 30 mph into a rigid barrier. “Passive restraint” means without the use of any safety device requiring actions by the driver or passenger, such as manual safety belts.In model year 1987, the first year of the phase-in period for this regulation, all the automobiles NHTSA tested met this requirement with automatic safety belts. By 1993, almost all the tested cars fulfilled the passive restraint requirement with air bags rather than automatic belts alone, although many of the cars with air bags also had automatic safety belts. NHTSA has announced major changes in this regulation. All cars manufactured in September 1997 or later will be required to have both air bags and manual lap and shoulder safety belts for both drivers and right-front-seat passengers. Very importantly, the revised regulation prohibits automatic safety belts—not just for use in the compliance tests but as safety equipment. All cars will have to be equipped with manual safety belts. Beginning with the 1994 model year, NHTSA began phasing in a requirement for automobile occupant protection in side impacts. By model year 1997, all automobiles will have to meet safety standards in crash tests simulating the impact of a 3,000-pound vehicle hitting the target car in a side-impact collision at 33.5 mph. Unlike the frontal impact crash tests, active restraint systems, such as manual safety belts, must be used in these tests. NHTSA is also undertaking a variety of efforts to deal with particular mechanisms of occupant injury rather than points of contact on the automobile. For example, to reduce head injuries, NHTSA is developing a regulation that would require energy-absorbing padding in the areas of automobile interiors that occupants’ heads frequently strike in side-impact collisions. Also, NHTSA is studying ways to further reduce injuries in rollover crashes, primarily by reducing the risk of ejection, by improving door latches and increasing the strength of automobile windows other than windshields, as well as by considering tougher roof crush standards. Other NHTSA activities are concerned with particular types of automobile occupants, especially children and elderly persons. It is important to note that NHTSA is seeking ways to improve protection for elderly drivers, although a major focus of NHTSA’s work involves programs to improve their driving skills or otherwise reduce their likelihood of crash involvement. (See Transportation Research Board, 1992, and NHTSA, 1993a; see also NHTSA 1992b for its activities priority plan through 1994.) Automobile manufacturers understand that different segments of the consumer market for automobiles prefer different types of cars. For example, young men are likely to prefer sports cars over station wagons, and older drivers disproportionately prefer large cars over smaller ones. In other words, in the marketplace for automobiles, one size does not fit all. Similarly, one size does not fit all when it comes to automobile safety: the crashworthiness problems of different types of drivers, and of drivers involved in different types of crashes, require a variety of different solutions. Here, we look at the differential safety concerns of segments of the safety “marketplace” that are defined by safety belt use and driver age and gender. Drivers involved in traffic crashes, on the whole, operate their vehicles in a riskier manner than drivers who are not involved in crashes. For example, the rate of safety belt use for drivers involved in crashes is less than the use rate for the general driving population. Estimates of the degree to which drivers who do not wear safety belts are overinvolved in roadway crashes vary considerably. For example, NHTSA (1992a) estimated that unbelted drivers experience potentially fatal crashes 2.2 times more than belted drivers, while Hunter et al. (1993) found that unbelted drivers had a crash involvement rate 35 percent higher than belt users. Unbelted and belted drivers have very different injury experiences in a crash. Unbelted drivers are more likely to suffer severe injuries, and their injuries are more likely to result from contact with the steering wheel or windshield (Danner, Langieder, and Hummel, 1987; Lestina et al., 1991). These differences are explained by the mechanisms of safety belt effectiveness. Safety belts tie the occupant to the car, helping the occupant decelerate over a relatively long period. In addition, by restricting movement, safety belts reduce the chances of the wearer’s striking the interior of the vehicle and help make his or her course of motion within the car more predictable. In contrast, unbelted occupants keep moving within the automobile in the moments after collision, the direction of their movement within the vehicle is relatively unpredictable, and it is likely either that their rapid motion will be abruptly stopped by contact with a rigid surface within the vehicle or that they will be ejected from it. Therefore, optimally safe vehicle interiors are conceptually dissimilar for belted and unbelted occupants (Mackay, 1993). For belted occupants, the more interior space the better, as increasing the space reduces the odds of contact with interior surfaces. Conversely, for unbelted occupants, the goal is to restrict movement and provide a soft place to land, so heavily padded interiors that minimize interior space are preferred. How can crash protection be improved for unbelted and belted drivers? For unbelted drivers, the obvious answer is to put them in safety belts. In practical terms, the best way to do this is to increase the number of automobiles with automatic safety belts. As NHTSA (1992a) and Williams et al. (1992) have reported, automobiles equipped with automatic safety belts have much higher belt usage rates than those with manual belts. While experimental vehicles have been designed with substantial protection for unbelted occupants, we do not believe that any combination of interior padding, air bags, and other passive restraint systems will be able to rival the effectiveness of safety belts in production automobiles for the foreseeable future. One reason for this is that, as noted above, designing an optimally safe car for unrestrained drivers may require abandoning safety belts as the centerpiece of occupant protection strategies. And safety belts are extraordinarily effective; alone, they are much more effective at reducing serious injuries than are air bags alone. For belted drivers, the prospects for dramatic improvements in crash protection are less obvious. On the one hand, promising efforts are under way to reduce much of the residual risk of injury confronting belted drivers. These include improvements in safety belt technology, the greater availability of air bags, and NHTSA’s efforts to improve occupant protection in side impacts. On the other hand, the great success of recent occupant protection efforts means that further crashworthiness improvements are harder to achieve, primarily because the dwindling proportion of crashes that still cause serious injury and death to belted occupants are exceptionally severe events. For example, Mackay et al. (1992), reviewing a sample of crashes involving the death of restrained front-seat occupants in Britain, found that the deaths occurred in extremely severe crashes. Fifty percent of the deaths in frontal crashes were in collisions with large trucks, and 86 percent involved passenger compartments crushed so severely as to eliminate the space occupied by the fatally injured person before the crash. Similarly, Green et al. (1994) reported that most of the fatalities of restrained occupants that they examined involved severe intrusion into the passenger compartment and multiple injuries so severe that 90 percent of the victims died within an hour of the crash. The “market segments” for automobile safety defined by driver age and gender require very different strategies for reducing fatalities. For men drivers and younger drivers, the problem is crash involvement, not crashworthiness. As we demonstrated in chapter 2, compared to women and older drivers, not only are men drivers and younger drivers involved in more automobile crashes but also the crashes they are particularly likely to be involved in have comparatively severe consequences—that is, single-car crashes have much higher driver injury rates than multivehicle crashes. However, as we saw in chapter 3, men drivers and younger drivers are significantly less likely to be hurt in a crash than women and older drivers. That is, men and younger drivers benefit from a degree of occupant protection that is not available to women and older drivers (we will discuss some of the reasons later). In summary, the surest way to improve the safety of men drivers and younger drivers is to attempt to reduce their crash involvement rates, particularly their rates of involvement in single-car crashes. The situation is exactly the reverse for women and older drivers. The problem for them is crashworthiness, not crash involvement. Compared to men and younger drivers, women and older drivers are involved in fewer automobile crashes, and the crashes they are involved in are, on the average, less severe, since they are less likely to be involved in single-car crashes than in multivehicle collisions. However, once a crash has occurred, women and, especially, older drivers are more likely to be hospitalized or killed. In our judgment, improving the crash protection offered by automobiles to women and older drivers so that it approaches the level enjoyed by men and younger drivers offers the greatest chance for reducing roadway injuries for them. In the absence of compelling evidence for the inherent physical frailty of women compared to men, we are optimistic that crashworthiness for women can be substantially improved. In contrast, the evidence we have reviewed indicates that older drivers are, in fact, more fragile than young drivers. Nonetheless, we believe that older drivers can be afforded better protection by automobiles than they now receive (see subsequent discussion and Mackay, 1988). It is important that occupant protection for women drivers and older drivers be improved without compromising the crash protection of men drivers and younger drivers; design changes that merely shift injury risk from one group of drivers to another will not improve traffic safety in the aggregate. One possible reason for the relatively high degree of crash protection enjoyed by men drivers and younger drivers is that efforts at improving automobile crashworthiness have concentrated on the crash types and occupant characteristics most often experienced by them. Current safety regulations and automobile safety designs emphasize protection in high-speed frontal collisions, and men drivers and younger drivers are more likely to be in single-car crashes, which disproportionately involve frontal impacts. The automobile crash tests NHTSA currently requires for all cars include full-frontal crashes into a rigid barrier at 30 mph (although the introduction of a requirement for side-impact tests is under way). Air bags reduce the risk of injury in frontal impacts only, not in side impacts. Similarly, safety belts are more effective in frontal than in side impacts (for example, Evans, 1990), and because of this, safety belts have a somewhat greater benefit in single-car crashes than in collisions with cars and light trucks. A second possible reason for the crashworthiness deficit of women drivers compared with men drivers is that current NHTSA regulations require the use of only one size of crash test dummy—a dummy representing the 50th percentile of the male population, or 5 feet 9 inches tall, weighing 165 pounds. Maximizing the safety of persons with these characteristics may, in a relative sense, compromise the safety of others. Another possible explanation for the greater injury risk for women drivers is that, on the average, women are shorter and lighter than men. Automobiles designed to accommodate taller and heavier men drivers may not accommodate women as well. For example, the Insurance Institute for Highway Safety (1993) recommends that drivers sit back as far as possible from the steering wheel and dashboard in order to minimize the risk of hitting those structures in a crash. Shorter drivers obviously cannot sit as far back as taller drivers if they hope to reach the accelerator and brake pedals, and this may expose them to more risk. All safety belts are not equally effective. In particular, many cars on the market today have safety belts with automatic pretensioners or web locking devices that substantially improve their effectiveness (IIHS, 1993). Pretensioners work by reducing the amount of slack in the belts or by tightening them in a crash a fraction of a second sooner. They cause the belted occupant to begin decelerating sooner in a crash, thereby increasing the total deceleration period. In addition, they increase the chances that the occupant’s forward motion will be stopped before he or she contacts the interior of the automobile. To give an idea of the magnitude of the safety increment available from belts with these features, Viano (1988) compared the performance of several restraint mechanisms in frontal crash tests. Depending on the outcome measure used, lap and shoulder belts with pretensioners had injury scores about 15 to 40 percent below those of lap and shoulder belts without pretensioners. NHTSA has recently announced regulations that would implement the requirement in the Intermodal Surface Transportation Efficiency Act of 1991 that all passenger cars and light trucks be equipped with air bags and lap and shoulder safety belts. Beginning with all cars manufactured in September 1997, both drivers and right-front-seat passengers will have both air bags and manual lap and shoulder safety belts; automatic safety belts are prohibited. We are concerned that NHTSA’s implementation of the requirement for air bags may not achieve the greatest degree of improvement in the aggregate safety of the population of automobile occupants. Automobile occupants who travel in cars with air bags and who wear manual lap and shoulder safety belts will be well protected. However, because safety belts alone offer much more protection than air bags alone, occupants of air bag-equipped cars who do not wear lap and shoulder safety belts will be less well protected than if they were traveling in cars with automatic safety belts. This is important because cars with automatic safety belts have higher safety belt usage rates than cars with manual belts, and individuals involved in serious automobile crashes have lower safety belt use rates than others. If many automobile occupants in serious crashes do not wear manual safety belts, the aggregate safety of automobile occupants under NHTSA’s proposal would be less than if, in addition to air bags, automatic safety belts were encouraged or required. To examine this question, we compared the average amount of occupant protection available to all automobile occupants under three different safety-belt-use scenarios based on a recent NHTSA report (NHTSA, 1992a). In that report, NHTSA noted that cars equipped with manual lap and shoulder belts had a belt usage rate of 56 percent in 1991, while cars equipped with automatic safety belts had usage rates ranging from 64 to 97 percent, depending on the type of automatic belt. If all cars had air bags and manual lap and shoulder belts and a belt usage rate of 56 percent, we estimate that fatality risk would fall 37.2 percent for the average automobile occupant compared with unprotected occupants. If all cars had air bags and automatic safety belts and a belt usage rate of 64 percent, we estimate that the average automobile occupant would have a 37.7-percent reduction in fatality risk. If all cars had air bags and automatic safety belts and a belt usage rate of 97 percent, we estimate that the total fatality risk reduction would be 46 percent. Thus, from the standpoint of maximizing the aggregate safety of all automobile occupants, the best proposal may be one that requires both air bags and automatic lap and shoulder safety belts. The magnitude of the fatality risk reduction arising from that configuration compared to NHTSA’s regulation requiring manual lap and shoulder safety belts depends on the difference between the usage rates of automatic and manual safety belts for automobile occupants involved in serious crashes. As our estimates show, if that difference is small, the automatic safety belt alternative offers only a very slight aggregate safety improvement. Conversely, if the usage rate difference is high, placing air bags and automatic lap and shoulder safety belts in all cars would substantially improve the safety of automobile occupants in the aggregate. DOT had two comments regarding the implications of our finding that, holding constant crash characteristics and automobile weight, women are more likely than men to suffer serious injury in a crash. The first is that NHTSA plans to conduct crash tests with test dummies of different sizes rather than only the standard dummy that represents a 50th percentile man driver. The second is that NHTSA has recently made final a rule requiring improvements in the adjustability of safety belts that may increase the percentage of vehicle occupants using belts correctly. We applaud both these developments. Nonetheless, in our opinion, there is no definitive evidence that either size differences or patterns of safety belt use fully account for the differences in injury rates between men and women. DOT also had two comments on our discussion of NHTSA’s implementation of the requirement for air bags. First, it contended that the usage figures for automatic safety belts that we used in our example are unrealistically high. More specifically, DOT stated that the usage rates for complete automatic belt systems are much less than the 97-percent scenario we described, since some drivers use only one component but not the other (for example, using the shoulder belt but not the lap belt) and other drivers disconnect the automatic belt system entirely. Second, DOT disagreed with our conclusion that manual and automatic safety belts provide “a roughly equivalent degree of protection.” For the first point, we understand that it is extremely difficult to accurately measure safety belt use, especially the use of particular safety belt components (see chapter 2). However, NHTSA (1992a) has concluded that automatic safety belts are used more often than manual belts, and our 97-percent usage rate scenario was based on a NHTSA report, not on our own analysis. Further, our findings would not differ even if automatic safety belts had usage rates much less than 97 percent; thus, we found that the scenario with a 64-percent usage rate for automatic belts (NHTSA’s lowest estimate) still provided slightly more total protection than the other scenario we considered, manual belts with a 56-percent usage rate. For the second point, our conclusion that manual and automatic safety belts provide approximately equivalent protection is based on NHTSA’s work, not on our own analyses of automobile crash data. For example, NHTSA (1993d, p.II-13) estimated that, when used in a crash, manual lap and shoulder safety belts reduce fatality risk by 45 percent and automatic three-point belts reduce fatality risk by 42.5 percent. Similarly, NHTSA earlier reported that it was unable to find any statistically significant differences between several different configurations of manual and automatic safety belts (NHTSA, 1992a, p.66). Most importantly, neither of DOT’s comments about our discussion of NHTSA’s implementation of the requirement for air bags addressed our main point—that drivers involved in serious crashes use safety belts much less than the general driving population. Our discussion is aimed at improving crash protection for drivers who have the greatest risk of involvement in serious crashes. A comprehensive evaluation of the best ways to increase safety belt use for those drivers is beyond the scope of this report. However, as our analysis demonstrates, NHTSA’s decision to prohibit automatic safety belts may not achieve the best result from that perspective. At a minimum, NHTSA needs to continue to emphasize in its public education efforts the importance of wearing safety belts even in cars equipped with air bags.

Pursuant to a congressional request, GAO reviewed highway safety, focusing on: (1) the most important predictors of injury in an automobile crash; (2) how the risk of injury in a crash is affected by the severity and type of crash, automobile size, safety belts and airbags, and the occupants' age and gender; and (3) areas for further reducing automobile occupants' crash injury risks. GAO found that: (1) the most important determinants of driver injury in car crashes are speed at impact, the type of crash, safety belt use, driver age and gender, and automobile weight and size; (2) injury is more likely in high-speed crashes, one car crashes, frontal crashes, and rollovers; (3) occupants of heavier and larger cars are less likely to be injured, but those cars pose a greater danger to persons in multivehicle crashes; (4) heavier cars offer more protection in one-car nonrollover and multivehicle crashes, but occupants of these cars are subject to more injury in rollovers than are occupants of lighter cars; (5) although safety belts reduce injury risks overall, they are most effective in rollovers, single car crashes, and frontal crashes; (6) air bags are only effective in frontal crashes and are less effective than safety belts alone; (7) although they are involved in fewer crashes overall, female and older drivers are more often injured than male and younger drivers are in similar crashes; (8) safety belts are not as effective for women as they are for men; (9) female and older drivers are involved in more multivehicle crashes and male and younger drivers are involved in more single car crashes; (10) older drivers tend to be involved in more side impact crashes; and (11) the government and manufacturers are working to improve automobile safety for each category of driver.

You are an expert at summarizing long articles. Proceed to summarize the following text: Currently, public safety officials primarily communicate with one another using LMR systems that support voice communication and usually consist of handheld portable radios, mobile radios, base stations, and repeaters, as described: Handheld portable radios are typically carried by emergency responders and tend to have a limited transmission range. Mobile radios are often located in vehicles and use the vehicle’s power supply and a larger antenna, providing a greater transmission range than handheld portable radios. Base station radios are located in fixed positions, such as dispatch centers, and tend to have the most powerful transmitters. A network is required to connect base stations to the same communication system. Repeaters increase the effective communication range of handheld portable radios, mobile radios, and base station radios by retransmitting received radio signals. Figure 1 illustrates the basic components of an LMR system. LMR systems are generally able to meet the unique requirements of public safety agencies. For example, unlike commercial cellular networks, which can allow seconds to go by before a call is set up and answered, LMR systems are developed to provide rapid voice call-setup and group- calling capabilities. When time is of the essence, as is often the case when public safety agencies need to communicate, it is important to have access to systems that achieve fast call-set up times. Furthermore, LMR systems provide public safety agencies “mission critical” voice capabilities—that is, voice capabilities that meet a high standard for reliability, redundancy, capacity, and flexibility. Table 1 describes the key elements for mission critical voice capabilities, as determined by the National Public Safety Telecommunications Council (NPSTC). According to NPSTC, for a network to fully support public safety mission critical voice communications, each of the elements in table 1 must address part of the overall voice communications services supported by the network. In other words, NPSTC believes a network cannot be a mission critical network without all of these elements. Furthermore, unlike commercial networks, mission critical communication systems rely on “hardened” infrastructure, meaning that tower sites and equipment have been designed to provide reliable communications even in the midst of natural or man-made disasters. To remain operable during disasters, mission critical communications infrastructure requires redundancy, back- up power, and fortification against environmental stressors such as extremes of temperature and wind. Nationwide, there are approximately 55,000 public safety agencies. These state and local agencies typically receive a license from FCC to operate and maintain their LMR voice systems. Since these systems are supported by state and local revenues, the agencies generally purchase equipment and devices using their own local budgets without always coordinating their actions with nearby agencies, which can hinder interoperability. Since 1989, public safety associations have collaborated with federal agencies to establish common technical standards for LMR systems and devices called Project 25 (P25). The purpose of these technical standards is to support interoperability between different LMR systems, that is, to enable seamless communication across public safety agencies and jurisdictions. While the P25 suite of standards is intended to promote interoperability by making public safety systems and devices compatible regardless of the manufacturer, it is a voluntary standard and currently incomplete. As a result, many LMR devices manufactured for public safety are not compatible with devices made by rival manufacturers, which can undermine interoperability. The federal government plays an important role in public safety communications by providing funding for emergency communication systems and working to increase interoperable communication systems. Congress, in particular, has played a critical role by designating radio frequency spectrum for public safety use. Furthermore, Congress can direct action by federal agencies and others in support of public safety. For example, through the Homeland Security Act of 2002, Congress established DHS and required the department, among other things, to develop a comprehensive national incident management system comprising all levels of government and to consolidate existing federal government emergency response plans into a single, coordinated national response plan. The number of licenses excludes the 700 MHz public safety broadband license, the 4.9 GHz band, and public safety point-to-point microwave licenses. for public safety broadband use.its Public Safety and Homeland Security Bureau (PSHSB), which is responsible for developing, recommending, and administering FCC’s policies pertaining to public safety communications issues. FCC has issued a series of orders and proposed rulemakings and adopted rules addressing how to develop a public safety broadband network, some of which are highlighted: In September 2006, FCC established In 2007, FCC adopted an order to create a nationwide broadband network with the 10 MHz of spectrum designated for a public safety broadband network and the adjacent 10 MHz of spectrum––the Upper 700 MHz D Block, or “D Block.” As envisioned by FCC, this nationwide network would be shared by public safety and a commercial provider and operated by a public/private partnership. However, when FCC presented the D Block for auction in 2008 under these conditions, it received no qualifying bids and thus was not licensed. Subsequently it was found that the lack of commercial interest in the D Block was due in part to uncertainty about how the public/private partnership would work. Although many stakeholders and industry participants called for the D Block to be reallocated to public safety, an alternate view is that auctioning the D Block for commercial use would have generated revenues for the U.S. Treasury. As noted previously, a provision in pending legislation, the Middle Class Tax Relief and Job Creation Act of 2012, reallocates the D Block to public safety. In 2007, FCC licensed the 10 MHz of spectrum that FCC assigned for public safety broadband use to the Public Safety Spectrum Trust (PSST), a nonprofit organization representing major national public safety associations. This 10 MHz of spectrum, located in the upper 700 MHz band is adjacent to the spectrum allocated to public safety for LMR communications. As the licensee, the PSST’s original responsibilities included representing emergency responders’ needs for a broadband network and negotiating a network sharing agreement with the winner of the D Block auction. However, since the D Block was not successfully auctioned, FCC stayed the majority of the rules guiding the PSST. In 2009, public safety entities began requesting waivers from FCC’s rules to allow early deployment of broadband networks in the 10 MHz of spectrum licensed to the PSST, and since 2010, FCC granted waivers to 22 jurisdictions for early deployment. These jurisdictions had to request waivers because the rules directing the deployment of a broadband network were not complete. In this report, we refer to the 22 entities receiving waivers as “waiver jurisdictions.” As a condition of these waivers, FCC required that local or regional networks would interoperate with each other and that all public safety entities in the geographic area would be invited to use the new networks. In addition, FCC required that all equipment operating on the 700 MHz public safety broadband spectrum comply with Long Term Evolution (LTE), a commercial data standard for wireless technologies.shown in table 2, of the 22 jurisdictions that successfully petitioned for waivers, only 8 received federal funding. Seven waiver jurisdictions received funding from NTIA’s Broadband Technology Opportunities Program (BTOP), a federal grant program authorized through the American Recovery and Reinvestment Act of 2009 that had several As purposes, including promoting the expansion of broadband infrastructure. In January 2011, FCC adopted rules and proposed further rules to create an effective technical framework for ensuring the deployment and operation of a nationwide, interoperable public safety broadband network. As part of this proceeding, FCC sought comment on technical rules and security for the network as well as testing of equipment to ensure interoperability. The comment period for the proceeding closed on April 11, 2011, and FCC received comments from waiver jurisdictions, consultants, and manufacturers, among others. As of February 7, 2012, FCC did not have an expected issuance date for its final rules. In addition to FCC, DHS has been heavily involved since its inception in supporting public safety by assisting federal, state, local, and regional emergency response agencies and policy makers with planning and implementing interoperable communication networks. Within DHS, several divisions have focused on improving public safety communications. DHS also has administered groups that bring together stakeholders from all levels of government to discuss interoperability issues: The Emergency Communications Preparedness Center (ECPC) was created in response to Hurricane Katrina by the 21st Century Emergency Communications Act of 2006 to help improve intergovernmental emergency communications information sharing. The ECPC has 14 member agencies with a goal, in part, to support and promote interoperable public safety communications through serving as a focal point and clearing house for information. It has served to facilitate collaboration across federal entities involved with public safety communications. SAFECOM is a communications program that provides support, including research and development, to address interoperable communications issues. Led by an executive committee, SAFECOM has members from state and local emergency responders as well as intergovernmental and national public safety communications associations. DHS draws on this expertise to help develop guidance and policy. Among other activities, SAFECOM publishes annual grant guidance that outlines recommended eligible activities and application requirements for federal grant programs providing funding for interoperable public safety communications. Within Commerce, NTIA and NIST are also involved in public safety communications by providing research support to the PSCR program. The PSCR serves as a laboratory and advisor on public safety standards and technology. It provides research and development to help improve public safety interoperability. For example, the PSCR has ongoing research in many areas related to communications, including the voluntary P25 standard for LMR communication systems, improving public safety interoperability, and the standards and technologies related to a broadband network. PSCR also conducts laboratory research to improve the audio and video quality for public safety radios and devices. Congress has appropriated billions in federal funding over the last decade to public safety in grants and other assistance for the construction and maintenance of LMR voice communication systems and the purchase of communication devices. Approximately 40 grant programs administered by nine federal agencies have provided this assistance for public safety. Some of the grants provided a one-time infusion of funds, while other grants have provided a more consistent source of funding. For example, in 2007, the one-time Public Safety Interoperable Communications Grant Program awarded more than $960 million to assist state and local public safety agencies in the acquisition, planning, deployment, or training on interoperable communication systems.Grant Program has provided $6.5 billion since 2008, targeting a broad scope of programs that enhance interoperability for states’ emergency medical response systems and regional communication systems, as well as planning at the community level to improve emergency preparedness. See appendix II for more information about the grant programs. However, the Homeland Security State and local governments have also invested millions of dollars of their own funds to support public safety voice communications, and continue to do so. Jurisdictions we visited that received federal grants to support the construction of a broadband network have continued to invest in the upgrade and maintenance of their current LMR voice systems. For example, Adams County, Colorado, has spent about $19.7 million since 2004 on its LMR system, including $6.9 million in local funds, supplemented with $12.8 million in federal grants. Mississippi, another jurisdiction we visited that is constructing a statewide broadband network, has spent about $214 million on its LMR network, including $57 million in general revenue bonds and $157 million in federal grants. Officials in the jurisdictions we contacted stressed the importance of investing in the infrastructure of their LMR networks to maintain the reliability and operability of their voice systems, since it was unclear at what point the broadband networks would support mission critical voice communications. In addition to upgrading and maintaining their LMR networks, many jurisdictions are investing millions of dollars to meet FCC’s requirement that communities use their spectrum more efficiently by reducing the bandwidth on which they operate. In addition to direct federal funding, the federal government has allocated more than 100 MHz of spectrum to public safety over the last 60 years. The spectrum is located in various frequency bands since FCC assigned frequencies to public safety in new bands over time as available frequencies became congested and public safety’s need for spectrum Figure 2 displays the spectrum allocated to public safety, increased.which is located between 25 MHz and 4.9 GHz. As noted previously, the Middle Class Tax Relief and Job Creation Act of 2012 requires FCC to reallocate the D Block from commercial use to public safety use. Public safety agencies purchase radios and communication devices that are designed to operate on their assigned frequency. Since different frequencies of radio waves have different propagation characteristics, jurisdictions typically use the spectrum that is best suited to their particular location. For example, very high frequency (VHF) channels— those located between 30 and 300 MHz—are more useful for communications that must occur over long distances without obstruction from buildings, since the signals cannot penetrate building walls very well. As such, VHF signals are well suited to rural areas. On the other hand, ultra high frequency (UHF) channels—those located between 300 MHz and 3 GHz—are more appropriate for denser urban areas as they have more capacity and can penetrate buildings more easily. When we visited Adams County, Colorado, we learned that public safety officials in the mountainous areas of Colorado use the 150 MHz and 450 MHz bands because of the range of the signals and their ability to navigate around the natural geography. However, public safety officials in the Denver, Colorado, metropolitan area operate on the 700 and 800 MHz frequency bands which can support more simultaneous voice transmissions, such as communications between fire, police, public utility, and transportation officials. The current public safety LMR systems use their allocated spectrum to facilitate reliable mission critical voice communications. Such communications need to be conveyed in an immediate and clear manner regardless of environmental and other operating conditions. For example, while responding to a building fire, firefighters deep within the building need the ability to communicate with each other even if they are out of range of a wireless network. The firefighters are able to communicate on an LMR system because their handheld devices operate on as well as off network. Currently, emergency response personnel rely exclusively on their LMR systems to provide mission critical voice capabilities. One waiver jurisdiction we visited, Mississippi, is constructing a new statewide LMR system and officials there noted a high degree of satisfaction with the planned LMR system. They said the new system is designed to withstand most disasters and when complete, will provide interoperability across 97 percent of the state. Public safety officials in the coastal region of the state have already used the system to successfully respond to problems caused by the Mississippi River flooding in the spring of 2011. LMR public safety communication systems also are able to provide some data services but the systems are constrained by the narrowband channels on which they operate. These channels allow only restricted data transfer speeds, thus limiting capacity to send and receive data such as text and images, or to access existing databases. Some jurisdictions supplement their LMR systems with commercial data services that give them better access to applications that require higher data transfer rates to work effectively. However, commercial service also has limitations, such as the lack of priority access to the network in an emergency situation. According to DHS, interoperability of current public safety communications has improved as a result of its efforts. In particular, the DHS National Emergency Communications Plan established a strategy for improving emergency communications across all levels of government, and as a result, all states have a statewide interoperability coordinator and governing body to make strategic decisions within the state and guide current and future communications interoperability. According to DHS, it has worked with states to help them evaluate and improve their emergency communications abilities. DHS also helped to develop the Interoperability Continuum, which identifies five critical success elements to assist emergency response agencies and policy makers to plan and implement interoperability solutions for data and voice communications. Furthermore, DHS created guidance to ensure a consistent funding strategy for federal grant programs that allow recipients to purchase communications equipment and enhance their emergency response capabilities. As we have reported in the past, interoperability has also improved due to a variety of local technical solutions. For example, FCC established mutual aid channels, whereby specific channels are set aside for the sole purpose of connecting incompatible systems. Another local solution is when agencies maintain a cache of extra radios that they can distribute during an emergency to other first responders whose radios are not interoperable with their own. However, despite decades of effort, a significant limitation of current LMR systems is that they are not fully interoperable. One reason for the lack of interoperability is the fragmentation of spectrum assignments for public safety, since existing radios are typically unable to transmit and receive in all these frequencies. Therefore, a rural area using public safety radios operating on VHF spectrum will not be interoperable with radios used in an urban area that operate on UHF spectrum. While radios can be built to operate on multiple frequencies, which could support greater interoperability, this capability can add significant cost to the radios and thus jurisdictions may be reluctant to make such investments. In addition, public safety agencies historically have acquired communication systems without concern for interoperability, often resulting in multiple, technically incompatible radio systems. This is compounded by the lack of mandatory standards for the current LMR systems or devices. Rather, the P25 technical standards remain incomplete and voluntary, creating incompatibility among vendors’ products. Furthermore, local jurisdictions are often unable to coordinate to find solutions. Public safety communication systems are tailored to meet the unique needs of individual jurisdictions or public safety entities within a given region. As such, the groups are reluctant to give up management and control of their systems. Numerous federal entities have helped to plan and begin to define a technical framework for a nationwide public safety broadband network. In particular, FCC, DHS, and Commerce’s PSCR program, have coordinated their planning and made significant contributions by developing technical rules, educating emergency responders, and creating a demonstration network, respectively. Since 2008, FCC has: Created a new division within its PSHSB, called the Emergency Response Interoperability Center (ERIC), to develop technical requirements and procedures to help ensure an operable and interoperable nationwide network. Convened two advisory committees, the ERIC Technical Advisory Committee and the Public Safety Advisory Committee, that provide advice to FCC. The Technical Advisory Committee’s appointees must be federal officials, elected officers of state and local government, or a designee of an elected official. It makes recommendations to FCC and ERIC regarding policies and rules for the technical aspects of interoperability, governance, authentication, and national standards for public safety. ERIC’s Public Safety Advisory Committee’s members can include representatives of state and local public safety agencies, federal users, and other segments of the public safety community, as well as service providers, equipment vendors, and other industry participants. Its purpose is to make recommendations for a technical framework that will ensure interoperability on a nationwide public safety broadband network. Defined technical rules for the broadband network, including identifying LTE as the technical standard for the network, which FCC and public safety agencies believe is imperative to the goal of achieving an interoperable nationwide broadband network. In addition, FCC sought comments on other technical aspects and challenges to building the network in its most recent proceeding, which FCC hopes will further promote and enable nationwide interoperability. FCC officials said they continue to monitor the waiver jurisdictions that are developing broadband networks to ensure they are meeting the network requirements by reviewing required reports and quarterly filings. Since 2010, DHS has: Partnered with FCC, Commerce, and the Department of Justice to conduct three forums for public safety agencies and others. These forums provided insight about the needs surrounding the establishment of a public safety broadband network as they relate to funding, governance, and the broadband market. Coordinated federal efforts on broadband implementation by bringing together the member agencies of ECPC. Also, ECPC updated its grant guidance for federal grant programs to clarify that broadband deployment is an allowable expense for emergency communications grant programs. These updates could result in more federal grant funding going to support the development of a broadband network. Updated its SAFECOM program’s grant guidance targeting grant applicants to include information pertaining to broadband deployment, based on input from state and local emergency responders. Worked with public safety entities to define the LTE standard and write educational materials about the broadband network. Partnered with state and regional groups and interoperability coordinators in preparing broadband guidance documentation. Represented federal emergency responders and advocated for sharing agreements between the federal government and the PSST that will enable federal users, such as responders from the Federal Emergency Management Agency, to access the broadband network. Since 2009, PSCR has: Worked with public safety agencies to develop requirements for the network and represents their interests before standards-setting organizations to help ensure public safety needs are met. Developed a demonstration broadband network that provides a realistic environment for public safety and industry to test and observe public safety LTE requirements on equipment designed for a broadband network. According to PSCR representatives, the demonstration network has successfully brought together more than 40 vendors, including manufacturers and wireless carriers. Among many goals, PSCR aims to demonstrate to public safety how the new technology can meet their needs and encourage vendors to share information and results. FCC requires the 22 waiver jurisdictions and their vendors to participate in PSCR’s demonstration network and provide feedback on the challenges they have faced while building the network. PSCR representatives told us that the lessons learned from the waiver jurisdictions would be applied to future deployments. Tested interoperable systems and devices and provided feedback to manufacturers. Currently, there are five manufacturers working with PSCR to develop and test systems and devices. With higher data speeds than the current LMR systems, a public safety broadband network could provide emergency responders with new video and data applications that are not currently available. Stakeholders we contacted, including waiver jurisdictions, emergency responders, and federal agencies, identified transmission of video as a key potential capability. For example, existing video from traffic cameras and police car mounted cameras could provide live video feeds for dispatchers. Dispatchers could use the video to help ensure that the proper personnel and necessary equipment are being deployed immediately to the scene of an emergency. Stakeholders we contacted predict that numerous data applications will be developed once a broadband network is complete, and that these applications will have the potential to further enhance incident response. These could range from a global positioning system application that provides directions based on traffic patterns to a 3D graphical floor plan display that supports firefighters’ efforts to battle building fires. In addition, unlike the current system, a public safety broadband network could provide access to existing databases of information, such as fire response plans and mug shots of wanted criminals, which could help to keep emergency responders and the public safe. As shown in figure 3, moving from lower bandwidth voice communications to a higher bandwidth broadband network unleashes the potential for the development of a range of public safety data applications. Besides new applications, a public safety broadband network has the potential to provide nationwide access and interoperability. Nationwide access means emergency responders and other public safety officials could access their home networks from anywhere in the country, which could facilitate a better coordinated emergency response. Interoperability on a broadband network could allow emergency responders to share information irrespective of jurisdiction or type of public safety agency. For example, officials from two waiver jurisdictions indicated that forest fires are a type of emergency that brings together multiple jurisdictions, and in these situations a broadband network could facilitate sharing of response plans. However, an expert we contacted stressed that broadband applications should be tailored to the bandwidth needs of the response task. For example, responders should not use high-definition video when grainy footage would suffice to enable them to pursue a criminal suspect. A major limitation of a public safety broadband network is that it would not provide mission critical voice communications for many years. LTE, the standard FCC identified for the public safety broadband network, is a wireless broadband standard that is not currently designed to support mission critical voice communications. Commercial wireless providers are currently developing voice over LTE capabilities, but this will not meet public safety’s mission critical voice requirements because key elements needed for mission critical voice, such as push-to-talk, are not part of the LTE standard. While one manufacturer believes mission critical voice over LTE will be available as soon as 5 years, some waiver jurisdictions, experts, government officials, and others told us it will likely be 10 years or more due to the challenges described in table 3. Absent mission critical voice capabilities on a broadband network, emergency responders will continue to rely on their current LMR voice systems, meaning a broadband network would supplement, rather than replace, LMR systems for the foreseeable future. Furthermore, until mission critical voice communications exist, issues that exacerbated emergency response efforts to the terrorist attacks on September 11, 2001—in particular, that emergency responders were not able to communicate between agencies—will not be resolved by a public safety broadband network. As a result, public safety agencies will continue to use devices operating on the current LMR systems for mission critical voice communications, and require spectrum to be allocated for that purpose. Additionally, public safety agencies may be reluctant to give up their LMR devices, especially if they were costly and are still functional. As jurisdictions continue to spend millions of dollars on their LMR networks and devices, they will likely continue to rely on such communication systems until they are no longer functional. In addition to not having mission critical communications, emergency responders may only have limited access to the public safety broadband network from the interior of large buildings. While the 700 MHz spectrum provides better penetration of buildings than other bands of the spectrum, if emergency responders expect to have access to the network from inside large buildings and underground, additional infrastructure will need to be constructed. For example, antennas or small indoor cellular stations could be installed inside buildings and in underground structures to support access to the network. FCC is seeking comment on this issue as part of its most recent proceeding. Without this added infrastructure, emergency responders using the broadband network may not have access to building blue prints or fire response plans during building emergencies, such as a fire. In fact, one jurisdiction constructing a broadband network that we visited told us their network would not support in-building access in one city of the jurisdiction because the plan did not include antennas for inside the buildings. A final limitation to a public safety broadband network could be its capacity during emergencies. Emergencies tend to happen in localized areas that may be served by a single cell tower or even a single cellular antenna on a tower. With emergency responders gathering to fight a fire or other emergency, the number of responders and the types of applications in use may exceed the capacity of the network. If the network reaches capacity it could overload and might not send life saving information. Therefore, the network would have to be managed during emergencies to ensure that the most important data are being sent, which could be accomplished by prioritizing data. Furthermore, capacity could be supplemented through deployable cell sites to emergency locations. Although the federal agencies have taken important steps to advance the broadband network, challenges exist that may slow its implementation. Specifically, stakeholders we spoke with prioritized five challenges to successfully building, operating, and maintaining a public safety broadband network. These challenges include (1) ensuring interoperability, (2) creating a governance structure, (3) building a reliable network, (4) designing a secure network, and (5) determining funding sources. FCC, in its Fourth Further Notice of Proposed Rulemaking, sought comment on some of these challenges, and as explained further, the challenge of creating a governance structure has been addressed by recent law. However, the other challenges currently remain unresolved and, if left unaddressed, could undermine the development of a public safety broadband network. Ensuring interoperability. To avoid a major shortcoming of the LMR communication systems, it is essential that a public safety broadband network be interoperable across jurisdictions and devices. DHS, in conjunction with its SAFECOM program, developed the Interoperability Continuum which identifies five key elements to interoperable networks— governance, standard operating procedures, technology, training, and usage—that waiver jurisdictions and other stakeholders discussed as important to building an interoperable public safety broadband network, as shown in figure 4. For example, technology is critical to interoperability of the broadband network and most stakeholders, including public safety associations, experts, and manufacturers believe that identifying LTE as the technical standard was a good step towards interoperability. To further promote interoperability, stakeholders indicated that additional technical functionality, such as data sharing and roaming capabilities, should be part of the technical design. If properly designed to the technical standard, broadband devices will support interoperability regardless of the manufacturer. Testing devices to ensure they meet the identified standard could help eliminate devices with proprietary applications that might otherwise limit interoperability. In its Fourth Further Notice, FCC solicited input on the technical design of the network and testing of devices to ensure interoperability. Creating a governance structure. As stated previously, governance is a key element for interoperable networks. A governance authority can promote interoperability by bringing together federal, state, local, and emergency response representatives. Each of the waiver jurisdictions we contacted had identified a governance authority to oversee its broadband network. Jurisdictions we visited, as well as federal agencies, told us that any nationwide network should also have a nationwide governance entity to oversee it. Although several federal entities are involved with the planning of a public safety broadband network, at the time we conducted our work no entity had overall authority to make critical decisions for its development, construction, and operation. According to stakeholders, decisions on developing a common language for the network, establishing user rights for federal agencies, and determining network upgrades, could be managed by such an entity. Pending legislation, the Middle Class Tax Relief and Job Creation Act of 2012, establishes a First Responder Network Authority as an independent authority within NTIA and gave it responsibility for ensuring the establishment of a nationwide, interoperable public safety broadband network. Among other things, the First Responder Network Authority is required to (1) ensure nationwide standards for use and access of the network; (2) issue open, transparent, and competitive requests for proposals to private sector entities to build, operate, and maintain the network; (3) encourage that such requests leverage existing commercial wireless infrastructure to speed deployment of the network; and (4) manage and oversee the implementation and execution of contracts and agreements with nonfederal entities to build, operate, and maintain the network. Building a reliable network. A public safety broadband network must be as reliable as the current LMR systems but it will require additional infrastructure to do so. As mentioned previously, emergency responders consider the current LMR systems very reliable, in part because they can continue to work in emergency situations. Any new broadband network would need to meet similar standards but, as shown in figure 5, such a network might require up to 10 times the number of towers as the current system. This is because a public safety broadband network is being designed as a cellular network, which would use a series of low powered towers to transmit signals and reduce interference. Also, to meet robust public safety standards, each tower must be “hardened” to ensure that it can withstand disasters, such as hurricanes and earthquakes. According to waiver jurisdictions and other stakeholders, this additional infrastructure and hardening of facilities may be financially prohibitive for many jurisdictions, especially those in rural areas that currently use devices operating on VHF spectrum—spectrum that is especially well suited to rural areas because the signals can travel long distances. Designing a secure network. Secure communications are important. Designing a protected and trusted broadband network will encourage increased usage and reliance on it. Security for a public safety network will require authentication and access control. By defining LTE as the technical standard for the broadband network, a significant portion of the security architecture is predetermined because the standard governs a certain level of security. Given the importance of this issue, FCC required waiver jurisdictions to include some security features in their networks and FCC’s most recent proceeding seeks input on security issues. Furthermore, FCC’s Public Safety Advisory Committee has issued a report making several security-related recommendations. For example, it recommended that standardized security features be in place to support roaming to commercial technologies. However, one expert we contacted expressed concern that the waiver jurisdictions were not establishing sufficient network security because they had not received guidance. He believes this would result in waiver jurisdictions using security standards applied to previous networks. Determining funding sources. It is estimated that a nationwide public safety broadband network could cost up to $15 billion or more to construct, which does not take into account recurring operation and maintenance costs. As noted previously, of the 22 waiver jurisdictions, 8 have received federal grants to support deployment of a broadband network. Some of the other waiver jurisdictions have obtained limited funding from nonfederal sources, such as through issuing bonds. Several of the jurisdictions we spoke with stressed that in addition to the upfront construction costs, the ongoing costs associated with operating, maintaining, and upgrading a public safety broadband network would need to be properly funded. As previously indicated, the ECPC and SAFECOM have updated grant guidance to reflect changing technologies but this does not add additional funding for emergency communications. Rather, it defines broadband as an allowable purpose for emergency communications funding grants that may currently support the existing LMR systems. Since the LMR systems will not be replaced by a public safety broadband network, funding will be necessary to operate, maintain, and upgrade two separate communication systems. Handheld LMR devices often cost thousands of dollars, and many stakeholders, including national public safety associations, state and local public safety officials, and representatives from the telecommunications industry, attribute these high prices to limited competition. Industry analysts and stakeholders estimate that the approximately $4 billion U.S. market for handheld LMR devices consists of one manufacturer with about 75 to 80 percent market share, one or two strong competitors, and several device manufacturers with smaller shares of the market. According to industry stakeholders, competition is weak because of limited entry by device manufacturers; this may be due to (1) the market’s relatively small size and (2) barriers to entry that confront nonincumbent device manufacturers. Small size of the public safety market. The market for handheld LMR devices in the United States includes only about 2 to 3 million customers, or roughly 1 percent of the approximately 300 million customers of commercial telecommunication devices. According to an industry estimate in 2009, approximately 300,000 handheld LMR devices that are P25 compliant are sold each year. Annual sales of handheld LMR devices are small in part because of low turnover. For example, device manufacturers told us that public safety devices are typically replaced every 10 to 15 years, suggesting that less than 10 percent of handheld LMR devices are replaced annually. In contrast, industry and public safety sources indicate that commercial customers replace devices roughly every 2 to 3 years, suggesting that about 33 to 50 percent are replaced annually. Together, low device turnover and a small customer base reduce the potential volume of sales by device manufacturers, which may make the market unattractive to potential entrants. The size of the market is reduced further by the need for manufacturers to customize handheld LMR devices for individual public safety agencies. Differences in spectrum allocations across jurisdictions have the effect of decreasing the customer base for any single device. As previously discussed, public safety agencies operate on different frequencies scattered across the radio spectrum. For example, one jurisdiction may need devices that operate on 700 MHz frequencies, whereas another jurisdiction may need devices that operate on both 800 MHz and 450 MHz frequencies. Existing handheld LMR devices typically do not transmit and receive signals in all public safety frequencies. As a result, device manufacturers cannot sell a single product to customers nationwide, and must tailor devices to the combinations of frequencies in use by the purchasing agency. Barriers to entry by nonincumbent manufacturers. Device manufacturers wishing to enter the handheld LMR device market face barriers in doing so, which further limits competition. The use of proprietary technologies represents one barrier to entry. The inclusion of proprietary technologies often makes LMR devices noninteroperable with one another. This lack of interoperability makes it costly for customers to switch the brand of their devices, since doing so requires them to replace or modify older devices. These switching costs may continually compel customers to buy devices from the incumbent device manufacturer, preventing less established manufacturers from making inroads into the market. For example, in a comment filed with FCC, one of the jurisdictions we visited said that device manufacturers offer a proprietary encryption feature for free or at only a nominal cost. When a public safety agency buys devices that incorporate this proprietary encryption feature, the agency cannot switch its procurement to a different manufacturer without undertaking costly modifications to its existing fleet of devices. Switching costs are particularly high when a device manufacturer has installed a communication system that is incompatible with competitors’ devices. In this scenario, a public safety agency cannot switch to a competitor’s handheld device without incurring the cost of new equipment or a patching mechanism to resolve the incompatibility. Even where devices from different manufacturers are compatible, a fear of incompatibility may deter agencies from switching to a nonincumbent brand. According to industry stakeholders—and as we have confirmed in the past—devices marketed as P25 compliant often are not interoperable This lack of confidence in the P25 standard may encourage in practice.agencies to continue buying handheld LMR devices from their current brand, placing less established device manufacturers at a disadvantage and thus discouraging competition. At the same time that less established manufacturers are at a disadvantage, the market leader enjoys distinct “incumbency advantages.” These advantages refer to the edge that a manufacturer derives from its position as incumbent, over and above whatever edge it derives from the strength of its product: According to an industry analyst, some public safety agencies are reluctant to switch brands of handheld LMR devices because their emergency responders are accustomed to the placement of the buttons on their existing devices. According to another industry analyst, the extensive network of customer representatives that the market leader has established over time presents an advantage. According to this analyst, less established device manufacturers face difficulty winning contracts because their networks of representatives are comparatively thin. The well-recognized brand of the market leader also represents an advantage. According to one stakeholder, some agencies mistakenly believe that only the market leader is able to manufacturer devices compliant with P25, and thus conduct sole-source procurements with this manufacturer. Even where procurements are competitive, the market leader is likely to enjoy an upper hand over its competitors; according to an industry analyst, local procurement officers prefer to buy handheld LMR devices from the dominant device manufacturer because doing so is an uncontroversial choice in the eyes of their management. Competition aside, handheld LMR devices are costly to manufacture, so their prices will likely exceed prices for commercial devices regardless of how much competition exists in the market. First, this is in large part because these devices need to be reinforced for high-pressure environments. Handheld LMR devices must be able to withstand extremes of temperature as well physical stressors such as dust, smoke, impact, and immersion in water. Second, they also have much more robust performance requirements than commercial devices––including greater transmitter and battery power––to enable communication at greater ranges and during extended periods of operation. Third, the devices are produced in quantities too small to realize the cost savings of mass production. Manufacturers of commercial telecommunication devices can keep prices lower simply because of the large quantities they produce. For example, one industry stakeholder told us that economies of scale begin for commercial devices when a million or more devices are produced per manufacturing run. In contrast, LMR devices are commonly produced in manufacturing runs of 25,000 units. Fourth, the exterior of handheld LMR devices must be customized to the needs of emergency responders. For example, the buttons on these devices must be large enough to press while wearing bulky gloves. In addition, given that the P25 standard remains incomplete and voluntary, device manufacturers develop products based on conflicting interpretations of the standard, resulting in incompatibilities between their products. Stakeholders from one jurisdiction we visited said that agencies can request add-on features––such as the ability to arrange channels according to user preference or to scan for radio channels assigned for particular purposes—which fall outside the P25 standard. These features increase the degree of customization required to produce handheld LMR devices, pushing costs upward. Furthermore, public safety agencies may be unable to negotiate lower prices for handheld LMR devices because they cannot exert buying power in relationship with device manufacturers. We found that public safety agencies are not in an advantageous position to negotiate lower prices because they often request customized features and negotiate with device manufacturers in isolation from one another. According to a public safety official in one jurisdiction we contacted, each agency has unique ordinances, purchasing mechanisms, and bidding processes for devices. Because public safety agencies contract for handheld LMR devices in this independent manner, they sacrifice the quantity discounts that come from placing larger orders. Moreover, they are unlikely to know what other agencies pay for similar devices, enabling device manufacturers to offer different prices to different jurisdictions rather than set a single price for the entire market. One public safety official told us that small jurisdictions therefore pay more than larger jurisdictions for similar devices. As we have reported in the past, agencies that require similar products can combine their market power—and therefore obtain lower prices—by engaging in joint procurement.procurement at the state, regional, or national level are likely to increase the buying power of public safety agencies and help bring down prices. Therefore, wider efforts to coordinate Although these factors drive up prices in the current market for handheld LMR devices, industry observers said that many of these factors diminish in the future market for handheld broadband devices. As described earlier, FCC has mandated a commercial standard, LTE, for devices operating on the new broadband networks. The use of this standard may reduce the prevalence of proprietary features that inhibit interoperability. In addition, the new broadband networks will operate on common 700 MHz spectrum across the nation, eliminating the need to customize devices to the frequencies in use by individual jurisdictions. Together, the adoption of a commercial standard and the use of common spectrum are likely to increase the uniformity of handheld public safety devices, which in turn is likely to strengthen competition and enable the cost savings that come from bulk production. In addition, industry analysts and federal officials told us that they expect a heightened level of competition in the market for LTE devices because multiple device manufacturers are expected to develop them. Options exist to reduce prices in the market for handheld LMR devices by increasing competition and the bargaining power of public safety agencies. One option is to reduce barriers to entry into the market. As described above, less established manufacturers may be discouraged from entering the market for handheld LMR devices because of the lack of interoperability between devices produced by different manufacturers. Consistent implementation of the P25 standard would increase interoperability between devices, enabling public safety agencies to mix and match handheld LMR devices from different brands. As we have reported in the past, independent testing is necessary to ensure compliance with standards and interoperability among products.past several years, NIST and DHS have established a Compliance In the Assessment Program (CAP) for the P25 standard. CAP provides a government-led forum in which to test devices for conformance with P25 specifications. If the CAP program succeeds in increasing interoperability, it may reduce switching costs—that is, the expense of changing manufacturers—and thus may open the door to greater competition. Although CAP is a promising means to lower costs in this way, it is too soon to assess its effectiveness. A second option is for public safety agencies to engage in joint procurement to lower costs. Joint procurement of handheld LMR devices could increase the bargaining power of agencies as well as facilitate cost savings through quantity discounts. One public safety official we interviewed said that while local agencies seek to maintain control over operational matters—such as which emergency responders operate on which channels—they are likely to cede control in procurement matters if As described earlier in this report, DHS provides doing so lowers costs. significant grant funding, technical assistance, and guidance to enhance the interoperability of LMR systems. For example, as described in its January 2012 Technical Assistance Catalog, DHS’s Office of Emergency Communications supports local public safety entities to ensure that LMR design documents meet P25 specifications and are written in a vendor- neutral manner. Based on its experience in emergency communications and its outreach to local public safety representatives, DHS is positioned to facilitate and incentivize opportunities for joint procurement of handheld LMR devices. An alternative approach to fostering joint procurement is through a federal supply schedule. In 2008, the Local Preparedness Acquisition Act, Pub. L. No. 110-248, 122 Stat. 2316 (2008), gave state and local governments the opportunity to buy emergency response equipment through GSA’s Cooperative Purchasing Program. The Cooperative Purchasing Program may provide a model for extending joint procurement to state and local public safety agencies. mission critical voice. As a result, a public safety broadband network would likely supplement, rather than replace, current LMR systems for the foreseeable future. Although a public safety broadband network could enhance incident response, it would have limitations and be costly to construct. Furthermore, since the LMR systems will still be operational for many years, funding will be necessary to operate, maintain, and upgrade two separate public safety communication systems. At the time of our work, there was not an administrative entity that had the authority to plan, oversee, or direct the public safety broadband spectrum. As a result, overarching management decisions had not been made to guide the development or deployment of a public safety broadband network. According to SAFECOM’s interoperability continuum, governance structures provide a framework for collaboration and decision making with the goal of achieving a common objective and therefore foster greater interoperability. In addition to ensuring interoperability, a governance entity with proper authority could help to address the challenges identified in this report, such as ensuring the network is secure and reliable. Pending legislation, the Middle Class Tax Relief and Job Creation Act of 2012, establishes an independent authority within NTIA to manage and oversee the implementation of a nationwide, interoperable public safety broadband network. Handheld communication devices used by public safety officials can cost thousands of dollars, mostly due to limited competition and high manufacturing costs. However, public safety agencies also lack buying power vis-à-vis the device manufacturers, which may result in the agencies overpaying for the devices. In particular, since public safety agencies negotiate individually with device manufacturers, they are unlikely to know what other agencies pay for comparable devices and they sacrifice the increased bargaining power and economies of scale that accompany joint purchasing. Especially in rural areas, public safety agencies may be overpaying for handheld devices. We have repeatedly recommended joint procurement as a cost saving measure for situations where agencies require similar products because it allows them to combine their market power and lower their procurement costs. Given that DHS has expertise in emergency communications and relationships with local public safety representatives, we believe it is well-suited to facilitate opportunities for joint procurement of handheld communication devices. To help ensure that public safety agencies are not overpaying for handheld communication devices, the Secretary of Homeland Security should work with federal and state partners to identify and communicate opportunities for joint procurement of public safety LMR devices. We provided a draft of this report to Commerce, DHS, the Department of Justice, and FCC for their review and comment. In the draft report we sent to the agencies, we included a matter for congressional consideration for ensuring that a public safety broadband network has adequate direction and oversight, such as by creating a governance structure that gives authority to an entity to define rules and develop a plan for the overarching management of the network. As a result of pending legislation that addresses this issue, we removed the matter for congressional consideration from the final report. Commerce provided written comments, reprinted in appendix III, in which it noted that NIST and NTIA will continue to collaborate with and support state, local, and tribal public safety agencies and other federal agencies to help achieve effective and efficient public safety communications. In commenting on the draft report, DHS concurred with our recommendation that it should work with federal and state partners to identify and communicate opportunities for joint procurement of public safety LMR devices. While DHS noted that this recommendation will not likely assist near-term efforts to implement a public safety broadband network, assisting efforts for the broadband network was not the intention of the recommendation. Rather, we intended this recommendation to help ensure that public safety agencies do not overpay for handheld LMR devices by encouraging joint procurement. DHS suggested in response to our recommendation that a GSA solution may be more appropriate than DHS contracting activity. Although we recognize that a GSA solution is one possibility for joint procurement of handheld LMR devices, other opportunities and solutions might exist. We believe DHS, based on its experience in emergency communications and its outreach to state and local public safety representatives, is best suited to identify such opportunities and solutions for joint procurement and communicate those to the public safety agencies. In its letter, DHS also noted that it continues to work with federal, state, local, and private-sector partners to facilitate the deployment of a nationwide public safety broadband network, and stressed that establishing an effective governance structure is crucial to ensuring interoperability and effective use of the network. DHS’s written comments are reprinted in appendix IV. Commerce, DHS, the Department of Justice, and FCC provided technical comments on the draft report, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Homeland Security, the Attorney General, the Secretary of Commerce, the Chairman of FCC, and appropriate 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) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Contact information and major contributors to this report are listed on appendix V. This report examines current communication systems used by public safety and issues surrounding the development of a nationwide public safety broadband network. Specifically, we reviewed (1) the resources that have been provided for current public safety communication systems and their capabilities and limitations, (2) how a nationwide public safety broadband network is being planned and its anticipated capabilities and limitations, (3) the challenges to building a nationwide public safety broadband network, and (4) the factors that influence competition and cost in the development of public safety communication devices and the options that exist to reduce prices. To address all objectives, we conducted a literature review of 43 articles from governmental and academic sources on public safety communications. We reviewed these articles and recorded relevant evidence in workpapers, which informed our report findings. To identify existing studies, we conducted searches of various databases, such as EconLit, ProQuest, Academic OneFile, and Social SciSearch. We also pursued a snowball technique—following citations from relevant articles— to find other relevant articles and asked external researchers that we interviewed to recommend additional studies. These research methods produced 106 articles for initial review. We vetted this initial list by examining summary level information about each piece of literature, giving preference to articles that appeared in peer-reviewed journals and were germane to our research objectives. As a result, the 43 studies that we selected for our review met our criteria for relevance and quality. For the 13 articles related to our fourth objective—factors that affect competition and cost in the market for public safety communication devices—a GAO economist performed a secondary review and confirmed the relevance to our objective. Articles were then reviewed and evidence captured in workpapers. The workpapers were then reviewed for accuracy of the evidence gathered. We performed these searches and identified articles from June 2011 to September 2011. We also interviewed government officials or stakeholders in 6 of the 22 jurisdictions that are authorized to build early public safety broadband networks and obtained information concerning each objective. In particular, we obtained information concerning their current communication systems and its capabilities, including any funding received to support the current network. We discussed their plan for building a public safety broadband network and the challenge they had faced thus far, including the role each thought the federal government should play in developing a network. We also discussed their views on the communication device market and the factors shaping the market. We selected jurisdictions to contact based on three criteria: (1) whether the jurisdiction received grant funds from the National Telecommunications and Information Administration (NTIA) to help build the network, (2) whether the planned network would be a statewide or regional network, and (3) geographic distribution across the nation. Table 4 lists the jurisdictions we selected based on these criteria. We selected jurisdictions based on NTIA grant funding because these jurisdictions had received the most significant federal funds dedicated towards developing a broadband network. Other jurisdictions either had not identified any funding or applied smaller grant funding that was not primarily targeted at emergency communications. We selected the size of the network, statewide or regional, to determine if challenges differed based on the size of the network and the number of entities involved. Finally, we selected sites based on the geographic region to get a geographic mix of jurisdictions from around the country. In jurisdictions that received NTIA funding, we met with government officials and emergency responders. In jurisdictions that did not receive NTIA funding we met with the government officials since the network had not progressed as much. To determine the resources that have been provided for current public safety communication systems, we reviewed Federal Communications Commission (FCC) data on spectrum allocations for land mobile radio (LMR) systems. In addition, we reviewed relevant documentation and interviewed officials from offices within the Departments of Commerce (Commerce), Homeland Security (DHS), and Justice that administer grant programs or provide grants that identify public safety communications as an allowable expense. We selected these agencies to speak with because they had more grant programs providing funds or were regularly mentioned in interviews as providing funds for public safety communications. We also reviewed documents from agencies, such as the Departments of Agriculture and Transportation, which similarly operate grant programs that identify public safety communications as an allowable expense. The grants were identified by DHS’s SAFECOM program as grants that can support public safety communications. To identify the capabilities and limitations of current public safety communication systems, we reviewed relevant congressional testimonies, academic articles on the capabilities and limitations of LMR networks, and relevant federal agency documents, including DHS’s National Emergency Communications Plan. We interviewed officials from three national public safety associations—the Association of Public-Safety Communications Officials (APCO), National Public Safety Telecommunications Council (NPSTC), and the Public Safety Spectrum Trust (PSST)—as well as researchers and consultants referred to us for their knowledge of public safety communications and identified during the literature review process. To determine the plans for a nationwide public safety broadband network and its expected capabilities and limitations, we reviewed relevant congressional testimonies and academic articles on services and applications likely to operate on a public safety broadband network, the challenges to building, operating, and maintaining a network. We interviewed officials from APCO, NPSTC, and PSST, as well as researchers and consultants who specialize in public safety communications to understand the potential capabilities of the network. In addition, we reviewed FCC orders and notices of proposed rulemaking relating to broadband for public safety, as well as comments on this topic submitted to FCC. To determine the federal role in the public safety broadband network, we interviewed multiple agencies involved in planning this network. Within FCC, we interviewed officials from the Public Safety and Homeland Security Bureau (PSHSB), the mission of which is to ensure public safety and homeland security by advancing state-of-the-art communications that are accessible, reliable, resilient, and secure, in coordination with public and private partners. Within Commerce, we interviewed officials from NTIA and the National Institute of Standards and Technology (NIST), two agencies that develop, test, and advise on broadband standards for public safety. We also interviewed officials from the Public Safety Communications Research (PSCR) program, a joint effort between NIST and NTIA that works to research, develop, and test public safety communication technologies. Within DHS, we interviewed officials from the Office of Emergency Communications (OEC) and the Office of Interoperability and Compatibility (OIC), two agencies that provide input on the public safety broadband network through their participation on interagency coordinating bodies. To determine the technological, historical, and other factors that affect competition in the market for public safety devices, as well as what options exist to reduce the cost of these devices, we reviewed the responses to FCC’s notice seeking comment on competition in public safety communications technologies. In addition, we reviewed our prior reports and correspondence on this topic between FCC and the House of Representatives Committee on Energy and Commerce that occurred in June and July of 2010 and April and May of 2011. We also conducted an economic literature review that included 13 academic articles examining markets for communications technology and, in particular, how issues of standards, compatibility, bundling, and price discrimination affect entry and competition in these markets. These articles provided a historical and theoretical context for communication technology markets, which helped shape our findings. We asked about factors affecting the price of public safety devices, as well as how to reduce these prices, during our interviews with national public safety organizations, local and regional public safety jurisdictions, and the federal agencies we contacted during our audit work. We also interviewed two researchers specifically identified for their knowledge of communication equipment markets based on their congressional testimony or publication history. In addition, we interviewed representatives from four companies that produce public safety devices or network components, as well as two financial analysts who track the industry. We conducted this performance audit from March 2011 to February 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. SAFECOM, a program administered by DHS, has identified federal grant programs across nine agencies, including the Departments of Agriculture, Commerce, Education, Health and Human Services, Homeland Security, Interior, Justice, Transportation, and the U.S. Navy that allow grant funds to fund public safety emergency communications efforts. These grants include recurring grants that support emergency communications, research grants that fund innovative and pilot projects, and past grants that may be funding ongoing projects. While the funding from these grants can support emergency communications, the total funding reported does not mean it was all spent on emergency communications. We provided the amounts of the grants and the years funded when this information was available. Two agencies within Commerce—NTIA and NIST—administer grants that allow funds to be directed towards public safety emergency communications (see table 5). Two agencies within DHS administer grants that allow funds to be directed towards public safety emergency communications—the Federal Emergency Management Agency (FEMA) and the Science and Technology Directorate. Another agency, OEC, has administered one such grant program. Furthermore, DHS maintains an authorized equipment list to document equipment eligible for purchase under its grant programs, including interoperable communications equipment.(See table 6.) Two offices within Department of Justice, the Community Oriented Policing Services (COPS) and the Office of Justice Programs (OJP), administer grants that allow funds to be directed towards public safety emergency communications (see table 7). Six additional federal agencies administer grants that can fund public safety emergency communications, including the Departments of Agriculture (USDA), Transportation (DOT), Health and Human Services (HHS), Education, Interior, and the U.S. Navy (see table 8). In addition to the contact named above, Sally Moino, Assistant Director; Namita Bhatia-Sabharwal; Dave Hooper; Eric Hudson; Josh Ormond; Bonnie Pignatiello Leer; Ellen Ramachandran; Andrew Stavisky; Hai Tran; and Mindi Weisenbloom made significant contributions to this report. Emergency Communications: National Communications System Provides Programs for Priority Calling, but Planning for New Initiatives and Performance Measurement Could Be Strengthened. GAO-09-822. Washington, D.C.: August 28, 2009. Emergency Communications: Vulnerabilities Remain and Limited Collaboration and Monitoring Hamper Federal Efforts. GAO-09-604. Washington, D.C.: June 26, 2009. First Responders: Much Work Remains to Improve Communications Interoperability. GAO-07-301. Washington, D.C.: April 2, 2007. Homeland Security: Federal Leadership and Intergovernmental Cooperation Required to Achieve First Responder Interoperable Communications. GAO-04-740. Washington, D.C.: July 20, 2004. Project SAFECOM: Key Cross-Agency Emergency Communications Effort Requires Stronger Collaboration. GAO-04-494. Washington, D.C.: April 16, 2004. Homeland Security: Challenges in Achieving Interoperable Communications for First Responders. GAO-04-231T. Washington, D.C.: November 6, 2003.

Emergency responders across the nation rely on land mobile radio (LMR) systems to gather and share information and coordinate their response efforts during emergencies. These public safety communication systems are fragmented across thousands of federal, state, and local jurisdictions and often lack “interoperability,” or the ability to communicate across agencies and jurisdictions. To supplement the LMR systems, in 2007, radio frequency spectrum was dedicated for a nationwide public safety broadband network. Presently, 22 jurisdictions around the nation have obtained permission to build public safety broadband networks on the original spectrum assigned for broadband use. This requested report examines (1) the investments in and capabilities of LMR systems; (2) plans for a public safety broadband network and its expected capabilities and limitations; (3) challenges to building this network; and (4) factors that affect the prices of handheld LMR devices. GAO conducted a literature review, visited jurisdictions building broadband networks, and interviewed federal, industry, and public safety stakeholders, as well as academics and experts. After the investment of significant resources—including billions of dollars in federal grants and approximately 100 megahertz of radio frequency spectrum—the current land mobile radio (LMR) systems in use by public safety provide reliable “mission critical” voice capabilities. For public safety, mission critical voice communications must meet a high standard for reliability, redundancy, capacity, and flexibility. Although these LMR systems provide some data services, such as text and images, their ability to transmit data is limited by the channels on which they operate. According to the Department of Homeland Security (DHS), interoperability among LMR systems has improved due to its efforts, but full interoperability of LMR systems remains a distant goal. Multiple federal entities are involved with planning a public safety broadband network and while such a network would likely enhance interoperability and increase data transfer rates, it would not support mission critical voice capabilities for years to come, perhaps even 10 years or more. A broadband network could enable emergency responders to access video and data applications that improve incident response. Yet because the technology standard for the proposed broadband network does not support mission critical voice capabilities, first responders will continue to rely on their current LMR systems for the foreseeable future. Thus, a broadband network would supplement, rather than replace, current public safety communication systems. There are several challenges to implementing a public safety broadband network, including ensuring the network’s interoperability, reliability, and security; obtaining adequate funds to build and maintain it; and creating a governance structure. For example, to avoid a major shortcoming of the LMR systems, it is essential that a public safety broadband network be interoperable across jurisdictions and devices by following five key elements to interoperable networks: governance, standard operating procedures, technology, training, and usage. With respect to creating a governance structure, pending legislation—the Middle Class Tax Relief and Job Creation Act of 2012, among other things—establishes a new entity, the First Responder Network Authority, with responsibility for ensuring the establishment of a nationwide, interoperable public safety broadband network. The price of handheld LMR devices is high—often thousands of dollars—in part because market competition is limited and manufacturing costs are high. Further, GAO found that public safety agencies cannot exert buying power in relationship to device manufacturers, which may result in the agencies overpaying for LMR devices. In particular, because public safety agencies contract for LMR devices independently from one another, they are not in a strong position to negotiate lower prices and forego the quantity discounts that accompany larger orders. For similar situations, GAO has recommended joint procurement as a cost saving measure because it allows agencies requiring similar products to combine their purchase power and lower their procurement costs. Given that DHS has experience in emergency communications and relationships with public safety agencies, it is well-suited to facilitate joint procurement of handheld LMR devices. The Department of Homeland Security (DHS) should work with partners to identify and communicate opportunities for joint procurement of public safety LMR devices. In commenting on a draft of this report, DHS agreed with the recommendation. GAO also received technical comments, which have been incorporated, as appropriate, in the report.

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

You are an expert at summarizing long articles. Proceed to summarize the following text: This section describes (1) the operation and regulation of the electricity system and (2) advances in technologies available to customers that allow them to generate, store, and manage their consumption of electricity. The electricity system involves four distinct functions: electricity generation, electricity transmission, electricity distribution, and grid operations. As shown in figure 1, electricity is generated at power plants, from which it flows over high-voltage, long-distance transmission lines to transformers that convert it to a lower voltage to be sent through a local distribution system for use by residential and other customers. Because electricity is not typically stored in large quantities, grid operators constantly balance the generation and consumption of electricity to maintain reliability. In addition, electricity suppliers sell electricity to residential and other customers. Continuously balancing the generation and consumption of electricity can be challenging for grid operators because customers may use sharply different amounts of electricity over the course of a day and throughout the year. For example, in many areas, customer demand for electricity rises throughout the day and reaches its highest point, or peak demand, in late afternoon or early evening (see figure 2 for an example of how demand changes throughout the day). As we noted in a prior report, throughout the day, grid operators direct power plants to adjust their output to match changes in demand for electricity. Grid operators typically first use electricity produced by the power plants that are least expensive to operate; operators then increase the use of electricity generated by more expensive power plants, as needed to match increases in electricity demand. As a result, providing electricity to meet peak demand is generally more expensive than during other parts of the day, because to do so, grid operators use power plants that are more expensive to operate. In general, grid operators perform planning to ensure that grid infrastructure has sufficient capacity—the maximum capability in megawatts to generate and transmit electricity—to meet future peak demand, as we found in our review of reports from DOE and industry sources. To accomplish this, grid operators typically develop forecasts of future electricity demand based on historical information about customer electricity use combined with assumptions about how customer demand will change in the future based on population growth, economic conditions, and other factors. In general, grid operators assess the adequacy of existing grid infrastructure, identify any capacity needs, and evaluate the cost and effectiveness of potential solutions to address these needs. Potential solutions could include building a power plant to generate additional electricity, building a new transmission line to transport electricity to an area with estimated high future electricity demand, or implementing a program to encourage customers in a high- demand area to use less electricity. Responsibility for regulating the electricity industry is divided between the states and the federal government. Most customers purchase electricity through retail markets. State regulators, often called public utility commissions, generally oversee these markets and the prices retail customers pay for electricity (see sidebar). Before electricity is sold to retail customers, it may be bought, sold, and traded in wholesale electricity markets. The Federal Energy Regulatory Commission (FERC), which oversees wholesale electricity markets, among other things, has statutory responsibility for ensuring that wholesale electricity prices are just and reasonable, and not unduly discriminatory or preferential. Technological innovation in recent years has led to the development and increased availability of new and more advanced technologies that can be deployed where customers live and that give customers greater control over how they use electricity. These technologies can be deployed by customers, electricity suppliers, or third-party providers—independent entities that sell specific products and services to customers. Figure 3 illustrates the deployment of these technologies at a residence. Distributed generation systems. Distributed generation systems are relatively small-capacity electricity generation systems, such as those installed at residences or other customer locations throughout the grid, generally at or near the site where the electricity will be used. A common type of distributed generation system is a solar system, such as solar photovoltaic panels installed on a roof. Solar systems installed at a customer’s location allow the customer to generate electricity for their own use and send excess electricity to the grid that electricity suppliers can use to meet other customers’ electricity needs. Solar systems utilize inverters—devices installed with the system to convert the electricity it generates into a form usable by the customer and the grid. Advanced meters and associated infrastructure. Advanced or “smart” meters are deployed at residences and other customers’ locations by grid operators to allow them to collect data on customers’ electricity use at more frequent intervals than is possible with traditional meters. Advanced meters are integrated with communications networks to transmit meter data to grid operators. This integration can reduce or eliminate the need for grid operator personnel to read meters at a customer’s location. Data management systems store, process, and receive data from advanced meters. Certain advanced meters can be enabled to communicate directly with customers’ smart devices by sending information, such as electricity prices, that these devices use to take actions such as reducing consumption. Distributed storage systems. Distributed storage systems—such as batteries located at homes—allow customers to store electricity from the grid or from a distributed generation system for use at a later time. For example, customers with distributed storage systems may store electricity produced from an on-site solar system during the day when their electricity consumption is lower than the amount of electricity the solar system produces. Customers may then use this stored electricity generated by the solar system later in the day, for example, during peak demand periods. Electricity management technologies. Smart devices—such as smart thermostats, smart appliances, and electric vehicles with automated charging controls—contain electronics capable of automatically adjusting electricity consumption. Smart devices may be controlled by energy management systems that allow customers to automate control of their devices and respond to changing grid conditions. For example, customers could choose to program their electric vehicle to charge at night to avoid charging during peak demand periods. Federal and state policymakers have used a variety of policies to encourage deployment of solar systems, advanced meters, and other residential electricity storage and management technologies. Specifically, policymakers have used (1) federal financial incentives and state electricity policies to encourage residential deployment of solar systems; (2) federal grants and state requirements to encourage residential deployment of advanced meters; and (3) federal and state financial incentives and state deployment targets to encourage residential deployment of electricity storage and management technologies. Federal and state policymakers have used financial incentives and other policies to encourage residential deployment of solar systems. Many of these policies shorten the expected payback period of solar systems—the period of time it takes customers to realize savings equal to the cost of installation. These policies typically do so by reducing the up-front costs of installation or by increasing the level of expected savings from the system. At the federal level, the government has established tax incentives encouraging residential deployment of solar systems. For example, the Investment Tax Credit provides a tax credit, equal to 30 percent of the cost of installing a solar system, to the owner—either a customer that owns the system or third-party provider that installs and owns the system on behalf of a customer. This tax credit can generally be claimed in full in the tax year during which the system is completed, allowing the customer to immediately offset a large portion of the installation costs. Data are not available on the amount of revenue losses attributable to the use of the federal tax credits for residential solar systems. However, the federal government is expected to forgo billions of dollars in tax revenue as a result of individuals and corporations claiming federal tax credits for installing solar systems and other renewable energy technologies. At the state level, policymakers have used several types of policies to encourage residential deployment of solar systems. Net metering policies. Net metering policies implemented by state regulators generally require electricity suppliers to offer net metering programs that credit customers for the electricity they send to the grid from their solar or other distributed generation system. As of July 2016, 41 states had established policies that require electricity suppliers to offer net metering programs to electricity customers, according to the Database of State Incentives for Renewables and Efficiency. Under net metering programs, electricity suppliers generally subtract the amount of electricity customers send to the grid from the amount of electricity they purchase from the grid to determine the net amount of electricity for which customers are billed. This reduces or in some cases eliminates customers’ payments for electricity they obtain from the grid. Net metering programs can provide more value for customers who pay high electricity prices because these programs often credit customers for electricity they send to the grid at the same retail price they pay to purchase electricity from the grid. For example, a customer facing an electricity price of 23 cents per kWh would receive a $23 bill credit for each 100 kWh increment of electricity sent to the grid, whereas a customer facing a price of 10 cents per kWh would be credited $10 for sending the same amount of electricity to the grid. Policies allowing third-party-owned solar systems. Some states have adopted policies that make it possible for third-party providers to install solar systems, which the providers own and operate, on residential customers’ private homes—thereby allowing solar systems to be deployed on the homes of customers who could not otherwise pay the up-front costs of installing the systems. Under these arrangements, the third-party provider pays to install the solar system, and the customer agrees to buy electricity generated by the solar system or to make lease payments on the system to the third-party provider. As of July 2016, at least 26 states authorized third-party providers to enter into agreements to sell electricity in this way to homeowners, according to the Database of State Incentives for Renewables and Efficiency. Third-party providers may be able to obtain federal tax incentives that are not available to individual homeowners, in addition to claiming the federal Investment Tax Credit. These tax benefits may be passed through, in part, to residential customers in the form of lower prices for electricity purchased from the solar system or more favorable system lease terms. Incentives. State financial incentives encourage the residential deployment of solar systems by offsetting some of the up-front cost of deploying the systems. For example, as of October 2016, 14 states provided personal tax credits for installing solar systems, according to the Database of State Incentives for Renewables and Efficiency. In addition to tax incentives, states can provide grants, loans, or other financial support to individuals who install solar systems. For example, the California Public Utilities Commission reported that from 2007 to 2016, the California Solar Initiative made available more than $2 billion for a program that funded rebates to residential and other customers who installed solar systems. Other policies. States have established several other types of policies to encourage the deployment of residential solar systems, as we found in our review of stakeholder reports and the Database of State Incentives for Renewables and Efficiency. These policies are described in table 1. Federal policymakers have used grants, and state policymakers have used requirements and regulatory decisions, to encourage residential deployment of advanced meters. At the federal level, DOE reported that it provided more than $3.4 billion in grants through its Smart Grid Investment Grant program from 2009 through 2015 for upgrades to the electricity grid, including the deployment of advanced meters. In addition, DOE provided about $600 million through its Smart Grid Demonstration Program for demonstration projects that involved innovative applications of existing and emerging grid technologies and concepts, which supported some additional advanced meter deployments. At the state level, policymakers in some states have enacted policies that require regulated grid operators to deploy advanced meters at residences and other customer locations or to file deployment plans with regulators, according to an EIA analysis. For example, the California Public Utilities Commission established a requirement that the three grid operators it regulates install advanced meters at customers’ residences; the commission also authorized the operators to recover associated deployment costs through increased retail electricity prices. In addition, DOE officials told us that regulators in some states have approved proposals from the grid operators they regulate to install advanced meters and recover the costs of installation from customers. However, some state regulators do not have jurisdiction over all grid operators in their state, such as those that are municipally owned; as a result, state regulatory policies may not affect the deployment of advanced meters by all grid operators in a state. Federal and state policymakers have used financial incentives, and state policymakers have used deployment targets, to encourage residential deployment of electricity storage and management technologies. The federal government has provided incentives to promote these technologies, though federal support for these technologies has been more limited than federal support for advanced meters and solar systems. For example, DOE funding through both the Smart Grid Investment Grant program and Smart Grid Demonstration Program provided some support for the installation of smart devices, including thermostats that can receive price and other data from electricity suppliers. Furthermore, customers who install residential storage systems potentially are eligible for the Investment Tax Credit when they use the storage system to store energy from their solar system; however, there is no federal tax incentive for stand-alone storage systems. Additionally, customers who purchase a qualifying electric vehicle potentially can receive a federal tax credit of $2,500 plus an additional credit depending on the size of the vehicle’s battery. Electric vehicles are primarily used for transportation, but potentially can also be used as an electricity storage and management technology. At the state level, we identified examples of state policies that have encouraged the deployment of electricity storage and management technologies, based on interviews with stakeholders and our review of state documentation. For example, in 2013, the California Public Utilities Commission set targets for the electricity suppliers that it regulates to procure about 1.3 gigawatts of storage capacity by 2020; this includes procuring capacity from distributed storage systems installed by residential and other customers. In 2012, California’s governor issued an executive order focused on reducing greenhouse gas emissions that established a target of having more than 1.5 million zero-emission vehicles—including electric vehicles—on the road in the state by 2025. In addition, the New York State Energy Research and Development Authority partnered with an electricity supplier in the state to provide residential and other customers with a financial incentive of $2.10 per watt for distributed storage systems installed and operational before June 1, 2016 in order to reduce the electricity supplier’s peak demand. The deployment of solar systems and advanced meters has increased, especially in some states, but other technologies have not been as widely deployed. Specifically, our analysis of EIA data indicated that the deployment of residential solar systems has increased significantly in some states, but residential solar systems account for a small portion of nationwide electricity generation. Additionally, our analysis of EIA data indicated that advanced meters have been widely deployed among residential customers in some states, and the use of advanced meters has increased nationwide. However, available information suggests that residential electricity storage and management technologies have not been widely deployed. Residential customers increasingly deployed solar systems from 2010 through 2015. Specifically, the total number of residential electricity customers with solar systems increased sevenfold over this period, according to EIA data. Despite this significant increase, our analysis of EIA data found that only about 0.7 percent of all residential customers nationwide had installed solar systems in 2015. In addition, residential solar generation was low overall, accounting for approximately 0.1 percent of nationwide electricity generation, according to our analysis of EIA estimates. At the state level, every state experienced increases in the number of residential customers with solar systems from 2010 through 2015, but certain states accounted for most of the growth, according to EIA data. For example, during this period, more residential customers in California installed solar systems than customers in any other state. Furthermore, California, together with nine other states, accounted for nearly all of the increase in the number of customers with solar systems. The three states with the highest proportion of residential customers with solar systems in 2015 were Hawaii, with more than 14 percent; California, with 4 percent; and Arizona, with 3 percent. These three states had state or local policies that encouraged the installation of solar systems. These policies included net metering policies and policies that allow residential customers to purchase power from third parties that install solar systems on customers’ roofs, among others. Figure 4 shows data from EIA on the number of customers who installed solar systems and the systems’ total electricity generation capacity from 2010 through 2015. In addition to identifying the aforementioned federal and state policies to encourage the deployment of residential solar systems, we identified through our review of reports and discussions with stakeholders that other factors—such as increased efficiency, declining system costs, and high electricity prices—also contributed to the deployment of residential solar systems in some states. The efficiency of solar photovoltaic panels has substantially increased across a broad range of manufacturers and panel types over the past several decades, according to a National Renewable Energy Laboratory analysis. As a result, similarly sized panels can produce more electricity, improving the cost effectiveness of systems because customers may need to purchase and install fewer panels to achieve a desired amount of electricity generation. Additionally, recent decreases in the costs of solar systems have made them more economical for residential customers nationwide. DOE’s Lawrence Berkeley National Laboratory reported that the national median price to install a residential solar system has decreased since 1998, with the most rapid declines occurring after 2009. (See fig. 5 below.) Based on these data, a 6-kilowatt residential solar system that would have cost about $51,000 in 2009 cost approximately $25,000 in 2015. High electricity prices in some states also contributed to increasing solar system deployment, according to several stakeholders we interviewed, including electricity suppliers. Solar systems produce savings for customers when the cost of the electricity that the systems generate is lower than the cost of electricity that customers would otherwise have purchased from the grid. Generally, the higher the retail price for grid electricity, the more likely it is that a solar system will be cost effective for customers, according to stakeholders we interviewed. For example, in 2015, Hawaii had the highest retail electricity price for residential customers—29.6 cents per kWh, compared to the national average of 12.7 cents per kWh. Hawaii also had the highest proportion of customers that deployed residential solar systems, with more than 14 percent of residential customers having systems by the end of 2015. Grid operators widely deployed advanced meters among residential customers in some states from 2007 through 2015, according to EIA data. Nationwide, according to EIA data, the number of advanced meters installed at residences grew 26-fold in recent years, from 2 million meters in 2007 to 57 million meters (43 percent of all residential meters) in 2015. However, as of 2015, levels of advanced meter deployment at residences varied substantially by state, as shown in figure 6. Some states that have experienced widespread deployment of advanced meters—such as California, Maine, and Vermont—had established policies requiring or encouraging grid operators to deploy meters. For example, in California, about 99 percent of the residential meters installed by the state’s three regulated grid operators were advanced meters, as of 2015, according to EIA data. Other states, such as New York and Rhode Island, had virtually no advanced meter deployment. In addition to the aforementioned federal and state policies to encourage the deployment of advanced meters, stakeholders we interviewed told us that the economic benefits of installing meters also contributed to their deployment. For example, advanced meters allow electricity suppliers to use fewer personnel and other resources for on-site meter reading. In one case, representatives from a rural cooperative electricity supplier in Arizona said that they began installing some form of advanced meters about 15 years ago, largely because on-site meter readings for their dispersed customer base were time consuming and costly. These representatives said that all of their approximately 40,000 customers now have advanced meters. Residential electricity storage and management technologies have not been widely deployed, according to electricity suppliers we interviewed and available data from EIA; however, comprehensive data on their deployment were not available. Residential deployment of distributed storage systems, such as battery storage systems, has been limited, according to representatives from several electricity suppliers we interviewed, although comprehensive data on the deployment of these systems were not available. For example, representatives from one electricity supplier we interviewed said that as of May 2016, there were 72 customers with residential storage systems in their service territory of more than 1 million customers. Similarly, residential deployment of other technologies that can manage electricity consumption—such as smart thermostats, smart appliances, and electric vehicles—is limited, according to several electricity suppliers we interviewed. Comprehensive data are not available on the extent to which residential customers have deployed these electricity management technologies. However, available data from EIA indicate that certain electricity management technologies are becoming increasingly available. Specifically, the number of electric vehicles available for sale has increased from almost none in 2010 to more than 90,000 in 2014, according to EIA data. Several stakeholders told us that several factors have kept the deployment of these technologies low. These factors include high up-front costs for technologies such as distributed storage systems, which can cost a few thousand dollars per system. In addition, as discussed later in this report, customers may have limited opportunities to receive electricity bill savings that offset these up-front costs. Solar systems, advanced meters, and electricity storage and management technologies could increase the efficiency of grid operations, but the increasing deployment of residential solar systems has begun to pose challenges for grid management in some areas. Policymakers have implemented or are considering measures to maximize the potential benefits and mitigate the potential challenges associated with the increasing deployment of these technologies. Solar systems, advanced meters, and electricity storage and management technologies have the potential to lead to more efficient grid operations by enabling individual customers to generate, store, and manage their consumption of electricity in response to conditions on the grid, as we found in our analysis of reports and stakeholder interviews. For example, the supply of electricity must constantly be balanced with demand for electricity, and customers can use these technologies to decrease individual consumption of electricity from the grid when demand is high and increase consumption when demand is low. More efficient grid operations can reduce the cost of producing electricity and reduce the need for investments in additional generation, transmission, and distribution infrastructure, according to several reports we reviewed. Some of these cost savings can result in lower consumer prices. These technologies can provide additional benefits, such as potentially reducing greenhouse gas and other harmful emissions. Several grid operators we interviewed identified various factors that could affect the extent to which these benefits are realized, including where technologies are located, how they are operated, and variations in conditions on the grid, among others. Below we highlight several potential benefits associated with solar systems, advanced meters, and other electricity storage and management technologies identified in our review of reports and interviews with stakeholders: Solar systems. Several reports we reviewed and stakeholders we interviewed identified examples of how residential solar systems can help make grid operations more efficient. For example, in some locations, electricity generated by solar systems can reduce peak demand for electricity from the grid, which can lower electricity costs. Additionally, because these systems generate electricity near the point where it is consumed, they can potentially reduce how much electricity grid operators have to transmit to customers, which can help defer the need to upgrade distribution or transmission lines, thus avoiding potential cost increases for customers. In addition, grid operators and third-party providers told us that improvements in solar system technologies, such as advanced inverters, may create additional ways for solar systems to increase the efficiency of grid operations. Advanced inverters have a variety of potentially useful functions, including the ability to adjust a solar system’s electricity output. Grid operators can use these functions to help balance moment-to-moment changes in electricity demand. In addition, according to several reports we reviewed, solar systems generate electricity without producing greenhouse gas emissions or other harmful pollutants, and electricity generated by these systems can offset the need for electricity generated by power plants that emit these pollutants. Advanced meters. Advanced meters can improve the efficiency of grid operations by providing grid operators with better information on grid conditions and by enabling customers to manage their generation, storage, and consumption of electricity in ways that align with grid conditions, as we found in examples provided during interviews with several stakeholders and in reports we reviewed. According to DOE officials, advanced meters can provide more detailed information about grid conditions by, for example, notifying grid operators when individual customers have lost electricity service. This information helps grid operators identify and remedy outages in a more timely manner. In addition, advanced meter data collection and communications capabilities, when enabled, can help customers better manage their electricity consumption in ways that align with grid conditions, such as by reducing electricity consumption during peak demand periods. Specifically, advanced meters measure customer electricity consumption data at shorter intervals than traditional meters, and this more detailed information can help customers better understand and adjust their electricity consumption patterns. Additionally, certain advanced meters can communicate information on grid conditions (e.g. periods of high demand) directly to smart devices that can automatically modify their electricity consumption (e.g. by reducing consumption during these periods of high demand). Electricity storage and management technologies. Technologies that enable customers to store electricity and manage their electricity consumption could help improve the efficiency of grid operations, among other benefits, according to reports we reviewed and stakeholders we interviewed. In particular, customers could use technologies, such as smart thermostats and possibly electric vehicles, to modify their electricity consumption in response to the overall demand for electricity from the grid. For example, a customer could program a smart thermostat to reduce electricity consumption when demand for electricity is high. Likewise, storage systems can store electricity generated at times of low demand for use when demand is high. These systems also can provide other benefits to individual customers, such as giving customers a temporary source of backup electricity in the event of an outage. Using multiple residential technologies in combination increases the potential to improve the efficiency of grid operations, according to stakeholders we interviewed and reports we reviewed. For example, while a solar system could reduce demand during peak periods, several grid operators we interviewed told us that peak demand in their service areas occurs in the evening, when solar systems generate little or no electricity. However, a solar system combined with a storage system could store electricity generated during the day for use in the evening, when the demand for electricity is high. In addition, smart devices provide customers with the flexibility to shift their consumption to periods when a solar system is producing electricity so they can make full use of the electricity the system generates. Several grid operators we interviewed told us they have begun to experience grid management and other challenges in some areas as deployment of residential solar systems increases, but they said these challenges generally have been manageable because overall deployment of these systems has been low. Several stakeholders we interviewed identified various factors that could affect the extent to which these challenges occur, including where solar systems are located, how they are operated, and variations in conditions on the grid, among others. Several stakeholders also identified similar challenges potentially posed by other residential technologies, although these technologies have not been widely deployed. The challenges we identified in our analysis of reports we reviewed and in the views of stakeholders and federal officials we interviewed include the following: Limited information. Several grid operators we interviewed told us that they typically only have information on customers’ net consumption of electricity from the grid, and they generally do not know (1) how much electricity is being generated by a customer’s residential solar system or (2) how much total electricity is being consumed at a customer’s location. According to these grid operators, such information is important to effectively manage grid operations and meet customers’ total electricity needs at all times. For instance, during periods when a solar system is not producing electricity, such as when clouds or snow prevent sunlight from reaching solar panels, customers may be forced to shift from relying on their solar system to relying on the grid to meet their total electricity needs. For areas with high deployment of residential solar systems, this lack of information can contribute to uncertainty about how best to prepare for and respond to changes in electricity demand, which can, in turn, result in higher costs for customers, as we found in our review of reports. For example, grid operators may need to pay for a greater number of flexible, fast-starting power plants to be on standby to account for changes in demand. If operators had better information, they might not need to have as many plants on standby. Having a greater number of fast-starting plants on standby can raise operating costs, which operators can pass on to all customers in the form of higher electricity bills. Representatives from the transmission system operator in California told us that they also lack information about the electricity usage patterns of electricity storage and management technologies, such as storage systems and customer smart devices. This lack of information could further complicate grid operation and planning if the technologies are added to the grid in increasing numbers. Limited control. Grid operators generally do not control where residential solar systems are installed or how much electricity these systems produce and when. The installation of solar systems is generally based on customers’ preferences, while the amount of electricity that solar systems generate is generally based on the amount of usable sunlight available to the systems. In contrast, grid operators generally control the level of electricity generated by power plants and, in many regions, plan for the types of power plants that are built and where they are located. According to several reports we reviewed, the lack of grid operators’ control over solar systems’ output can present challenges to these operators and result in additional costs if solar systems’ locations and electricity output do not align with grid conditions. For example, according to representatives from a grid operator in Hawaii, high concentrations of residential solar systems in some neighborhoods sent more electricity to the grid than the distribution infrastructure in those neighborhoods was designed to accommodate. These representatives said that this resulted in the need to upgrade the distribution infrastructure to increase the amount of electricity it could accommodate from solar systems; these upgrades in turn resulted in additional costs for customers. In addition, according to representatives from two grid operators we interviewed, a lack of control over rooftop solar systems has, in some circumstances, resulted in the operators reducing the amount of electricity generated by large, renewable power plants under their control, even though electricity from these larger renewable power plants is less expensive to procure than the electricity that grid operators purchase from residential solar systems. Furthermore, the location and operation of other residential technologies—such as storage systems and smart devices—are not controlled by grid operators. Based on our review of several reports, these technologies could mitigate or exacerbate operational challenges depending on how well their use aligns with grid conditions. Lower revenues for electricity suppliers. Under the traditional business model, electricity suppliers earn revenue when they sell electricity to customers. Customers who install solar systems use less electricity from the grid, and this decline in usage can reduce electricity supplier revenues, according to several reports we reviewed. In addition, net metering policies under which electricity suppliers credit customers for the electricity these customers send to the grid can reduce electricity supplier revenues. Lower consumption of electricity from the grid may produce some cost savings for suppliers (e.g. reduced fuel consumption). However, several electricity suppliers we interviewed told us that many of their costs—such as costs associated with investments they previously made to build and maintain power plants and transmission and distribution lines—are fixed in the short term and will not decline even if solar customers use less electricity from the grid. To the extent that reduced electricity supplier revenues exceed any cost savings from customers’ use of solar systems, suppliers may collect insufficient revenues to cover the costs of operating and maintaining the grid, and they may earn a lower financial return, as we found in our review of reports from DOE national laboratories and other stakeholders. Our review of these sources also found electricity storage and management technologies could exacerbate challenges related to lower revenues, for example, if storage systems facilitate further reductions in customers’ use of electricity from the grid. According to several reports we reviewed from multiple sources, the greater use of residential storage and electricity management technologies—particularly storage systems— in combination with significantly expanded deployment of solar systems, could lead to a cycle of reduced electricity consumption, declining supplier revenues, and increasing electricity prices, potentially creating long-term financial challenges for electricity suppliers. Cost shifts among customers. If electricity suppliers collect revenues that are insufficient to cover the costs of operating and maintaining the grid, as a result of lower electricity consumption from customers who have solar systems, some of these costs could be shifted to non-solar customers, according to several reports we reviewed and stakeholders we interviewed. Several electricity suppliers we interviewed expressed concern about cost shifts. Two suppliers told us that while cost shifts had been negligible with low levels of deployment, increasing deployment has made cost shifts more significant. According to an electricity supplier in Arizona, as reported in a 2013 filing to the state regulator, an average of $1,000 in costs per net-metered solar system per year were shifted from residential customers with net-metered solar systems to customers without such systems. This resulted in a shift of an estimated $18 million in total annual costs. Another Arizona electricity supplier told us that in its service territory, costs were often shifted from wealthier customers, who could afford to install residential solar systems, to lower-income customers, such as customers on tribal reservations. Nevertheless, according to several reports we reviewed, solar systems can provide benefits to the grid and society, as well as result in financial savings for other customers. Recent estimates of the specific costs and benefits of solar systems have varied widely, according to a DOE national laboratory report we reviewed; these variations have led to differing estimates of the potential cost shifts some customers may face. Increasing complexity of electricity industry oversight. The increasing deployment of solar systems may increase the complexity of overseeing the electricity industry, according to our analysis of reports and the views of stakeholders we interviewed. For example, increases in residential customers’ deployment of solar systems may affect electricity transmission system operations. Residential solar systems, when installed in large enough numbers within a geographic area, can generate electricity that moves onto the transmission system, according to two reports we reviewed. In areas with high solar system deployment, grid reliability problems could cause a large number of these systems to disconnect from the grid at the same time. Such an occurrence could, in turn, cause a rapid drop in the amount of electricity being sent to the grid from these systems and make it challenging for transmission grid operators to maintain the reliable operation of the grid. The installation of residential solar systems is subject to state oversight, while the reliability of the transmission system is subject to FERC oversight. This may complicate oversight and operation of the transmission system as additional solar and other residential technologies are added to the grid. In addition, once solar systems are installed, FERC-regulated transmission system operators generally do not have information and control over the solar systems’ operation. Representatives from DOE told us that electricity storage and management technologies also increase the complexity of electricity industry oversight. Policymakers in some states and the federal government are considering measures designed to maximize the potential benefits of advanced meters, solar systems, and residential electricity storage and management technologies, while mitigating the potential challenges, based on our analysis of reports and the views of stakeholders we interviewed. For example, based on our review, policymakers are considering measures in several key areas: Prices for electricity purchased from the grid. Policymakers in several states have implemented or are considering measures to change how customers pay for electricity in order to increase the efficiency of grid operations and provide electricity suppliers with sufficient revenues to maintain the grid. For example, time-based prices—prices that vary throughout the day with demand—can be used to encourage customers to manage their electricity consumption in a way that aligns with conditions on the grid. Specifically, time- based prices are higher when demand for electricity is high and lower when demand for electricity is low, which can encourage customers to shift their electricity consumption from high to low demand times (see sidebar on the following page). However, in 2004, we found that most customers faced unchanging electricity prices, which limited their incentive to respond to changing grid conditions. According to EIA data, as of 2015, only five percent of residential electricity customers nationwide paid time-based electricity prices. Several state regulators recently have allowed electricity suppliers to adopt voluntary time- based prices, and regulators in other states are considering this approach. In addition to time-based prices, policymakers in several states have adopted policies that periodically and automatically adjust customers’ electricity prices to ensure that electricity suppliers earn sufficient revenue to cover the costs of operating and maintaining the grid and that they earn a rate of return allowed by state regulators. These policies can make electricity suppliers less dependent on selling a specific amount of electricity, because the suppliers earn the same amount of revenue regardless of how much electricity they sell. However, according to two electricity suppliers and a state regulator we interviewed, while such policies help ensure electricity suppliers receive sufficient revenue even as solar systems reduce the amount of electricity that customers purchase, they do not necessarily address concerns about cost shifts among customers. Retail electricity prices historically have been designed to reflect the average cost of serving customers (see dotted line above) for an extended period, up to a year or more, as we found in past GAO work and stakeholder reports. However, as we previously reported, prices also can be designed to vary with the cost of serving retail customers. These time- based prices can be designed in different ways to align with grid conditions, such as in the time-of-use pricing plan illustrated above. With time-based prices, customers can achieve bill savings by shifting their electricity use from high-cost times to low-cost times. For example, a storage system could be used to store electricity from the grid during times when prices are lower and discharge the stored electricity when prices are higher. Similarly, smart appliances could be programmed to operate during periods when electricity costs are relatively low. Compensation for electricity sent to the grid. In order to mitigate challenges related to reduced electricity supplier revenues and cost shifts among customers, among other challenges, policymakers in several states have begun to implement or are considering measures to change how customers are compensated for the electricity they generate and send to the grid. In making this determination, policymakers have considered the benefits that solar systems and other technologies provide as well as any costs that result from the installation of solar systems, among other factors. In October 2015, in Hawaii—a state with high deployment of solar systems and high retail electricity prices—the Hawaii Public Utility Commission closed the state’s existing net metering program to new participants and established options for new solar systems, including reducing the price customers would be paid for the electricity they send to the grid. The Commission stated that this would allow the state’s electricity suppliers to procure electricity in a more cost-effective manner and reduce electricity costs for all customers. Policymakers in other states have made different decisions about whether and how to modify compensation for electricity sent to the grid based on their assessment of the benefits and costs of distributed solar systems in their states. For example, in California, state regulators made changes to the state’s net metering policy that will compensate new solar customers for the electricity they send to the grid at a price that varies throughout the day based on overall customer electricity demand. Grid planning. Policymakers in several states are beginning to implement or are considering measures to incorporate solar and electricity storage and management technologies into grid planning. In particular, state regulators in California and New York have developed policies requiring regulated electricity suppliers in their states to analyze the grid and identify areas where customer deployment of solar systems and electricity storage and management technologies could provide the greatest benefit, given local grid conditions. Locating combined solar and storage systems in areas where peak demand is projected to exceed the grid’s capacity to transmit electricity to customers generally would be more beneficial than locating such a system in an area with ample grid capacity, as we found in our review of reports. For the long term, regulators in New York are considering how prices for electricity could be modified to encourage customers to locate and operate technologies in a way that is most beneficial for grid operation, given conditions throughout the grid, according to state documents we reviewed. Furthermore, according to one stakeholder report we reviewed, electricity prices could be modified to vary by both time and location to provide customers with an economic signal about variations in grid conditions. In addition, some regional transmission operators are beginning to incorporate into their grid planning processes estimates of the future deployment of solar systems, in an effort to identify the extent to which these systems will reduce future demand for electricity from the grid. Technology and data solutions. Policymakers at the state and federal levels are considering measures to mitigate challenges associated with grid operators’ limited information about and lack of control over solar systems as well as to facilitate the greater use of data from advanced meters. For example, efforts are ongoing to develop industry standards to facilitate the development and use of advanced inverters that could provide grid operators with more information about solar systems’ electricity generation as well as provide them with some control over these systems’ electricity output. Some states—such as California and Hawaii—have begun to develop policies to use advanced inverters for future solar systems that are connected to the grid. Additionally, in 2012, DOE helped launch the Green Button initiative to encourage grid operators to provide customers with electricity usage data from advanced meters in a standardized format. Such standardized data formats allow third- party providers to more easily develop products—such as electricity management software that can control smart devices—and help customers manage their electricity consumption in ways that align with conditions on the grid, according to our review of reports. The role of the electricity supplier. Policymakers in some states are considering whether the increasing use of solar systems and electricity storage and management technologies necessitate policy changes to ensure electricity suppliers remain financially viable and able to support the reliable operation of the grid. Specifically, some policymakers are considering changes to how electricity suppliers operate and generate revenue, including developing new sources of revenue. For example, according to a publication from the New York State Energy Planning Board, the current business model for electricity suppliers needs reform to ensure electricity suppliers can accommodate and adapt to greater deployment of solar systems and electricity storage and management technologies. As one component of a broad strategy of energy reforms, the New York State Department of Public Service has approved several demonstration projects to identify, among other things, new revenue sources for electricity suppliers. For example, one project involves an electricity supplier in the state administering a website that provides customers with electricity management information and access to third-party providers that sell electricity management products and services. Among other things, this project will evaluate various new sources of revenue for electricity suppliers, such as earning a percentage of revenues from sales of products and services made through this website. Regulatory coordination. Developing some measures to maximize the benefits and mitigate the challenges associated with the increasing deployment of advanced meters, solar systems, and electricity storage and management technologies may require coordination between federal and state regulators, as well as others, based on our review of information in reports and the views of stakeholders we interviewed. For example, as we noted in a 2004 report, the actions customers take in response to retail electricity prices can affect the electricity markets under FERC jurisdiction. In recommendations we made in 2004, we emphasized that FERC should continue to coordinate with states and other industry stakeholders to develop complementary policies related to electricity prices. Furthermore, according to DOE officials, among other things, it may be increasingly necessary to integrate electricity distribution and transmission system planning processes and for grid operators and regulators to collaborate to ensure that such technologies do not adversely affect the reliable operation of the transmission system. FERC officials we interviewed agreed that some opportunities exist for FERC and the states to collaborate as technology deployment increases, and they told us that FERC has some mechanisms to achieve such collaboration. Specifically, FERC officials told us that FERC collaborates with the states on issues of emerging interest in a variety of formal and informal settings. We provided a draft copy of this report to DOE and FERC for review and comment. DOE and FERC did not provide written comments or indicate their agreement or disagreement with our findings but provided technical comments, which we incorporated as appropriate. As agreed upon with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Energy, the Chairman of FERC, 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 III. This report examines technologies available to residential customers to generate, store, and manage their consumption of electricity. These technologies include distributed generation systems (e.g. solar systems), advanced meters, distributed storage systems, and electricity management technologies (e.g. electric vehicles and smart devices). Our objectives were to describe (1) key federal and state policies used to encourage the deployment of these technologies, (2) the extent to which these technologies are being deployed, and (3) the benefits and challenges of deploying these technologies. To address all three of these objectives, we reviewed reports and other documentation, as well as interviewed stakeholders. We identified relevant reports by conducting database and web searches and through suggestions from the stakeholders we interviewed. Specifically, we searched sources including Proquest, Inspec, SciSearch, among others, and the websites of national laboratories and organizations focused on electricity industry research. We selected 20 reports for in-depth review based on their relevance to the residential sector, a focus on commercially available technologies included in our scope, and the source of the report, including the perspective represented by that source. We selected studies from academics and research institutions, such as the Department of Energy’s (DOE) national laboratories, as well as studies from industry and other stakeholder groups representing different views. These reports were published from 2013 through 2016. The team also reviewed other documentation, including state regulatory filings made by electricity suppliers, key policy decisions by state and federal regulators, and reports on specific topics relevant to our work. In addition, we interviewed officials and representatives from 46 government agencies and stakeholder groups. In particular, we interviewed federal officials from DOE, the National Renewable Energy Laboratory, the Lawrence Berkeley National Laboratory, the Federal Energy Regulatory Commission, the Department of the Treasury, and the Internal Revenue Service. Furthermore, we selected stakeholders that provided single-state, regional, and national perspectives based on their experience with the deployment and use of relevant technologies and with policies related to these technologies, and the extent to which the group represented a diversity of perspectives. To select stakeholders representing single-state perspectives, we used EIA data to identify states that had high deployments of relevant technologies and reviewed state policymaking activity related to these technologies. We selected a non-generalizable sample of five states that have been actively addressing issues related to these technologies: Arizona, California, Hawaii, Minnesota, and New York. We interviewed state regulators and at least one electricity supplier in each state, and, in some cases, additional stakeholders such as state energy departments and consumer advocates. We identified additional stakeholders representing multi-state perspectives through our research, using our past work, and by considering suggestions from other stakeholders. We selected these additional stakeholders to represent different perspectives and experiences and to maintain balance with respect to stakeholders’ roles in the market. The stakeholders included industry associations, third-party providers (e.g. solar installers and software vendors), consumer advocacy organizations, academics, electricity suppliers, non-governmental organizations, and regional transmission organizations. Because this was a nonprobability sample of 46 government agencies and stakeholders, views are not generalizable to all potential government agencies and stakeholders. (For a list of stakeholders interviewed, see Appendix II). Throughout the report, we use the indefinite quantifier “several” when three or more stakeholder and literature sources combined supported a particular idea or statement. Our review of policies to encourage deployment focused on methods of direct policy support for the deployment of these technologies, as opposed to research and development activities. In addition, our review did not consider cybersecurity issues or standards for technology interoperability. To describe the deployment of technologies by residential customers to generate, store, and manage their consumption of electricity, we obtained and analyzed data from the Energy Information Administration’s (EIA) survey of electricity suppliers collected on EIA’s Form 861. Specifically, we merged data sets on advanced meters, net metering, demand response, distributed generation, dynamic pricing, and retail sales from 2007 through 2015. We calculated yearly totals for key variables, including: number of advanced meters, number of customers receiving daily access to electricity consumption data, number of residential customers with distributed generation under net metering agreements, and generating capacity of residential customers with distributed generation under net metering agreements, among others. In addition, we calculated percentages to determine the level of deployment, such as the percentage of advanced meters out of all meters and the percentage of residential customers with distributed generation, such as residential solar systems, among others. We analyzed these figures at the national, state, and electricity supplier levels for each year in which data were available. We also obtained and analyzed other data, including: 1) EIA 886 survey data on electric vehicles to determine trends of electric vehicles becoming available in the marketplace each year, 2) EIA estimates of average residential retail electricity prices by state, and 3) EIA estimates on national solar generation by sector. Some technologies, such as battery storage and smart devices, did not have readily available, comprehensive data on deployment. We took several steps to assess the reliability of EIA data. We reviewed relevant documentation, interviewed EIA representatives, reviewed the data for outliers, and addressed outliers through discussions with EIA representatives. In addition, we reviewed available documentation on the Database of State Incentives for Renewables and Efficiency and gathered additional information about the data-gathering practices from knowledgeable representatives at the North Carolina Clean Energy Technology Center, which maintains the database. We determined the data were sufficiently reliable for the purposes of this report. We conducted this performance audit from September 2015 to February 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. In addition to the contact named above, Jon Ludwigson (Assistant Director), Eric Charles, Paige Gilbreath, and Miles Ingram made key contributions to this report. Important contributions were also made by Antoinette Capaccio, John Delicath, Cindy Gilbert, Michael Kendix, Gregory Marchand, MaryLynn Sergent, Maria Stattel, Sara Sullivan, and Barbara Timmerman.

Traditionally, electricity has moved in one direction—from electricity suppliers to customers. Today, solar systems allow electricity to be generated at a customer's home and sent to the grid for electricity suppliers to use to meet other customers' electricity needs. Storage systems allow residential customers to store electricity from the grid or their own solar system for use at a later time. Furthermore, customers can use smart devices, such as thermostats, to manage their electricity consumption. GAO was asked to provide information on the deployment and use of technologies that give customers the ability to generate, store, and manage electricity. This report describes (1) key federal and state policies used to encourage the deployment of these technologies, (2) the extent to which these technologies are being deployed, and (3) the benefits and challenges of deploying these technologies. GAO analyzed available data on technology deployment from EIA and reviewed relevant reports and regulatory documents. GAO interviewed a non-generalizable sample of 46 government agencies and stakeholder organizations. This sample included state regulators and at least one electricity supplier from each of five states: Arizona, California, Hawaii, Minnesota, and New York, which were selected based on state policies and having high levels of technology deployment. GAO is not making recommendations in this report. Federal and state policymakers have used a range of policies to encourage the deployment of solar systems and other technologies that allow residential customers to generate, store, and manage their electricity consumption. For example, federal tax incentives—such as the investment tax credit—have reduced customers' up-front costs of installing solar systems. In addition, a Department of Energy funded database of renewable energy incentives identifies 41 states with net metering policies that require electricity suppliers to credit customers for electricity sent from their solar systems to the grid, providing an additional incentive. Moreover, in 14 states, customers can also receive state tax credits for installing solar systems, according to the database, which further reduces the up-front costs. According to GAO's analysis of Energy Information Administration (EIA) data, deployment of solar systems has increased significantly in some states, with the total number of residential customers with solar systems increasing sevenfold from 2010 to 2015. However, customers with solar systems represent a very small portion of overall electricity customers—about 0.7 percent of U.S. residential customers in 2015, according to EIA data. Every state experienced growth in the number of customers with residential solar systems, although certain states, such as California and Hawaii, accounted for most of the growth and have had more widespread deployment. For example, about 14 percent of residences in Hawaii have installed a solar system, according to EIA data. Although comprehensive data on the deployment of electricity storage systems and smart devices are not available, the data and information provided by stakeholders GAO interviewed suggest their deployment is limited. The increasing residential deployment of solar systems and other technologies poses potential benefits and challenges, and some policymakers have implemented or are considering measures to address these, as GAO found in its analysis of reports and stakeholder interviews. Specifically, these technologies can provide potential benefits through more efficient grid operation, for example, if customers use these technologies to reduce their consumption of electricity from the grid during periods of high demand. Nonetheless, grid operators GAO interviewed said they have begun to confront grid management and other challenges in some areas as solar deployment increases. For example, in some areas of Hawaii, solar systems have generated more electricity than the grid was built to handle, which resulted in the need for infrastructure upgrades in these areas. However, grid operators reported that challenges generally have been manageable because overall residential solar deployment has been low. Policymakers in some states have implemented or are considering measures to maximize potential benefits and mitigate potential challenges associated with the increasing deployment of these technologies. For example, two states' regulators have required electricity suppliers to identify areas of the grid where solar and other technologies would be most beneficial to grid operation. In addition, several state regulators recently have allowed electricity suppliers to adopt voluntary time-based electricity prices that increase when demand for electricity is high, providing customers with an incentive to reduce consumption at these times, potentially by using solar, storage, and other technologies.

You are an expert at summarizing long articles. Proceed to summarize the following text: National security threats have evolved and require involvement beyond the traditional agencies of DOD, the Department of State, and USAID. The Departments of Homeland Security, Energy, Justice, the Treasury, Agriculture, Commerce, and Health and Human Services are now a bigger part of the equation. What has not yet evolved are the mechanisms that agencies use to coordinate national security activities such as developing overarching strategies to guide planning and execution of missions, or sharing and integrating national security information across agencies. The absence of effective mechanisms can be a hindrance to achieving national security objectives. Within the following key areas, a number of challenges exist that limit the ability of U.S. government agencies to work collaboratively in responding to national security issues. Our work has also identified actions that agencies can take to enhance collaboration. Although some agencies have developed or updated overarching strategies on national security-related issues, our work has identified cases where U.S. efforts have been hindered by the lack of information on roles and responsibilities of organizations involved or the lack of mechanisms to coordinate their efforts. National security challenges covering a broad array of areas, ranging from preparedness for an influenza pandemic to Iraqi governance and reconstruction, have necessitated using all elements of national power—including diplomatic, military, intelligence, development assistance, economic, and law enforcement support. These elements fall under the authority of numerous U.S. government agencies, requiring overarching strategies and plans to enhance agencies’ abilities to collaborate with each other. Strategies can help agencies develop mutually reinforcing plans and determine activities, resources, processes, and performance measures for implementing those strategies. The Government Performance and Results Act (GPRA) provides a strategic planning and reporting framework intended to improve federal agencies’ performance and hold them accountable for achieving results. Effective implementation of GPRA’s results-oriented framework requires, among other things, that agencies clearly establish performance goals for which they will be held accountable, measure progress towards those goals, and determine strategies and resources to effectively accomplish the goals. Furthermore, defining organizational roles and responsibilities and mechanisms for coordination in these strategies can help agencies clarify who will lead or participate in which activities and how decisions will be made. It can also help them organize their individual and joint efforts, and address how conflicts would be resolved. Our prior work, as well as that by national security experts, has found that strategic direction is required as a foundation for collaboration toward national security goals. We have found that, for example, in the past, multiple agencies, including the State Department, USAID, and DOD, led separate efforts to improve the capacity of Iraq’s ministries to govern, without overarching direction from a lead entity to integrate their efforts. Since 2007, we have testified and reported that the lack of an overarching strategy contributed to U.S. efforts not meeting the goal for key Iraqi ministries to develop the capacity to effectively govern and assume increasing responsibility for operating, maintaining, and further investing in reconstruction projects. We recommended that the Department of State, in consultation with the Iraqi government, complete an overall strategy for U.S. efforts to develop the capacity of the Iraqi government. State recognized the value of such a strategy but expressed concern about conditioning further capacity development investment on completion of such a strategy. Moreover, our work on the federal government’s pandemic influenza preparedness efforts found that the Departments of Homeland Security and Health and Human Services share most federal leadership roles in implementing the pandemic influenza strategy and supporting plans; however, we reported that it was not clear how this would work in practice because their roles are unclear. The National Strategy for Pandemic Influenza and its supporting implementation plan describes the Secretary of Health and Human Services as being responsible for leading the medical response in a pandemic, while the Secretary of Homeland Security would be responsible for overall domestic incident management and federal coordination. However, since a pandemic extends well beyond health and medical boundaries—to include sustaining critical infrastructure, private-sector activities, the movement of goods and services across the nation and the globe, and economic and security considerations—it is not clear when, in a pandemic, the Secretary of Health and Human Services would be in the lead and when the Secretary of Homeland Security would lead. This lack of clarity on roles and responsibilities could lead to confusion or disagreements among implementing agencies that could hinder interagency collaboration. Furthermore, a federal response could be slowed as agencies resolve their roles and responsibilities following the onset of a significant outbreak. We have also issued reports recommending that U.S. government agencies, including DOD, the State Department, and others, develop or revise strategies to incorporate desirable characteristics for strategies for a range of programs and activities. These include humanitarian and development efforts in Somalia, the Trans-Sahara Counterterrorism Partnership, foreign assistance strategy, law enforcement agencies’ role in assisting foreign nations in combating terrorism, and meeting U.S. national security goals in Pakistan’s Federally Administered Tribal Areas. In commenting on drafts of those reports, agencies generally concurred with our recommendations. Officials from one organization—the National Counterterrorism Center—noted that at the time of our May 2007 report on law enforcement agencies’ role in assisting foreign nations in combating terrorism, it had already begun to implement our recommendations. Organizational differences—including differences in agencies’ structures, planning processes, and funding sources—can hinder interagency collaboration. Agencies lack adequate coordination mechanisms to facilitate this collaboration during planning and execution of programs and activities. U.S. government agencies, such as the Department of State, USAID, and DOD, among others, spend billions of dollars annually on various diplomatic, development, and defense missions in support of national security. Achieving meaningful results in many national security– related interagency efforts requires coordinated efforts among various actors across federal agencies; foreign, state, and local governments; nongovernment organizations; and the private sector. Given the number of agencies involved in U.S. government national security efforts, it is important that there be mechanisms to coordinate across agencies. Without such mechanisms, the results can be a patchwork of activities that waste scarce funds and limit the overall effectiveness of federal efforts. A good example of where agencies involved in national security activities define and organize their regions differently involves DOD’s regional combatant commands and the State Department’s regional bureaus. Both are aligned differently in terms of the geographic areas they cover, as shown in figure 1. As a result of differing structures and areas of coverage, coordination becomes more challenging and the potential for gaps and overlaps in policy implementation is greater. Moreover, funding for national security activities is budgeted for and appropriated by agency, rather than by functional area (such as national security), resulting in budget requests and congressional appropriations that tend to reflect individual agency concerns. Given these differences, it is important that there be mechanisms to coordinate across agencies. In addition to regional bureaus, the State Department is organized to interact through U.S. embassies located within other countries. As a result of these differing structures, our prior work and that of national security experts has found that agencies must coordinate with a large number of organizations in their regional planning efforts, potentially creating gaps and overlaps in policy implementation and leading to challenges in coordinating efforts among agencies. Given the differences among U.S. government agencies, developing adequate coordination mechanisms is critical to achieving integrated approaches. In some cases, agencies have established effective mechanisms. For example, DOD’s U.S. Africa Command had undertaken efforts to integrate personnel from other U.S. government agencies into its command structure because the command is primarily focused on strengthening security cooperation with African nations and creating opportunities to bolster the capabilities of African partners, which are activities that traditionally require coordination with other agencies. However, in other cases, challenges remain. For example, we reported in May 2007 that DOD had not established adequate mechanisms to facilitate and encourage interagency participation in the development of military plans developed by the combatant commanders. Furthermore, we noted that inviting interagency participation only after plans have been formulated is a significant obstacle to achieving a unified government approach in the planning effort. In that report, we suggested that Congress require DOD to develop an action plan and report annually on steps being taken to achieve greater interagency participation in the development of military plans. Moreover, we reported in March 2010 that DOD has many strategy, policy, and guidance documents on interagency coordination of its homeland defense and civil support mission; however, DOD entities do not have fully or clearly defined roles and responsibilities because key documents are outdated, are not integrated, or are not comprehensive. More specifically, conflicting directives assigned overlapping law enforcement support responsibilities to three different DOD entities, creating confusion as to which DOD office is actually responsible for coordinating with law enforcement agencies. DOD’s approach to identifying roles and responsibilities and day-to-day coordination processes could also be improved by providing relevant information in a single, readily-accessible source. This source could be accomplished through a variety of formats such as a handbook or a Web-based tool and could provide both DOD and other agencies a better understanding of each other as federal partners and enable a unified and institutionalized approach to interagency coordination. We recommended, and DOD agreed, that the department update and integrate its strategy, policy, and guidance; develop a partner guide; and implement key practices for management of homeland defense and civil support liaisons. We have reported other instances in which mechanisms are not formalized or fully utilized. For example, we found that collaboration between DOD’s Northern Command and an interagency planning team on the development of the command’s homeland defense plan was largely based on the dedicated personalities involved and informal meetings. Without formalizing and institutionalizing the interagency planning structure, we concluded efforts to coordinate may not continue when personnel move on to their next assignments. We made several recommendations, and DOD generally concurred, that the department take several actions to address the challenges it faces in its planning and interagency coordination efforts. In recent years we have issued reports recommending that the Secretaries of Defense, State, and Homeland Security and the Attorney General take a variety of actions to address creating collaborative organizations, including taking actions to provide implementation guidance to facilitate interagency participation and develop clear guidance and procedures for interagency efforts, develop an approach to overcome differences in planning processes, create coordinating mechanisms, and clarify roles and responsibilities. In commenting on drafts of those reports, agencies generally concurred with our recommendations. In some cases, agencies identified planned actions to address the recommendations. For example, in our April 2008 report on U.S. Northern Command’s plans, we recommended that clear guidance be developed for interagency planning efforts, and DOD stated that it had begun to incorporate such direction in its major planning documents and would continue to expand on this guidance in the future. Federal agencies do not always have the right people with the right skills in the right jobs at the right time to meet the challenges they face, to include having a workforce that is able to quickly address crises. As the threats to national security have evolved over the past decades, so have the skills needed to prepare for and respond to those threats. To effectively and efficiently address today’s national security challenges, federal agencies need a qualified, well-trained workforce with the skills and experience that can enable them to integrate the diverse capabilities and resources of the U.S. government. Our work has found that personnel often lack knowledge of the processes and cultures of the agencies with which they must collaborate. Some federal government agencies lack the personnel capacity to fully participate in interagency activities and some agencies do not have the necessary capabilities to support their national security roles and responsibilities. For example, in June 2009, we reported that DOD lacks a comprehensive strategic plan for addressing its language skills and regional proficiency capabilities. Moreover, as of September 2009, we found that 31 percent of the State Department’s generalists and specialists in language-designated positions did not meet the language requirements for their positions, an increase from 29 percent in 2005. Similarly, we reported in September 2008 that USAID officials at some overseas missions told us that they did not receive adequate and timely acquisition and assistance support at times, in part because the numbers of USAID staff were insufficient or because the USAID staff lacked necessary competencies. We also reported in February 2009 that U.S. Africa Command has faced difficulties integrating interagency personnel into its command. According to DOD and Africa Command officials, integrating personnel from other U.S. government agencies is essential to achieving Africa Command’s mission because it will help the command develop plans and activities that are more compatible with those agencies. However, the State Department, which faced a 25 percent shortfall in midlevel personnel, told Africa Command that it likely would not be able to fill the command’s positions due to personnel shortages. DOD has a significantly larger workforce than other key agencies involved in national security activities as shown in figure 2. Furthermore, agencies’ personnel systems often do not recognize or reward interagency collaboration, which could diminish agency employees’ interest in serving in interagency efforts. In June 2009 we reviewed compensation policies for six agencies that deployed civilian personnel to Iraq and Afghanistan, and reported that variations in policies for such areas as overtime rate, premium pay eligibility, and deployment status could result in monetary differences of tens of thousands of dollars per year. The Office of Personnel Management acknowledged that laws and agency policy could result in federal government agencies paying different amounts of compensation to deployed civilians at equivalent pay grades who are working under the same conditions and facing the same risks. In another instance, we reported in April 2009 that officials from the Departments of Commerce, Energy, Health and Human Services, and the Treasury stated that providing support for State Department foreign assistance program processes creates an additional workload that is neither recognized by their agencies nor included as a factor in their performance ratings. Various tools can be useful in helping agencies to improve their ability to more fully participate in collaboration activities. For example, increasing training opportunities can help personnel develop the skills and understanding of other agencies’ capabilities. We have previously testified that agencies need to have effective training and development programs to address gaps in the skills and competencies that they identified in their workforces. Moreover, we issued a report in April 2010 on DOD’s Horn of Africa task force, which found that DOD personnel did not always understand U.S. embassy procedures in carrying out their activities. This resulted in a number of cultural missteps in Africa because personnel did not understand local religious customs and may have unintentionally burdened embassies that must continuously train new staff on procedures. We recommended, and DOD agreed, that the department develop comprehensive training guidance or a program that augments personnel’s understanding of African cultural awareness and working with interagency partners. Training and developing personnel to fill new and different roles will play a crucial part in the federal government’s endeavors to meet its transformation challenges. Also, focusing on strategic workforce planning can support agencies’ efforts to secure the personnel resources needed to collaborate in interagency missions. We have found that tools like strategic workforce planning and human capital strategies are integral to managing resources as they enable an agency to define staffing levels, identify critical skills needed to achieve its mission, and eliminate or mitigate gaps between current and future skills and competencies. In recent years we have recommended that the Secretaries of State and Defense, the Administrator of USAID, and the U.S. Trade Representative take a variety of actions to address the human capital issues discussed above, such as staffing shortfalls, training, and strategic planning. Specifically, we have made recommendations to develop strategic human capital management systems and undertake strategic human capital planning, include measurable goals in strategic plans, identify the appropriate mix of contractor and government employees needed and develop plans to fill those needs, seek formal commitments from contributing agencies to provide personnel to meet interagency personnel requirements, develop alternative ways to obtain interagency perspectives in the event that interagency personnel cannot be provided due to resource limitations, develop and implement long-term workforce management plans, and implement a training program to ensure employees develop and maintain needed skills. In commenting on drafts of those reports, agencies generally concurred with our recommendations. In some cases, agencies identified planned actions to address the recommendations. For example, in our April 2009 report on foreign aid reform, we recommended that the State Department develop a long-term workforce management plan to periodically assess its workforce capacity to manage foreign assistance. The State Department noted in its comments that it concurred with the idea of further improving employee skill sets and would work to encourage and implement further training. U.S. government agencies do not always share relevant information with their national security partners due to a lack of clear guidelines for sharing information and security clearance issues. The timely dissemination of information is critical for maintaining national security. Federal, state, and local governments and private-sector partners are making progress in sharing terrorism-related information. For example, we reported in October 2007 that most states and many local governments had established fusion centers—collaborative efforts to detect, prevent, investigate, and respond to criminal and terrorist activity—to address gaps in information sharing. However, we found that non-DOD personnel could not access some DOD planning documents or participate in planning sessions because they may not have had the proper security clearances. Moreover, because of concerns about agencies’ ability to protect shared information or use that information properly, other agencies and private- sector partners may be hesitant to share information. For example, we have reported that Department of Homeland Security officials expressed concerns about sharing terrorism-related information with state and local partners because such information had occasionally been posted on public Internet sites or otherwise compromised. To facilitate information sharing, it is important to establish clear guidelines, agreements, and procedures that govern key aspects, such as how information will be communicated, who will participate in interagency information sharing efforts, and how information will be protected. When agencies do share information, managing and integrating information from multiple sources presents challenges regarding redundancies in information sharing, unclear roles and responsibilities, and data comparability. For example, we reported in December 2008 that in Louisiana, reconstruction project information had to be repeatedly resubmitted separately to state and Federal Emergency Management Agency officials during post-Hurricane Katrina reconstruction efforts because the system used to track project information did not facilitate the exchange of documents. Information was sometimes lost during this exchange, requiring state officials to resubmit the information, creating redundancies and duplication of effort. As a result, reconstruction efforts in Louisiana were delayed. In another instance, we reported in October 2008 that biometric data, such as fingerprints and iris images, collected in DOD field activities such as those in Iraq and Afghanistan, were not comparable with data collected by other units or with large federal databases that store biometric data, such as the Department of Homeland Security biometric database or the Federal Bureau of Investigation (FBI) fingerprint database. A lack of comparable data, especially for use in DOD field activities, prevents agencies from determining whether the individuals they encounter are friend, foe, or neutral, and may put forces at risk. Since 2005, we have recommended that the Secretaries of Defense, Homeland Security, and State establish or clarify guidelines, agreements, or procedures for sharing a wide range of national security information, such as planning information, terrorism-related information, and reconstruction project information. We have recommended that such guidelines, agreements, and procedures define and communicate how shared information will be protected; include provisions to involve and obtain information from nonfederal partners in the planning process; ensure that agencies fully participate in interagency information- sharing efforts; identify and disseminate practices to facilitate more effective communication among federal, state, and local agencies; clarify roles and responsibilities in the information-sharing process; and establish baseline standards for data collecting to ensure comparability across agencies. In commenting on drafts of those reports, agencies generally concurred with our recommendations. In some cases, agencies identified planned actions to address the recommendations. For example, in our December 2008 report on the Federal Emergency Management Agency’s public assistance grant program, we recommended that the Federal Emergency Management Agency improve information sharing within the public assistance process by identifying and disseminating practices that facilitate more effective communication among federal, state, and local entities. In comments on a draft of the report, the Federal Emergency Management Agency generally concurred with the recommendation and noted that it was making a concerted effort to improve collaboration and information sharing within the public assistance process. Moreover, agencies have implemented some of our past recommendations. For example, in our April 2006 report on protecting and sharing critical infrastructure information, we recommended that the Department of Homeland Security define and communicate to the private sector what information is needed and how the information would be used. The Department of Homeland Security concurred with our recommendation and, in response, has made available, through its public Web site, answers to frequently asked questions that define the type of information collected and what it is used for, as well as how the information will be accessed, handled, and used by federal, state, and local government employees and their contractors. Underlying the success of these key areas for enhancing interagency collaboration for national security-related activities is committed and effective leadership. Our prior work has shown that implementing large- scale change management initiatives or transformational change—which is what these key areas should be considered—are not simple endeavors and require the concentrated efforts of leadership and employees to realize intended synergies and to accomplish new goals. Leadership must set the direction, pace, and tone and provide a clear, consistent rationale for the transformation. Sustained and inspired attention is needed to overcome the many barriers to working across agency boundaries. For example, leadership is important in establishing incentives to promote employees’ interest in serving in interagency efforts. The 2010 National Security Strategy calls for a renewed emphasis on building a stronger leadership foundation for the long term to more effectively advance our interests in the 21st century. Moreover, the strategy identifies key steps for improving interagency collaboration. These steps include more effectively ensuring alignment of resources with our national security strategy, adapting the education and training of national security professionals to equip them to meet modern challenges, reviewing authorities and mechanisms to implement and coordinate assistance programs, and other policies and programs that strengthen coordination. National security experts also note the importance of and need for effective leadership for national security issues. For example, a 2008 report by the Project on National Security Reform notes that the national security system requires skilled leadership at all levels and, to enhance interagency coordination, these leaders must be adept at forging links and fostering partnerships all levels. Strengthening interagency collaboration—with leadership as the foundation—can help transform U.S. government agencies and create a more unified, comprehensive approach to national security issues at home and abroad. Mr. Chairman, this concludes my prepared remarks. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. For future information regarding this statement, please contact John H. Pendleton at (202) 512-3489 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this statement. Key contributors to this statement are listed in appendix II. Defense Management: DOD Needs to Determine the Future of Its Horn of Africa Task Force, GAO-10-504, Washington, D.C.: Apr. 15, 2010. Homeland Defense: DOD Needs to Take Actions to Enhance Interagency Coordination for Its Homeland Defense and Civil Support Missions, GAO-10-364, Washington, D.C.: Mar. 30, 2010. Interagency Collaboration: Key Issues for Congressional Oversight of National Security Strategies, Organizations, Workforce, and Information Sharing, GAO-09-904SP, Washington, D.C.: Sept. 25, 2009. Military Training: DOD Needs a Strategic Plan and Better Inventory and Requirements Data to Guide Development of Language Skills and Regional Proficiency. GAO-09-568. Washington, D.C.: June 19, 2009. Influenza Pandemic: Continued Focus on the Nation’s Planning and Preparedness Efforts Remains Essential. GAO-09-760T. Washington, D.C.: June 3, 2009. U.S. Public Diplomacy: Key Issues for Congressional Oversight. GAO-09-679SP. Washington, D.C.: May 27, 2009. Military Operations: Actions Needed to Improve Oversight and Interagency Coordination for the Commander’s Emergency Response Program in Afghanistan. GAO-09-61. Washington, D.C.: May 18, 2009. Foreign Aid Reform: Comprehensive Strategy, Interagency Coordination, and Operational Improvements Would Bolster Current Efforts. GAO-09-192. Washington, D.C.: Apr. 17, 2009. Iraq and Afghanistan: Security, Economic, and Governance Challenges to Rebuilding Efforts Should Be Addressed in U.S. Strategies. GAO-09-476T. Washington, D.C.: Mar. 25, 2009. Drug Control: Better Coordination with the Department of Homeland Security and an Updated Accountability Framework Can Further Enhance DEA’s Efforts to Meet Post-9/11 Responsibilities. GAO-09-63. Washington, D.C.: Mar. 20, 2009. Defense Management: Actions Needed to Address Stakeholder Concerns, Improve Interagency Collaboration, and Determine Full Costs Associated with the U.S. Africa Command. GAO-09-181. Washington, D.C.: Feb. 20, 2009. Combating Terrorism: Actions Needed to Enhance Implementation of Trans-Sahara Counterterrorism Partnership. GAO-08-860. Washington, D.C.: July 31, 2008. Information Sharing: Definition of the Results to Be Achieved in Terrorism-Related Information Sharing Is Needed to Guide Implementation and Assess Progress. GAO-08-637T. Washington, D.C.: July 23, 2008. Highlights of a GAO Forum: Enhancing U.S. Partnerships in Countering Transnational Terrorism. GAO-08-887SP. Washington, D.C.: July 2008. Stabilization and Reconstruction: Actions Are Needed to Develop a Planning and Coordination Framework and Establish the Civilian Reserve Corps. GAO-08-39. Washington, D.C.: Nov. 6, 2007. Homeland Security: Federal Efforts Are Helping to Alleviate Some Challenges Encountered by State and Local Information Fusion Centers. GAO-08-35. Washington, D.C.: Oct. 30, 2007. Military Operations: Actions Needed to Improve DOD’s Stability Operations Approach and Enhance Interagency Planning. GAO-07-549. Washington, D.C.: May 31, 2007. Combating Terrorism: Law Enforcement Agencies Lack Directives to Assist Foreign Nations to Identify, Disrupt, and Prosecute Terrorists. GAO-07-697. Washington, D.C.: May 25, 2007. Results-Oriented Government: Practices That Can Help Enhance and Sustain Collaboration among Federal Agencies. GAO-06-15. Washington, D.C.: Oct. 21, 2005. In addition to the contact name above, Marie Mak, Assistant Director; Laurie Choi; Alissa Czyz; Rebecca Guerrero; and Jodie Sandel made key contributions to this testimony. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Recent terrorist events such as the attempted bomb attacks in New York's Times Square and aboard an airliner on Christmas Day 2009 are reminders that national security challenges have expanded beyond the traditional threats of the Cold War Era to include unconventional threats from nonstate actors. Today's threats are diffuse and ambiguous, making it difficult--if not impossible--for any single federal agency to address them alone. Effective collaboration among multiple agencies and across federal, state, and local governments is critical. This testimony highlights opportunities to strengthen interagency collaboration by focusing on four key areas: (1) developing overarching strategies, (2) creating collaborative organizations, (3) developing a well-trained workforce, and (4) improving information sharing. It is based on GAO's body of work on interagency collaboration. Federal agencies have an opportunity to enhance collaboration by addressing long-standing problems and better positioning the U.S. government to respond to changing conditions and future uncertainties. Progress has been made in enhancing interagency collaboration, but success will require leadership commitment, sound plans that set clear priorities, and measurable goals. The agencies involved in national security will need to make concerted efforts to forge strong and collaborative partnerships, and seek coordinated solutions that leverage expertise and capabilities across communities. Today, challenges exist in four key areas: 1) Developing and implementing overarching strategies. Although some agencies have developed or updated overarching strategies on national security-related issues, GAO's work has identified cases where U.S. efforts have been hindered by the lack of information on roles and responsibilities of organizations involved or coordination mechanisms. 2) Creating collaborative organizations. Organizational differences--including differences in agencies' structures, planning processes, and funding sources--can hinder interagency collaboration. Agencies lack adequate coordination mechanisms to facilitate this collaboration during planning and execution of programs and activities. 3) Developing a well-trained workforce. Agencies do not always have the right people with the right skills in the right jobs at the right time to meet the challenges they face--including having a workforce that is able to quickly address crises. Moreover, agency performance management systems often do not recognize or reward interagency collaboration, and training is needed to understand other agencies' processes or cultures. 4) Sharing and integrating national security information across agencies. U.S. government agencies do not always share relevant information with their national security partners due to a lack of clear guidelines for sharing information and security clearance issues. Additionally, incorporating information drawn from multiple sources poses challenges to managing and integrating that information. Strengthening interagency collaboration--with leadership as the foundation--can help transform U.S. government agencies and create a more unified, comprehensive approach to national security issues at home and abroad.

You are an expert at summarizing long articles. Proceed to summarize the following text: Traffic safety data are the primary source of knowledge about crashes and how they are related to the traffic safety environment, human behavior, and vehicle performance. Most states have developed traffic safety data systems and manage these data through the initial reporting of crashes by law enforcement officers through data entry and analysis. Figure 1, which is based on NHTSA’s Traffic Records Highway Safety Program Advisorydepicts a model state traffic safety data system, including the collection and submission of data, the processing of these data into state safety data systems, and the potential uses for quality crash information. These data are often not housed in a single file or on just one computer system; however, users should have access to crash information in a useful form and of sufficient quality to support the intended use. At the state level, state agencies use traffic safety data to make highway safety planning decisions and to evaluate the effectiveness of programs, among other uses. In those states where quality crash data on a range of crashes are not available, officials use federal data such as that from NHTSA’s Fatality Analysis Reporting System (FARS) to make programming decisions. FARS data, while useful for some purposes, are limited because they only include information about fatal crashes, thus preventing decision making based on a range of crash severity or the entirety of a state’s crash situation. At the federal level, NHTSA provides guidelines, recommendations, and technical assistance to help states improve their crash data systems and is responsible for overseeing state highway safety programs. Under TEA-21, NHTSA awarded $935.6 million in highway safety incentive grants to improve safety. In 2003, NHTSA made improving traffic safety data one of the agency’s highest priorities. Since the early 1980s, NHTSA has been obtaining crash data files from states, which in turn have been deriving the data from police crash reports. These statewide crash data files are referred to as the SDS program. Participation by states is voluntary, with 27 states currently participating. These data include some of the basic information for the analyses and data collection programs that support the NHTSA mission of identifying and monitoring traffic safety problems. One of NHTSA’s grant programs was specifically aimed at improving traffic safety data. Administered through its 10 regional offices around the country, the program provided about $36 million to states for improving their crash data systems. This grant program was authorized under TEA-21 and was known as the “411 grant program” after the relevant section of the U.S. Code. NHTSA administers a number of other grant programs besides the 411 grant program; however, it was the only incentive grant program that was specifically directed at improving state traffic safety data systems. The grant program required states to establish a foundation for improving their traffic safety data systems by first completing three activities: Establish a coordinating committee of stakeholders to help guide and make decisions about traffic safety data: The committee would ideally include stakeholders from agencies that manage the various data files (e.g., representatives from the state department of transportation responsible for roadway information, and from the state department of motor vehicles responsible for the management of vehicle licensing information). Conduct an assessment of the current system: The assessment would evaluate a state’s system by identifying strengths and weaknesses and providing a baseline from which the state could develop its strategic plan to address data system needs. Develop a strategic plan that prioritizes traffic safety data system needs and identifies goals: The strategic plan is to provide the “map” specifying which activities should be implemented in order to achieve these goals. As with the assessment, the focal point for developing the strategic plan, if a state did not already have one, would be the coordinating committee. The level of funding available to a state was dependent on whether states had already put these requirements in place. Additionally, states were required to contribute matching funds of between 25 and 75 percent, depending on the year of the grant. Three types of grants were awarded: A state received a start-up grant if it had none of the three requirements in place. This was a one-time grant of $25,000. A state received an initiation grant if it had established a coordinating committee, had completed or updated an assessment within the previous 5 years, and had begun to develop a strategic plan. This grant was a one-time grant of $125,000, if funds were available. A state received an implementation grant if it had all three requirements in place and was positioned to make specific improvements as indicated in its strategic plan. This grant was at least $250,000 in the first year and $225,000 in subsequent years, if funds were available. The Congress has extended TEA-21 until May 2005, and new House and Senate bills will likely be introduced during the next congressional session. The most recent House and Senate bills under consideration, which were not passed in the 2004 session, included proposals to reauthorize the 411 grant program in a similar, but not identical, form to the original program. The proposals included funding up to $270 million, which is over six times the original funding amount. They also included (1) additional requirements for documentation from states describing how grant funds would be used to address needs and goals in state strategic plans and (2) a requirement that states demonstrate measurable progress toward achieving their goals. The proposals, however, did not include one of the original program requirements—that states have an assessment of their traffic safety data systems that is no more than 5 years old when they applied for the grant. The 9 states we examined in detail varied considerably in the extent to which their traffic safety data systems met NHTSA’s recommended criteria for the quality of crash information. NHTSA’s six criteria (shown in table 1 below, along with an explanation of each criterion’s significance) appear in the agency’s Traffic Records Highway Safety Program Advisory, the guide used by NHTSA when it carries out traffic records assessments at the request of state officials. These assessments are a technical assistance tool offered to state officials to document state traffic safety data activities, note strengths and accomplishments, and offer suggestions for improvement. In addition, NHTSA released the report Initiatives to Address Improvement of Traffic Safety Data in July 2004, which emphasized these data quality criteria and provided recommendations to states. We examined all six criteria for the 9 case-study states, and our review of 17 states that participated in NHTSA’s SDS program provided additional information for three of these six criteria. None of the 9 states in our case-study review met all six criteria, and most had opportunities for improvement in many of the criteria. The sections below discuss each criterion. data available. Data processing times for the 9 states ranged from less than 1 month in 2 states to 18 months or more in 2 others. For example, to develop their 2005 highway safety plans during 2004, 4 of the 9 states used data from 2000, 2001, or 2002, and the remaining 5 states used 2003 data. (See fig. 2.) For 6 of the 9 states, three factors accounted for their not meeting the timeliness criterion: slow data entry, data integration delays, and lengthy data edits. As a result, the state safety plans are unable to take recent crash trends into account in these states. Generally, those states submitting data electronically from local law enforcement agencies to the state traffic safety data system had much faster entry of crash information into centralized databases. In contrast, states that processed reports manually by keying in information from paper forms at the state level had longer data entry time frames. The availability of data was also sometimes delayed by inefficient data completion processes. In states where this is not done automatically, crash data and location information are often manually entered into the traffic safety data system. In addition, checks for accuracy also delayed data availability. For example, 1 of the states that had to use data from 2000 to develop its highway safety plan, had used electronic methods to enter more recent data, but detailed edit checks delayed the data’s release considerably. Seven of the 9 states we visited had crash forms that could be used to collect data across all jurisdictions within the state, helping to ensure that data collected within the state are consistent. However, no state had forms that met all of the consistency criteria recommended in the Model Minimum Uniform Crash Criteria (MMUCC) guidelines that were developed collaboratively by state and federal authorities. These guidelines provide a recommended minimum set of data elements to be collected for each crash, including a definition, attributes, and the rationale for collecting each element. While variation in the crash data collected by states can be attributed to varying information needs, guidelines help to improve the reliability of information collected and also assist in state-to­ state comparisons and national analyses. The variation between states can be seen among the 17 states we analyzed that contribute to NHTSA’s SDS program. For example, the MMUCC guidelines recommend reporting on whether alcohol was a factor in the crash by indicating the presence or absence of an alcohol test, the type of test administered, and the test results. However, several of the states collected information on impaired driving without specifying the presence of an alcohol test, the test type, or the test result; thereby making it difficult to determine whether alcohol-use contributed to the crash. In addition, the states were not uniform in collecting and reporting the VIN, another element recommended in the MMUCC. A VIN is a unique alphanumeric identifier that is applied to each vehicle by the manufacturer. The VIN allows for an effective evaluation of vehicle design characteristics such as occupant protection systems. As figure 3 shows, data about VINs were not available for all 17 states in crashes for any year between 1998 and 2002. For example, although every state had submitted crash data for 1998 and 1999, crash data for 6 of the 17 states did not include VINs. The lack of consistency limits the use of state crash data for most nationwide analyses. For example, in a recent National Center for Statistics and Analysis (NCSA)Research Note on child safety campaigns, only 3 states met the criteria to be included in the analysis, not nearly enough data to statistically represent the nation. The criteria necessary for inclusion in the report included collecting data on all vehicle occupants, including uninjured occupants, and VINs for the relevant years (1995-2001). If state systems matched the MMUCC, they would include this information. Similarly, only 5 states qualified for use in a NCSA analysis of braking performance as part of the New Car Assessment Program because only these states collected VINs and had the necessary variables for the years involved in the study. There is evidence that as states redesign their crash forms, they are following the MMUCC guidelines more closely. Remaining differences from the suggested guidelines often reflect the needs of individual states. Among the 9 states we visited, 5 had redesigned their crash forms since 1997. All 5 used the guidelines as a baseline, although each of them tailored the form to a degree. One state, for example, collected no data about the use of seat belts for uninjured passengers, while another chose to collect additional state-specific attributes, such as describing snow conditions (e.g., blowing or drifting). Among the remaining 4 states we visited, 2 states are currently using the MMUCC guidelines to redesign their forms. One factor affecting the degree of completeness is state reporting thresholds—that is, standards that local jurisdictions use to determine whether crash data should be reported for a particular crash. These thresholds include such things as the presence of fatalities or injuries or the extent of property damage. Although all 9 of the states we visited had reporting thresholds that included fatalities and injuries, the thresholds for property damage varied widely. For example, some states set the property damage threshold at $1,000, while 1 state did not require reporting of property-damage-only crashes. In addition, it was not possible to determine the extent that all reportable crashes had been included in the traffic safety data system. Officer discretion may play a role. For example, capturing complete documentation of a crash event is often a low priority when traffic safety data are not perceived as relevant to the work of the law enforcement officer or other public safety provider. In 1 state, for example, the police department of a major metropolitan area only reported crashes involving severe injuries or fatalities, although the state’s reporting threshold included damage of $1,000 or more. Variation in thresholds among states is not the only factor that affects the completeness of crash data. For the crash information that does make it into the state database, there are often gaps in the data, as we learned from evaluating the records of 17 states participating in NHTSA’s SDS program. For 5 of these states, we analyzed data coded “unknown” and “missing” for 24 data elements. The percentage of data coded as unknown or missing was frequent for several key data elements, such as the VIN; the results of alcohol or drug testing; and the use of seat belts, child car seats, and other restraint devices. For example, the percentage of data coded as unknown or missing for the use of seat belts and other restraints ranged between 1.5 and 54.8 percent for 4 of the 5 states. Such data can be inherently difficult to collect.For example, when officers arrive at the scene of a crash, drivers and passengers may already be outside their vehicles, making it impossible to know if they were wearing seat belts. Asked if they were wearing a seat belt, those involved in the crash may not tell the truth, especially if the state has a law mandating seat belt use. Six of the 9 states we visited made use of quality control methods to help ensure that individual reports were accurate when they were submitted to the traffic safety data system. Of these 6 states, for example, 4 linked crash reports to other traffic safety data, including driver or vehicle files, to verify or populate information on crash reporting forms. Table 2 contains examples of other tools and checks that the states used to help ensure accuracy. Four of the 9 states did quality checks at the aggregate level—that is, when crash reports are analyzed in batches to identify abnormalities in reporting that may not be apparent looking at individual reports. Of these 4 states, for example, 1 had staff analyze the reports to identify invalid entries and data miscodings, while another conducted edit checks each year to check for invalid vehicle types or other problems. Such aggregate-level analysis can be useful to identify systematic problems in data collection that may lead to erroneous investigation or false conclusions, such as when officers report one type of collision as another. For instance, officers in 1 state were found to be characterizing some car-into-tree crashes as head-on collisions. Once identified, such data collection problems can often be resolved through officer training. To test data accuracy, we analyzed crash data submitted by the 17 states to NHTSA and found relatively few instances of data that had been coded as “invalid”—generally 3 percent or less. Data classified as invalid were most often for elements more likely to be transposed or miscopied, such as VINs. However, because we could not observe crash-scene reporting and did not examine or verify information on source documents (such as police accident reports), we cannot assume that the other 97 percent of data were accurately reported and entered correctly. Invalid data entries are a good starting point for measuring the accuracy of a data system, but they are only one indication of the accuracy of state traffic safety data. All 9 states produced crash information summaries, although some were based on data that were several years old—a factor that limited their usefulness. In addition, 8 states provided law enforcement agencies or other authorized users with access to crash information within 6 months of crashes. Such access was often via the Internet, and data analysis tools were typically limited to a certain number of preestablished data reports. Thus, any in-depth analysis was limited to the tools available online. Three states had analysts available to provide information or complete data queries upon request. In another state, which had the capability to conduct data collection electronically, local law enforcement agencies had access to analysis tools to use with their own data. If users wanted direct access to completed data for more detailed analysis, they often had to wait somewhat longer, given the need for additional data entry or the completion of accuracy checks. In 1 state, for example, there was a 2- to 3-month delay due to the transfer of preliminary crash data from the state police database to the state department of transportation where location information was added to complete the data. Only 1 of the 9 states integrated the full array of potential databases—that is, linked the crash file with all five of the files typically or potentially available in various state agencies: driver, vehicle, roadway, citation/conviction, and medical outcome. All 9 of the states we visited integrated crash information with roadway files to some degree, but only a few integrated these data with driver or vehicle licensing files, or with the conviction files housed in state court systems. (See table 3.) In addition, 7 of the 9 states participated in NHTSA’s Crash Outcome Data Evaluation System (CODES) program, which links crash data with medical information such as emergency and hospital discharge data, trauma registries, and death certificates. Technological challenges and the lack of coordination among state agencies often posed hurdles to the integration of state data. In 1 state, for example, crash files were sent from the central traffic records database kept by the state department of safety to the state department of transportation for manual entry of location information from the roadway file. Once the state department of transportation completed these records, however, there was no mechanism to export that information back into the central database. Also, in some states data integration was limited because data were not processed with integration in mind. In 1 state, for example, state department of transportation officials noted that the new crash system had been developed for state police use, and that efforts were still under way to develop an interface to bring crash data into the department’s system. In contrast, a state official in another state noted that the housing of several agencies involved in the traffic safety data system—including those responsible for the driver, vehicle, and roadway files—in the state department of transportation had facilitated the direct sharing of information and the full integration of data. In support of these quality criteria and improved traffic safety data systems, NHTSA released a report in July 2004 detailing steps that could be taken by federal and state stakeholders to improve traffic safety data. The report, Initiatives to Address Improvement of Traffic Safety Data, was issued by NHTSA and drafted by an Integrated Project Team that included representatives from NHTSA, the Bureau of Transportation Statistics, the Federal Highway Administration, and the Federal Motor Carrier Safety Administration. The report articulates the direction and steps needed for traffic safety data to be improved and made more useful to data users. It makes a number of recommendations under five areas, including improving coordination and leadership, improving data quality and availability, encouraging states to move to electronic data capture and processing, creating greater uniformity in data elements, and facilitating data use and access. Along with these recommendations, the report also outlines initiatives that NHTSA and other stakeholders should implement. For example, under the area of data quality and availability, the report indicates that states—under the guidance of their coordinating committees—should encourage compliance by law enforcement with state regulations for obtaining blood-alcohol concentration and drug use information and should also strive to capture exact crash locations (using latitude and longitude measures) in their traffic safety data systems. States reported carrying out a range of activities with funding made available under the 411 grant program. However, relatively little is known about the extent to which they made progress in improving their traffic safety data systems for the years of the grant. When applying for follow-on grants, states were required to report to NHTSA’s regional offices on the progress they were making in improving their traffic safety data systems during the prior year. However, the required documents filed with NHTSA yielded little or no information on what states had achieved. We were able to discern from the 8 states we reviewed in detail that those states had indeed used their grants for a variety of projects and showed varying degrees of progress. Regardless of whether states concentrated their grant funds on one project or funded a number of activities, the level of progress was influenced by the effectiveness of state coordinating committees. Forty-eight states applied for and received grant awards under the 411 grant program. As table 4 shows, most states (29) began their participation at the implementation grant level—that is, most of them already had the three basic requirements in place, including a coordinating committee, an assessment of their data system, and a strategic plan for improvement. Those states receiving start-up or initiation grants were expected to put the three requirements in place before beginning specific data-related improvement projects. By the 4th year of the grant, 44 states were still participating, and all but 1 was at the implementation grant level. The 4 states that were no longer participating by the 4th year reported that they discontinued participation mainly because they could not meet grant requirements. All three basic program requirements were useful to states to initiate or develop improvements in their traffic safety data systems. By meeting these grant requirements, states were able to “jump start” their efforts and raise the importance of improving state traffic safety data systems. The assessments, which were required to be conducted within 5 years of the initial grant application, provided benchmarks and status reports to NHTSA and state officials and included information on how well state systems fared in regard to NHTSA’s six recommended quality criteria. Officials with whom we spoke generally agreed that these assessments were excellent tools for systematically identifying needed state improvements. Similarly, strategic plans generally appeared to be based on the state assessment findings and helped states identify and prioritize their future efforts. The establishment of the traffic records coordinating committees to guide these efforts was also key to initiating improvements, since traffic safety data systems involve many departments and their cooperation is essential in developing and implementing improvements to a state traffic safety data system. Documentation of state progress was limited and of little use in assessing the effect of traffic safety data improvement efforts. To qualify for grants beyond the first year, each state had to (1) certify that it had an active coordinating committee and (2) provide documentation of its efforts through updated strategic plans, separate progress reports, or highway safety annual evaluation reports. We reviewed these documents when available and found that they contained a variety of activities, ranging from completing the basic requirements (such as conducting assessments and developing strategic plans) to identifying specific projects (such as outsourcing data entry services and redesigning crash forms). Figure 4 lists examples of these types of reported activities. The grant documentation NHTSA received provided few details on the quality of the state efforts. For example, although states certified the existence of a coordinating committee, they were not required to report on what the committee did or how well it functioned. Also, while states for the most part identified efforts to improve their data systems, we found it difficult to assess their progress because the reports lacked sufficient detail. For example: One state reported using grant funds on alcohol testing devices to collect more alcohol impairment data on drivers. However, the progress reports did not indicate who received these devices and how data collection was improved. One state used funds to hire data entry staff to reduce the backlog of old crash reports. However, the state provided no indication of whether the increase in staff had reduced the backlog and how any reduction in the backlog could be sustained in the longer term. One state reported using funds on multimillion dollar information technology projects, but it is unclear how the grant funds were used in these projects. Our visits to 8 of the states that participated in the 411 grant program yielded additional information and documentation about their grant activities, the nature of their efforts, and the extent of progress made. These states expended funds on a variety of activities, ranging from completing the basic requirements of assessments and strategic plans to implementing specific projects. As figure 5 shows, in the aggregate, these activities translated into two main types of expenditures—equipment, such as computer hardware and software, and consultant services, such as technical assistance in designing new data systems. The 8 states either concentrated funding on one large project or used funding on a variety of activities, including data entry, salaries, training, and travel. Four of the 8 states focused on a single project related to improving their data systems mainly by enhancing electronic reporting. One state reengineered its files to better integrate them with other data systems; 1 piloted an electronic crash data collection tool; and the remaining 2 created new electronic data systems, which were upgrades from their previous manual systems. These states also improved the tools used by law enforcement officers to input data into their crash systems, such as software for mapping and graphing traffic crashes or laptop computers for patrol cars so that law enforcement officers could collect and transmit crash data electronically to statewide repositories. The remaining 4 states used funding on multiple activities, such as obtaining technical support, adding capability for more data entry, or attending conferences. Some also conducted pilot projects. For example, 1 state created a project that enabled electronic uploads of traffic citation data from local agencies to the state department of motor vehicles. According to state officials, this project helped considerably with both timeliness and completeness in the uploading of conviction information to driver files. In another example, the state used funding to pilot a project to capture data about crashes electronically. States made improvements under both the single- and multiple-project approaches. One state that focused on a single project, for example, developed a new statewide electronic crash system that officials said had improved data timeliness and completeness. Similarly, of the states that spread funding among multiple activities, 1 state used funding for a data project on driver convictions—paying for traffic records staff’s salaries and hiring consultants to map crashes to identify roadway issues. As a result, the quality and completeness of crash data improved overall, according to a state official. One factor that affected state progress was the relative effectiveness of the state’s coordinating committee. In those states, where the state coordinating committee did not actively engage all stakeholders or where its level of authority was limited, projects did not fully address system needs. For example, 1 state established a coordinating committee that included few stakeholders outside the state police, and this committee decided to concentrate funding on a new electronic crash data system. The new system, acknowledged by many stakeholders as improving the timeliness and completeness of crash data, resulted in a useful resource allocation and crash-reporting tool for the state police to allocate resources and report on crashes. According to officials at the state department of transportation, however, improvements in the crash information did not effectively serve to facilitate the state’s use of crash data to identify unsafe roadways because the state department of transportation was not fully engaged in the coordinating committee’s process. Similarly, in another state, the coordinating committee lacked the authority needed to fully implement its efforts. The coordinating committee created two subcommittees—a technical committee and an executive committee. While the executive committee was made up of higher level managers from various agencies, the coordinating committee did not have the legislative authority to compel agencies to participate in the process or to even use the newly created statewide crash data system. To date, the state does not have all key stakeholders participating in the process and is continuing to have difficulty persuading the largest municipality in the state to use the newly developed statewide electronic reporting system. As a result, the municipality continues to lag behind other communities in having its crash information entered into the state crash system. In contrast, another state’s coordinating committee had the authority to approve or reject proposals for data system improvements as well as funding. This state was able to complete several agreed-upon projects, including implementing an electronic driver citation program, which improved the completeness and timeliness of the state crash data. NHTSA did not adopt adequate regulations or guidelines to ensure states receiving 411 grants submitted accurate and complete information on progress they were making to improve their traffic safety data systems. In addition, the agency did not have an effective process for monitoring progress and ensuring that grant monies were being spent as intended. We found some examples where states did not report their progress accurately. NHTSA, while beginning to take some actions to strengthen program oversight, must be more proactive in developing an effective means of holding states accountable under this program. In our previous discussion about activities being carried out under the grant program, we described how state documentation of progress often contained too little detail to determine anything about the progress being made as a result of activities being funded with program grants. Reasons for this lack of information, in our view, were NHTSA’s limited regulatory requirements and inconsistent guidance about what information states should submit. Regulations for the 411 grant program required states to submit an updated strategic plan or a progress report, but did not specify how progress should be reported. Further, NHTSA’s regulations required states to report on progress as part of their 411 grant application, which in effect meant that states did not have to report specifically on 411 activities after fiscal year 2001. According to NHTSA regulations, states were to include information on progress through their highway safety plans and annual evaluation reports after fiscal year 2001, which are part of the reporting for all of NHTSA’s highway safety grants. However, our analysis of these documents found that they lacked the detail needed to adequately assess state activities undertaken with 411 funds. Further, while NHTSA officials told us they also informally obtained information about progress after fiscal year 2001, the available information about what the activities actually accomplished was limited. Limitations in the information regarding states activities were particularly significant given that states spent most of their grant funds after fiscal year 2001. NHTSA regional offices supplemented the regulatory requirements with their own guidance to states, but the guidance varied greatly from region to region. Some of the regional offices said that their contact with states about these requirements was informal, and that their primary contact with states (1) was over the telephone or by e-mail and (2) was generally in regards to technical assistance, such as training or referring states to existing guidelines. Other regional office staff said they had additional contact with states through participation in meetings of state coordinating committees, where they were able to provide additional assistance. However, we found this participation occurred most often for states in proximity to NHTSA regional offices. Few regional offices provided written guidance to states with specific direction on what to include in their progress reports. For the regions that did so, the requested information included documentation indicating how states intended to use the current year grant funds, a list of projects implemented in the past fiscal year, a brief description of activities completed, an account of problems encountered, and the status of allocated funds. Without consistent and clear requirements and guidance on the content of progress reports, states were left to their own devices. We found that even in regions where NHTSA officials outlined the information that should be included in the progress reports, states did not necessarily provide the level of information needed for NHTSA to adequately track state progress. For example, in 1 region, states were to provide NHTSA with documentation that included a list of projects and a description of progress made. However, 1 state in that region did not provide the list of completed projects; it only provided a brief description of projects completed during 1 of the 4 years of the grant. We also found a wide variation in how states reported their activities. For example: Some states provided brief descriptions of the activities completed or under way, while others did not. States that provided brief descriptions of their activities did not always include the same information. For example, some states indicated how they were intending to use the current grant funds but did not list projects implemented in the past year. Some states did not indicate the status of their allocated funds for ongoing activities. None of the states in our review indicated problems that were encountered in implementing projects or activities. Under the 411 grant program, NHTSA’s oversight process for monitoring state progress and ensuring that funds were spent in line with program intent was limited. In fact, NHTSA was unable to provide copies of many of the documents that states were required to submit to qualify for the 411 grant program. We requested these documents beginning in February 2004, and NHTSA was only able to provide us with complete documentation for half of the states participating in the program. When we visited 8 states that participated in the program, we were able to compare expenditure reports obtained from the states with activities that were reported to NHTSA. We found instances in which documentation of state reported activities provided by NHTSA did not match information provided directly to us by the states. In documentation submitted to NHTSA, 1 state reported using grant funds on alcohol breath test devices. However, documents available at the state level indicate that nearly all of the funds were expended on a single project to redevelop a crash data system. Officials we spoke with also indicated that the money had gone for redeveloping the data system. In a report to NHTSA, 1 state we visited had reported undertaking four projects, but we found that two of them were actually funded by a different federal grant. The degree to which NHTSA monitored state 411-funded activities was difficult to determine. NHTSA officials told us that they were not required to review state 411-funded activities in detail. A few regional office officials told us that they verified state reported activities by linking them to objectives identified in state strategic plans; however, no documentation of these reviews was provided. NHTSA has taken several steps to improve its oversight and assist states in improving their traffic safety data systems; however, more efforts are needed. As we were completing our work, NHTSA released a report, Initiatives to Address Improvement of Traffic Safety Data, that provides the status of data systems in five areas, including coordination and leadership, improving data quality and availability, encouraging states to move to electronic capture and processing, creating greater uniformity in data elements, and facilitating data use and access. It also provides recommendations and initiatives in support of NHTSA’s efforts to improve state traffic safety data systems. Although the report outlines (1) steps to be taken, (2) stakeholder responsibilities for each recommendation, and (3) the general outcomes expected, the extent to which actions will occur as a result of the report is unclear. The report is limited to a description of conditions and needs for traffic safety data improvements and does not include an implementation plan with milestones or timelines. The report acknowledges that due to limited funding, NHTSA will focus primarily on recommendations that are feasible given current resources. According to NHTSA, the report was issued as a fact-finding status report and, therefore, no timelines or milestones were included. However, beginning October 2004, a newly created National Traffic Records Coordinating Committee is developing an implementation plan for the goals identified in the report. NHTSA also recently enhanced its oversight tools for all safety grants. It has mandated management reviews every 3 years and also expanded its existing regional planning documents for the areas of occupant protection and impaired driving, with three additional areas, including traffic safety data.The first of these regional action plans aimed at data improvements are being initiated fiscal year 2005 and include goals, objectives, and milestones. Mandating management reviews that encompass the broad array of grant programs every 3 years is an improvement over the inconsistent application of these reviews in the past. Also, by establishing traffic safety data improvements as part of the regional action plans, NHTSA will have more uniform tracking of state data improvements and also better information on state progress. While these newly initiated efforts are positive steps to improving oversight, it is too soon to tell how effective they will be for monitoring and ensuring accountability under the 411 grant program, should the Congress chose to reauthorize it. NHTSA’s oversight of the 411 grant program may be strengthened under reauthorized legislation. Proposed reauthorization bills that were considered by the Congress in 2004 included additional requirements that states (1) demonstrate measurable progress toward achieving goals in their strategic plans and (2) specify how they will use grant funds. These additional provisions would be important steps in addressing the too-vague reporting requirements of the current program and would be helpful in addressing congressional and other inquiries about what the program is accomplishing. As the previous proposed bills were drafted, however, they omitted one requirement that will be important in tracking state progress—the requirement for a state to have an assessment of its traffic safety data system no more than 5 years prior to participating in the 411 grant program. Assessments are used mainly to establish the status of state efforts, but state and NHTSA officials suggest that updated assessments could also help in tracking state progress. During our review, we found some assessments submitted by states that were nearly 10 years old. We also found that assessments based on recent information reflected the dynamic and often-changing reality of state systems. For example, 1 of our case­ study states had recently conducted an assessment in 2002. When we compared the information we had collected during our site visit, we found much of the information from our visit reflected in the assessment. Updating these assessments at least every 5 years would allow NHTSA to track state progress. According to NHTSA officials, these assessments were valuable starting points in helping states take stock of the strengths and weaknesses of their entire systems. Updated assessments would take into account changes made as a result of the new 411 grant program and other efforts to improve the system since previous assessments were conducted. The states and the federal government base significant roadway-related spending and policy decisions on traffic safety data, ranging from deciding to repair particular roadways to launching major safety campaigns. The quality of such decisions is tied to the quality of these data. Our review indicates that there were opportunities for states to improve crash data. However, because NHTSA exercised limited oversight over the 411 grant program, it is difficult to say what the program as a whole specifically accomplished or whether there was a general improvement in the quality of these data over the program’s duration. Nevertheless, information we obtained from the 8 states we visited suggests the premise that the 411 program did help states improve their traffic safety data systems. Based on our work in these 8 states, we believe that states undertook important improvements in their data systems with the federal grant funds. The potential reauthorization of the grant program and NHTSA’s recent study of state safety data provide an opportunity to include assurances that states use these grants on effective and worthy projects. Furthermore, the reauthorization may provide greater funding and, therefore, greater opportunity for states to improve their traffic safety data systems. However, a larger program would come with a greater expectation regarding what states will accomplish as well as with a need to effectively track the progress states are making. NHTSA’s inability to provide key grant documentation and its deficiencies in monitoring state progress with 411 grant funds could be minimized if NHTSA (1) better managed grant documents, (2) had clearer requirements and guidance for the grant program, and (3) had an effective oversight process in place to monitor activities and progress. Requiring more specific information on the improvements states are making in their data systems would begin to address the problems we identified with regard to inadequate reporting on the program. If the program is reauthorized, NHTSA should develop an oversight process that does a better job of (1) tracking state activities to their strategic plans and assessments, (2) providing information about progress made in improving safety data, and (3) ensuring that NHTSA can adequately manage the documentation it is requiring. In addition, if NHTSA develops a plan to implement the recommendations in its recent Integrated Project Team report on traffic safety data systems, it could incorporate these recommendations through improved oversight efforts. Finally, one requirement present in the earlier program—up-to-date assessments of state traffic safety data systems—was not included in recent proposals to reauthorize the 411 grant program. These assessments proved a valuable tool to states in developing and updating their strategic plans and activities for the 411 grant program. They also provide NHTSA with valuable information, including the current status of state traffic safety data systems organized by NHTSA’s own recommended quality criteria. In considering the reauthorization of the traffic safety incentive grant program, the Congress should consider including the requirement that states have their traffic safety data system assessed or an update of the assessment conducted at least every 5 years. If the Congress reauthorizes the traffic safety data incentive grant during the next session, we recommend that the Secretary of Transportation direct the Administrator, National Highway Traffic Safety Administration, to do the following: Ensure better accountability and better reporting for the grant program by outlining a process for regional offices to manage and archive grant documents. Establish a formal process for monitoring and overseeing 411-funded state activities. Specifically, the process should provide guidance for submitting consistent and complete annual reporting on progress for as long as funds are being expended. These progress reports should, at a minimum, include the status of allocated funds, documentation indicating how states intend to use the current year grant funds, a list of projects implemented in the past fiscal year, brief descriptions of activities completed, and any problems encountered. Establish a formal process for ensuring that assessments, strategic plans, and progress reports contain the level of detail needed to adequately assess progress and are appropriately linked to each other. Agency Comments and We provided a draft of this report to the Department of Transportation for Our Evaluation its review and comment. Generally, the department agreed with the recommendations in this report. Department officials provided a number of technical comments and clarifications, which we incorporated as appropriate to ensure the accuracy of our report. These officials raised two additional points that bear further comment. First, officials voiced concern regarding the use of data quality criteria from NHTSA’s Traffic Records Highway Safety Program Advisory to review the quality of data or the performance of states. The department emphasized that these criteria are voluntary and states are not required to meet them; therefore, states should not be judged against them. We acknowledge that these criteria are voluntary and clarified the report to emphasize this point more fully. However, we used the criteria as a framework for providing information on the status of state systems and view this analysis as appropriate since these criteria are used by NHTSA in conducting assessments of state traffic safety data systems. Second, department officials noted that their oversight of the 411 grant program was in accordance with the statutory requirements. Although we recognize that there were minimal requirements for the 411 grant program specifically, we believe the department should carry out more extensive oversight activities so that NHTSA can monitor the progress states are making to improve their traffic safety data systems and better ensure that states are spending the grant monies as intended. We will send copies of this report to the interested congressional committees, the Secretary of Transportation, and other interested parties. 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 staff have any questions about this report, please call me at (202) 512-6570. Key contributors to this report are listed in appendix IV. The objectives in this report were to identify (1) the quality of state crash information; (2) the activities states undertook using 411 grant funds to improve their traffic safety data systems, and progress made using the data improvement grants; and (3) the National Highway Traffic Safety Administration’s (NHTSA) oversight of the grant program, including what changes in oversight, if any, might help encourage states to improve traffic safety data systems and ensure accountability under a reauthorized program. To address these objectives, we conducted case-study visits to 9 states, analyzed state crash data, interviewed key experts, reviewed 411 grant program documentation, and interviewed NHTSA officials regarding their oversight and guidance to states in improving their traffic safety data systems. To provide information on the quality of state crash data and state efforts to improve these data, we conducted site visits to 9 states, including California, Iowa, Kentucky, Louisiana, Maine, Maryland, Tennessee, Texas, and Utah. The case-study states were chosen on the basis of a variety of criteria, including population, fatality rates, participation in the 411 grant program, the level of funding received through the program, and participation in the State Data System (SDS) program and the Crash Outcome Data Evaluation System (CODES). We adopted a case-study methodology for two reasons. First, we were unable to determine the status of state systems from our review of 411 documents. Second, while the results of the case studies cannot be projected to the universe of states, the case studies were useful in illustrating the uniqueness and variation of state traffic safety data systems and the challenges states face in improving them. During our case-study visits, we met and discussed the status of state traffic data systems with a variety of traffic safety data officials. These discussions included gathering information on NHTSA’s criteria, state objectives, and the progress made with 411 grant funds. In addition to these case-study visits, we analyzed data for 17 states that currently participate in NHTSA’s SDS program to identify variations in data structure and quality. We selected a number of elements to assess the quality of data as they related to completeness, consistency, and accuracy for 5 of the 17 states that were part of the SDS program and also part of our case-study visits. We based the analysis on data and computer programs provided by NHTSA. We reviewed the programs for errors and determined that they were sufficiently accurate for our purposes. (See app. II.) Finally, we interviewed key experts who use traffic safety data, including consultants, highway safety organizations, and researchers. In order to describe the activities that states undertook to improve their traffic safety data systems and the progress made under the data improvement grant, we reviewed 411 grant documentation for all 48 participating states, including 8 of our 9 case-study states. Our review included examining required documents states submitted to NHTSA, including their assessments, strategic plans, and grant applications and progress reports. We obtained these documents from NHTSA regional offices. For the case-study states, we also obtained additional documentation, including 411 grant expenditure information, in order to (1) describe state activities and progress made and (2) compare actual expenditures with the activities states reported to NHTSA. To review NHTSA’s oversight of the 411 grant program, we interviewed NHTSA officials responsible for oversight and administration of the program. Our interviews were conducted with NHTSA program staff at headquarters and in all 10 NHTSA regional offices. We also discussed program oversight with state officials in 8 of our 9 case-study states. We reviewed NHTSA guidance and policy, including regulations for the 411 grant program and rules issued by NHTSA for the program. We also reviewed previous House and Senate bills that were introduced reauthorizing the 411 grant program. Finally, in order to understand NHTSA’s broader role in oversight, we spoke with NHTSA staff and reviewed NHTSA’s response to our recommendations that it improve its oversight. We conducted our review from January 2004 through October 2004 in accordance with generally accepted government auditing standards. Because an examination of data quality was one of the objectives of this report, we also conducted an assessment of data reliability. Appendix II contains a more complete discussion of data reliability. As part of our work, we examined data quality for 17 states that participate in NHTSA’s SDS program. The body of our report presents several examples of the kinds of limitations we found; this appendix contains additional examples. The examples discussed below relate to two of NHTSA’s quality criteria—data consistency and data completeness. The extent to which a state captures information about various data elements has much to do with the standards or thresholds it sets for what should be reported in crash reports. NHTSA’s Model Minimum Uniform Crash Criteria (MMUCC) recommends that every state have reporting thresholds that include all crashes involving death, personal injury, or property damage of $1,000 or more; that reports be computerized statewide; and that information be reported for all persons (injured and uninjured) involved in the crash. We found these thresholds differed from state to state. Two thresholds, in particular, create variation in the data: (1) criteria for whether a crash report must be filed and (2) criteria for whether to report information about uninjured occupants. Determining Which Crashes The states varied greatly in their policies on when a police report must be Require a Crash Report filed. Fourteen of the 17 states set a property damage threshold, but the threshold varied from less than $500 to as much as $1,000 (see fig. 6). Among the other 3 states, 1 left the reporting of property-damage-only crashes to the officer’s discretion, and 2 stipulated that no report is to be filed unless at least one vehicle has to be towed from the scene. Thus, a crash involving $900 of damage to an untowed vehicle would be reported in some states but not in others. Similarly, some states did not collect information about uninjured passengers involved in crashes. (See fig. 7.) While all 17 states collected information about uninjured drivers (such as whether he or she was wearing a seat belt), 5 did not collect such information about uninjured passengers. Such information could potentially be important, for example, in assessing the degree to which seat belt use helped prevent injuries from occurring. Even for states that collected information about uninjured passengers, the information may be incomplete. NHTSA officials said they thought that in these states, some officers left seat belt information blank or coded it as “unknown,” either because reporting officers did not know the information or because collecting it was too time-consuming. Alcohol and drug data also showed state-to-state differences, both in consistency and completeness. Alcohol and drug data are important in addressing a major safety issue—impaired driving. In 2000, crashes in which drivers had blood-alcohol levels above .08 (.08 recently became the threshold for being legally impaired in all 50 states) accounted for an estimated 2 million crashes that killed nearly 14,000 people and injured nearly 470,000 others. Alcohol-related crashes in the United States that year cost an estimated $114.3 billion. To assess the quality of these data in the SDS program, we selected 5 states for detailed review. The states, chosen because they were also visited as part of our case studies, were California, Kentucky, Maryland, Texas, and Utah—although they are not identified by name in the results below. We looked at the degree to which they conform to guidelines recommended in the MMUCC with regard to the consistency and completeness of their data. Information collected about alcohol- and drug-impaired driving varied from state to state and was not consistent with MMUCC guidelines. Table 5 provides examples of this variation by comparing crash information submitted by states with the recommended guidelines. The table shows MMUCC’s recommended guidelines for four elements—two elements each for alcohol and drugs. One element relates to whether the officer suspects alcohol or drug use, and the other to an actual test for alcohol or drugs. All 5 states collected some type of information on suspected alcohol or drug use, but each state differed from the others to some degree. Three states, for example, collected this information as part of a broader element that includes suspected alcohol and drug use as one attribute in a list of causes that might have contributed to the crash. For alcohol and drug testing, 1 state did not report such testing at all, and the 4 others differed both from each other and from MMUCC guidelines. To determine the completeness of state data files regarding impaired driving, we looked at alcohol test result data that were coded as “missing” or “unknown.” Figures 8 and 9 show the results for the first and last years we reviewed. The percentage of data recorded as missing varied from 0 percent to more than 12 percent, while the percentage of data recorded as unknown varied from 0 percent to more than 6 percent.In addition, the 2 states with the most data in these two categories were almost mirror images of each other: that is, state D showed no data as missing but had the highest percentage of data classified as unknown, while state E showed virtually no data as unknown but had the highest percentage of data classified as missing. These variations could reflect differences in how states classify and record information. For example, NHTSA officials said some states may code an alcohol test result that comes back indicating no alcohol in the driver’s blood stream as missing or unknown, rather than “negative” or “.00.” Because the alcohol and drug data in SDS are subject to so many problems with completeness and consistency, many researchers and state policy makers use alcohol and drug data from the Fatality Analysis Reporting System (FARS) database instead. This database, which is also administered by NHTSA, contains information on crashes involving fatalities that occur within 30 days of the crash. FARS is generally seen as a reliable data source, with quality control measures and personnel that do as much follow-up as possible to fill in data gaps by contacting hospitals, medical offices, and coroners’ offices to obtain accurate and complete information. However, FARS contains information only on fatal crashes—about 1 percent of all crashes. Thus, while the FARS data may be more complete and consistent for those crashes that are included, the vast majority of alcohol- and drug-related crashes are not included. Further, NHTSA imputes some of the alcohol information because even with follow-up there are often gaps in data. Federal Motor Carrier Safety Administration (FMCSA) The Commercial Vehicle Analysis and Reporting Systems is a cooperative effort between NHTSA and FMCSA to improve collection of bus and truck data. Its aim is to improve the national data system for all crashes involving commercial motor vehicles and to develop a national analytical data system similar to the Fatality Analysis Reporting System for commercial vehicles. Federal Highway Administration (FHWA) The Highway Safety Information System (HSIS) is a 9-state database that contains crash, roadway inventory, and traffic volume data. Under contract with FHWA, the University of North Carolina Highway Safety Research Center and LENDIS Corporation operate the system. The HSIS uses state highway data for the study of highway safety. The system is able to analyze a large number of safety problems, ranging from more basic "problem identification" issues to identify the size and extent of a safety problem to modeling efforts that attempt to predict future accidents from roadway characteristics and traffic factors. American Association of State Highway and Transportation Officials (AASHTO) The Transportation Safety Information Management System (TSIMS) is a joint application development project sponsored by AASHTO to enable states to link crash data with associated driver, vehicle, injury, commercial carrier, and roadway characteristics. TSIMS is an enterprise safety data warehouse that will extend and enhance the safety analysis capabilities of current state crash records information systems by integrating crash data with other safety-related information currently maintained by each state. Association of Transportation Safety Information Professionals (ATSIP) ATSIP aims to improve traffic safety data systems by (1) providing a forum on these systems for state and local system managers, including the collectors and users of traffic safety data; (2) developing, improving, and evaluating these systems; (3) encouraging the use of improved techniques and innovative procedures in the collection, storage, and uses of traffic safety data; and (4) serving as a forum for the discussion of traffic safety data programs. In addition to those individuals named above, Nora Grip, Brandon Haller, Molly Laster, Dominic Nadarski, Beverly Ross, Sharon Silas, Stan Stenersen, and Stacey Thompson made key contributions to this report.

Auto crashes kill or injure millions of people each year. Information about where and why such crashes occur is important in reducing this toll, both for identifying particular hazards and for planning safety efforts at the state and federal levels. Differences in the quality of state traffic data from state to state, however, affect the usability of data for these purposes. The National Highway Traffic Safety Administration (NHTSA) administers a grant program to help states improve the safety data systems that collect and analyze crash data from police and sheriff's offices and other agencies, and the Congress is considering whether to reauthorize and expand the program. The Senate Appropriations Committee directed GAO to study state systems and the grant program. Accordingly, GAO examined (1) the quality of state crash information, (2) the activities states undertook to improve their traffic records systems and any progress made, and (3) NHTSA's oversight of the grant program. States vary considerably in the extent to which their traffic safety data systems meet recommended criteria used by NHTSA to assess the quality of crash information. These criteria relate to whether the information is timely, consistent, complete, and accurate, as well as to whether it is available to users and integrated with other relevant information, such as that in the driver history files. GAO reviewed systems in 9 states and found, for example, that some states entered crash information into their systems in a matter of weeks, while others took a year or more. While some systems were better than others, all had opportunities for improvement. States reported carrying out a range of activities to improve their traffic safety data systems with the grants they received from NHTSA. Relatively little is known about the extent to which these activities improved the systems, largely because the documents submitted to NHTSA contained little or no information about what the activities accomplished. The states GAO reviewed used their grant funds for a variety of projects and showed varying degrees of progress. These efforts included completing strategic plans, hiring consultants, and buying equipment to facilitate data collection. NHTSA officials said their oversight of the grant program complied with the statutory requirements, but for two main reasons, it does not provide a useful picture of what states were accomplishing. First, the agency did not provide adequate guidance to ensure that states provided accurate and complete data on what they were accomplishing with their grants. Second, it did not have an effective process for monitoring progress. The agency has begun to take some actions to strengthen oversight of all its grant programs. If the Congress decides to reauthorize the program, however, additional steps are needed to provide effective oversight of this particular program. GAO also noted that in proposing legislation to reauthorize the program, one requirement was omitted that may be helpful in assessing progress--the requirement for states to have an up to date assessment of their traffic data systems.

You are an expert at summarizing long articles. Proceed to summarize the following text: Taxpayers’ experience depends heavily on IRS’s performance during the tax filing season, roughly mid-January through mid-April. During this period, millions of taxpayers who are trying to fulfill their tax obligations contact IRS over the phone, face-to-face, and via the Internet to obtain answers to tax law questions and information about their tax accounts. This period is also when IRS processes the bulk of the approximate 140 million returns it will receive, runs initial compliance screens, and issues over 100 million refunds. In recent years, IRS has improved its returns processing but has seen its taxpayer service performance deteriorate. For years we have reported that electronic filing (e-filing) has many benefits for taxpayers, such as higher accuracy rates and faster refunds compared to filing on paper. So far in 2012, the percentage of e-filed returns has increased by 1.9 percentage points to 88.8 percent since about the same time last year (a 2.2 percent increase), as table 1 shows. Since the same time in 2007, the percentage of e-filed returns has increased from 72.3 percent to 88.8 percent. This year, IRS may meet its long-held goal of having 80 percent of individual tax returns e-filed. However, the overall e-file percentage is likely to decline as the tax filing season ends since IRS typically receives more returns filed on paper later in the filing season. In addition, IRS is in the midst of a multi-phase modernization project, known to as the Customer Account Data Engine (CADE) 2, which will fundamentally change how it processes returns. With CADE 2, IRS also expects to be able to issue refunds in 4 business days for direct deposit and 6 business days for paper checks after IRS processes the return and posts the return data to the taxpayer’s account. Early in the 2012 filing season, IRS experienced two processing problems that delayed refunds to millions of taxpayers, and reported the problems had been resolved by mid-February. We summarized these problems in an interim report on the 2012 filing season. Providing good taxpayer service is important because, without it, taxpayers may not be able to obtain necessary and accurate information they need to comply with tax laws. In addition, more and more, taxpayers are relying on IRS’s website to obtain information and execute transactions, making it important that IRS have a modern website. However, as we have reported, IRS has experienced declines in performance in selected taxpayer service areas, most notably with respect to providing live telephone assistance and timely responses to taxpayers’ correspondence.from IRS to paper correspondence or have access to information online, they call IRS, correspond again, or seek face-to-face assistance—all of which are costly to IRS and burdensome to the taxpayer. Table 2 shows the declines in telephone service and paper correspondence and the goals for 2012 and 2013. Additional performance data is shown in appendix I. To improve the taxpayer experience and voluntary compliance, IRS has a range of options. Some of its options could provide taxpayers with better information to accurately fulfill their tax obligations. Other options would allow IRS to take enforcement actions sooner and with less burden on taxpayers. Simplifying the tax code could reduce unintentional errors and make intentional tax evasion harder. GAO-12-176. develop an online locator tool listing volunteer tax preparation sites— and IRS introduced an enhanced volunteer site locator tool in 2012;complete an Internet strategy that provides a justification for online self-service tools as IRS expands its capacity to introduce such tools. In addition to actions we recommended, IRS is also studying ways to better communicate with taxpayers and determine which self-service tools would be the most beneficial to taxpayers. According to IRS officials, the study should be completed later this year. Identifying more efficient ways to provide service also benefits IRS because it is able to make better use of scarce resources. GAO-12-176. most effective for improving the quality of tax returns prepared by different types of paid preparers. Likewise, IRS has discussed how to measure the effect of the requirements such as requiring continuing education and testing on tax return accuracy. It will take years to implement the approach as it will likely evolve over time and become more detailed. Tax preparation software is another critical part of tax administration. Almost 30 percent of taxpayers use such software to prepare their returns and, in the process, understand their tax obligations, learn about tax law changes, and get questions answered. Many also electronically file through their software provider. Consequently, tax software companies are another important intermediary between taxpayers and IRS. We have reported that IRS has made considerable progress in working with tax software companies to provide, for example, clearer information about why an e-filed return was not accepted, require additional information on returns to allow for IRS to better identify the software used, and enhance security requirements for e-filing. To illustrate the potential for leveraging tax software companies to improve taxpayer compliance, 4 years ago we recommended and IRS agreed to expand outreach efforts to external stakeholders and include software companies as part of an effort to reduce common types of misreporting related to rental real estate. In another report, we discussed the value of research to better understand how tax software influences compliance. IRS has volunteer partners, often nonprofit organizations or universities, that staff over 12,000 volunteer sites. Volunteers at these sites prepare several million tax returns for traditionally underserved taxpayers, including the elderly, low-income, disabled, and those with limited English proficiency. In recent reports we have made recommendations about estimating of the effectiveness of targeting underserved populations at such sites and making it easier for taxpayers to find the locations of nearby sites.to work with these volunteer partners to help improve assistance to taxpayers with the goal of improving compliance. Information reporting is a proven tool that reduces tax evasion, reduces taxpayer burden, and helps taxpayers voluntarily comply. This is, in part, because taxpayers have more accurate information to complete their returns and do not have to keep records themselves. In addition, IRS research shows that when taxpayers know that IRS is receiving data from third parties, they are more likely to correctly report the income or expenses to IRS. As part of its recent update of its tax gap estimates, IRS estimated that income subject to substantial information reporting, such as pension, dividend, interest, unemployment, and Social Security income, was misreported at an 8 percent rate compared to a 56 percent misreporting rate for income with little or no information reporting, such as sole proprietor, rent, and royalty income. GAO, Tax Administration: Costs and Uses of Third-Party Information Returns, GAO-08-266 (Washington, D.C.: Nov. 20, 2007). have not entered into an agreement with IRS to report details on U.S. account holders to IRS. As these three sets of information reporting requirements have only recently taken effect, it is too soon to tell the impact they are having on taxpayer compliance. We have made recommendations or suggested possible legislative changes in several other areas in which IRS could benefit from additional information reporting. They include the following: Service payments made by landlords. Taxpayers who rent out real estate are required to report to IRS expense payments for certain services, such as payments for property repairs, only if their rental activity is considered a trade or business. However, the law does not clearly spell out how to determine when rental real estate activity is considered a trade or business. Service payments to corporations. Currently, businesses must report to IRS payments for services they make to unincorporated persons or businesses, but payments to corporations generally do not have to be reported. Broader requirements for these two forms of information reporting, covering goods in addition to services, were enacted into law in 2010, but later repealed. We believe the more narrow extensions of information reporting to include services, but not goods, remain important options for improving compliance. Additionally, we have identified existing information reporting requirements that could be enhanced. Examples include the following: Mortgage interest and rental real estate. We recommended requiring information return providers to report the address of a property securing a mortgage, mortgage balances, and an indicator of whether the mortgage is for a current year refinancing when filing mortgage interest statements (Form 1098) could help taxpayers comply with and IRS enforce rules associated with the mortgage interest deduction. We have reported that collecting the address of the secured property on Form 1098 would help taxpayers better understand and IRS better enforce requirements for reporting income from rental real estate. Higher education expenses. Eligible educational institutions are currently required to report information on qualified tuition and related expenses for higher education so that taxpayers can determine the amount of educational tax benefits they can claim. However, the reporting does not always separate eligible from ineligible expenses. We recommended revising the information reporting form could improve the usefulness of reported information. Identifying additional third-party reporting opportunities is challenging. Considerations include whether third parties exist that have accurate information available in a timely manner, the burden of reporting, and whether IRS can enforce the reporting requirement. We have noted, for example, that the reason there is little third-party reporting on sole proprietor expenses is because of the difficulty of identifying third parties that could report on expense like the business use of cars. Modernized systems should better position IRS to conduct more accurate and faster compliance checks, which benefits taxpayers by detecting errors before interest and penalties accrue. In addition, modernized systems should result in more up-to-date account information, faster refunds, and other benefits, such as clearer notices so that taxpayers can better understand why a return was not accepted by IRS. Two new, modernized systems IRS is implementing include the following: Customer Account Data Engine (CADE) 2. For the 2012 filing season, IRS implemented the first of three phases to introduce modernized tax return processing systems. Specifically, IRS introduced a modernized taxpayer account database, called CADE 2, and moved the processing of individual taxpayer accounts from a weekly to a daily processing cycle. IRS expects that completing this first phase will provide taxpayers with benefits such as faster refunds and notices and updated account information. IRS initially expected to implement phase two of CADE 2 implementation by 2014. However, IRS reported that it did not receive funding in fiscal year 2011 that would have allowed it to meet the 2014 time frame. Modernized e-File (MeF). IRS is in the final stages of retiring its legacy e-file system, which preparers and others use to transmit e- filed returns to IRS, and replacing it with MeF. Early in the 2012 filing season, IRS experienced problems transferring data from MeF to other IRS systems. IRS officials said that they solved the problem in early February. IRS officials recently reiterated their intention to turn off the legacy e-file in October 2012 as planned. However, more recently, IRS processing officials told us they would reevaluate the situation after the 2012 filing season. MeF’s benefits include allowing taxpayers to provide additional documentation via portable document files (PDF), as opposed to filing on paper. In addition, MeF should generate clearer notices to taxpayers when a return is rejected by IRS compared to the legacy e-file system. The Commissioner of Internal Revenue has talked about a long-term vision to increase pre-refund compliance checks before refunds are sent to taxpayers. As previously noted, early error correction can benefit taxpayers by preventing interest and penalties from accumulating. In one example, IRS is exploring a process where third parties would send information returns to IRS earlier so they could be matched against taxpayers’ returns when the taxpayer files the return as opposed to the current requirement that some information returns go to taxpayers before being sent to IRS. The intent is to allow IRS to match those information returns to tax returns during the filing season rather than after refunds have been issued. Another option for expanding pre-refund compliance checks is additional math error authority (MEA) that Congress would need to grant IRS through statute. MEA allows IRS to correct calculation errors and check for obvious noncompliance, such as claims above income and credit limits. Despite its name, MEA encompasses much more than simple arithmetic errors. It also includes, for instance, identifying incorrect Social Security numbers or missing forms. The errors being corrected can either be in the taxpayers’ favor or result in additional tax being owed. MEA is less intrusive and burdensome to taxpayers than audits and reduces costs to IRS. It also generally allows taxpayers who make errors on their returns to receive refunds faster than if they are audited. This is due, in part, to the fact that IRS does not have to follow its standard deficiency procedures when using MEA—it must only notify the taxpayer that the assessment has been made and provide an explanation of the error. Taxpayers have 60 days after the notice is sent to request an abatement. Although IRS has MEA to correct certain errors on a case-by-case basis, it does not have broad authority to do so. In 2010, we suggested that Congress consider broadening IRS’s MEA with appropriate safeguards against the misuse of that authority. In the absence of broader MEA, we have identified specific cases where IRS could benefit from additional MEA that have yet to be enacted. These include authority to: use prior years’ tax return information to ensure that taxpayers do not improperly claim credits or deductions in excess of applicable lifetime limits, use prior years’ tax return information to automatically verify taxpayers’ compliance with the number of years the Hope credit can be claimed, and identify and correct returns with ineligible (1) individual retirement account (IRA) “catch-up” contributions and (2) contributions to traditional IRAs from taxpayers over age 70½. In 2009, Congress enacted our suggestion that IRS use MEA to ensure that taxpayers do not improperly claim the First-Time Homebuyer Credit in multiple years, which we estimate resulted in savings of about $95 million. Tax code complexity can make it difficult for taxpayers to voluntarily comply. Efforts to simplify or reform the tax code may help reduce burdensome record keeping requirements for taxpayers and make it easier for individuals and businesses to understand and voluntarily comply with their tax obligations. For example, eliminating or combining tax expenditures, such as exemptions, deductions, and credits, could help taxpayers reduce unintentional errors and limit opportunities for tax evasion. Frequent changes in the tax code also reduce its stability, making tax planning more difficult and increasing uncertainty about future tax liabilities. Limiting the frequency of changes to the tax code could also help reduce calls to IRS with questions about the changes. We have reported that IRS annually receives millions of calls about tax law changes. Reducing complexity in the tax code could take a variety of forms, ranging from comprehensive tax reform to a more incremental approach focusing on specific tax provisions. Policymakers may find it useful to compare any proposed changes to the tax code based on a set of widely accepted criteria for assessing alternative tax proposals. These criteria include the equity, or fairness, of the tax system; the economic efficiency, or neutrality, of the system; and the simplicity, transparency, and administrability of the system. These criteria can sometimes conflict, and the weight one places on each criterion will vary among individuals. Our publication Understanding the Tax Reform Debate: Background, Criteria, & Questions may be useful in guiding policymakers as they consider tax reform proposals. In closing, improving the taxpayer experience and increasing voluntary compliance will not be achieved through a single solution. Because voluntary compliance is influenced by so many factors, multiple approaches, such as those listed here, will be needed. Chairman Baucus, Ranking Member Hatch, and Members of the Committee, this completes my prepared statement. I would be happy to respond to any questions you and Members of the Committee may have at this time. For further information regarding this testimony, please contact James R. White, Director, Strategic Issues, 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 statement. Individuals making key contributions to this statement include Joanna Stamatiades, Assistant Director; LaKeshia Allen; David Fox; Tom Gilbert; Kirsten Lauber; Sabrina Streagle, and Weifei Zheng. As shown in table 3, in recent years, the level of access to telephone assistors has declined and average wait time has increased. In addition, the volume of overage correspondence has steadily increased. On a positive note, tax law and account accuracy remains high. As shown in table 4, access to IRS assistors has declined over the last few years. IRS officials attribute the higher-than-planned level of service so far this year to a slight decline in the demand for live assistance. At the same time, the number of automated calls has significantly increased which IRS officials attributed in part to taxpayers calling about refunds, and requesting transcripts (i.e., a copy of their tax return information).

The U.S. tax system depends on taxpayers calculating their tax liability, filing their tax return, and paying what they owe on time—what is often referred to as voluntary compliance. Voluntary compliance depends on a number of factors, including the quality of IRS’s assistance to taxpayers, knowledge that its enforcement programs are effective, and a belief that the tax system is fair and other people are paying their share of taxes. Voluntary compliance is also influenced by other parties, including paid tax return preparers, tax software companies, and information return filers (employers, financial institutions, and others who report income or expense information about taxpayers to IRS). For this testimony, GAO was asked to (1) evaluate the current state of IRS’s performance and its effect on the taxpayer experience, and (2) identify opportunities to improve the taxpayer experience and voluntary compliance. This testimony is based on prior GAO reports and recommendations. Additionally, GAO analyzed IRS data in delivering selected taxpayer services in recent years. The Internal Revenue Service (IRS) has made improvements in processing tax returns, and electronic filing (e-filing), which provides benefits to taxpayers including faster refunds, continues to increase. However, IRS’s performance in providing service over the phone and responding to paper correspondence has declined in recent years. For 2012, as with previous years, IRS officials attribute the lower performance to other funding priorities. The following are among the opportunities to improve the taxpayer experience and increase voluntary compliance that GAO identifies in this testimony: IRS can provide more self-service tools to give taxpayers better access to information. IRS can create an automated telephone line for amended returns (a source of high call volume) and complete an online services strategy that provides justification for adding new self-service tools online. Better leveraging of third parties could provide taxpayers with other avenues to receive service. Paid preparers and tax software providers combine to prepare about 90 percent of tax returns. IRS is making progress implementing new regulation of paid preparers. As it develops better data, IRS should be able to test strategies for improving the quality of tax return preparation by paid preparers. Similarly, IRS may also be able to leverage tax software companies. Expanded information reporting could reduce taxpayer burden and improve accuracy. Expanded information reporting, such as the recent requirements for banks and others to report businesses’ credit card receipts to IRS, can reduce taxpayers’ record keeping and give IRS another tool. Implementing modernized systems should provide faster refunds and account updates. Modernized systems should allow IRS to conduct more accurate and faster compliance checks, which benefits taxpayers by detecting errors before interest and penalties accrue. Expanding pre-refund compliance checks could result in more efficient error correction. Expanding such checks could reduce the burden of audits on taxpayers and their costs to IRS. Reducing tax complexity could ease taxpayer burden and make it easier to comply. Simplifying the tax code could reduce unintentional errors and make intentional tax evasion easier to detect. GAO has made numerous prior recommendations that could help improve the taxpayer experience. Congress and IRS have acted on some recommendations, while others are reflected in the strategies presented in this testimony.

You are an expert at summarizing long articles. Proceed to summarize the following text: As we have reported in the past, the impact of all types of invasive species in the United States is widespread, and their consequences for the economy and the environment are profound. Invasive species are found on agricultural cropland and in natural and urban areas, and can be either terrestrial or aquatic. Invasive species represent all taxonomic groups— plants, animals, and microorganisms—and cause harm by multiplying rapidly, crowding out native species, damaging agricultural and industrial resources, and generally altering natural systems. For example, they can alter entire ecosystems by disrupting food chains, preying on critical native species such as pollinators, increasing the frequency of fires, or—as in the case of some plants—simply overshadowing and outcompeting native plants. As such, many scientists believe that invasive species are a significant threat to biodiversity and many endangered species in the United States. The cost to control invasive species and the cost of damages they inflict, or could inflict, on property or natural resources are estimated to total billions of dollars annually. Once they have arrived, invasive species are hard to eradicate. As the Fish and Wildlife Service noted, “Invasive species management is a never-ending activity because of the insidious and explosive nature of the species themselves. Elimination of established populations of multiple invasive species has not yet been demonstrated in the 100-year history of the Refuge System.” The Plant Conservation Alliance—an organization created in 1994 to protect native plants by ensuring that their populations and communities are maintained, enhanced, and restored—estimates that about 4,000 foreign plant species have been introduced into the United States since European settlement began, and as many as 1,000 of these have been identified as a threat to our native flora and fauna as a result of their aggressive, invasive characteristics. All 50 states have been affected, although certain states are particularly hard hit. California, Florida, and Hawaii are hosts to an estimated 2,000 nonnative plants, or half of the 4,000 that exist nationwide. Some of the 4,000 introduced plant species were brought as food crops and do not display invasive or harmful characteristics. Others arrived by accident, perhaps germinated from seeds either contaminating otherwise beneficial commodities such as grain or in the soil once used as ships’ ballast. Other plant species were introduced intentionally to serve some purpose or as an ornamentally desirable plant. Kudzu, for example—a rapidly growing vine that thrives in the southeastern and mid-Atlantic United States—was intentionally introduced from Japan by USDA in the 1930s to control soil erosion but has now overtaken many natural areas. Similarly, multiflora rose was promoted for use as a living fence, like hedgerows on pastureland, but has spread far beyond its original purpose. Ornamentally pleasing but also invasive plants include English ivy, autumn olive, Japanese honeysuckle, and purple loosestrife. Some species that are considered invasive—autumn olive, for example—are still advertised as beneficial to the environment because they are a food source for wildlife. However, once established, the seeds of invasive plants can spread through wind, water, and animals, and by hitching a ride on people or their vehicles. Invasive weeds may also take hold or spread as a result of disturbances in ecological systems. Disturbances could include deforestation, road building, or changes in water quality or quantity. Historically, weed control has been practiced primarily in agricultural areas. However, there is a growing recognition that invasive weeds’ effects are felt throughout natural areas as well. For example, sagebrush-grassland ecosystems such as those in the Great Basin states, including Idaho, Nevada, Oregon, and Washington, are degraded by cheatgrass, introduced from Eurasia. This grass, along with other nonnative grasses such as medusahead, are now the dominant plant species on tens of millions of acres in the West. Because cheatgrass tolerates wildfire and adds to fuel loads, it has increased the frequency of major fires in these grasslands— ecosystems that cannot handle frequent, intense fires—thereby causing a near extirpation of native flora and fauna. In the Northeast and Midwest, purple loosestrife is rapidly degrading wetlands by filling in open waters with dense stands—some thousands of acres in size. In the Southwest, tamarisk—also known as salt cedar—proliferates along streams in otherwise arid landscapes, ousting native trees and shrubs upon which native animals depend while also lowering water tables. This report focuses on efforts to manage terrestrial invasive weeds in nonagricultural areas, including forests, rangelands, parks, and urban areas. A wide range of organizations and individuals manage and control invasive weeds on nonagricultural lands across the United States, including federal, state and local agencies; large and small nongovernmental organizations; and private landowners. The weed management activities of these entities are guided by federal and state laws, agency policies and regulations, executive initiatives, or natural resource management principles. The four major land management agencies we examined are responsible for the vast majority of federal lands in the United States—over 630 million acres out of a total of over 700 million acres (BLM, 261 million; Forest Service, 193 million; FWS, 96 million; NPS, 84 million). As directed by the various statutes that they implement, these agencies are to ensure they manage the lands under their jurisdiction for a variety of important economic, recreation, and conservation purposes. While the laws do not specifically require the agencies to control invasive weeds, they give the agencies broad authority to guard against threats to the resources they are responsible for protecting. For example, invasive weeds such as leafy spurge and yellow star thistle, which degrade western rangelands, hamper BLM’s ability to ensure adequate forage for grazing; some rangeland weed species are actually toxic or fatal if consumed by livestock, while others displace desirable native grasses. Invasive weeds are also crowding out some native species on national wildlife refuges and other federal lands, harming threatened or endangered species or other protected wildlife. The Fish and Wildlife Service reported that invasive weeds interfere significantly with meeting wildlife objectives on nearly 50 percent of its refuges. In addition, invasive weeds that increase fuels can feed high- intensity fires and crowd out seedlings, thereby hindering the Forest Service’s ability to manage forests for sustainable timber harvests. Three of the four agencies—BLM, the Forest Service, and the Fish and Wildlife Service—are authorized to expend funds to protect resources outside of lands they manage, which is important in battling invasive weeds as the weeds do not respect jurisdictional borders. The National Park Service does not have this authority. While the federal agencies may use these broad authorities for natural resource management to control weeds, section 15 of the Federal Noxious Weed Act requires federal agencies to have a management program for the control of some invasive plant species. As authorized under the Plant Protection Act, USDA’s APHIS maintains a list of noxious weeds—plants or plant products that can cause certain harms, including damage to agricultural or natural resources. The current list contains 96 plant taxa, about one-half of which are known to be in the United States, according to USDA. This represents a small percentage of the overall number of plants that have invaded the country. USDA’s APHIS is authorized to take a number of actions to prevent the introduction or spread of these listed weeds and may cooperate with other federal agencies. In addition, Executive Order 13112 directs federal agencies to take actions against invasive species, including preventing their introduction, providing for their control, and conducting relevant research. The order, issued in 1999, established a National Invasive Species Council, comprising the heads of certain federal departments and agencies, and directed the council to develop a national management plan for invasive species; the resulting plan contains action items for the land management agencies (and others). For example, the plan called upon agencies to request additional funding through the annual appropriation process, to reduce the spread of invasive species from federal lands to neighboring areas, and to lessen the impact of invasive species on natural areas. To help carry out their responsibilities, the four land management agencies have either strategic plans or other policy or management guidance for addressing invasive species. In addition, the agencies have done some assessments of the extent of weed infestations on federal lands. All have identified significant infestations and taken actions to treat weeds, although officials noted to us that, because the agencies have only recently used standardized methods of measuring infestations or areas treated, comparisons over time must be done with caution. They also cautioned us that treating an acre of weeds does not necessarily mean controlling the weeds on that acre; subsequent treatments are likely to be necessary. (See table 1 for agency estimates.) According to most federal officials we spoke with (15 of 18), weed infestations are getting worse. The Forest Service estimated in 1998 that weed infestations were increasing on its lands by approximately 8 percent to 12 percent annually. Recognizing the threat that infestations pose, federal agencies try to control weeds by pulling them out by hand, mowing, applying herbicides, and using biological control agents, among other methods. For example, in 2002, the National Park Service distributed approximately 5 million flea beetles in three parks in North Dakota, South Dakota, and Wyoming in an attempt to biologically control leafy spurge. In the Washington, D.C., area, National Park Service staff members have manually removed Japanese stiltgrass to protect sensitive native species. Often, a combination of methods, known as integrated pest management, is needed. For example, federal agencies have used a combination of chemical and mechanical methods—including burning and plowing—to manage tamarisk in the West. They are also experimenting with biological control. In Hawaii, USDA and Interior have supported efforts to suppress an invasive tree (miconia) by uprooting it, spraying herbicide from helicopters, and using a fungal biological control agent. Such actions, though, are resource intensive, and agencies often do not have enough staff to carry out many projects. In 2000, to address the issue of a lack of on-site staff, the National Park Service created Exotic Plant Management Teams, which move among the parks to control harmful plants. The Park Service has found these teams to be an effective tool and expanded the program to 16 teams that cover 209 of the 388 units in the national park system (see fig. 1). The Fish and Wildlife Service also began to use this approach in fiscal year 2004 with three so-called “strike teams” that work at refuges in the Everglades, the Lower Colorado River, and the Columbia-Yellowstone- Missouri River areas. In light of staffing limitations, all four land management agencies also seek volunteers to help control invasive weeds. For example, the Fish and Wildlife Service is using trained volunteers to help with early detection at six refuges. In general, the agency reports that volunteers conduct about 20 percent of all work on refuges, which now includes assisting with noxious weed activities. Sixteen federal agencies—including the 4 federal land management agencies we reviewed—also work toward better weed control by participating in the Federal Interagency Committee for the Management of Noxious and Exotic Weeds, which was established in 1994 through a memorandum of understanding. According to the committee’s charter, the committee is to coordinate (1) information on the identification and extent of invasive weeds in the United States and (2) federal agency management of these species. Since it began, the committee made recommendations that led federal agencies to create a grant program for managing weeds known as the Pulling Together Initiative, published a nontechnical overview of invasive weeds to increase public awareness, and developed a conceptual design for a national early detection and rapid response system for invasive weeds. The committee has also encouraged the development of state and regional invasive species teams and councils. We found similarities and differences in the state and local agencies that manage invasive weeds among the five states we examined. These states— California, Colorado, Idaho, Maryland, and Mississippi—all have laws to address the management of noxious weeds. In four states, the laws require a state agency to designate or list noxious weeds, but they define what is considered noxious differently (app. II discusses states’ definitions in detail). The number of listed weeds varied widely across the five states, from a low of 3 in Maryland to a high of 133 in California. All five states’ weed laws authorize certain management efforts for noxious weeds. For example, states’ laws typically discuss control steps that can be taken, agency responsibilities, provisions regarding sale and transport of listed weeds, and taxes or other steps that can be taken to raise revenue to implement management programs. The weed lists can also limit the specific weeds that state agencies are able to work on; some laws limit agencies’ use of state funds to efforts that address only listed weeds or stipulate that they must use state funds on listed weeds before addressing other weeds. In addition, four of the five states—Mississippi is the exception—require private landowners to control or eradicate listed weeds on their property. Most of the laws provide for assessing misdemeanor charges or fines for noncompliance. Each of the five states has infrastructure in place to address noxious weeds, although the infrastructure varies from informal to formal. In all five states, the state agriculture department is responsible for implementing the state weed law. Agencies responsible for parks, natural resources, and transportation were also involved in invasive species management. Some states also have laws or other directives that establish additional organizational responsibilities. For example, in Idaho, state law established a statewide weed coordinator, and a gubernatorial executive order created an invasive species council. Colorado law created a statewide weed coordinator and a statewide noxious weed advisory committee. Also, in Colorado, the state agency for higher education plays a key role in implementing the state’s strategic plan for managing invasive species by providing research, education, and outreach. California law provides for a weed coordinator and a weed mapping specialist. Maryland and Mississippi have much less formal infrastructures. The five states have other mechanisms to help manage invasive weeds. Each has an invasive species or plant pest council or committee, which is primarily intended to share information among the entities involved in weed management. Three of the five states—California, Colorado, and Idaho—also have strategic plans for addressing noxious weeds. Appendix III provides detailed information on weed management in the five states. Some of the state laws also impose infrastructure requirements on counties. For example, in Colorado and Idaho, state law requires each county to have a weed coordinator and weed advisory council. In California, county agriculture commissioners carry out most of the work on noxious weed eradication and control in the state. In Maryland and Mississippi, weed management programs are at the discretion of the county. In Maryland, almost all counties have some programs addressing invasive weeds that were initiated in cooperation with the state’s agriculture agency. We found very little activity at the county level in Mississippi. A growing number of areas in the country—particularly in the western states—participate in multijurisdictional organizations known as “weed management areas” or “cooperative weed management areas.” These areas—which typically include federal, state, and local agencies; nongovernmental organizations and businesses; and citizens—coordinate and collaborate on weed management issues among neighboring landowners. The areas are considered important grassroots efforts that garner local support and enthusiasm for controlling noxious weeds. Federal agencies—BLM, Forest Service, Fish and Wildlife Service, Park Service, USDA’s Natural Resources Conservation Service, and others—are often partners in weed management areas. Participating state agencies include departments of transportation, agriculture, fish and game, forestry, and parks. Other typical partners include county weed agencies, soil and water conservation districts, community groups, railroads, irrigation districts, and private landowners. For the five states we reviewed, California, Colorado, and Idaho had weed management areas while Maryland and Mississippi did not. According to the California Department of Food and Agriculture, the state has 40 weed management areas representing over 50 of the state’s 58 counties. Idaho’s Department of Agriculture lists 30 areas that cover nearly the entire state. In Colorado, weed management areas encompass one-half of the state, according to the state weed coordinator. Officials in these three states have stated that the management areas have had a positive impact on weed control by increasing coordination or leveraging limited resources. Maryland and Mississippi officials, as well as other stakeholders, speculated that weed management areas might not be as common in the East because of differences in typical land ownership patterns. Eastern states are less likely to be dominated by a large landowner, such as the federal government, which often provides needed leadership. Figure 2 describes the activities of one weed management area in the Pacific Northwest. Another type of multijurisdictional organization—exotic plant pest councils—allows government and nongovernmental organizations and academic experts to collaborate and share information on weed management. The councils—typically nonprofit organizations formed voluntarily by interested parties—obtain funding from membership dues, grants, donations, and other sources. Three regional councils cover portions of the United States in the Mid-Atlantic, Southeast, and New England. Similarly, the Western Weed Coordinating Committee is a voluntary organization designed to help coordinate noxious weed management programs and efforts among state and federal agencies. Many nongovernmental organizations—often voluntary “friends” groups— also provide services at national wildlife refuges and national parks or for state or local governments. For example, in 2003, the Fish and Wildlife Service and the National Wildlife Refuge Association began an initiative involving “friends” groups and volunteers to assist in combating invasive species. Similarly, the National Park Service has entered into an agreement with the Student Conservation Association to collaborate on weed control in national parks. In California, chapters of the California Native Plant Society organize members to volunteer for weed removal, sometimes in collaboration with government agencies and other nongovernmental organizations. In Montgomery County, Maryland, volunteers through the “weed warrior” program donated nearly 3,000 hours of labor in 2004. In addition, BLM’s volunteer services program reports many instances of weed control done by volunteers brought together through other nongovernmental organizations or as individuals. Weed management areas also engage volunteers in the war on weeds (see fig. 3). With regard to national nongovernmental organizations, we found The Nature Conservancy was active in weed management—both as a landowner and as a partner with other landowners—in all five states we reviewed. In these states, the Conservancy owns lands on which it conducts weed management activities, and it assists government agencies on weed management projects on public lands. For example, in Mississippi, the Conservancy is under contract to the Department of Defense to help it protect threatened and endangered species by controlling invasive weeds at Camp Shelby, a National Guard training facility. Because the camp is partly within national forest boundaries, the Conservancy also coordinates weed control work with the Forest Service. Figure 4 provides detailed information on a weed management project The Nature Conservancy led in Colorado. Efforts to manage invasive weeds rely on a web of federal, state, and local government funding as well as nongovernmental funding sources. Some entities use general operating funds, while others rely on grant programs administered by numerous federal agencies. Often, funding from one source is used to leverage funding from other sources. Federal land management agencies generally do not receive specific appropriations for weed management but typically fund weed and other invasive species management out of appropriations for broad budget line items, such as vegetation management or refuge operations and maintenance. However, the agencies do not all track expenditures on weed management activities and therefore cannot comprehensively describe the amount of funding devoted to weed management or the sources of that funding. Overall, as can be seen in the following examples, agencies fund a mix of activities to help them determine the extent of their weed problems, control particularly bad infestations and eradicate them where possible, and conduct research and education: The Forest Service’s rangeland management program—with an estimated budget of about $15.7 million for invasive weeds in fiscal year 2004—uses resources from its vegetation and watershed management appropriation. Its most significant expenditures are for prevention, early detection and eradication, and control of terrestrial weeds; its 2004 plan called for treating weeds on over 67,000 acres. Forest Service officials told us that the agency also manages invasive weeds through fire management and other programs, but that it cannot easily quantify those expenditures. The National Park Service funds its weed management activities from its resource stewardship account. While individual park units draw from this appropriation, the Park Service also uses it to fund its exotic plant management teams. The agency spends about $5.2 million annually out of its natural resource stewardship budget on 16 teams that serve many park units. According to the Fish and Wildlife Service, it funds invasive weed work out of its refuge operations and maintenance budget. From this budget, the agency estimates that it spent $4.7 million in fiscal year 2004 to prevent, manage, and control invasive weeds. Included in this total are the Fish and Wildlife Service’s three invasive species “strike teams” that are similar to the National Park Service’s exotic plant management teams. BLM funds weed management activities primarily through its range management program, which in fiscal year 2004 provided about $7.2 million for weed control. However, other BLM activities, such as fire or wildlife management, can also be used to fund weed management. On occasion, Congress uses appropriations legislation to direct activities on weed management or invasive species. For example, the conference committee for Interior’s fiscal year 2004 appropriations directed the Forest Service to spend $300,000 from its vegetation and watershed management account on leafy spurge control. It also directed the Secretary of the Interior to transfer $5 million to the Fish and Wildlife Service’s resource management account to fund, among other things, water quality monitoring and eradication of invasive plants at the A.R.M. Loxahatchee National Wildlife Refuge in Florida. Interior and USDA manage at least eight programs that provide hundreds of millions of dollars through grants and cooperative agreements to other federal agencies, state and local governments, nongovernmental organizations, and private landowners to support resource conservation efforts, including weed control. Most of these programs award grants to support a variety of conservation activities, and agencies do not consistently track how much these programs spend directly on weed control. Table 2 shows the major programs that have been used to support weed control, the estimated amount of funding provided for weed control, and the total funding that the programs provided for conservation. More information on these and other programs is in appendix IV. The federal programs have specific purposes and eligibility criteria that guide what type of projects will receive funds or cooperative agreements (see app. IV for program descriptions). The programs vary in how funding decisions are made, although most of them receive input from other agencies and stakeholders. For example, USDA makes funding decisions at the state level for relevant farm bill conservation programs, such as the Environmental Quality Incentives Program. While USDA issues a national announcement about funding availability and describes the types of conservation activities that are eligible for funding, a state technical committee—made up of a variety of public and private sector stakeholders—determines which of those activities will receive the highest priority. This may mean that some state committees may emphasize funding weed control projects while others may not. Funding decisions for grants provided under the Pulling Together Initiative are made at a national level by a steering committee of weed management experts from government, industry, professional societies, and nonprofit organizations. The committee reviews all applications together and makes award decisions once a year. The Fish and Wildlife Service’s Private Stewardship grant program also draws upon a diverse panel of representatives from federal and state governments and other organizations to assess proposals. Among the programs listed in table 2, two are dedicated solely to weed management—the Pulling Together Initiative and the Center for Invasive Plant Management’s grant program. Under the Pulling Together Initiative, the National Fish and Wildlife Foundation distributes federal grant funds to state, county, and local agencies, and private nonprofit organizations, among others. The grants are designed to build capacity at the local level to manage invasive weeds by supporting the creation of weed management areas. According to the foundation, local partners will match the grants in 2004 with over $3.3 million in nonfederal contributions. Among the states we reviewed, in 2004 the Pulling Together Initiative awarded five grants to Colorado, four California, two each to Idaho and Maryland, and one to Mississippi, for a total of $396,300. Two of those grants include the following: Larimer County Weed District in Colorado received $25,000 to coordinate a cooperative effort to manage and, where possible, eradicate leafy spurge from the riparian areas of the Poudre River and its tributaries using chemical, biological, and mechanical weed control methods. The local matching contribution was about $60,000. The California Department of Food and Agriculture received a $20,000 grant to continue to survey, map, and implement integrated pest management practices to control and eradicate purple loosestrife in Humboldt, Kern, Mendocino, San Mateo, Siskiyou, and Sonoma counties. The local matching contribution was $40,000. The other program devoted solely to weed management is administered by the Center for Invasive Plant Management at Montana State University. The university created the center following discussions among public and private stakeholders. From fiscal years 2000 through 2004, the center received about $3.3 million in federal funds specifically for weed management. The center supports the efforts of weed management areas in the West by offering them small, competitive grants. From fiscal years 2002 through 2004, the center made 58 grants to weed management areas in 14 states, for a total of about $282,000. For instance, the center awarded $4,937 in 2003 to the Mojave Weed Management Area in San Bernardino County, California, to develop a comprehensive weed management plan for the Mojave River; tamarisk is the primary target species of this project. The center has also used funding from BLM to create an online course in ecological land management, provide grants for weed management research and for synthesizing research libraries, establish restoration projects for weed-dominated lands, and publish numerous public education and outreach documents, among other things. The Forest Service’s cooperative forest health management program is also heavily focused on weed management. This program supports cooperation among state, private, and tribal land jurisdictions and develops weed management programs using integrated pest strategies. Since fiscal year 2002, the program has provided funding to Forest Service regions for invasive plant activities on state and private forested lands. In fiscal year 2004, the program distributed $5.2 million—an increase of $2 million compared with 2003—to its regions. APHIS enters into cooperative agreements with state agencies and universities and others to conduct surveys, develop biological control methods, and implement weed management. Data from APHIS show that in fiscal year 2004, the agency provided at least $3.2 million through cooperative agreements for agricultural and nonagricultural weed projects. APHIS’s total budget for pest and disease management in fiscal year 2004 was $331 million, most of which is devoted to agricultural pests and diseases. In addition to the federal natural resource conservation programs in table 2 that are known to provide support for weed management, others have the potential to be used for that purpose. For example, USDA reports that the Natural Resource Conservation Service’s Grassland Reserve Program could be used to address tamarisk, an invasive tree species, or other invasive plants. These programs that agencies could potentially use to support weed control provide billions of dollars for conservation efforts in general (see app. IV for more detail on these programs). After we completed our interviews of weed management officials, Congress enacted the Noxious Weed Control and Eradication Act of 2004, calling for the establishment of a new source of funds for weed management. This law amends the Plant Protection Act and requires the Secretary of Agriculture to establish a program to support weed control efforts by weed management entities on BLM, Forest Service, and nonfederal lands. The law authorizes USDA to provide grants to and enter into cooperative agreements with weed management entities. Eligible activities include education, inventories and mapping, management, monitoring, methods development, and other activities to control or eradicate noxious weeds. In addition, USDA may enter into cooperative agreements at the request of a state’s governor for rapid response to outbreaks of noxious weeds. The law authorizes appropriations of $7.5 million for grants and $7.5 million for cooperative agreements for each of 5 years beginning in fiscal year 2005. It is not yet clear what agency within USDA will administer this new program. If the law were fully funded, it would represent a significant source of funds for weed management. The authorized amount is about 40 percent of all federal grant funding identified by our review as devoted to nonagricultural invasive weed management in fiscal year 2004. However, it is not yet clear what portion of the new program’s funds will be used to address noxious weeds in nonagricultural settings. The law authorizes that funds may be used on natural area lands that BLM, the Forest Service, and nonfederal entities manage—but not on national parks or refuges—but it does not limit weed control support to nonagricultural lands. In the 108th Congress, Members of Congress introduced two other legislative proposals calling for additional resources for weed management—one addressed invasive species in general, while the other was limited to two western weed species. Much of the federal funding already discussed deals with the management of invasive weed infestations; however, federal agencies also conduct or support weed management research. We identified four federal agencies within Agriculture and Interior that provide funding and other support to federal and nonfederal researchers. The types of research range from studies of the natural history of weeds (such as their life cycles and methods of spread) to evaluations of the effectiveness of control techniques. This research, however, primarily addresses weeds in agricultural settings. USDA agencies fund several research efforts. The Agricultural Research Service has funded research on several key weeds in natural areas, including tamarisk, leafy spurge, and melaleuca, as part of its overall weed and invasive species program. The Cooperative State Research, Education, and Extension Service is making an estimated $3.6 million available in fiscal year 2005 through its National Research Initiative to a wide range of educational institutions, local governments, nonprofit organizations, individuals, and others to study the biology of weedy and invasive plants. For example, the initiative has funded research on the causes and consequences of weed plant invasions in forestlands and on the effects of nitrogen supply on Japanese barberry and Japanese stiltgrass. The Forest Service also supports research related to invasive weeds such as in developing new guides for identifying and controlling for invasive plants using mechanical and biological control methods. According to the Forest Service, in fiscal year 2004 it allocated more than $3.5 million for weed research. In fiscal year 2004, Interior’s U.S. Geological Survey (USGS) budgeted $9.3 million for invasive species research. USGS reports that it spends about half of its invasive species research funds on weeds—about $4.7 million. It develops its research agenda in consultation with its client agencies in Interior (Fish and Wildlife Service, National Park Service, and Bureau of Land Management), which determine their research needs, in part, based on the National Invasive Species Council’s National Management Plan for Invasive Species, departmental priorities, and congressional interests. For example, the survey has been researching nutria, ballast water, and tamarisk because of recent congressional actions on these issues. The states we reviewed primarily use funds from a variety of state agencies’ general appropriations to undertake weed management. Typically, state agencies responsible for agriculture, natural resources, and transportation are most active in weed management and have either dedicated weed funding or utilize funds from general maintenance accounts. State agencies also rely on federal grant programs to assist in their weed management efforts. For example, as discussed previously, all five states received funds through the Pulling Together Initiative for weed management activities. The five states we reviewed differed in the level of resources devoted to controlling weeds. The disparity in resources no doubt reflects differences in the size and geography of the states and the nature and extent of the invasive species problem. We believe that it also reflects differences in the priority that certain states have assigned to the problem and their capacity for allocating resources. For this report, while we obtained information on expenditures, we did not attempt to precisely determine how much the five states are spending on weed management on nonagricultural lands. As with the federal agencies, it is often difficult to distinguish state agency expenditures on agricultural weeds from those on nonagricultural weeds, and between general maintenance work and weed control. In 2000, we reported on similar issues with regard to state expenditures on all types of invasive species (not just weeds), including three of the states we reviewed for this report. California: Several state agencies spend funds on weed management. The Department of Food and Agriculture, the lead agency for weed management in California, receives approximately $2 million and the Department of Transportation about $1 million annually for weed control from state appropriations. The Department of Parks and Recreation’s funding fluctuates based on available funds, including general appropriations, ongoing maintenance funds, and specially funded projects. The Coastal Conservancy (a state agency focused on protecting coastal resources) has spent approximately $800,000 per year of grant money and $300,000 per year for in-kind, staff, and direct expenses over the last 3 years on management of a specific invasive weed (Spartina alternifolia, a wetlands grass). Colorado: The state weed coordinator estimated that state funding for invasive weeds was approximately $3.6 million for fiscal year 2002. This amount included the Colorado Department of Agriculture’s noxious weed program, the Department of Natural Resources’ program for controlling weeds on state lands, and the Department of Transportation’s work along roadsides. In the past, the state provided additional resources for addressing invasive weeds. From fiscal years 1998 through 2002, the Colorado legislature provided about $1.3 million through the Colorado Noxious Weed Management Fund to support communities, weed control districts, or other entities engaged in cooperative noxious weed management efforts. On average, private, local, other state, and federal entities matched every dollar of the state’s investment with more than a 5- to-1 ratio. However, the state legislature discontinued funding for the program in 2003 because of concerns about the state’s overall financial situation. Idaho: Congressional appropriation committees have directed land resource appropriation funds for noxious weed control in Idaho. Since 2000, the state has received a total of about $5.6 million in federal funds through BLM and the Forest Service. Over that same period, the state’s general fund has provided about $2.2 million. The Idaho Department of Agriculture manages these funds. Other state departments, including Fish and Game, Lands, Transportation, and Parks and Recreation, are also responsible for weed management on the lands they oversee and for determining what portion of their general operating budgets will be devoted to weed management on a yearly basis. Maryland: The Maryland Department of Agriculture had a 2004 budget of $310,000 for weed management for salaries, equipment, enforcement, and other expenses; also included was $80,000 in grants to 20 county weed programs. The state’s highway administration spent about $2 million on vegetation management in 2004, of which less than $50,000 was for control of two state-listed noxious weeds (Canada thistle and Johnsongrass) and phragmites. The Maryland Department of Natural Resource’s associate director for habitat conservation told us that funding for weed control efforts on departmental lands, including state parks, comes from general operating budgets and is difficult to estimate. Mississippi: The lead agency for weed management, the Mississippi Department of Agriculture and Commerce, spent about $100,000 from its general budget for weed management in fiscal year 2004. It also received funding from other sources, including a $25,000 Pulling Together Initiative grant and $250,000 from USDA’s Animal and Plant Health Inspection Service in fiscal year 2004. Those funds have been used to support landowners’ weed control efforts through a cost-share program. The Mississippi Department of Transportation spent about $2.5 million from its general operating budget in fiscal year 2003 for chemical weed control on over 27,000 miles of state-owned roadways. Private landowners also reimbursed the Mississippi Forestry Commission about $177,000 for weed management work it did that year on private lands. The conference committee for the Department of the Interior and Related Agencies Appropriations Act of 2004 directed $1 million of the U.S. Geological Survey’s water resources appropriation to go to the GeoResources Institute of Mississippi State University to develop remote sensing techniques and monitoring strategies for early detection of invasive weeds in the Southeast, control techniques for invasive aquatic plants, and an assessment of new invaders. Counties that we reviewed receive funding for weed management from the federal government, state agencies, their own general operating funds, and special tax levies. County agriculture departments or weed management districts are the primary recipients of this funding but other departments may include those responsible for roads, parks, or public works. The counties we contacted illustrated a wide range of funding available for weed control, from a few thousand dollars per county to more than $1 million. For example, in Idaho, we identified two counties with significantly different funding levels. Ada County, Idaho, provided almost $1 million for weed management in fiscal year 2004 and budgeted over $1.3 million for fiscal year 2005. In 2004, the funding sources were a weed management mill levy, weed control fees charged to residents when the county treats their weeds, and the reimbursements from government agencies for weed treatment on federal lands (BLM, Bureau of Reclamation, and the National Guard). Ada County’s weed superintendent told us that because the county has these sources of funding, and because it recognizes that other counties have fewer resources, he does not apply for grants and funding from other sources that may be the primary source of funding for some counties. In contrast to Ada County’s situation, Idaho’s Adams County spent about $67,000 for weed management in 2003, including a $49,085 Resource Advisory Council grant, $12,356 from the state, and $6,000 from the county. However, according to a county official, because the funding is not sufficient to meet existing needs, the county recently established a weed levy to help fund its limited program. In total, the county agriculture departments in California devoted an estimated $4 million from their general operating funds to weed control in fiscal year 2004. In Maryland, the Department of Agriculture provided a total of $80,000 in grants in 2004 to 20 counties that the counties matched or exceeded. We did not identify Mississippi counties engaged in weed control. The majority of the officials we interviewed cited insufficient funding as the primary barrier to dealing effectively with invasive weeds (39 of 48 and 37 of 41 officials responding to questions about managing weeds on nonfederal land and federal land, respectively). Many of these officials highlighted the magnitude of the task at hand to control invasive weeds in discussing their funding situations. For example, Fish and Wildlife Service refuge managers have identified invasive plant management projects estimated to cost approximately $70 million, compared with estimated agency expenditures of $4.7 million on weed control in fiscal year 2004. The California Department of Food and Agriculture’s annual weed management budget is approximately $2 million, but it has identified about $5 million in necessary management projects per year. Similarly, the Forest Service region responsible for California had a weed management budget of about $600,000 in fiscal year 2004 but estimated that it needed about $1.8 million to control weeds. Officials we interviewed also identified specific issues related to funding. First, federal and nonfederal officials said that project funding needs to be consistent and predictable from year to year, because, to be effective, weed eradication actions need to be done regularly until the weed population is under control—which in some cases may take several years. Currently, officials submit new funding requests each year with no guarantee that projects started will be funded through to completion—potentially losing the investment made in weed reduction in prior years. The Fish and Wildlife Service’s national strategy recognized the difficulty of addressing invasive species and its funding implications commenting, “Like an out-of-control wildfire, the cost of fighting invasive species increases each year.” The agency also noted that, according to experts, the cost to control invasive species increases two- to threefold each year that control efforts are delayed. The National Park Service noted that, in some cases, parks do not have funds for routine maintenance to ensure that treated areas do not become reinfested. Second, some officials responsible for both federal and nonfederal lands noted that funding often arrives late in the year, which may limit their ability to begin weed control in the spring, when many types of weeds can be attacked most effectively. In addition, in many northern communities, the window of opportunity for weed treatment is small because of weather conditions. Third, some officials identified what they described as an often burdensome grant application process as a disincentive to pursuing needed funds for work on nonfederal lands. For example, one large nongovernmental organization said it would not apply for grants of less than $25,000 because the benefits would not outweigh the costs associated with applying. In addition, county and municipal governments often do not have the time or the expertise to identify and apply for grants. One county parks department official commented that she was reluctant to apply for grants because the likelihood of receiving one did not warrant the time and effort required to apply. And lastly, some of our respondents said that local communities sometimes have difficulty meeting requirements to provide matching funds for federal grants to work on nonfederal lands. Officials identified additional barriers to addressing invasive weeds on federal lands, although not nearly as frequently as funding. More than one- third of the officials (15 of 41), including 6 federal and 9 nonfederal officials, cited compliance with the National Environmental Policy Act as an impediment, although they were generally supportive of the goals of the act. Officials said that the time it takes to conduct required analyses of the potential impacts of treatment, such as applying herbicides, could make it difficult to respond rapidly to new infestations. The Forest Service director of rangeland management told us that she believes that agency personnel should be able to routinely use registered herbicides—without going through an impact analysis—as long as they follow label directions. Similarly, one Fish and Wildlife official told us he does not believe the agency should need to extensively analyze the potential impacts of using certain herbicides that any homeowner could legally purchase and use. Some agencies seek to or have tried to streamline the process for complying with the act, including the following: The Forest Service’s National Strategy and Implementation Plan for Invasive Species Management calls for pursuing use of National Environmental Policy Act regulations’ categorical exclusions and the agency’s emergency authorities to ensure environmental analysis does not inhibit environmentally sound rapid response or control efforts. Under a categorical exclusion, certain activities that are deemed not to have a significant effect on the environment can be conducted without the need for an environmental assessment or environmental impact statement. In Mississippi, the Forest Service has completed a programmatic environmental assessment of cogongrass control using herbicides. According to the Forest Service, the programmatic assessment enables the service to use an environmental impact analysis of herbicide use at one location to satisfy the requirements of the act at other locations, if certain circumstances are met. This enables forest managers to act more quickly to invasive weed outbreaks, in some cases. BLM prepared a series of environmental impact statements on vegetation management—including noxious weeds—for the entire western United States in the 1980s and early 1990s that has helped to streamline analytical processes by providing an overview of the possible impacts of different treatment methods based on the broad regional characteristics of the 13 western states. The agency still has to conduct site-specific analysis of the potential impacts of treatment methods, but the extent of that analysis is reduced. BLM is in the process of developing an updated programmatic environmental impact statement to address pesticide use and general vegetation management on its lands. In terms of nonfederal lands, in addition to funding barriers, more than one- third of officials responding (19 of 48) identified a lack of cooperation as problematic for effective weed management. State and county officials told us that successful weed control depends on the efforts of neighboring landowners to do their part, since weeds pay no attention to property lines. However, officials said that some landowners are uncooperative with weed control efforts. In addition, because some people do not understand the long-lasting damage that can be caused by invasive weeds, they often oppose the use of herbicides, which may have more intense short-term effects on the environment but are needed to eradicate invasive weeds. National Park Service officials noted that, in contrast with other land management agencies, the park service is not authorized to conduct work outside its boundaries and this has hampered them in cooperating with adjacent landowners. Also for nonfederal lands, about one-third of officials (14 of 48) identified a lack of awareness or education as a barrier. Some officials said that because people are unaware of the harmful effects of invasive weeds, they sometimes neglect weeds on their property, thereby reducing the effectiveness of other control efforts. In addition, some officials noted that greater public awareness could lead to higher government priority for the issue and could help prevent the introduction and spread of invasive species by making the public aware of the risks of such activities as spreading seeds through recreational activities. We also asked officials to identify the factors contributing to effective management of invasive weeds. About 83 percent (44 of 53 officials responding) identified cooperation and coordination as important for successful management on both federal and nonfederal lands. Officials noted that cooperation among numerous landowners and government agencies allows for the sharing of resources that are often in short supply and an ability to address weeds over a larger geographic area than if tackled alone. This sentiment is most evident in the strong support and momentum that has been building for the creation of weed management areas. Officials routinely highlighted such major benefits of these areas as improved coordination among the participating entities and the resulting collaboration on weed management projects. (Fig. 5 discusses a successful collaborative project in Mississippi addressing invasive cogongrass.) The officials we interviewed offered wide-ranging views on how the federal government could best provide additional resources to weed management entities. In some instances, these views were consistent with the approach called for in the newly enacted Noxious Weed Control and Eradication Act of 2004; in others they were not. (We conducted our interviews before this law was passed.) Most officials responding to the issue (33 of 38) stated that the federal government should expand an existing program or programs rather than create a new one to distribute additional weed management funds. Some officials told us that they preferred using existing programs because they know the application procedures, the types of projects the programs typically fund, and the agency officials that run the programs. The creation of a new program—which the newly passed law requires—will add another set of application procedures to learn and a new set of officials who may or may not be familiar with state and local weed management entities and their respective needs. One official noted that there was no need to “reinvent the wheel.” The act requires the Secretary of Agriculture to implement the new program, but does not designate a responsible agency within USDA. The act amended the Plant Protection Act, which USDA has delegated to APHIS for implementation. About two-thirds of officials responding to our question (20 of 31) also identified USDA or one of its agencies as the best fit to lead a new program. Officials we interviewed did not agree on which agency within USDA should lead a new program, but the Forest Service was identified most often (by 13 officials). Four officials named APHIS as an appropriate agency to manage the program. Officials noted that the various USDA agencies have different focuses that could affect how they would implement the program. For example, while the Forest Service was cited as having knowledgeable staff, established relationships with local land managers, and experience in delivering funding, one official expressed concern that the service might fund weed management projects on forested lands only, and not in other nonagricultural settings. Similarly, while some officials said that USDA’s Natural Resources Conservation Service would be a good fit because of its extensive contacts at the local level and funding expertise, others were concerned that it does not have much experience with weed management on nonagricultural lands. Officials’ views on the types of activities that should be eligible for funding are consistent with the activities and projects eligible for funding under the act. The act includes a broad range of activities and projects that can be funded, including education, methods development, control, and monitoring. Eighteen officials (of 40) said that all of these activities should be eligible and everyone agreed that at least a subset of these should be eligible. As noted earlier, public education is important because citizens and businesses may be the unintentional carriers of invasive weeds, and improved awareness can help garner additional support for addressing the problem. Research and monitoring are essential to identifying ways to prevent invasive weed introductions and cost-effectively control or eradicate them, and to ensure that treated areas do not become reinfested. Some officials also identified inventorying and mapping, and early detection and rapid response as important activities that should be funded. Inventorying and mapping of weed infestations is important so that the extent of the problem can be determined and tracked over time, while early detection and rapid response help avoid future costs by addressing weed infestations before they become unmanageable. (See fig. 6 for an example of the value of early detection and rapid response in Maryland.) With regard to the method of awarding grant funds to weed management entities, the act specifies some selection considerations and states that the grants should be awarded competitively, but leaves the development of the program to the Secretary. The act states that the Secretary shall, to the maximum extent practicable, rely on technical and merit reviews provided by regional, state, or local weed management experts in making funding decisions. However, 24 of 39 officials stated that funding should be provided directly to the states, which would then distribute the funds to local weed management entities. Officials supportive of this approach said that states best know their weed problems and therefore would make better-informed funding decisions. This approach is similar to the way in which Idaho currently receives federal funding and then distributes it to state and local weed management entities. Until USDA’s new program is developed, however, it is not clear how much influence these nonfederal experts will have in the funding decisions. It is also unclear how the Secretary will delegate implementation authority and which other federal officials will be involved in the decision making. About one-quarter of those who commented on this issue (8 of 39) expressed a preference for federal officials deciding about project-specific grants to state and local entities based on a review of proposals. A few officials cited the Pulling Together Initiative as a model that could be followed, in which representatives from relevant federal agencies and nonfederal stakeholders consider the merits of grant applications and jointly make funding decisions. Such an approach could provide a balance in federal and nonfederal influence in deciding how to allocate funds for weed management. Clearly the attack on invasive weeds in the United States is a massive effort that will continue far into the future. This effort involving a multitude of entities is needed, however, because invasive weeds pervade the landscape and affect virtually every type of ecosystem. Certainly, an additional source of funds to address invasive weeds, as authorized in recent legislation, will be welcomed by those involved in the battle. However, given the magnitude of the problem in relation to the resources devoted to it, identifying priorities and deciding how those resources should be allocated is important. As officials pointed out to us during our work, many types of weed management activities are needed, and different areas of the country are plagued by different weed problems and have varying levels of infrastructure in place to deal with them. In addition, when it comes to providing federal assistance to deal with invasive weeds, federal agencies have specific strengths and weaknesses with regard to their connection to, and understanding the needs of, weed management entities. While the newly enacted Noxious Weed Control and Eradication Act recognizes the importance of drawing upon the expertise of others by requiring reliance on information provided by regional, state, or local weed management experts, it does not specifically require consultation with other federal entities. Nonetheless, we believe it is important for the Secretary of Agriculture to direct the implementing agency of the new program to collaborate with other federal entities with relevant weed management experience to (1) benefit from lessons learned in administering grant programs and cooperative agreements and (2) identify priorities that should receive funding from this new source so as to complement other federal assistance to on-the-ground weed management activities. To help ensure that the new program under the Noxious Weed Control and Eradication Act is implemented effectively, we recommend that the Secretary of Agriculture direct the implementing agency to collaborate with other USDA and Interior agencies that have experience managing invasive weeds (1) in developing the mechanisms for allocating funds to weed management entities, and (2) in determining what entities should receive such funding, using the agencies—along with other regional, state, and local experts—as technical advisers, as appropriate. We provided copies of our draft report to the Departments of the Interior and Agriculture. The Department of the Interior provided written comments (see app. V). The Department of Agriculture did not provide comments, although the Animal and Plant Health Inspection Service and Forest Service provided technical comments and clarifications. We have incorporated those where appropriate. The Department of the Interior concurred with our findings. Specifically, the department stated that the report contributes to the call for cooperation and collaboration across all government levels to control and eradicate invasive plants, and agrees with the attention it places on natural or nonproduction areas as significant contributors to our nation’s biological and natural resources heritage. The department supported our recommendation regarding implementation of the Noxious Weed Control and Eradication Act of 2004. In addition, the department suggested that the issue be approached through the National Invasive Species Council and that council’s advisory committee. Four Interior bureaus (the National Park Service, Fish and Wildlife Service, Bureau of Land Management, and the U.S. Geological Survey) also reviewed the report and provided technical comments relating to funding data, the number of acres infested with weeds, and other issues. We have incorporated those comments where appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we will plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to other interested congressional committees and the Secretaries of Agriculture and the Interior. We also 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 staff have any questions, please call me at (202) 512-3841. Key contributors to this report are listed in appendix VI. The objectives of this report are to determine (1) the federal and nonfederal entities that implement projects to address harmful nonagricultural weeds, (2) the sources of funding that these entities use, (3) the views of federal and nonfederal officials on the barriers that limit the effectiveness of weed control efforts, (4) these officials’ observations on specific aspects of how to implement a new program—or to infuse new resources into an existing program—to support weed management and control, and (5) the legal ramifications, if any, of the use of certain terms— such as invasive, noxious, and nonnative—and their associated definitions on control efforts. As called for in the objectives, we focused on weed control programs that address problems in nonagricultural areas, such as parks, forests, rangeland, and other types of land. As agreed with the requester, we focused on terrestrial weeds. While a large number of departments and agencies are in some way responsible for weed management, as agreed with the requester, we limited our focus on the federal entities engaged in weed management to the Department of the Interior and the Department of Agriculture (USDA). (We therefore excluded other federal departments engaged in weed management, such as the Department of Defense and the Department of Transportation.) To determine what federal entities implement projects to address harmful nonagricultural weeds and what sources of funding these entities use, we interviewed relevant officials at Interior, USDA, and the National Invasive Species Council, and reviewed weed management literature and Web sites. Within Interior and USDA, we limited our scope to the four agencies that manage the most public land—Bureau of Land Management (BLM), National Park Service (NPS), Fish and Wildlife Service (FWS), and Forest Service; other agencies administering programs that can provide funding to landowners and other partners (Animal and Plant Health Inspection Service, Natural Resources Conservation Service, and Farm Services Agency); and agencies engaged in research into the use of weed control methods (Agricultural Research Service; Cooperative State Research, Education, and Extension Service; and U.S. Geological Survey). This scope excluded several Interior and USDA agencies that are less involved in weed management or research, including Interior’s Bureau of Reclamation and Bureau of Indian Affairs and USDA’s Economic Research Service. To learn more about the role of state and local governments and other nonfederal entities in weed management, we interviewed officials from several national organizations, including the National Association of Counties, the National Association of Conservation Districts, the Weed Science Society of America, and the Environmental Law Institute. On the basis of these interviews, we determined that the number of state and local agencies engaged in weed management was large. We also decided that it was not feasible or necessary to attempt to identify all such entities. Therefore, we selected a nonprobability sample of states to review in detail to provide illustrations of the types of weed management structures and entities that are at work across the country. The states we selected were California, Colorado, Idaho, Maryland, and Mississippi. We selected them to provide a range of characteristics, using criteria that included geography, federal land ownership, and maturity of weed management programs. While these states are not representative of all states, they illustrate some of the types of weed management entities and activities that exist within states. For these five states, we determined whether there was a lead official—such as a state weed coordinator or invasive species coordinator—who would be able to direct us to other officials working on weed control in the state on behalf of federal, state, local, and nongovernmental organizations. We used those recommendations and other means to generate a list of entities to contact. To gather information on the activities of federal and nonfederal weed control entities, determine what factors could improve the effectiveness of weed control efforts, and obtain opinions on specific aspects of how to implement a new federal weed control support program, we administered two structured interview guides. We designed the first interview guide to gather information from officials connected with weed control efforts at federal, state, and local government agencies and nongovernmental organizations. We administered that guide to 52 officials. We designed the second interview guide to gather information from officials connected with federal grant and cooperative agreement programs that can be used to fund the weed control work of a variety of entities and stakeholders. We administered that interview guide to 5 federal officials. The interview guides contained common questions regarding the officials’ opinions about the top three barriers to effective weed management, the top three factors contributing to success, and their views on certain aspects related to providing additional financial support to weed management entities. The guides also contained unique questions tailored to the different types of respondents. For example, the interview guide for weed managers contained questions about the sources of funding the entities use, while the interview guide for federal grant program managers contained questions about the extent to which those programs support weed control. We gathered information about weed control expenditures by federal and nonfederal entities from a variety of sources. These include the structured interview guides, agency budget documents, and other agency reports and databases. In the instances where officials provided us with information through the interview guide, we asked if their answer was an estimate. We sought other documentation where practicable. We independently corroborated the data the officials provided in answer to our questions, to the extent possible, using other documentation. In some instances, we verified that expenditures agencies reported to have made for weed control were consistent with expenditures reported for recent years. We determined that the data were sufficiently reliable for the purposes of this report. Similarly, we obtained information on federal and other grant resources directed to weed control from a variety of sources, including structured interviews, and agency or organizational documents. In some instances, agency officials were only able to provide estimates of the resources directed to weed control, while in other cases the data were more definitive. We independently corroborated the funding estimates provided by federal officials in response to our questions, to the extent possible, by comparing it with overall agency budgets for those programs. With respect to federally funded programs that are administered by other organizations (the Pulling Together Initiative and Center for Invasive Plant Management), we compared reported expenditures on weed projects with prior years’ expenditures. We determined that the data were sufficiently reliable for the purposes of this report. Some of the questions in the guides asked for open-ended opinions regarding how to provide new federal funding for weed control. At times, in answering one question, a respondent would also provide an answer to a subsequent question. In our analysis, we assigned their answers to the appropriate question. In some instances, respondents did not give clear answers to specific questions. For example, in response to a question about which federal agency should be responsible for administering a new program to support weed management agencies, one official said “any land management agency.” In a situation like that, we classified the response as “unclear” rather than adding to the tallies of each land management agency. We analyzed the responses to these questions in light of the provisions of the newly enacted Noxious Weed Control and Eradication Act of 2004. Within the five states we reviewed, we contacted officials at federal, state, and local government agencies, as well as at nongovernmental organizations. We did not attempt to identify or contact all federal, state, and local agencies engaged in weed management in each state. For the five states, we set as a target contacting representatives from the federal land management agencies’ regional or state offices, as well as representatives from one federal land management unit—such as a national park or wildlife refuge—within each state. We also sought to contact representatives from at least four counties, municipalities, or nongovernmental organizations in each state. To accomplish this, we asked state weed coordinators or other knowledgeable officials to recommend appropriate entities, and we conducted Internet research. In addition to using the interview guides, we also interviewed 36 officials in a less formal way. We conducted some of these interviews prior to preparing the interview guides. In other instances, we used an informal interview method because we did not believe that either of the guides was appropriate for the interviewee. In our report, we present information obtained from the informal interviews, but do so separately from our presentation of information we obtained through the interview guides. In all, we spoke with over 90 officials representing 58 federal and nonfederal organizations. Table 3 shows the number of organizations from different levels of government we contacted within each state. We did not contact representatives from all of the categories in each state; for example, in Mississippi we learned that county and municipal agencies are not actively involved in weed management. We made site visits in Maryland, Idaho, and Colorado to observe weed control entities in action. For example, in Maryland we observed National Park Service staff hand pulling and mechanically removing Japanese stilt grass to protect native plant species, and in Idaho we observed the use of goats to graze leafy spurge. To provide information on issues related to the terminology of invasive weeds, we researched the use and definitions of relevant terms in federal and state laws. This included analysis of the Plant Protection Act and section 15 of the Federal Noxious Weed Act, Executive Order 13112, and relevant statutes and regulations concerning invasive weeds in all 50 states. We also reviewed testimony provided to Congress by stakeholders to gain a better understanding of some of the concerns associated with the use a certain terminology. We conducted our review from May 2004 through December 2004 in accordance with generally accepted government auditing standards. Based on our review of the statutes and regulations of the federal government and the fifty states, federal and state laws use many different terms to describe harmful weeds, including invasive, noxious, and exotic. In federal law, three different terms are used for, or encompass, invasive weeds—invasive species, noxious weeds, and undesirable plants. At the state level, almost all states use the term noxious weed, but define it differently. The states’ lists of noxious weeds and the manner in which states determine whether to categorize a weed as noxious, also differ among the states. The noxious weed definitions, noxious weed lists, and other legal provisions affect control efforts by federal and state officials. In the United States, three terms are used at the federal level for invasive weeds: invasive species, noxious weeds, and undesirable plants. The common element of all of these different terms is the concept of harm. However, the definitions and scope of these different terms vary. Executive Order 13112 uses the term invasive species and defines such species broadly as an alien species whose introduction does or is likely to cause economic or environmental harm or harm to human health. Alien species are defined as a species (including its seeds, eggs, spores, or other biological material capable of propagating that species) that is not native to a particular ecosystem. The Plant Protection Act uses the term noxious weed, which it defines as “any plant or plant product that can directly or indirectly injure or cause damage to crops (including nursery stock or plant products), livestock, poultry, or other interests of agriculture, irrigation, navigation, the natural resources of the United States, the public health, or the environment.” This definition expanded upon an earlier definition of noxious weed that only included plants of a foreign origin posing a threat to agricultural interests that were new to or not widely spread in the United States. Section 15 of the Federal Noxious Weed Act of 1974, as amended, uses the term undesirable plants and defines them as “plant species that are classified as undesirable, noxious, harmful, exotic, injurious, or poisonous, pursuant to State or Federal law.” This provision prohibits the designation of endangered species or plants indigenous to the area where control measures are taken as undesirable plants. There are several important distinctions in these definitions. One distinction is whether a species is native or nonnative. The Executive Order defines invasive species as those that are not native to any particular identifiable ecosystem within the United States. Section 15 of the Federal Noxious Weed Act limits control activity to those undesirable plants that are not indigenous to the area where control efforts are to be taken. The Plant Protection Act’s definition of a noxious weed, however, does not limit work on invasive weeds to those that are not native, authorizing control efforts to address native species that may be harmful. Another distinction relates to a definitional issue that the International Union for Conservation of Nature and Natural Resources-World Conservation Union (IUCN) has identified as important with regard to management of invasive species. Specifically, because lower taxonomic units of species can be harmful, the IUCN has recommended that the term “species” include subspecies, lower taxa, and any part, gametes, seeds, eggs, or propagule of the species that could survive and reproduce. Both the Plant Protection Act’s definition of noxious weed and the Executive Order’s definition of invasive species include plant products or parts. However, the definition of an undesirable plant, while including species identified as noxious by state or federal law, does not specifically indicate that subspecies or plant parts are included. In addition to these definitional distinctions, some plant species have both beneficial uses for some purposes but also demonstrate harmful characteristics—spurring debate over how these species should be characterized and managed. For example, a number of invasive plants have been intentionally introduced into the United States because of their beneficial uses, but later turned out to be harmful. Crownvetch has been useful in slope stabilization, beautification and erosion control on highways, and as a living mulch for no-till corn. Some officials in the agriculture industry have testified that it should not be considered an invasive species. However, the Wisconsin Department of Natural Resources and others have found crownvetch to be a serious management threat to natural areas and native plants because of its rapid spread by creeping roots and seeds. Similarly, kudzu and salt cedar were promoted for erosion control, but these weeds have overgrown native vegetation and are now the subject of significant eradication efforts. A somewhat similar debate has arisen with respect to genetically modified organisms and crops, which may provide benefits to humans but may also pose a threat to natural systems or other crops by introducing certain genetic characteristics. Federal agencies have various authorities under which they can control invasive weeds. Under the Plant Protection Act, USDA’s APHIS has listed 96 noxious weeds that are prohibited or restricted from entering the United States or that are subject to restrictions on interstate movement within the United States. While the Plant Protection Act’s definition of a noxious weed no longer requires a plant to be new to or not widely spread in the United States, USDA continues to state that candidates for the federal noxious weed list should be either not yet present in the United States or of limited distribution. According to an APHIS official, the rule of thumb APHIS uses for determining whether a plant is new is whether it has been in the United States for three years or less. Since the enactment of the Plant Protection Act in 2000, no additional weeds have been added to the federal noxious weed list. For those noxious weeds that are listed, the Secretary of Agriculture has authority to control these noxious weeds, including their parts, moving into or through the United States or interstate. If the Secretary considers it necessary in order to prevent the spread of a noxious weed that is new to or not known to be widely prevalent or distributed in the United States, the Secretary may take certain control actions, including destroying or quarantining the noxious weed and ordering an owner of one of these noxious weeds to take control actions. All federal agencies are required, under section 15 of the Federal Noxious Weed Act, to undertake a number of control efforts for undesirable plants. Every federal agency must designate an office or person adequately trained in the management of undesirable plant species to develop and coordinate an undesirable plants management program for control of undesirable plants on federal lands under the agency’s jurisdiction; establish and adequately fund an undesirable plants management program through the agency’s budgetary process; complete and implement cooperative agreements with state agencies regarding the management of undesirable plant species on federal lands under the agency’s jurisdiction; and establish integrated management systems to control or contain undesirable plant species targeted under cooperative agreements. However, as discussed above, undesirable plants are not defined by section 15 beyond the species level to include plant parts; rather, undesirable plants are defined as “plant species that are classified as undesirable, noxious, harmful, exotic, injurious, or poisonous, pursuant to State or Federal law.” Thus—even though the definition of an undesirable plant would include a weed designated as noxious either under the Plant Protection Act or under state law and even though these other laws may extend to subspecies, lower taxa, or plant parts—the control requirements under section 15 could technically be limited to just noxious weeds and other designated plants that are at the species level. While this is a potential definitional issue, we have not found any evidence, from federal agencies or others, identifying this issue as a barrier to control efforts. In addition to these required control efforts, the heads of federal departments or agencies are authorized and directed to permit officials from any state in which there is in effect a control program for noxious plants to enter upon any federal lands under their control or jurisdiction and destroy noxious plants if certain conditions are met. Federal agencies also have a number of other statutory authorities under which they can undertake control efforts for invasive weeds. For example, under the Endangered Species Act, federal agencies are required to establish and implement a program to conserve fish, wildlife, and plants. Conservation can include habitat maintenance and thus invasive weed control efforts. Finally, the Executive Order directs agencies, as permitted by law, to detect, respond rapidly to, and control invasive species in a cost-effective and environmentally sound manner. All of the states but Alaska use the term “noxious weed,” but the states vary in the manner in which they define a noxious weed (see table 5 at the end of this appendix for a complete listing of the states’ noxious weed definitions). Twenty-nine states define noxious weeds either in statute or in regulation (26 and 3 states, respectively). Thirteen states do not have a general definition of what a noxious weed is, but rather list particular weeds as noxious in statute (11 states) or in regulation (2 states). Eight states use the term noxious weed, but only with regard to their weed seed laws. For the 26 states that statutorily define a “noxious weed,” the specificity and scope of their definitions, and thus, the regulatory authority delegated to state agencies in designating noxious weeds varies (see table 4). Some states’ noxious weed definitions are so focused on agricultural harm that invasive weeds that cause harm to the natural environment could be statutorily excluded from being regulated as a noxious weed. Although definitions that include harm to land or other property could potentially cover weeds that cause harm to natural resources or the environment, it is only clear that such weeds would be covered under the states’ definitions that specifically include the concept of harm caused to natural resources or the environment. The 24 states that do not have statutory definitions define or identify noxious weeds in a variety of ways: Regulatory definitions. Three states provide general definitions for noxious weeds in regulations. South Dakota defines a noxious weed in regulation as “a weed which the commission has designated as sufficiently detrimental to the state to warrant enforcement of control measures” and possesses some specific invasive characteristics. A North Carolina regulation defines a noxious weed as “any plant in any stage of development, including parasitic plants whose presence whether direct or indirect, is detrimental to crops or other desirable plants, livestock, land, or other property, or is injurious to the public health.” Vermont defines a “noxious weed” in regulation almost identically to North Carolina, but also includes plants that are detrimental to the environment. Statutory lists. Eleven states (Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Missouri, Oklahoma, Tennessee, and Wisconsin) do not provide a definition for a noxious weed in either statute or regulation, but instead have statutes that list specific plants considered to be noxious weeds. Kentucky uses the term “noxious weed” but does not provide a definition for the term, stating only that it includes Johnsongrass and pests. Regulatory lists. Ohio and Oregon do not define noxious weeds in statute or regulation, but instead list specific noxious weeds in regulations. Weed seed laws. Eight states (Alaska, Connecticut, Georgia, Maine, Massachusetts, New Hampshire, New Jersey, and Rhode Island) only use the term noxious weed with respect to their noxious weed seed laws. Noxious weed seed laws generally restrict or prohibit the sale of the seeds of noxious weeds, either as a product in their own right or as contaminants of other seeds or agricultural products. Alaska has a law providing for the eradication of “obnoxious weeds” in addition to its weed seed law, but has no statutory or regulatory list of such weeds. In addition to the states identified above as having statutory or regulatory lists rather than definitions of noxious weeds, most of the other states also have noxious weed lists. As detailed in state statutes or regulations, the states’ noxious weed lists differ greatly in length, from one noxious weed in Louisiana and Kentucky to 133 noxious weeds in California (see table 5). It is important to note, however, that the number of noxious weeds listed may not portray the complete picture of a state’s efforts to control invasive weeds for several reasons. First, one state may list an entire genus as a noxious weed (which could include numerous individual species or taxa of weeds), while another state may list only particular species or varieties of plants within that genus but list them as separate entries on a noxious weed list. For example, Iowa lists all species within the Carduus genus as a single entry on its noxious weed list, while California lists certain Carduus species separately. Second, some states take control actions against invasive weeds in addition to those identified as noxious weeds in their statutes and regulations. For example, in addition to its list of noxious weeds, Illinois lists 10 exotic weeds that are subject to control efforts. Department of Natural Resources officials in Maryland also told us that they have authority to manage any weed species that threaten the lands they manage, regardless of whether it is listed as noxious. Lastly, localities may have their own noxious weed lists or undertake control efforts for weeds that do not appear on the states’ lists. In addition, the states may categorize or use their noxious weed lists in various ways that can affect state control efforts. Ten states’ statutes and regulations categorize listed noxious weeds into particular definitional classifications. In further classifying noxious weeds, the states may make a distinction in the types of control efforts that are authorized. For example, Colorado has three classes of noxious weeds—List A, List B, and List C—defined as follows: List A noxious weeds are rare noxious weed species that are subject to eradication wherever detected statewide in order to protect neighboring lands and the state as a whole. List B noxious weeds are species with discrete statewide distributions that are subject to eradication, containment, or suppression in portions of the state designated by the commissioner in order to stop the continued spread of these species. List C noxious weeds are widespread and well-established noxious weed species for which control is recommended but not required by the state, although local governing bodies may require management. Thus, in Colorado, List C noxious weeds are not subject to the same control requirements as List A and B noxious weeds. States also use their noxious weed lists and implement the noxious weed definitions in a variety of ways. For example, noxious weed lists can represent weeds under quarantine, weeds subject to import or sale restrictions, weeds for which control is required, or weeds for which control is authorized. Aside from the definitions or lists that stipulate what a noxious weed is, other legal provisions may detail how, where, and by whom control efforts can be carried out. Some states have laws that specifically restrict control efforts to certain noxious weeds. For example: In Hawaii, a number of regulatory criteria must be met. To be designated as a noxious weed for eradication and control projects, a plant species must be one that (1) is not effectively controlled by present day technology or by available herbicides currently registered for use under Hawaii law; (2) is effectively controlled only by extraordinary efforts such as repeated herbicidal applications at high dosage rates; or (3) is effectively controlled only by additional effort over and beyond the normal weed maintenance effort required for the production or management of certain crops and pasturelands, recreation areas, forest lands, or conservation areas. In addition, the plant species must meet certain criteria regarding distribution and spread, growth characteristics, reproduction, and detrimental effects. Nevada is divided into weed control districts, and the weeds subject to control vary by these districts. For example, all state-designated noxious weeds are subject to control in Nevada’s Ruby Weed Control District, but only four weeds are subject to control in the Lovelock Valley Weed Control District. While in some cases the control districts restrict which weeds on the noxious weed list can be controlled, in other cases some weeds that are not listed on the Nevada designated noxious weed list are nonetheless subject to control in Nevada’s control districts. Some states must take particular actions before undertaking control or eradication projects on noxious or invasive weeds. For example, the Maryland Secretary of Agriculture may declare a quarantine to control or eradicate exotic plants, but a public hearing must first be held. In Illinois, governing bodies of each county are required to establish coordinated programs and to publish notices for the control and eradication of noxious weeds. Moreover, some state laws define “control,” providing for the scope of control or eradication efforts authorized in the state. For example, Nebraska defines “control” in a fairly broad manner as “the prevention, suppression, or limitation of the growth, spread, propagation, or development or the eradication of weeds.” Controlling a noxious weed in Hawaii, however, is defined in a more limited manner as “limit the spread of a specific noxious weed and . . . reduc its density to a degree where its injurious, harmful, or deleterious effect is reduced to a tolerable level.” This appendix provides detailed information on the weed management in the five states we reviewed: California, Colorado, Idaho, Maryland, and Mississippi. It describes the weed species posing serious threats in the states; the legal framework for invasive weeds; federal agencies’ activities on lands they manage in the states; state, county, and municipal governments’ responsibilities; and cooperative and private entities’ activities. California has a state weed coordinator, an invasive plant council, and a strategic plan that addresses weeds. Weed species posing serious threats in the state. According to the state’s weed action plan, noxious and invasive weeds infest over 20 million acres in California and result in hundreds of millions of dollars in control costs and lost productivity. California’s noxious weed list includes 133 species. According to the state weed coordinator, the weeds that pose the biggest problems in the state include yellow star thistle, Arundo donax (also known as giant reed), perennial pepperweed, and several species of broom. Perennial pepperweed (also known as tall white top) has infested about 10 million acres in central California. Several species of broom—French, Spanish, Portuguese, and Scotch—invaded California more than 70 years ago. Broom crowds out other habitat and damages agriculture, timber, livestock, and other industries. It also increases fire susceptibility because it contains volatile organic compounds that allow it to burn when either green or dry. Legal framework relevant to invasive and noxious weeds. California administers a pest prevention system designed to protect agriculture from damaging agricultural pests—including weeds—and protect natural environments. Key implementers of the system include the California Department of Food and Agriculture (CDFA), county departments of agriculture, and USDA. State law defines noxious weeds and gives the Department of Food and Agriculture primary responsibility for their control. CDFA has established through regulation a noxious weed list that includes over 130 plant species. In addition, CDFA policy is to classify those weeds on the basis of how widespread they are. The classification determines the extent to which the department undertakes control or other action on the weeds. The California Seed Law also gives the CDFA authority to regulate noxious weed seeds found in agricultural or vegetable seed. In 1999, the Noxious Weed Subcommittee of the state’s California Range Management Advisory Committee published the Strategic Plan for the Coordinated Management of Noxious Weeds in California. This plan was focused on cooperative weed management areas; following the plan, the state legislature enacted Assembly Bill 1168 in 1999 and Senate Bill 1740 in 2000, to provide funding for development of such areas. In 2002, the California Invasive Weed Awareness Coalition, a consortium of businesses and nongovernmental organizations that works to increase awareness of noxious and invasive weeds and resources for weed prevention and control, asked the CDFA to take the lead in developing a statewide plan that would be focused more broadly on invasive weed management. In 2004, the department published the California Noxious and Invasive Weed Action Plan. The ultimate goal of this plan is to protect and enhance the economy, natural environment, and safety of the citizens of California through greater awareness, cooperation, and action in the prevention and control of noxious and invasive weeds. Federal weed management infrastructure in the state. Three of the federal land management agencies we reviewed are active in weed management. The Forest Service manages approximately 20 million acres in California and estimates that approximately 300,000 acres are infested with weeds. The regional office in California and each forest unit have a designated weed coordinator. Forest Service budgeted about $600,000 in fiscal year 2004 to treat invasive weeds. The Bureau of Land Management (BLM) is responsible for 17 million acres of land and estimates that about 1.8 million acres are infested with noxious or priority weeds (priority weeds are not on the state’s list of noxious weeds but are of concern). BLM has a management plan for weeds and an agency weed coordinator for California. Its current weed budget is about $625,000. The National Park Service deploys the California Exotic Plant Management Team to control weeds on 12 parks encompassing almost 2.4 million acres. State, county, and municipal governments’ weed management infrastructure. The California Department of Food and Agriculture is the state’s lead agency in noxious weed control. It is responsible for maintaining the list of officially designated noxious weeds and regulating their movement in commerce. It also implements the state’s pest prevention system, which it coordinates with county departments of agriculture and USDA. Furthermore, the CDFA coordinates with counties’ eradication efforts for high-priority noxious weeds and provides partial funding, oversight, and guidance to county-based weed management areas. The current CDFA expenditure for targeted noxious and invasive weed management in California is approximately $2 million annually. At least five other state agencies also control for invasive weeds. The Department of Parks and Recreation manages 1.4 million acres. According to a 2004 inventory, approximately 100,000 acres of these are infested with invasive weeds. In addition, the Department of Fish and Game manages almost 970,000 acres of fish and wildlife habitat. In 2003, state department personnel worked to control 68 invasive weed species on their lands. The California Bay-Delta Authority distributed over $2.6 million for weed control, management and research activities during fiscal year 2004. Species addressed included Arundo donax, purple loosestrife, Brazilian elodea, and perennial pepperweed. Since 1999, the state’s Wildlife Conservation Board has also provided over $5 million to restore riparian areas in 11 counties, particularly by removing invasive weeds. The state is spending about $10 million annually to treat Arundo donax in Orange County and $100,000 to study the agricultural productivity lost because of yellow star thistle. Many county agricultural commissioners carry out regulatory and other weed eradication and control programs, generally in coordination with CDFA and the local weed management area. County programs typically focus on high priority weeds (those rated “A”), such as musk thistle and spotted knapweed. Lower priority weeds (those rated “B” and “C” because they are more widespread) may also be subject to local control, especially when they are just beginning to invade a county. Counties have increased their efforts in recent years to detect and inventory using electronic systems, which has led to the discovery of new populations of listed weeds. Counties also manage biological control programs in cooperation with CDFA, and some counties participate in weed management areas, roadside weed control, and weed control for fire abatement purposes. Estimated funding for weed programs in county agriculture departments was about $4 million last year, putting the statewide expenditure at about $6 million. According to the state’s 2004 weed action plan, not many cities have weed control programs that can be thought of as dealing with targeted noxious or invasive weeds. The plan does note that some municipalities do have strict mandatory abatement programs to control weeds, but they are designed to alleviate fire risk and unsightliness. Cooperative and private entities. At least 50 of the 58 counties in California are involved in weed management areas. These areas focus on education and local outreach, including workshops and demonstration projects; detecting, surveying and mapping weeds; setting priorities for weed management and conducting strategic planning; fostering cooperative weed control projects; and writing grants. Personnel from county agricultural departments most commonly lead weed management areas, although resource conservation districts and state or federal agency employees also take the primary leadership role in many counties. Each weed management area received approximately $80,000 in state funding from 1999 through 2004, for a total of about $4.5 million. However, the state funding for the program ended in June 2004. The weed management areas raised over $5 million in grants, local matches, and in-kind donations. In 1998, Mendocino County officials helped found the International Broom Initiative, which includes California, Hawaii, Oregon, Washington, Australia, New Zealand, and France. In California, both public and private sectors have joined to fund this initiative. Additionally, the initiative has recently obtained federal funds because of the problems broom is causing, especially along the coasts. Colorado has a state weed coordinator, a noxious weed advisory committee, and a state strategic plan for weeds. Weed species posing serious threats. Regulations under Colorado’s Noxious Weed Act designate 71 weed species as state noxious weeds. For example, yellow star thistle is listed because it causes chewing disease and death in horses. Purple loosestrife is listed because it rapidly displaces habitat and feed for wildlife; spawning fish, ducks, cranes, and turtles leave when loosestrife invades an area. Whitetop, also known as hoary cress, is another major noxious weed threat. Its deep and creeping rootstalks make it difficult to control because cultivation tends to spread root pieces that start new plants. Legal framework for invasive and noxious weeds. Until the enactment of the 1990 Colorado Weed Management Act, weed management focused almost entirely on controlling weeds in agricultural areas. This act, however, broadly addresses the effect of nonnative plants on the economy and environment. The state law classifies weeds depending upon how widespread they are, among other things, and tailors its management of them accordingly. It also required each county to have a weed advisory board. A 1996 amendment to the act created a statewide weed coordinator and established the Colorado Noxious Weed Management Fund to provide financial resources to communities, weed control districts, or other entities engaged in cooperative noxious weed management efforts. An amendment to the act in 2003 created a statewide noxious weed advisory committee. The Department of Agriculture, in coordination with over 40 other state, local, and federal agencies, as well as private entities, formulated a strategic plan to address the spread of noxious weeds. According to the plan, during the 21st century, the state seeks to stop the spread of noxious weed species and restore degraded lands that have exceptional agricultural and environmental value. Federal weed control infrastructure within the state. BLM and the Forest Service manage 94 percent of all the federal land in Colorado. These lands are generally not used for agriculture but are often used for grazing livestock. The Fish and Wildlife Service also manages six refuges throughout the state. All three agencies have active weed management programs to control weeds on their own lands and to support the weed control efforts of nonfederal agencies and organizations. They plan and implement weed control projects on public lands in a decentralized manner; most units conduct weed management as part of another program, such as range or vegetation management. In fiscal year 2004, BLM, Forest Service, and the Fish and Wildlife Service provided an estimated $537,000, $500,000, and $564,000, respectively, to weed control on federal lands within Colorado. State, county, and municipal governments’ weed control infrastructure. The Departments of Agriculture and of Natural Resources are the states’ primary weed control agencies. They work on state-owned lands and help coordinate the activities of other state entities involved in weed management. Between fiscal years 1998 and 2002, the state’s Noxious Weed Management Fund provided approximately $1.3 million for noxious weed management, education, and mapping. On average, every dollar of the state’s investment was matched more than 5 to 1 with private, local, other state, and federal resources. Because requests for funding always exceeded the resources available, the Department of Agriculture, which administers the fund, made awards on a competitive basis, following the recommendations of a committee of weed management professionals. The applications were scored on such factors as the nature of partnerships formed, urgency of the problem, projected impact of the project, and use of sensible and integrated pest management strategies. However, in 2003, the state discontinued its contributions to the fund because of state budget shortfalls. The Department of Natural Resources is responsible for weed management on some state lands and is also the lead state agency for controlling tamarisk—a state executive order establishes tamarisk eradication as a priority. The department recently published the state’s strategic plan for the eradication of tamarisk by 2013. In addition, the department oversees weed management on state lands managed by the Division of Parks and Outdoor Recreation and the Division of Wildlife. In addition to the Departments of Agriculture and Natural Resources, the state’s Department of Higher Education plays a major role in the implementation of the state’s strategic weed management plans by supporting education, research, and outreach. Colorado State University’s agricultural research station and cooperative extension service play a major role in research and outreach. Also, the state Department of Transportation incorporates weed management principles into the construction, operation, and maintenance programs on the state highways. For fiscal year 2002, the Colorado Department of Transportation’s weed control funding was estimated to be $3 million. Other weed management activities are organized along county lines. Most of Colorado’s counties have a weed board and weed supervisor. The counties maintain most of the state’s transportation corridors and also work with private landowners to manage their own weeds. We did not attempt to obtain information on funding in all of the state’s counties. Few municipal governments have dedicated weed control programs, according to the state weed coordinator. To the extent that cities own and manage parks and other public lands, weed control is part of general maintenance. For example, the city of Steamboat Springs employs an open space supervisor who manages weeds part time. Cooperative and private entities. Cooperative weed management areas now cover about half the state; state funding has supported these areas. For example, in 1998, the Colorado Noxious Weed Management Fund provided a $5,000 grant to organizations in the Upper Arkansas River Valley, located in the south central part of the state, as an incentive to create a watershedwide partnership to coordinate weed management planning. As a result, a weed management area representing eight counties was formed. The area received about $92,000 between 1999 and 2002 to, among other things, purchase equipment and supplies to control such weeds as leafy spurge and knapweed. Idaho has a state weed coordinator, an invasive species council, and a strategic plan that addresses weeds. Weed species posing serious threats in the state. Idaho lists 36 noxious weeds, and the state is in the process of ranking them in order of priority for treatment. Some of the most serious threats are yellow star thistle, which is now found throughout the state, and several species of hawkweeds, knapweeds, and knotweeds, all of which diminish the health of rangeland. Recent invaders that could have a serious impact on Idaho lands are Japanese knotweed and tamarisk, both aggressive weeds capable of crowding out other vegetation and animal habitat. Neither is on the state’s noxious weed list. Legal framework relevant for invasive and noxious weeds. The state’s noxious weed law gives the Idaho Department of Agriculture the authority to designate noxious weeds and devise rules and regulations to carry out the provisions of the law. The law also establishes a state weed coordinator to carry out these duties and responsibilities for the director of the Department of Agriculture. The law places the responsibility for controlling weeds upon all landowners, and requires county weed superintendents to inspect lands for weeds and take enforcement actions, when necessary. Idaho also has a seed law that authorizes the Department of Agriculture to regulate and control the spread of noxious weed seeds through inspection, testing, and stopping the sale of contaminated agricultural seeds. In 1996, the Department of Agriculture sponsored a workshop that resulted in an agreement between the public and private sector to develop a statewide strategic plan and noxious weed list, and to cooperate in identifying problems and better ways to use resources. In February 1999, Idaho published its strategic plan to heighten the general public’s awareness about the damage nonnative weeds were causing to state lands and to establish statewide cooperation to halt their spread and restore infested lands and waters. The plan also recommended the statewide formation of cooperative weed management areas. Through a 2001 gubernatorial executive order, Idaho established an invasive species council to provide statewide policy direction and planning. Federal weed management infrastructure within the state. The Forest Service and BLM own 20.5 million and 11.8 million acres, respectively, of noncultivated forest and rangeland. In addition to conducting work on their own lands, both agencies distribute federal funds to state agencies and cooperative weed management areas in Idaho. Since 1999, Idaho has received about $500,000 per year in federal funds through BLM’s land resources appropriation account at the direction of House and Senate appropriations committees. Beginning in fiscal year 2001, the Forest Service’s State and Private Forestry Program also started providing funds to the state Department of Agriculture for weed management, including $812,578 in fiscal year 2004. Over the past 5 years, federal funds have constituted about 72 percent of the total funds state agencies have used for weed management. Forest Service and BLM staff also assist state weed officials in designing their yearly weed management programs. Additionally, federal staff make in-kind contributions by donating equipment, volunteer labor, and other services. For example, federal employees volunteer during weed workdays conducted on both federal and nonfederal lands. State, county, and municipal governments’ weed management infrastructure. The director of the Department of Agriculture is responsible for enforcing the state’s noxious weed law and distributing federal funds. In fiscal year 2004, the department spent about $388,000 on weed management. The director has a state noxious weed advisory committee to assist in developing, modifying, and directing a statewide noxious weed management strategy, and in helping evaluate cost-share projects and research proposals. The director also can call for annual weed plans and end-of-year reports from each county, cooperative weed management area, and other state departments. In addition to working with weed management areas and counties, state agencies participate in other multijurisdictional efforts. For example, state agencies belong to the Hawkweed Biological Control Consortium, along with BLM, Forest Service, and government agencies in Montana, Washington, and British Columbia, Canada. At the county level, weed management usually consists of a board of county commissioners and weed management area volunteers. The commissioners allot county departments their general budget, and the departments in turn determine the amount of funds they will use to treat weeds as part of their general property maintenance. The commissioners also contribute to local weed management areas and work with them to obtain federal weed management cost-share funds. Additionally, counties usually support weed management by providing herbicides during “weed workdays,” when volunteers from public and private entities come together to treat infested areas across jurisdictional boundaries. In the three counties we reviewed, infrastructure and funding for weeds varied depending on the tax base. For example, Ada County’s tax base is large enough to support seven full-time employees. Since the county does not require external funds, it does not belong to a cooperative weed management area. In contrast, Adams County has found it difficult to establish and maintain a weed management infrastructure because it has fewer tax dollars. (Adams’s tax base is smaller because the federal government owns about 65 percent of the county and it has a smaller population.) It hired a weed superintendent in 2003, when it obtained federal and state dollars to fund the position. Washington County has three full-time employees devoted to weed control. One project the county has managed with federal funds uses goats to graze on leafy spurge, although officials commented to us that the county had to provide all initial funding because the federal funds arrived about 8 months after they were committed. Idaho municipalities do not have active weed management programs or full-time weed managers. Instead, municipalities generally have agreements with either counties or weed management areas to treat noxious weeds on municipal property not covered by their own departments as part of general maintenance. Municipalities have nuisance ordinances that restrict the height of weeds and require weed cleanup to avoid fire hazards on private property. Additionally, they sponsor community cleanup days in which federal, county, and local government employees and volunteers participate. Cooperative and private entities. Cooperative weed management areas are the key component of Idaho’s strategic weed plan. The Department of Agriculture uses the areas to distribute federal and state weed funds based on the quality of their grant proposals. Each weed management area has its own steering committee to advise members on developing and implementing integrated weed management plans and strategies. A few Idaho counties are not part of a weed management area either because they do not require external funds or because they do not have the grassroots support to form one. According to officials, a few counties have refused to participate because the federal government will not commit to a partnership and provide consistent financial assistance. The Nature Conservancy is a nongovernmental organization active in weed management in Idaho. It has worked with weed managers from all sectors on both private and public lands and has emerged as a principal in providing leadership and resources in the state. Conservancy staff chair the Idaho Weed Awareness Campaign and the Idaho Weed Coordinating Committee. On the ground, The Nature Conservancy is using new technologies such as the Global Positioning System and geographic information systems, as well as partnerships and public awareness campaigns, to detect, prevent, and control weeds. Maryland has an invasive species council but not a state weed coordinator or a strategic plan that addresses weeds. Weed species posing serious threats. The invasive species council names 34 invasive plant species of concern in Maryland. Several of these species stand out as being particularly harmful. For example, according to state estimates, thistles (five species), Johnsongrass and shattercane cause $15 million in agricultural losses annually. Other weeds, such as garlic mustard, kudzu, and mile-a-minute, are problems in forests and other natural areas. Legal framework for invasive and noxious weeds. Maryland has had a noxious weed law since 1969, which lists Johnsongrass, shatttercane, and thistles (including musk, nodding, Canada, bull, and plumeless thistle) as noxious weeds that are regulated by the Department of Agriculture. The law emphasizes protecting agricultural lands from harmful weeds. It requires landowners to control or eradicate any infestations of listed weeds and prohibits the transport of noxious weeds in any form capable of growth. In 2004, owing to control costs, the Departments of Agriculture and Natural Resources opposed an attempt in the state legislature to add mile- a-minute weed to the noxious weed list. According to an analysis of the proposal, adding the weed to the list—it grows in every county—would cost the state government an estimated $1.5 million per year to assist counties and private landowners with control efforts. Federal weed control infrastructure in the state. Of the four land management agencies we reviewed, the National Park Service and the Fish and Wildlife Service have the most significant land holdings in Maryland. The National Park Service’s National Capital Region Exotic Plant Management Team carries out weed control on five national parks that total about 42,000 acres. In addition to scheduling activities based on the needs of individual parks, the team can quickly respond to infestations, thus filling a rapid response role. Individual park units, however, are responsible for general maintenance on invasive weeds on a routine basis. To do so, these units use funding from their vegetation management fund. The Fish and Wildlife Service manages five national wildlife refuges in Maryland totaling about 44,000 acres. The refuges are responsible for managing weed infestations found on their lands. For example, the Patuxent Research Refuge uses its biological resources staff and its facilities management staff to conduct weed control activities on its more than 12,000 acres. Because weed efforts are part of general refuge maintenance, refuge officials were unable to estimate how much they spend on weed management. State, county, and municipal governments’ weed control infrastructure. Three departments engage in weed control. The Department of Agriculture has a staff of six weed supervisors who work with 20 of the state’s 23 counties to manage weeds—primarily those on the noxious weed list—on agricultural and nonagricultural lands. The department provides grants that the counties match or exceed—about $80,000 in fiscal year 2004, with counties contributing about $200,000. For example, the department granted $3,500 in 2004 to Carroll County, while the county contributed $18,000 for weed management. The county weed coordinators look for infestations in their counties and work with landowners to remove them. Some of the 20 counties also have a spraying program to conduct weed control for private or public landowners in return for a fee, as well as to treat weeds on county lands. The Department of Agriculture’s fiscal year 2004 budget for weed control, including the county grant programs, was $310,000. In the Department of Natural Resources, individual natural resource land units—including forests, wildlife areas, and state parks—conduct weed management as part of general operations. Funding for these efforts comes from general operating budgets; the department was not able to estimate how much it spends. The department is currently exploring the creation of “weed teams” similar to ones used by the National Park Service. At the Department of Transportation, the highway administration is responsible for weed control on 5,700 miles of state-managed roads. According to an administration official responsible for vegetation management, an estimated 40 percent of those roads are infested with state-listed noxious weeds. In addition, the administration conducts control efforts for weeds that are not on the state list. In fiscal year 2004, the administration spent $2 million on vegetation management, of which less than $50,000 was for control of thistles, Johnsongrass, and phragmites (the latter of which is not on the state’s noxious weed list). In addition to joint efforts with the Department of Agriculture, some counties have their own weed management programs. For example, Montgomery County has a voluntary “Weed Warriors” program to control weeds on about 32,500 acres of county parklands. The park system has a few natural resources staff who work part time on weeds, as well as maintenance crews, but it does not set aside any funding specifically for weed management. According to state officials we spoke with, municipalities in Maryland are generally not active in weed management. In Baltimore, however, the city’s Department of Recreation and Parks recently began work to control weeds in city parks, and in 2004 received a Pulling Together Initiative grant for $39,500. The city will, as a result of that grant, conduct weed control on six different sites. Weed efforts in the city are otherwise few in number. The city of Frederick requires landowners to cut down weeds that the city determines to be a nuisance. If the owner does not comply with such an order, the city can perform that work and charge the landowner for it. Cooperative and private entities. The Maryland Invasive Species Council, begun in 2000, includes members representing state, federal and private interests. The council shares ideas and knowledge and helps increase public awareness of invasive species issues, but is not statutorily established. According to state officials, however, Maryland does not have any cooperative weed management areas and the high degree of urbanization and fragmented land ownership makes the creation of these types of collaborative entities difficult. Private landowners can receive support for weed management from various sources. For example, the USDA’s Natural Resources Conservation Service and the state’s Department of Natural Resources provide cost-share funds to landowners for phragmites control. Nongovernmental landowner organizations such as The Nature Conservancy manage noxious and other weeds on their lands. The conservancy owns 31 preserves in the state totaling 62,000 acres; it uses its own resources, as well as volunteer labor, to control weeds. Other groups, such as the Maryland Native Plant Society, run volunteer efforts to control weeds on public lands throughout the state. Mississippi does not have a state weed coordinator, an invasive species council, or a strategic plan for addressing weeds. Weed species posing serious threats. The state lists eight species of noxious weeds: Brazilian satintail, Chinese tallow tree, cogongrass, giant salvinia, hydrilla, itchgrass, kudzu, and tropical soda apple. Six of these weeds are also on the federal noxious weed list (Chinese tallow tree and kudzu are not). Cogongrass, which has been named the seventh worst weed in the world, is found in more than half of Mississippi’s counties, and kudzu is a major problem primarily in the northern part of the state. Other weeds of concern harm agricultural and natural areas in Mississippi, such as Chinese tallow tree, smutgrass, and tropical soda apple, but most of the weed control work concerns either cogongrass or kudzu. Legal framework for invasive and noxious weeds. In 2004, Mississippi amended its Plant Pest Act regulations to list the eight noxious weeds. The Department of Agriculture and Commerce regulates the transportation of the listed weeds and inspects for them at nurseries. However, the law does not require Mississippi landowners to manage any infestations of listed noxious weeds on their property. Federal weed control infrastructure within the state. Mississippi is host to federal lands managed by three of the land management agencies we reviewed. The Forest Service manages about 1.1 million acres in six national forests. Its Southeastern regional office provides advice and guidance to individual forests and districts. The Forest Service funds weed management out of general vegetation management funds. For example, the Holly Springs National Forest’s major weed problem is kudzu, which infests about 22,500 of its 150,000 acres. Holly Springs used about $42,000 from its overall vegetation management budget to treat 185 acres of kudzu in fiscal year 2004. According to forest officials, they are limited in their ability to treat kudzu because they have not analyzed the potential impact of treating the kudzu with herbicides, as the National Environmental Policy Act requires. In contrast to the efforts on kudzu, the national forests in Mississippi have worked together to create a “programmatic” environmental assessment to use herbicides on cogongrass. While the forests still have to conduct site- specific assessments in certain areas, the programmatic assessment streamlines the process for cogongrass treatment in many areas of the Mississippi National Forest. According to the Forest Service, this means that infestations, when found, can be controlled in a timely manner. According to the environmental assessment, it can take up to three years to conduct the analysis and public notification to comply with the environmental requirements of the National Environmental Policy Act, during which time an infestation is likely to spread further. The National Park Service’s Gulf Coast Exotic Plant Management Team is responsible for conducting weed control on three national park units in Mississippi covering about 88,000 acres. The team has targeted kudzu infestations for control along the Natchez Trace Parkway and in Vicksburg National Military Park. Additionally, the team has targeted Chinese tallow tree, Chinese privet, and Japanese honeysuckle for control on Gulf Islands National Seashore. The Fish and Wildlife Service manages 14 national wildlife refuges in Mississippi. Individual refuges are responsible for managing weeds on their own land and use funds from refuge operations and invasive species funds. The regional office assists refuges in developing long-term comprehensive conservation plans and provides other guidance to refuges. As an example of a conservation plan, the plan for the Noxubee National Wildlife Refuge discusses efforts to control exotic and invasive plants, including its use of monitoring and integrated pest management. State, county, and municipal governments’ weed control infrastructure. Three state entities engage in weed control. The Department of Agriculture and Commerce is in charge of implementing the state’s noxious weed law and is the lead agency in the state’s cogongrass task force. Its regulatory activities include restricting the transportation of listed weeds and conducting nursery inspections to look for seeds of the listed weeds. While the department provided close to $100,000 from its own budget in fiscal year 2004 for weed management efforts, it has also relied on federal grants to help control cogongrass. For example, it received a $25,000 grant from the Pulling Together Initiative in 2004 to supply private landowners with herbicides for spraying cogongrass. The department also has received about $220,000 from USDA’s Animal and Plant Health Inspection Service to control cogongrass. With this funding, it provided cost-share funds to a total of 218 landowners in 2004 (the department received applications from 600 landowners). The Department of Transportation controls weeds along state-owned roadways—of which there are 27,270 miles—and spent about $2.5 million on chemical weed control in fiscal year 2003 out of its general operating budget. The Forestry Commission in Mississippi conducts weed control on about 500,000 acres of state-managed forests, as well as on privately owned nonindustrial forests in exchange for fees. Since the commission is mostly concerned about timber production, it focuses on controlling weeds that affect timber harvests. The Forest Service’s State and Private Forestry program provides much of the commission’s funding for weed management, including about $25,000 in fiscal year 2004. Private landowners reimbursed the commission about $177,000 for weed management work its crews did in fiscal year 2004. State officials said that neither counties nor municipalities are active in weed management in Mississippi. Cooperative and private entities. The Mississippi Exotic Plant Pest Council, which consists of over 30 organizations, was formed to raise awareness about invasive weeds and share knowledge. While the state does not have weed management areas, it does have species-specific groups. For example, a group of 17 federal, state, and local entities formed a cogongrass task force in 2002 to cooperatively fight the weed. In addition, the district ranger at Holly Springs National Forest took the initiative to form a kudzu-specific group. Though this group is not formal, members are interested in educating the public and sharing knowledge about kudzu control. In addition, some federal, state, and nongovernmental entities have formed an alliance to more effectively share information and coordinate invasive species management activities in Mississippi. Private landowners, including nongovernmental organizations, are also involved in weed management. The Nature Conservancy, for example, manages weeds on about 10,000 acres of land it owns. Its wetland mitigation program, in which developers pay a fee for wetland restoration to offset wetland losses due to development, is a source for some of its weed management funding, according to a Conservancy official in Mississippi. Some private landowners have also received funding from government sources. For example, USDA’s Natural Resources Conservation Service’s Environmental Quality Incentives Program provided $165,000 in cost-share funds to 82 Mississippi landowners in fiscal year 2003 and, as noted earlier, the state Department of Agriculture and Commerce offered a $220,000 cost-share program for cogongrass. Additionally, the Forestry Commission provides cost-share funds, through its Forest Resource Development Program, to forest owners for weed management. In fiscal year 2004, this program provided about $900,000 for forest regeneration and improvement activities, including weed management. Table 6 identifies major programs at the U.S. Department of Agriculture (USDA) and the Department of the Interior that directly support weed control, the objectives of those programs, the estimated amount of funding provided, and the overall amount of funding available through the program. In addition to the federal natural resource conservation programs known to provide support for weed management, others could potentially be used for that purpose. The programs listed in table 7 are those that USDA and Interior have identified as being potential sources of funding. The following are GAO’s comments on the Department of the Interior’s letter dated February 9, 2005. 1. We recognize that the definition of invasive weeds we use in the report is inconsistent with the definition of invasive species in Executive Order 13112. The primary difference is that our definition includes species that are native to a particular ecosystem whereas the Executive Order includes only those that are nonnative. We chose to use the broader definition because we were gathering information on entities that manage weeds in general, and not just those that are nonnative. This distinction has been added to the report. In addition to the individual named above, Ross Campbell, Judy Pagano, Matt Rosenberg, Dawn Shorey, Carol Shulman, Maria Vargas, and Amy Webbink made key contributions to this report.

Invasive weeds, native or nonnative plant species, cause harm to natural areas such as rangelands or wildlife habitat and economic impacts due to lost productivity of these areas. While the federal investment in combating invasive species is substantial most has been concentrated on agricultural lands, not on natural areas. In this report, GAO describes (1) the entities that address invasive weeds in natural areas and the funding sources they use; (2) federal, state, and local weed management officials' views on the barriers to weed management; and (3) their opinions about how additional resources for weed management could be distributed. GAO limited this study to entities in the Departments of Agriculture and the Interior, and California, Colorado, Idaho, Maryland, and Mississippi, and gathered information through interviews of over 90 weed management officials. All types of landowners--government and private--are involved in the battle against invasive weeds in natural areas and include federal agencies such as the Bureau of Land Management, the Fish and Wildlife Service, the Forest Service, and the National Park Service; state and local agencies such as those responsible for agriculture, natural resources, and transportation; and individuals who manage their lands for a variety of purposes, including production or preservation. In some cases, federal or state laws and regulations require that landowners and managers control specific regulated weeds. In other instances, land managers control weeds--including unregulated ones--to meet their larger responsibilities for natural resource conservation. Weed management entities rely on a wide range of funding sources to carry out their activities. The federal government is the largest source of funding through the general budgets of federal land management agencies and numerous grant programs for natural resource management. State and local agencies and nongovernmental entities often rely on a mix of their own funding, grant resources, and collaboration with other entities or volunteers to implement weed management projects. Not surprisingly, given the magnitude of the invasive weed problem, federal and nonfederal officials we questioned believed that the lack of consistent and adequate funding limits effective management of the problem. Specifically, some officials commented that funding needs to be consistent from year to year to ensure that invasive weeds are eradicated or kept in check, but available resources for weed management often fluctuate. In addition, some officials said that funding is sometimes received late in the year, beyond the point when effective actions can be taken. Other identified barriers to effective weed management included the requirement to comply with National Environmental Policy Act requirements in order to conduct treatments, a lack of cooperation among entities needed to combat invasive weeds, and a general lack of awareness and public education on the issue. Posed with the prospect of a new program or funds for addressing invasive weeds, a majority of the federal and nonfederal officials who responded to our question preferred that existing programs be used to disburse additional funds. Several officials noted that a key factor for such an approach is to capitalize on existing relationships among current programs and weed management entities, rather than creating a new program. A majority of officials also believed that an agency within the Department of Agriculture should implement any new program or funding source, but that states should play a key role in determining how funds should be distributed. Some officials noted, however, that certain agencies have different expertise with regard to weeds and knowledge of local weed management entities. As we completed our review, a new law required the creation of a new program to provide funding by the Department of Agriculture for weed management. The law requires that the department rely on reviews by regional, state, and local experts when making funding decisions.

You are an expert at summarizing long articles. Proceed to summarize the following text: Section 1107 of the NDAA for Fiscal Year 2013 established the Committee on National Security Personnel within the Executive Office of the President. The Committee was required to include, at a minimum, representatives from OMB, OPM, the Assistant to the President for National Security Affairs, DOD, and the Departments of State and Homeland Security. As part of the implementation of the section 1107 Interagency Rotation Program, the statute required the policies, processes, and procedures included in the Strategy to provide that the program be carried out in at least two Interagency Communities of Interest—Emergency Management and Stabilization and Reconstruction—and that no fewer than 20 executive branch employees be assigned to participate in the program in each of the first 4 fiscal years after the enactment of the NDAA for Fiscal Year 2013—fiscal years 2014, 2015, 2016, and 2017. Section 1107 indicated that the purpose of the program was to increase the efficiency and effectiveness of the government by fostering greater interagency experience among executive branch personnel on national security and homeland security matters involving more than one agency. Section 1107 defines an “Interagency Community of Interest” as positions in the executive branch of the government that (1) as a group, are positions within multiple agencies of the executive branch of government; and (2) have significant responsibility for the same substantive, functional, or regional subject area related to national security or homeland security that requires integration of the positions and activities in that area across multiple agencies to ensure that the executive branch of the government operates as a single, cohesive enterprise to maximize mission success and minimize cost. Additionally, the Strategy defines “Community of Practice” as a Community of Interest that has, among other things, identified members to engage in joint activities, experiences, and discussions and share information as an identified network. For example, according to the charter for the Emergency Management Community of Practice, the community will advance whole-of-government goals pertaining to national preparedness through unified, collaborative, interagency approaches to the prevention of, protection from, response to, recovery from, and mitigation of manmade and natural disasters. This will be accomplished by providing integrated education, training, and experiential activities to promote familiarization with emergency management missions, operations, and interagency structures across the federal government and to optimize operational planning and execution. Prior to the establishment of the section 1107 program, in May 2007, Executive Order 13434 established the National Security Professional Development Executive Steering Committee and designated OPM as its chair. Executive Order 13434 also called for the development of a strategy that set forth a framework that would become the National Security Professional Development (NSPD) Program—we will discuss the status of this program later in the report. The NSPD Program’s goal was to promote the education, training, and experience of current and future professionals in national security positions. To facilitate the implementation of the NSPD Program, the Executive Steering Committee established an Integration Office, which was originally housed at DOD and staffed by employees from other departments and agencies on temporary detail assignment. In 2012, the NSPD Integration Office was moved from DOD to OPM. Appendix I provides key dates in the establishment and implementation of both the section 1107 Interagency Rotation Program and NSPD Program. In 2010, we identified 225 professional development activities available for national security professionals that have a goal of improving interagency collaboration. Of the 225 activities, 7 were interagency rotation programs. Five of these seven programs involved rotating personnel between civilian agencies and the defense community. During that review, many departments and agencies reported the existence of other interagency assignments, but we found that the departments and agencies did not manage these as professional development programs and they lacked an explicit goal of improving interagency collaboration. The NSPD Program, which resulted from Executive Order 13434, was included as one of the professional development activities identified by this review. GAO also has a large body of work on the need for interagency coordination and collaboration to facilitate the federal government’s response to natural disasters and homeland security issues, among other things. Although this body of work does not directly call for an interagency rotation program similar to the section 1107 Interagency Rotation Program, it highlights the continued importance of improving interagency coordination and collaboration, more than a decade after catastrophic events such as the terrorist attacks of September 2001 and Hurricane Katrina in August 2005. For example, in 2006, we found that key issues with the federal response to Hurricane Katrina—the largest, most destructive natural disaster in our nation’s history—were reminiscent of the issues identified in the wake of Hurricane Andrew in 1992. Among other things, clearly defining and communicating leadership roles, responsibilities, and lines of authority for catastrophic event response and clarifying and applying procedures for activating the National Response Plan could have improved the federal government’s response efforts after Hurricane Katrina. See Appendix II for additional information on our prior work identifying the need for interagency coordination and collaboration. In March 2014, the Committee issued the Strategy required by section 1107 of the NDAA for Fiscal Year 2013. The Strategy complies with most of the statutory requirements and describes the basic policies, processes, and procedures for the section 1107 Interagency Rotation Program. However, implementation of the program has languished because there has been limited leadership and oversight of the program, and no national security personnel had been assigned for rotations as of September 2015. The departments and agencies also cited various actions that needed to be taken in order for the section 1107 program to be implemented in a timely manner. Examples of these actions include the development and issuance of guidance outlined in the Strategy. In addition to establishing the Committee on National Security Personnel, section 1107 of the NDAA for Fiscal Year 2013 required the Committee to develop and issue a National Security Human Capital Strategy that provided for the implementation of an interagency rotation program. On March 29, 2014, the Committee issued the required National Security Human Capital Strategy—entitled The Human Capital Strategy for Interagency Personnel Rotations. Our analysis of the Committee’s actions and the Strategy showed that they address most of the statutory requirements set forth in section 1107. Section 1107 included 19 requirements related to the development and issuance of the Strategy and the subsequent implementation and monitoring of the section 1107 program. However, for 2 of these requirements we had no basis to judge, because these requirements are contingent on actions that had not yet occurred, and, therefore, we did not assess these requirements. We found that the Committee’s actions and its Strategy address 13 of the 17 statutory requirements we assessed, for example, by (1) including provisions that specifically address the requirements, such as by including specific policy requirements; (2) assigning various departments and agencies tasks, such as developing policy or guidance; and (3) directing other organizations, including the Communities of Practice, to carry out the section 1107 program. We also found that the Committee’s actions and the Strategy partially address 2 and do not address 2 of the 17 statutory requirements we assessed. Appendix III includes our assessment of the Committee’s and Strategy’s compliance with each of the 17 section 1107 requirements we could assess. Among the 13 requirements addressed, we found that the Strategy identifies Interagency Communities of Interest for the purposes of carrying out the section 1107 program. The Strategy specifically identifies the two Communities called for in section 1107—Emergency Management and Stabilization and Reconstruction—but also names other possible Communities, including cyber-security, climate change adaptation, and energy security, among others. We also found that the Strategy discusses (1) training and education requirements; (2) prerequisites or requirements for participation; and (3) performance measures, reporting requirements, and other accountability devices associated with participation in and evaluation of the program. We found that the Strategy partially addresses 2 of the 17 requirements. Those are the requirements that (1) the Committee issue a National Security Human Capital Strategy within 270 days of enactment of the statute and (2) the Strategy designate agencies to be included or excluded from the program. The Committee issued the Strategy on March 29, 2014, but it was 6 months late and, therefore, did not meet the required deadline. In addition, the Strategy states that the Committee will determine which departments and agencies will participate as each Community is formed, and that a process will be described in further detail in a subsequent part of the Strategy. We determined that these statements make reference to a process for making decisions about which agencies and departments will participate; however, we found that the Strategy does not designate which departments and agencies will be included or excluded, as called for in section 1107. The Strategy does, however, state that agencies with national security missions will incorporate the Strategy into their training priorities. We found that the Strategy does not address 2 of the 17 requirements. Specifically, it does not address the requirements for the Strategy’s policies, processes, and procedures to provide that in each of the 4 fiscal years after enactment of the NDAA for Fiscal Year 2013 (1) the section 1107 Interagency Rotation Program shall be carried out in at least two Communities of Interest—one of which should be Emergency Management and the other Stabilization and Reconstruction; and (2) at least 20 employees should be assigned to participate in the program. We found that the Strategy only reiterates that the statute identifies the Emergency Management and the Stabilization and Reconstruction Communities and allows for additional Communities to be added, subject to approval by the Committee. However, the Strategy does not provide that, at a minimum, the program would be carried out in at least the two designated Interagency Communities of Interest or by at least 20 employees in each of the first 4 fiscal years after the NDAA was enacted. Specifically, the Strategy is silent on the number of participants that would rotate through the program and does not provide assurance that the rotations should occur each year in at least the two named Communities. As we discuss further in the next section, to date, no rotations have occurred under the section 1107 program. Finally, there were two statutory requirements for which we had no basis to judge. These are requirements for (1) the heads of each participating agency to help ensure that strong preference is given to those who participate in interagency rotational service when selecting individuals for senior positions; and (2) the Committee to assess and report on the established performance measures by September 30, 2015. With regard to the first requirement, because no rotations have occurred under the section 1107 program, we cannot assess whether agency heads have given such a preference to participants. With regard to the second requirement to assess and report on established performance measures, as discussed in the next section of this report, because the section 1107 program has not been implemented, we could not assess compliance with this requirement due to the reporting date. Further, our draft report and the report on performance measures were due on the same day. Agencies and organizations have taken limited steps to address the roles, responsibilities, and tasks assigned to them in the Strategy for implementing the section 1107 Interagency Rotation Program, and they had not implemented that program as of September 2015. More specifically, no rotational assignments have occurred. By September 30, 2015, at least 40 employees should have been assigned to rotational assignments (20 each in fiscal years 2014 and 2015). Agency officials report that, as of September 2015, no employees had been assigned to rotations under the section 1107 program. According to officials we spoke with and documents we reviewed, the program’s implementation is behind schedule because (1) there has been limited leadership and oversight over its implementation and (2) a number of actions need to be completed to address some of the roles, responsibilities, and tasks assigned to the departments and agencies. As noted above, the Committee on National Security Personnel issued the Strategy that assigned specific roles, responsibilities, and tasks to the various entities—OPM; the NSPD Executive Steering Committee, which OPM chairs; the participating departments and agencies; and the Communities of Practice—to implement the section 1107 Program. Table 1 summarizes the major roles, responsibilities, and tasks the Strategy assigned to the departments, agencies, and other organizations, as well as those the Committee reserved for itself. We identified other roles, responsibilities, and tasks assigned to the departments and agencies, among others, during our review of supporting documentation, including meeting minutes, organization charters, and implementation plans. For example, the charter for the Emergency Management Community of Practice states that OPM will lead the Committee to implement an interagency rotation system that complies with the law. The charter also states, for example, that the Department of Homeland Security will designate the Community Manager for the Emergency Management Community of Practice. We also found that assignments were made to departments and agencies during NSPD Executive Steering Committee meetings. These assignments were documented in the form of action items included in the minutes of the meetings and included creating inventories of current rotational assignment opportunities from participating departments and agencies and developing further guidance on personnel issues from OPM. We found, however, that implementation of the section 1107 Interagency Rotation Program is behind schedule because there has been limited leadership and oversight in place to guide the implementation effort and because a number of actions need to be completed to address some of the roles, responsibilities, and tasks assigned to the departments and agencies to help ensure the program is implemented in a timely manner. Officials we spoke with from OPM and the departments were not aware of the existence of a charter or similar document for the Committee, which we would expect to identify an organizational structure that clearly defines key areas of authority and responsibility and establish appropriate lines of reporting. With regard to leadership, officials we spoke with stated that the section 1107 program has not been a priority for those individuals currently overseeing the Committee. OPM officials also told us that they are not responsible for the performance of the section 1107 program because (1) they are not the lead for the Committee on National Security Personnel and (2) the NSPD Executive Steering Committee, which holds joint meetings with the Committee on National Security Personnel, is more of a collaborative effort of the participants. However, officials from multiple participating departments stated that they perceive OPM to be the lead for the section 1107 Interagency Rotation Program and look to the agency for leadership based on its role in the oversight of federal government personnel issues. Neither section 1107 or the Strategy specifies who should be the lead or chair for the Committee on National Security Personnel; however, OPM has been designated the chair of the NSPD Executive Steering Committee and, more importantly, the Strategy specifically identifies that the Committee will work with OPM to implement the Strategy. Officials from departments and agencies we interviewed told us that an office to oversee the section 1107 Interagency Rotation Program has not been established, but was needed. The managers for all three currently existing Communities of Practice also identified the need for a program office to help oversee and ensure the accountability of the implementation efforts, among other things. Further, officials told us that the individuals who have been tasked with carrying out the implementation of the section 1107 program and sit on the Committee have other responsibilities. For those individuals, responsibilities associated with the section 1107 program are collateral duties. Officials noted that the meetings of the NSPD Executive Steering Committee, which, as noted above, are held jointly with the Committee on National Security Personnel, are infrequent—with meetings being scheduled with only a few weeks’ notice or canceled. They also stated that very little communication or progress occurs on any task between meetings, further slowing the implementation of the section 1107 Interagency Rotation Program. Several documents identify OPM’s leadership roles with regard to developing further guidance and implementing the section 1107 Interagency Rotation Program, but we found that the existing leadership structure is not providing needed oversight of the program’s implementation. For example, OPM has an additional leadership role, in its capacity as the chair of the NSPD Executive Steering Committee, to provide oversight over the Communities of Practice through periodic updates from the Communities. As of September 2015, three Communities of Practice—Emergency Management, Federal Operations Centers, and Defense Intelligence and Security—had been approved by the NSPD Executive Steering Committee, which OPM chairs, and for which the NSPD Executive Steering Committee would have oversight responsibilities. One Community Manager stated that in 2014, when the Intelligence Community, which had previously established the Joint Duty Assignment program, submitted a charter for the Defense Intelligence and Security Community of Practice to be considered and approved by the NSPD Executive Steering Committee, it took OPM—as chair of the NSPD Executive Steering Committee—months to process the request and move it forward to the Committee on National Security Personnel for final approval, delaying the establishment of the community. According to OPM officials, Community Managers’ oral presentations at the NSPD Executive Steering Committee meetings provide the necessary oversight of the actions of the Communities of Practice. However, two of the three Communities’ charters require that additional written reports be provided to the NSPD Executive Steering Committee for oversight. One Community Manager reported that he had only been invited to provide oversight updates at the meetings starting in 2015, despite serving in the role since December 2013. That same manager had previously been unaware that the Strategy had been issued and that the Strategy required the Communities to develop performance metrics. Further, that Community Manager also stated the NSPD Executive Steering Committee recently began requesting information on the community’s performance metrics and first sent a document template in mid-August 2015 that requested performance information by the end of that month. Department and agency officials we spoke with also cited a number of actions that are needed in order for them to complete some of their assigned roles, responsibilities, and tasks, including steps that need to be taken and in what order to implement the section 1107 program. For example, OPM officials stated that their agency has not yet issued the personnel guidance required by the Strategy, but were unable to provide timeframes for when the guidance would be issued. Officials from participating departments told us they could not proceed with taking action on their tasks because they were waiting for further guidance from OPM. Those officials also told us that their departments have not taken steps to update previous lists of identified national security positions and personnel—another assigned task—because, according to officials from one of the departments, they are waiting for further guidance from OPM on the criteria for selecting employees and positions for participation in the program. Department officials also told us that they are waiting for guidance on how to develop policies for providing preference to those employees who had previously participated in the section 1107 program when they apply for senior level positions. DOD officials stated that they, as well as representatives from other departments and agencies, have requested guidance from OPM at least twice at NSPD Executive Steering Committee meetings and had not, as of September 2015, received such guidance. When asked about the need for such guidance, OPM officials stated that the departments and agencies do not need additional guidance from OPM to proceed with their assigned roles, responsibilities, and tasks under the Strategy. Although section 1107 requires the head of each agency to take certain actions to incorporate preference for the selection of individuals to senior positions and the Strategy requires the departments and agencies to select personnel and positions to participate in the program, confusion about such roles, responsibilities, and tasks has contributed to delays in the section 1107 program’s implementation. In 2012, we found that federal departments and agencies use a variety of mechanisms to implement interagency collaborative efforts that can be used to address a range of purposes including policy development, program implementation, oversight and monitoring, information sharing and communication, and building organizational capacity. Specifically, we found that, to implement interagency collaborative mechanisms, federal agencies should, among other things, consider (1) leadership; (2) clarity of roles and responsibilities, and (3) outcomes and accountability. Such considerations should include plans to sustain leadership over time, clearly identified and agreed upon roles and responsibilities, and tracking and monitoring of progress. In addition, with regard to actions not taken by the departments and agencies to implement the program, internal control standards state that management needs to comprehensively identify risks and should consider all significant interactions to accomplishing a stated objective. Risk identification methods may include qualitative and quantitative ranking activities, management conferences, and considerations of findings from audits and other assessments, among other things. Without committed leadership and oversight from all of the relevant entities—most specifically, the Committee on National Security Personnel and OPM—to oversee the implementation of the section 1107 Interagency Rotation Program and actions taken on necessary steps to proceed with the program’s implementation, it is unlikely that the goals of section 1107 of the NDAA for Fiscal Year 2013 will be addressed and that the section 1107 program will be implemented within the specified timeframes. Further, the executive branch will not be positioned to realize the expected benefits of the program, which could include improved interagency coordination and integration in preparing for and responding to national security challenges, among other things. Over a decade after catastrophic events such as the terrorist attacks of September 2001 and Hurricane Katrina in August 2005, interagency coordination and integration continue to be a challenge for the federal government’s national security and homeland security missions. Providing opportunities for national security personnel to gain interagency experience can benefit not only those individuals, but also enhance interagency coordination and integration. The section 1107 Interagency Rotation Program for national security personnel, when implemented, could support these goals. However, limited leadership and oversight, as well as inaction on a number of assigned roles, responsibilities, and tasks have caused the program’s implementation to languish. Until OPM, the Committee on National Security Personnel, departments and agencies, and other organizations take actions necessary to move forward with implementation, the program is likely to remain unrealized. Without a clear leadership structure for the Committee that can work with departments and agencies to identify and take action on any steps that are necessary for the program’s implementation, Congress’s intentions for the program and the benefits that could stem from it will also remain unfulfilled. To provide greater assurance that the Interagency Rotation Program for national security personnel will be implemented as provided in section 1107 of the National Defense Authorization Act for Fiscal Year 2013, we recommend that the Director of the Office of Personnel Management, in collaboration with the Committee on National Security Personnel, take the following two actions: (1) establish a clear leadership and oversight structure to guide future (2) work with the departments and agencies to identify and take action on necessary next steps to proceed with the program’s implementation, including developing and issuing required guidance for implementation within identified timeframes. We provided OPM, OMB, DOD, the Department of State, the Department of Homeland Security, and the National Security Council with a draft of this report for comment. OMB, DOD, the Department of Homeland Security, and the National Security Council had no comments on our draft report. The Department of State provided technical comments, which we considered and incorporated where appropriate. In comments on a draft of this report, OPM partially concurred with one recommendation and concurred with the second recommendation. OPM’s comments are reprinted in their entirety in appendix IV. In its response, OPM stated that our draft report made recommendations only to OPM, despite section 1107 establishing the Committee within the Executive Office of the President and delegating program and policy responsibilities to the heads of participating departments and agencies. We believe that this characterization misconstrues our recommendations. As our report shows, OPM’s role with regard to the section 1107 Interagency Rotation Program includes responsibilities specific to OPM, but also responsibilities to act in collaboration with other departments and agencies based on its roles as a member of the Committee on National Security Personnel and as the Chair of the NSPD Executive Steering Committee. To that end, both of our recommendations were not directed solely to OPM, but rather to OPM in collaboration with the Committee on National Security Personnel, as a joint effort. As specified in section 1107, the Committee is comprised of multiple departments and agencies, including OPM, OMB, and DOD, among others. Moreover, our second recommendation also includes working with the departments and agencies when identifying and taking action on next steps for the program’s implementation. OPM is not the sole recipient or target of our recommendations, but OPM and the Committee on National Security Personnel are both focal points because of their responsibilities. OPM also stated that table 1 of our report oversimplifies the Committee’s delegation of responsibilities to the various departments and agencies. We find this table an appropriate portrayal of the roles and responsibilities specifically outlined in the Strategy as the table describes only the major roles and responsibilities, which was our intent. In addition, in its response to our draft report, OPM criticized our methodology for not including interviews with the Executive Office of the President in our review. As we stated in our report, we made multiple attempts to meet with the Executive Office of the President through the National Security Council, but they were unable to meet with us during the statutory timeframes required by our review. However, when provided the opportunity to comment on our draft report, the National Security Council responded that it did not have any comments on our report. As a result, we worked with OPM, as well as the other departments and agencies, to obtain necessary clarification on the roles and responsibilities, the distinction between the work carried out by the two committees, and the status of the program’s implementation, among other things. Regarding our first recommendation to establish a clear leadership and oversight structure to guide future implementation efforts, OPM partially concurred. OPM stated that it agrees that a more formal system of reporting to the NSPD Executive Steering Committee and more frequent Executive Steering Committee review of performance metrics would improve the program’s accountability. However, OPM added that it cannot establish a charter or leadership structure for the program as a whole, because it would contravene section 1107(b) of the National Defense Authorization Act for Fiscal Year 2013, which established the Committee as the policy lead on national security personnel rotations and specified OPM as only one of several participating agencies. We agree that such steps may help improve the program’s accountability, but we disagree with OPM’s assessment of our recommendation— particularly the portion about a clear leadership structure. Specifically, we do not intend for OPM to act unilaterally, and we reiterate that our recommendation is directed at OPM in collaboration with the Committee. Further, as stated in our report, the Emergency Management Community of Practice charter—which was revised after the enactment of section 1107, approved by the NSPD Executive Steering Committee, and signed by the Chief Operating Officer of OPM—states that OPM will lead the Committee on National Security Personnel to implement an interagency rotation program that complies with the law. This statement clearly articulates OPM’s key role in the implementation of the system. Moreover, during the course of our review, officials we met with from the departments that comprise the Committee pointed to OPM as having a lead role in the program’s implementation and those officials continue to look to OPM for direction and guidance. Regarding our second recommendation to identify and take action on necessary next steps to proceed with the program’s implementation, including developing and issuing required guidance for implementation within identified timeframes, OPM concurred. OPM agreed with our assessment that OPM has not issued two guidance documents required by the Strategy and has agreed to develop at least two guidance documents, including, for example, guidance specifically addressing performance appraisals for employees participating in interagency rotations. We appreciate OPM’s acknowledgment of its responsibility to produce these guidance documents, but we believe that these statements miss the intent of our recommendation and will only address the recommendation in part. We continue to believe that OPM—in its capacity as both a member of the Committee and as the Chair of the NSPD Executive Steering Committee—needs to work with the Committee and the other departments and agencies to determine the steps needed to proceed with the implementation of the program. These steps may include OPM’s issuing additional guidance, but also may include, for example, identifying timeframes for next steps to help ensure implementation within the timeframes identified in section 1107. More specifically, the steps we identify here and in our report, including the aforementioned guidance documents, may not include all of the steps necessary to help ensure the implementation of the program. Thus, we continue to believe that OPM should work with the Committee and the departments and agencies to determine necessary next steps. We are sending copies of this report to the appropriate congressional committees, the Director of the Office of Personnel Management, the Director of the Office of Management and Budget, the Secretary of Defense, the Secretary of Homeland Security, the Secretary of State, and other interested parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions regarding this report, please contact me at (202) 512-3604 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. The following timeline identifies key dates in the establishment and implementation of the section 1107 Interagency Rotation Program and the National Security Professional Development (NSPD) Program. Section 1107 of the National Defense Authorization Act (NDAA) for Fiscal Year 2013 established the Committee on National Security Personnel and required the development and issuance of a National Security Human Capital Strategy that was to provide for the implementation of an interagency rotation program with the intent of increasing the efficiency and effectiveness of the federal government by fostering greater interagency experience among executive branch personnel on national security and homeland security matters. Prior to the establishment of the section 1107 program, in May 2007, Executive Order 13434 established the NSPD Executive Steering Committee to facilitate the implementation of a national strategy that set forth the framework for what would become the NSPD Program. GAO has a large body of work highlighting interagency coordination and collaboration efforts across the federal government, as well as the need for such efforts to facilitate national security and homeland security operations, among other things. For example, in 2009, we highlighted past work that identified situations in which a lack of interagency coordination and collaboration hindered national security objectives. The following provides summary examples of how interagency coordination and collaboration could have been improved over the last decade and how interagency rotations among personnel could improve collaboration and coordination. In the years after the terrorist attacks on September 11, 2001, we found that multiple federal agencies took action to address challenges and strategies in fulfilling our national security objectives, such as instituting interagency collaboration through intelligence sharing; however, in 2004, we continued to identify further actions that could be taken to fully address these needs. For example, the Federal Bureau of Investigation established a National Joint Terrorism Taskforce to assist with information sharing between agencies. However, we noted that a comprehensive and coordinated national plan to facilitate information-sharing on critical infrastructure was needed. Between 2005 and 2008, we found that multiple federal agencies— including the Department of Defense (DOD), the Department of State, and the U.S. Agency for International Development—participated in efforts to build the capacity of key Iraqi ministries to govern the country. Our work found that there was no overarching direction and coordination from a lead entity, which contributed to U.S efforts not meeting their goal of key Iraqi ministries having the capacity to govern reconstruction projects. In 2010, we found that coordination with federal partners is essential to DOD’s homeland security mission—including homeland defense and civil support. To improve coordination, we recommended that the department (1) establish a timeline and update and ensure the integration and comprehensiveness of DOD policy and guidance that delineates the roles and responsibilities of and relationships between DOD entities; (2) establish a timeline to develop and issue a partner guide that identifies the roles and responsibilities of DOD entities, processes, and agreed-upon approaches for interagency coordination for homeland defense and civil support efforts; (3) ensure implementation of DOD’s current instruction on the tracking of DOD liaisons’ assignments to other federal agencies, as well as the establishment of position descriptions for uniformed military and DOD civilian personnel; and (4) develop and issue additional workforce management policy and guidance regarding DOD liaisons to other federal agencies, as well as other federal agencies’ liaisons to DOD, to include routine staffing needs-assessments and position descriptions, among other things. DOD concurred with all four recommendations we made and has taken action to address those recommendations. In 2010, we found that the activities of U.S. Southern Command demonstrated a number of key practices that enhance interagency coordination and collaboration to achieve their mission objectives. However, the military relief efforts in response to the 2008 earthquake in Haiti challenged the organizational collaborative structure of U.S. Southern Command. Specifically, we found that initial relief efforts were hindered by weaknesses in the command’s organizational structure and a lack of augmentation planning. We concluded that the U.S. Southern Command must have a structure that is not only prepared for military activities, but that can also be effective in supporting other stakeholders or interagency groups in meetings challenges like corruption, crime, and poverty in the region. In 2012, we found that Department of State and Department of Defense’s rotational assignment programs, which include State’s Foreign Policy Advisor Program and the Army Command and General Staff College Interagency Fellowship program, help achieve collaboration-related results, as reported by program participants in a survey. Effective interagency rotation programs can achieve interagency collaboration results, by developing program participants’ collaboration skills and building interagency networks. To build on the success of these programs, we made seven recommendations to the Department of State, which included (1) expand the scope of current efforts by routinely evaluating the Foreign Policy Advisor Program’s effectiveness to determine if desired results are being achieved; (2) clarify how assignments will achieve shared national security goals; (3) work with host agency counterparts to develop orientation materials to maximize the benefit of the rotation; (4) routinely evaluate the effectiveness of State’s interagency rotations to other government agencies to determine if desired results are being achieved for participating individuals and agencies; (5) improve incentives for civil service personnel to participate in interagency rotations by providing guidance to supervisors on how to consider interagency experience for, among other things, ratings and awards; (6) improve incentives for supervisors to support civil service personnel’s participation in interagency rotations by establishing performance expectations that supervisors share human resources; and (7) develop guidance on how to ensure that the knowledge, skills, and networks gained during rotation can be used upon the personnel’s return. Additionally, we recommended that the Secretary of Defense (1) work with host agency counterparts to develop orientation materials to maximize the benefits of the rotational assignment and (2) routinely evaluate the effectiveness of the program to determine if desired results are being achieved. More recently, in 2014, we found that interagency collaboration is necessary for assessing and closing capability gaps in federal agencies’ emergency support functions for unexpected catastrophic disasters—such as an earthquake or improvised nuclear device. Lessons learned from the federal response to Hurricane Sandy underscored the importance of assessing gaps in interagency emergency response preparedness. The National Security Council’s after action report identified challenges that delayed the federal government’s response to the disaster. One such challenge was that some response efforts were conducted through intra-department approaches, rather than as part of a coordinated, integrated approach. On March 29, 2014, the Committee on National Security Personnel issued the required National Security Human Capital Strategy—entitled The Human Capital Strategy for Interagency Personnel Rotations (Strategy)—in response to requirements set forth in section 1107 of the National Defense Authorization Act for Fiscal Year 2013. The statute included 19 requirements related to the development and issuance of the Strategy and the subsequent implementation and monitoring of the section 1107 Interagency Rotation Program; however, for 2 of these requirements we had no basis to judge because these requirements are contingent on actions that had not yet occurred. Therefore, we did not assess these requirements. Table 2 provides our assessment of the extent to which the Committee, through its actions and issued Strategy, complied with each of the 17 section 1107 requirements we could assess. In addition to the above named contact, Vincent Balloon, Assistant Director; Jason Bair; Clifton Douglas, Jr; Rebecca Gambler; Terry Richardson; Justin Riordan; John Van Schaik; Jennifer Weber; Erik Wilkins-McKee; and Michael Willems made key contributions to this report. Critical Technologies: Agency Initiatives Address Some Weaknesses, but Additional Interagency Collaboration Is Needed. GAO-15-288. Washington D.C.: February 10, 2015. Managing for Results: Implementation Approaches Used to Enhance Collaboration in Interagency Groups. GAO-14-220. Washington, D.C.: February 14, 2014. Managing for Results: Key Considerations for Implementing Interagency Collaborative Mechanisms. GAO-12-1022. Washington, D.C.: September 27, 2012. Interagency Collaboration: State and Army Personnel Rotation Programs Can Build on Positive Results with Additional Preparation and Evaluation. GAO-12-386. Washington D.C.: March 9, 2012. National Security: An Overview of Professional Development Activities Intended to Improve Interagency Collaboration. GAO-11-108. Washington, D.C.: November 15, 2010. National Security: Interagency Collaboration Practices and Challenges at DOD’s Southern and Africa Commands. GAO-10-962T. Washington, D.C.: July 28, 2010. Defense Management: U.S. Southern Command Demonstrates Interagency Collaboration, but Its Haiti Disaster Response Revealed Challenges Conducting a Large Military Operation. GAO-10-801. Washington, D.C.: July 28, 2010. Homeland Defense: DOD Needs to Take Actions to Enhance Interagency Coordination for Its Homeland Defense and Civil Support Missions. GAO-10-364. Washington, D.C.: March 30, 2010. Interagency Collaboration: Key Issues for Congressional Oversight of National Security Strategies, Organizations, Workforce, and Information Sharing. GAO-09-904SP. Washington, D.C.: September 25, 2009. Results-Oriented Government: Practices That Can Help Enhance and Sustain Collaboration among Federal Agencies. GAO-06-15. Washington, D.C.: October 21, 2005.

Complex national security challenges—including nuclear proliferation and terrorist attacks—require a federal government workforce that can collaborate effectively across agency lines. Congress established the section 1107 Interagency Rotation Program in which national security personnel could be assigned to work at another agency for professional development purposes and to enhance the government's ability to collaborate and respond effectively to such challenges. Section 1107 of the NDAA for Fiscal Year 2013 included a provision for GAO to review the program. This report provides an assessment of the extent to which actions have been taken to establish and implement the Interagency Rotation Program, as required by law. GAO analyzed actions taken by the Committee and assessed its Strategy against 17 statutory requirements; reviewed other supporting documentation; and interviewed OPM, OMB, and Departments of Defense, State, and Homeland Security officials on the status of the program. As required by section 1107 of the National Defense Authorization Act (NDAA) for Fiscal Year 2013, the Committee on National Security Personnel (Committee) has taken steps to establish the Interagency Rotation Program for national security personnel, including developing a National Security Human Capital Strategy (Strategy). However, implementation of the program has languished and no personnel have participated in the program as of September 2015. The Committee was established within the Executive Office of the President and consists of representatives from the Office of Personnel Management (OPM), Office of Management and Budget, the Assistant to the President for National Security Affairs, and the Departments of Defense, State, and Homeland Security. The Committee issued the Strategy in March 2014, which addresses 13 of the 17 statutory requirements. For instance, the Strategy discusses, among other things, training and education requirements, prerequisites or requirements for participation, and performance measures to be used for personnel participating in the program. The Strategy also partially addresses 2 requirements, but does not address 2 other requirements, including providing that, at a minimum, 20 employees would participate in the section 1107 program in each of the first 4 fiscal years after the NDAA was enacted. GAO had no basis to assess 2 additional requirements, also related to the program's implementation and reporting on performance measures, because these requirements are contingent on actions that had not yet occurred. Implementing the section 1107 Interagency Rotation Program has languished because there has been limited leadership and oversight of the program, including necessary actions to be taken by the departments, agencies, and other organizations to complete their assigned roles, responsibilities, and tasks. The Strategy and other documents specifically assign roles, responsibilities, and tasks to the Committee on National Security Personnel, OPM, the Communities of Practice, and the participating departments and agencies. For instance, OPM is tasked with issuing guidance on the rights and responsibilities of employees returning from rotational service, but OPM officials told GAO that they have not done so and could not give timeframes for completion. Similarly, participating departments and agencies are tasked with identifying particular positions and personnel for rotations, but they have not used the procedures laid out in the Strategy because officials said they needed further guidance from OPM. OPM officials stated that the departments and agencies do not need further guidance from them to proceed with their assigned roles, responsibilities, and tasks. Importantly, the Strategy specifically identifies that the Committee will work with OPM to implement the Strategy. Further, officials that GAO interviewed stated they perceive that OPM is the lead for the program. Officials also noted that differing opinions about next steps have resulted in action not being taken on some assigned roles, responsibilities, and tasks, including the issuance of guidance. Without a clear leadership and oversight structure for the section 1107 program and efforts to identify and take action on next steps for implementation, it is unlikely that implementation of the program will move forward. GAO recommends that OPM, in collaboration with the Committee, establish a clear leadership and oversight structure to guide implementation of the Interagency Rotation Program and work with the departments and agencies to identify and take action on necessary next steps for implementation. OPM generally concurred with the recommendations, but raised issues primarily about the roles and responsibilities that GAO addresses in the report.

You are an expert at summarizing long articles. Proceed to summarize the following text: A child generally enters foster care after a dependency court and a child welfare agency have determined that the child should be removed from his or her home, for reasons such as substantiated abuse or neglect. Children in foster care may be temporarily placed in various types of out- of-home care arrangements, including in a foster home with relatives, in a foster home with nonrelatives, or in a group residential setting. Federal law requires that state child welfare agencies consider giving preference to placing children with qualified relatives, if consistent with the best interest of the child. Approximately one-quarter of children in foster care in fiscal year 2009 lived with relatives, according to HHS data. Federal law also requires child welfare agencies to make “reasonable efforts” to preserve and reunify families in most cases, but leaves it to states to define what these efforts entail, on a case by case basis. However, at a minimum, child welfare agencies must make a diligent effort to identify and notify all adult relatives shortly after the child’s removal from the custody of the parent. They must also develop a case plan for each foster care child which, among other requirements, must describe the services that will be provided to the parents, child, and foster parents to facilitate the child’s return to his or her own home or permanent placement, and address the child’s needs while in foster care. The plan may also specify goals for placing the child in a permanent home and the steps that a parent (or the principal caretaker) must take before a child can be returned home, if reunification is the goal. In general, returning children to their home is the preferred goal of state child welfare agencies, but this goal is still dependent on various factors, such as the extent that a parent has completed rehabilitative treatment or maintained a meaningful role in the child’s life through visits or other forms of contact. In fiscal year 2009, about half of the nation’s children who exited foster care were reunified with their parent or primary caretaker (see table 1). The Adoption and Safe Families Act of 1997 (ASFA) was passed, in part, in response to concerns about the length of time children were spending in foster care and included provisions to facilitate child welfare agencies’ ability to place children more quickly into safe and permanent homes. For example, the law requires child welfare agencies to hold permanency hearings within 12 months of the child’s entering foster care to determine the permanent placement for the child and requires child welfare agencies to file a petition to terminate parental rights when a child has been in foster care for 15 of the most recent 22 months (see fig. 1). However, states are not required to file for termination of parental rights if a child is in the care of relatives, the state has not provided necessary services to the family consistent with the case plan, or the state agency documents a compelling reason why filing for termination is not in the best interests of the child. These timelines and possible exceptions are relevant for incarcerated parents who have children in foster care, as 44 percent of inmates released from state prisons in 2008 served sentences longer than a year. Since the enactment of ASFA, the number of children in foster care nationwide has declined by more than 100,000, based on HHS data collected on children in care at the end of each fiscal year. HHS administers federal grant programs and provides information, training, and technical assistance to state child welfare systems. It uses its Adoption and Foster Care Analysis and Reporting System (AFCARS) to capture, report, and analyze information collected by the states. On a semiannual basis, all states submit data to HHS concerning all foster care children for whom state child welfare agencies have responsibility for placement, care, or supervision. HHS also uses its Child and Family Services Reviews (CFSR) to regularly evaluate state child welfare systems’ conformity with federal requirements and help states improve their provision of child welfare services. These reviews examine a range of outcomes and actions to assess states’ performance and enhance their capacity to ensure children’s safety, permanency, and well-being. For example, among many other factors, HHS examines states’ attempts to preserve parent-child relationships and involve parents in discussions about the child’s case plan. To help states provide child welfare services, HHS offers states training and technical assistance through its Children’s Bureau, as well as through its regional offices and various National Resource Centers. HHS also provides information and resources through its website, “The Child Welfare Information Gateway,” which is meant to serve as a comprehensive information resource for the child welfare field. Many children, not only those in foster care, have an incarcerated parent, and this number has grown over time. Since the early 1990s, the number of individuals in prison almost doubled from a little fewer than 800,000 in 1991 to more than 1.5 million in 2009. Many of these individuals have children. As of 2007, an estimated 1.7 million children under the age of 18 had a parent in prison—an increase of almost 80 percent since 1991 (see fig. 2). Fathers comprise more than 90 percent of the parents in prison and their numbers increased about 75 percent between 1991 and 2007. Meanwhile, the number of incarcerated mothers, who were more likely to be primary caretakers before incarceration, more than doubled during this time. Children who are minorities are disproportionately more likely to have an incarcerated parent than white children. In 2007, compared to non-Hispanic white children, non-Hispanic black children were more than seven times more likely to have a parent in prison and Hispanic children were more than two times more likely. Incarcerated parents may have a history of complex problems, such as substance abuse, mental illness, or past trauma. For instance, in 2004, about two-thirds of parents in state prisons met clinical criteria for having substance dependence or abuse based on BJS’s most recent available estimates. The federal government supports a number of residential treatment programs that focus specifically on the treatment of parents with substance abuse problems. Although these programs may require parents with substance abuse problems to live away from home, they generally serve nonincarcerated parents. (See app. II for more information.) Mental health and medical problems were also common for incarcerated parents, although women reported these at higher rates. Incarcerated mothers were also much more likely than fathers to report past physical or sexual abuse (64 percent for mothers in state prison versus 16 percent for fathers). The Second Chance Act of 2007 was enacted to, among other goals, reduce recidivism and provide for services to assist people transitioning back into the community from prisons and jails. The act amended existing federal grant programs and established new grant programs for state agencies and nonprofit organizations to provide a variety of programs or services that include employment assistance, substance abuse treatment, and help in maintaining or reestablishing family ties. DOJ’s Federal Bureau of Prisons (BOP) oversees and establishes central policy for 116 federal prison facilities, but it does not have authority over or establish policies for state or local corrections agencies or facilities (see table 2). Nevertheless, DOJ provides assistance to these entities in the form of discretionary grants, technical assistance, and information. The complete number of foster care children with an incarcerated parent cannot be identified in the database that HHS employs as part of its oversight of state programs, but their numbers can be reasonably estimated as being in the many thousands. HHS has proposed changes to state reporting requirements that would shed more light on these children; however, the department is currently in the process of revising that proposal and officials had not yet determined if collecting additional data on incarcerated parents will be included in the new proposed requirements. Also, some states are attempting to better identify them and to determine their needs. HHS data provided by states identified at least several thousand children nationwide who entered foster care due to the incarceration of a parent in a recent year, but this does not include the total population of foster care children with incarcerated parents. Through its national data system, AFCARS, HHS collects information about the characteristics and experiences of children in the foster care system, such as their age, race, and the factors associated with their removal from the home and placement into foster care. One potential reason for a child’s removal, among many others listed in AFCARS, is the incarceration of a parent. From this information, it is possible to identify some foster care children with an incarcerated parent—those who have entered foster care solely or in part for the reason of parental incarceration—but it is not possible to identify these children in other circumstances (see figure 3). Our analysis of AFCARS information identified approximately 14,000 children who entered foster care at least partly because of parental incarceration in 2009 alone (about 8 percent of all children entering foster care in 2009); however, this is an undercount of foster care children with an incarcerated parent for several reasons. First, this number does not include children who enter foster care in other circumstances, such as:  When a parent is incarcerated sometime before the child enters foster care. For example, a child welfare official and a researcher told us that some children are placed with a relative when a parent is incarcerated, and then enter foster care when this relative-care situation places the child at risk of abuse or neglect.  When a parent is incarcerated sometime after the child enters foster care.  When an incarcerated parent, such as a noncustodial father, was not the child’s caretaker at the time of removal. Researchers and local officials we interviewed noted that these circumstances were more common than placement in foster care specifically due to parental incarceration. While such additional information about a parent’s incarceration may be in the child’s individual child welfare case file, it is not reported in the data conveyed to HHS and incorporated into AFCARS. Second, state reporting on these children for AFCARS is not necessarily as complete as HHS requires. For example:  HHS’s AFCARS regulations require state child welfare caseworkers to report all applicable actions or conditions associated with a child’s removal from the home, but staff sometimes enter only one reason. One state official and one local official told us that, even if incarceration were involved, a case worker may opt for a more general reason, such as neglect.  New York, which has the second largest foster care population in the United States, has historically not reported data on any reasons for removal due to some localities’ older data systems, according to HHS officials.  Similarly, a few states can report information on only one reason for removal due to older data systems and, therefore, have not regularly reported instances in which a second reason might apply. HHS officials noted that the department assists state efforts to comply with AFCARS reporting requirements in several ways. For example, HHS has assessed most states’ AFCARS information systems to determine states’ abilities to collect, extract, and transmit AFCARS data accurately, as well as to review the timeliness and accuracy of data entry by caseworkers. When an HHS review team determines that a state does not fully satisfy the AFCARS standards, the state must make corrections identified by that team. HHS regional offices also work with states to improve their reporting by implementing training, supervisory oversight, and quality assurance, according to HHS officials. The fact that foster care children of incarcerated parents are not a well- identified population nationally precludes analyzing those children’s characteristics and experiences, or determining whether they differ from other foster care children in terms of their backgrounds, case management, or outcomes. Acknowledging that much of AFCARS information on the family’s circumstances is gathered only at the time a child enters foster care— when child welfare workers know the least about the family’s situation— HHS, in January 2008, proposed changing its state reporting requirements to require both additional and more current information. Specifically, the department proposed collecting additional data on circumstances that affect the child and family, such as a caretaker’s incarceration, at multiple times throughout a foster care case. However, due to significant statutory amendments made in October 2008 to the federal foster care and adoption assistance programs, in 2010, HHS announced plans to publish a new proposal to revise AFCARS and solicited suggestions about what case-level data would be important for agencies to collect and report to HHS. HHS officials told us that they are currently developing the new proposal for reporting requirements and estimated that it would be issued for public comment in February 2012. Officials had not yet determined whether the new proposed rule would include the same requirements on gathering additional information on a caretaker’s incarceration at multiple times throughout the foster care case as had been included in the 2008 proposal. Officials also said that they did not know when a final set of reporting requirements would be issued, as such timing is, in part, dependent on the comments received in response to the proposed rule. Although HHS data do not identify the complete number of foster care children with an incarcerated parent, BJS inmate surveys from 2004 and 2002—the most recent years available—suggest that there are many thousands of these children. Specifically, based on the 2004 survey of federal and state prison inmates, we estimate that about 19,300 inmates (about 13,700 men and 5,600 women) had at least one child in foster or agency care in 2004 and that the total number of these children likely exceeded 22,800. Similarly, a 2002 survey of inmates in local jails estimated that approximately 12,000 of these parents in jail had at least one child in foster care or cared for through an agency in 2002. These surveys asked a nationally representative sample of inmates about their children, the care arrangements for those children, and other questions regarding their families’ circumstances and experiences. The surveys also found that a higher percentage of mothers have at least one child in foster care; some state officials said that this is because fewer incarcerated mothers, compared to incarcerated fathers, have the option of having the other parent take care of the child (see figure 4). Nevertheless, close to 90 percent of all parents in state and federal prison (mothers and fathers) with a child in foster care reported that they had shared or had been providing most of the care for their child prior to their incarceration, based on the 2004 survey. Estimates of the number of inmates with children in foster care may be a conservative indicator of the number of children of inmates that are in foster care settings. This is because the inmate surveys do not fully account for inmates who have more than one child in foster care. Also, some of the children reported as living with relatives may be in relative care that is supervised by the child welfare system, according to two researchers we interviewed. Finally, prisoners may be generally reluctant to report that they have children or provide information on their children for various reasons, according to DOJ and several state and local officials. On the other hand, it is possible that incarcerated parents surveyed could report on the same child, since both mothers and fathers were survey subjects, though DOJ officials overseeing the survey and data said this situation was probably rare. Several state child welfare and corrections agencies are collecting additional data on foster care children with incarcerated parents to better understand such children and their parental circumstances. Officials from several states said that their state information is too limited to understand the population and that more data would be useful to help policymakers decide on policies or programs that might affect these children. Of the 10 state child welfare agencies we interviewed, three said they were collecting additional data not required by AFCARS that could help identify these children. For example, officials in New York’s child welfare agency said the agency has begun to collect more information in its state child welfare information system that would indicate whether the parent is in a correctional facility, based on the parent’s address. Moreover, officials at two corrections agencies in states we interviewed said they wer collecting information on inmates’ children and their care arrangements while the parent is incarcerated. Oregon’s Department of Corrections, for example, currently collects data on all prisoners regarding whether they have children and their children’s living arrangements, though this information is not housed in an automated system. Officials from e Oregon’s Department of Corrections said that, based on surveys and interviews of offenders in Oregon state prisons in 2000, 2002, and 2008, about 10 percent of incarcerated mothers and about 6 percent of incarcerated fathers had children living in foster care. Child welfare officials from California informed us that they have done some limited analysis of the parental address information the state collects, in response to a request from the California legislature to provide numbers on the foster care children of incarcerated parents. At our request, California officials updated and expanded this research, and said that 2,288 of California’s 52,561 children in foster care (about 4 percent) had an incarcerated parent as of January 1, 2011. Of those children, 1,268 had an incarcerated father and 1,020 had an incarcerated mother, according to the California officials. Officials also said that children with a case plan goal of adoption were slightly more likely to have an incarcerated parent than children with a goal of reunification. In our examination of 10 states and their child welfare and corrections agencies, we found states employed a number of strategies to support family ties for all children of incarcerated parents, including some strategies designed specifically for children in foster care. These strategies are intended to address some of the challenges incarcerated parents may face related to maintaining their parental rights and contact with their children or to aid caseworkers in managing such cases. While state and local officials discussed examples of these strategies, we did not review how widely these strategies were used in each state, nor did we evaluate the effectiveness of these strategies. Federal law allows for exceptions on a case-by-case basis to the requirement that states file to terminate parental rights when a child has been in foster care for 15 of the most recent 22 months. In addition to these federal exceptions, some of the 10 states included in our review have enacted explicit statutory provisions that could prevent or delay filing for termination of parental rights for incarcerated parents in certain circumstances. For example:  Nebraska prohibits filing for termination of parental rights solely on the basis that the parent is incarcerated.  California and New York require child welfare agencies and courts to consider the particular barriers faced by incarcerated parents—such as whether parents are able to maintain contact with their children or whether they lack access to rehabilitative services that would support reunification—when making certain decisions regarding termination.  New York and Colorado include provisions related to the requirement to file for termination of parental rights when a child has been in foster care for 15 of the most recent 22 months. New York allows child welfare agencies to delay filing for termination beyond standard timelines in certain cases where a parent is incarcerated. Specifically, in 2010, New York amended its statute to provide that the child welfare agency need not file for termination when a child has been in foster care for 15 of the most recent 22 months if, based on a case- by-case determination, the parent is incarcerated and maintains a meaningful role in the child’s life. Colorado does not require courts to consider the fact that the child has been in foster care for 15 of the most recent 22 months when deciding whether to terminate parental rights if the reason for the child’s length of stay is due to circumstances beyond the parent’s control, such as the parent’s incarceration “for a reasonable period of time.” While many of the state child welfare officials we spoke to said that federal timelines were difficult to meet for parents serving lengthier sentences, many state and local child welfare officials as well as child advocacy representatives did not think that such timelines should be changed specifically for incarcerated parents. Officials we spoke with said these timelines are important for being able to place children, especially younger children, as soon as possible into permanent homes. On the other hand, several local child welfare officials and caseworkers in New York and California told us these exceptions can make the difference in whether some parents can meet requirements in a case plan needed to reunify with their children. Federal law requires that child welfare agencies make reasonable efforts to reunify foster care children with their families before filing for termination; however, these efforts are subject to certain exceptions. In managing a foster care case involving an incarcerated parent, child welfare agency staff may work with both the parent and corrections officials at several junctures, as shown in figure 5. Federal law does not define what constitutes “reasonable efforts,” leaving it to states to define, on a case-by-case basis. Among our selected states, California and New York specify in statute what such efforts may entail with regard to incarcerated parents, such as:  Maintaining the parent-child relationship. New York law directs the child welfare agency to arrange for transporting the child to visit the correctional facility, if it is in the best interests of the child. California law provides examples of services that may be provided to incarcerated parents, which may include such things as facilitating parent-child telephone calls and transportation services, where appropriate. Involving the parent in the child’s case. Both states have statutes that may permit the use of videoconference or teleconference in certain circumstances, when such technology is available. In New York an incarcerated parent may use such technology to participate in developing the family service plan, including the child’s permanency plan. In California, courts may allow incarcerated parents to use it to participate in certain court hearings. Identifying rehabilitative services for the parent or documenting if such services are not available. New York requires child welfare agencies to provide incarcerated parents with information on social or rehabilitative services, including wherever possible transitional and family support services in the community to which they will return upon their release. California requires the caseworker to document in the case plan the particular barriers faced by incarcerated parents in accessing court-ordered services (such as counseling, parenting classes, or vocational training). In 2008, California amended its law to allow courts to extend court- ordered services for recently released parents who are making significant progress in establishing a safe home for the child, if there is a substantial probability that the child will be returned to the parent within the extended period or if reasonable services were not provided to the parent. A few caseworkers we spoke to considered this extension unfair to parents who had not been incarcerated. On the other hand, a dependency court judge we interviewed did not consider the law a “free pass” for incarcerated parents, since her decision would, as in other foster care cases, balance the likelihood that a parent could improve over time with a child’s immediate need for stability. Five of the 10 state child welfare agencies we spoke to have developed either statewide guidance or training on managing cases with children of incarcerated parents. California and New York officials said their general statewide training includes specific information for caseworkers on how to work with incarcerated parents in accordance with their state laws. New York officials said they also recently provided training on the new law that excuses filing for termination of parental rights under the standard timelines for certain incarcerated parents. Additionally, Michigan and Florida state child welfare officials said that new guidance to local agencies had resulted from recent state court cases involving incarcerated parents who had successfully appealed the termination of their parental rights. For example, Michigan officials reported holding a statewide webinar and providing information to local agencies after the Michigan Supreme Court reversed the termination of parental rights for an incarcerated parent because, among other reasons, the child welfare agency failed to provide sufficient reunification services. State and local officials we interviewed reported a number of local initiatives that have been undertaken by child welfare agencies, dependency courts, and correctional facilities to address the logistical barriers, expense, and disincentives involved when including an inmate in a child’s foster care case. For example, when the prison facility is located far from a county dependency court, transportation can be costly and require an extended absence from the facility. In the latter case, the parent can lose certain privileges or programming opportunities, according to child welfare and corrections officials. To address these barriers, dependency courts and several state prisons in Los Angeles, California, initiated, under a recently enacted state law, a pilot program that allows an inmate to participate in certain child welfare hearings via videoconference. Additionally, a few counties in Florida and Pennsylvania, while not guided by legislation, have begun to hold child welfare hearings via video or telephone for incarcerated parents, according to state officials. State officials we interviewed in Nebraska, Florida, and Michigan and local officials in California also described holding a child’s case planning meetings at the jail or including the parent by phone in some situations. Further, to address some of the logistical barriers to contact between these parents and their children, several local child welfare agencies in New York and California said they used assistants to help drive children to prisons or to supervise parent-child visits. State child welfare officials in a few other states also said that they had policies to provide prepaid phone cards to incarcerated parents or policies to accept collect calls from the parents to discuss their child’s case. Officials with correctional departments we interviewed offered a range of services to their general inmate populations relevant to parent rehabilitation, such as parenting programs and substance abuse treatment. However, the extent of such services varied among states and facilities. Officials at all 10 state departments of correction we interviewed reported having parenting classes in at least at a few facilities, although most said such classes sometimes had wait lists and some were only at women’s facilities. These parenting classes have been aimed at the general inmate population, although officials from a few facilities we visited told us that their parenting classes have covered the topic of parental rights, which may be more applicable to parents with children in foster care. Further, state corrections officials from Nebraska and Oregon told us that their agencies had taken steps to align their parenting curricula to meet child welfare standards and prevent parents from having to retake these classes to satisfy child welfare requirements upon release. Some corrections agencies we interviewed also administered treatment programs that allow incarcerated mothers to live with their young children who were not in foster care. For instance, some BOP facilities allow incarcerated women who are pregnant and meet certain criteria to go to a community program outside the facility for 3 months after the child is born in order to promote bonding and parenting skills. Likewise, officials in five states reported having in-prison nurseries or similar programs in at least one of their correctional facilities. In these programs, mothers live with their infants at the facility for a period of time after birth, up to 18 months, often receiving treatment and services, such as pre- and post-natal care, parenting classes, and counseling. Eligibility criteria for mothers may include being classified as a low security risk or having a limited amount of remaining time on their sentence. A state prison official commented that their facility’s 18-month nursery program affords mothers time to make amends with family members who may be more willing to care for the children while the mother completes her sentence. According to this official, most of these mothers give their infants to family caregivers without involving the child welfare system. In addition, state corrections agencies in California and Nebraska have allowed young children to live with their parents in residential drug treatment programs as an alternative to incarceration. For example, since 1999, California’s corrections department has administered the Family Foundations Program which provides substance abuse treatment and other services to mothers with nonviolent convictions and sentences of 36 months or less. Some corrections agencies had general policies or programs to mitigate the distance between prisoners and their families. Experts, advocates, and officials from both child welfare and correctional agencies we interviewed noted that the distance between incarcerated parents and their families was a major challenge for preserving family ties, particularly as prisons tend to be located far from urban areas. State corrections agencies in California, Pennsylvania, and Florida have formal policies to consider the location of an inmate’s family when assigning the inmate to a facility. Circumstances such as mental health or security needs take precedent over proximity to family, according to officials, and such policies were generally not realizable for women due to the limited number of female prison facilities. In addition, some corrections agencies provided free bus transportation for families to visit inmates. For example, New York and Pennsylvania’s departments of correction provide free or subsidized bus transportation between large cities and prison facilities hours away for children and adults visiting inmates. The Osborne Association (Osborne), a nonprofit community provider, working with the New York Department of Corrections recently set up video conferencing for children to ‘visit’ with their incarcerated parents. Osborne currently has an agreement to conduct tele-visits with one state women’s prison. Fifteen to 20 children from 2–17 years of age currently participate to varying levels in tele-visits lasting 45 minutes to an hour, according to Osborne staff. During visits, parents and children usually participate in activities or crafts together similar to an in-person visit. Further, because on-site visits were not always possible, a few correctional facilities in California, New York, and Pennsylvania were starting to use technology so that incarcerated parents could visit virtually with their children. Children participate through video equipment located at community service organizations or other sites such as local parole offices. Also, most corrections agencies had strategies to make visiting prisons more comfortable for children, sometimes specifically for foster care children. Officials representing seven different state departments of correction, as well as federal BOP officials, said that some of their facilities (often at least half) had special child-friendly visiting areas— particularly for women’s facilities. Several corrections agencies also had special procedures and trained staff to meet visiting children at the correctional facility entrance and guide them through a separate screening process. Also, corrections agencies in New York, California, Nebraska, and Colorado had specific policies for caseworkers and foster care children, such as visiting hours on weekdays in addition to usual weekend visitation so that caseworkers can transport the children. Extended visitation programs that allow parents and children to visit within the prison for longer periods of time, such as a full day or week, were offered in at least a few facilities within 8 of our 10 states. Some of the programs have bonding activities where parents work on reunification and parenting strategies with their children. For example, corrections officials from 3 of our 10 states told us that the Girls Scouts Beyond Bars program occurred in one or more of their women’s prisons. This program, originally developed by DOJ, typically provides regular visits and interaction between incarcerated mothers and their daughters. Child welfare and corrections officials in 6 of our 10 states collaborated at the state level to clarify policies, develop procedures, and provide information to staff. For example, in response to a recent state supreme court case reversing the termination of parental rights for an incarcerated parent, Michigan’s child welfare agency worked with state corrections officials to draft a memorandum to prison supervisors on ways to support child welfare staff who are working with incarcerated parents. Specifically, the memorandum required that corrections staff allow inmates to participate via phone in court hearings and planning meetings with child welfare officials, when requested, and any programs that will help improve their parenting skills. In New York, according to state officials, the recent legislation on filing for termination of parental rights for incarcerated parents was, in part, the impetus for the joint development of protocols for ways state corrections and child welfare agencies should coordinate. Per these protocols, child welfare staff must contact corrections staff to schedule meetings with parents and arrange children’s visits while corrections staff should return such calls within one week. The agencies also collaborated to develop training on the protocols for their respective staffs. New York’s state child welfare office also developed materials on the legal rights and responsibilities of parents that child welfare staff can use with incarcerated parents (see fig. 6). In some instances, state legislation directed government agencies to collaborate to meet the needs of children with incarcerated parents. In Oregon, according to officials, legislation passed in 2001 led corrections and child welfare agencies to collaborate to gather and share data, conduct joint training and outreach sessions, and better coordinate services for released inmates. More recently, officials from Pennsylvania told us about a 2009 legislative resolution that directed the creation of an advisory committee to study children of incarcerated parents and recommend ways to assess their needs, the services available to them, and the barriers to accessing those services. Many of the child welfare caseworkers we interviewed cited difficulty reaching staff at correctional facilities and navigating prison or jail policies as a challenge. However, we were told in interviews about examples of liaisons, in 5 of our 10 states, who facilitate communication between the agencies. These liaisons understand the procedures and operations of both agencies and work with officials to navigate each system and serve as a single point of contact. For example, in California, Texas, and Alabama, one or more state women’s prisons have employed a social worker who helps child welfare caseworkers locate offenders or helps inmates enroll in classes or services that the child’s case plan requires. More commonly, we heard of examples of cooperation between county jails and local welfare agencies due to their shared county jurisdiction and being geographically close. For example, in San Francisco, California, a liaison based at a county jail was responsible for notifying parents about their case; facilitating parent-child visits; and providing updates to parents, child welfare caseworkers, and jail staff about the visits. On a larger scale, staff of New York City’s Children of Incarcerated Parents Program, supported by the city’s child welfare agency, facilitate visits to 24 correctional facilities within New York. Such staff also prepare child welfare staff and foster parents for visits with incarcerated parents. Officials from agencies with liaison-type positions noted that they found the relationship helpful. HHS and DOJ each provide information and assistance to child welfare and corrections agencies related to children with incarcerated parents, albeit not usually focused on foster care children in particular. In the course of its on-site reviews of state and local foster care systems, however, HHS assesses whether state agencies have taken steps to work with incarcerated parents. Both HHS and DOJ post information on their websites relevant to practitioners working with children or their incarcerated parents. However, some state child welfare and corrections agencies we interviewed were not necessarily aware of these resources or told us that more information would be useful. Although the Second Chance Act gives DOJ discretionary authority to collect and disseminate information on best practices in collaboration between state corrections and welfare agencies, DOJ has not taken initiative in this area. HHS examines how state and local child welfare agencies work with incarcerated parents in the course of its regular and recurring state performance reviews, the CFSRs. For instance, one of HHS’s CFSR instruments assesses whether agencies have “encouraged and facilitated contact with incarcerated parents (where appropriate) or with parents not living in close proximity to the child,” as part of its examination of a state’s effort to strengthen parent-child relationships. HHS’s most recent CFSR reports for our 10 selected states (conducted between 2007 and 2010) also afford evidence of this oversight. For three states, HHS reviewers cited instances in need of improvement, such as when child welfare agencies in the state had not tried to facilitate visits between parents and their children or needed to improve their efforts to locate and involve a noncustodial incarcerated parent in case planning. HHS reviewers commended agencies in six states for their efforts to work with incarcerated parents, citing agencies in New York for facilitating parent- child visits, in Pennsylvania for enabling incarcerated parents to participate in group decision-making meetings by phone, and in Alabama for coordinating with other government agencies to help incarcerated mothers reenter communities and reconnect with their children. Most of HHS’s support for foster care children with incarcerated parents is in the form of informational resources across multiple websites that are not centrally organized. HHS’s Child Welfare Information Gateway posts reports under topic areas labeled “Children in Out-of-Home-Care With Incarcerated Parents” and “Services to Children & Families of Prisoners.” When we reviewed these websites, most publications listed under these topic areas were from prior to 2006. Further, these topic area websites did not cross-reference other HHS-supported websites with more recent information. For example, HHS’s Office of the Assistant Secretary for Planning and Evaluation has a list of citations on its website under “Research and Promising Approaches” for families with incarcerated parents. Additionally, the HHS-funded National Resource Center for Permanency and Family Connections posts research studies as well as various state-produced resources on how to work with foster care children of incarcerated parents. Although the Gateway is meant to serve as a comprehensive informational resource for the child welfare field, its relevant topic areas, such as “Children in Out-of-Home-Care With Incarcerated Parents,” did not cross-reference these other websites where we found more recent information. Moreover, we found that some of the state child welfare agencies we interviewed were not aware of the HHS resources for working with foster care children and their incarcerated parents. Officials from few of our 10 selected states had used or were aware that the Child Welfare Information Gateway website had relevant information. Officials from four states said that, while they had used this website for other resources, they were not aware that it had any information about working with children in child welfare and their incarcerated parents. Additionally, state child welfare officials in 8 of the 10 states said they would like to have more information for working with incarcerated parents. In particular, officials from several states said that they would like examples of what might constitute “reasonable efforts” with such parents. Similarly, a number of state child welfare officials we interviewed said that they would like to know of promising practices used by other states or localities such as how to better work with corrections agencies. DOJ’s National Institute of Corrections is developing a “Gender Informed Practice Assessment” designed to help correctional facilities develop policies and practices that are appropriate for female offenders; improve the safety and welfare of women; and, ultimately, reduce recidivism. Several items in the assessment recognize the role of children in female offenders’ lives such as designing visitation areas that are friendly and respectful to families, providing programming that facilitates healthy parent-child relationships, and informing women of their legal rights, including those involving custody of their children. According to the National Institute of Corrections, the assessment was developed based on evidence-based practices, standards in the field, and expert recommendations. The institute is developing the assessment in collaboration with the Center for Effective Public Policy, a nonprofit organization that provides training and technical assistance to practioners in criminal and juvenile justice issues. HHS has also administered two discretionary grant programs aimed at all children with incarcerated parents or the incarcerated parents, themselves. One is the Mentoring Children of Prisoners program, authorized in 2002 in response to the growing number of children with an incarcerated parent. Through one-on-one community-based mentoring, the program was intended, in part, to help alleviate some of the behavioral and academic risks that these youth face, as a result of their parent’s incarceration and other related factors. Until fiscal year 2010, HHS received about $50 million annually to administer grants to public and private entities operating the mentoring programs. However, this program was not funded for fiscal year 2011, according to HHS officials. The other program, known as the Healthy Marriage Promotion and Responsible Fatherhood grant program, funds some projects which offer parenting and family strengthening services for incarcerated and formerly incarcerated fathers and their partners. HHS is currently evaluating 12 such grant projects for incarcerated fathers to determine their effectiveness on outcomes such as marital stability, recidivism, and family financial well-being. DOJ’s relevant information and assistance to corrections agencies largely focuses on all offenders and their children. The department’s National Institute of Corrections has provided information and technical assistance to state corrections agencies, for example, on setting up in-prison nursery programs, developing corrections training curricula about offenders’ children and families, and developing practices specifically for female offenders, according to DOJ and state officials we interviewed. Officials with 8 of the 10 corrections agencies we interviewed reported using the National Institute of Corrections’ general resources related to offenders with children. In addition, the National Institute of Justice— DOJ’s research, development, and evaluation branch—has published and funded research on children of incarcerated parents, some of which has looked specifically at children in foster care. DOJ has engaged in some activities related to children of incarcerated parents under the Second Chance Act. For example, according to DOJ officials, the department administered about $7.4 million in grants in fiscal year 2010 to state and local government agencies serving incarcerated adults to incorporate family-based treatment practices in their facilities. A local sheriff’s department in California, for instance, reported using grants from this program to support its jail-based parenting class program among other activities to promote family relationships for incarcerated parents who will reenter their communities. DOJ has also led the Federal Reentry Interagency Council that supports reentry efforts by enhancing communication, coordination, and collaboration across the federal government. Other federal departments represented on the council include HHS and the U.S. Departments of Labor, Education, and Housing and Urban Development. The council recently undertook an education campaign to clarify federal policies regarding the families of incarcerated or formerly incarcerated individuals, by producing one-pagers entitled, “Reentry Myth Busters.” One such leaflet, developed through collaboration between HHS and DOJ, cites as “myth” the belief that child welfare agencies are required to terminate parental rights for incarcerated parents and explains that federal law gives child welfare agencies and states “discretion to work with incarcerated parents, their children and the caregivers to preserve and strengthen family relationships.” (See figure 7.) However, beyond this activity, DOJ has not taken initiative to act on a provision of the Second Chance Act that authorizes DOJ, at its discretion, to collect and disseminate information on best practices for collaboration between child welfare and corrections agencies to support children of incarcerated parents, including those in foster care, and to support parent-child relationships, as appropriate. According to officials from the National Institute of Justice, which would be responsible for implementing this provision, no specific activities are planned. Officials said that no funds have been appropriated specifically for this provision, and although DOJ did receive a $10 million research appropriation in fiscal year 2010 that could have been used to fund activities under this provision, that money was primarily used to fund three evaluation research grants related to reentry programs. These officials maintained that the National Institute of Justice has long supported research on children of incarcerated parents, typically in collaboration with HHS; nevertheless, neither it nor the National Institute of Corrections has taken steps to identify and disseminate examples of successful collaboration between child welfare and corrections agencies, as authorized by the act. BOP has also not developed any protocols to the federal prisons under its own jurisdiction for working with child welfare agencies and their staff. BOP has established some national standards and protocols for all of its facilities, such as for parenting classes and visiting areas. However, it has not set such protocols for how its facilities should deal with child welfare agencies trying to meet the needs of inmates with children in foster care, according to officials from BOP’s Central Office. Although we found a few state and local corrections agencies that had taken initiative to facilitate communication with child welfare agencies, such as by having a designated point of contact, we did not find these efforts in the two federal prisons we visited. Moreover, a number of child welfare officials, local caseworkers, and dependency court judges told us that it can be particularly difficult to establish appropriate contact with federal prisons and several said that more collaboration from federal prisons would help facilitate their work with foster care children with incarcerated parents. Several judges we interviewed said that it could be difficult to have federal inmates participate in child welfare dependency hearings, for example, because prison officials were unresponsive. Several local child welfare officials said that it was challenging to reach staff at a federal prison to get information on an incarcerated parent. Neither of the two federal facilities we visited had a designated staff position or a process for handling child welfare inquiries. Officials from one facility said that, at any one time, a different official might field questions from child welfare workers or inmates with children who are involved in child welfare. A few incarcerated mothers with whom we spoke said corrections staff vary as to how helpful they are, and they expressed the view that a designated position would be helpful. Further, BOP Central Office officials said that establishing protocols on how its facilities should deal with child welfare agencies could enhance or facilitate communication between the two parties. This is in keeping with one of BOP’s strategic planning goals that aims to build partnerships with other entities to help improve the effectiveness of its services and promote reintegration of offenders into communities. Moreover, among the officials from the 10 state corrections agencies and the BOP who we interviewed, 8 said that additional information from DOJ on how child welfare and corrections could better collaborate to address these children and their families would be very useful. Officials said that corrections agencies would benefit from practices that could improve prison visits for foster care children, tools that could facilitate communication between child welfare and corrections staff, and ways to share their data on affected families. State corrections and BOP officials we interviewed told us that they could use additional information from DOJ on other practices, programs, or policies that would support family ties between offenders and their children. (See fig. 8.) For children in foster care with an incarcerated parent, reunification is often not possible or appropriate, especially if the prison sentence is long or the parent-child tie is already compromised by abuse, neglect, or other complex problems such as substance abuse. Yet, for children and parents who have the potential for reunification or who would benefit from maintaining their parent-child ties, the lack of information about these cases may affect policymakers’ decisions and limit opportunities to improve these families’ outcomes. Given concerns about whether incarcerated parents can maintain their parental rights under federal child welfare timelines, as well as state legislation to address the special circumstances of children with incarcerated parents, the lack of complete data leaves legislators less able to assess the impact of these policies on this group of children. Meanwhile, although not seemingly widespread, pockets of activity among child welfare agencies, corrections departments, courts, and community providers are occurring that may support children in foster care and their incarcerated parents. As evidenced by the Second Chance Act, there is growing attention in the field of corrections on keeping offenders connected with their families to facilitate reentry and, ultimately, lower recidivism. Many parties may be interested in learning about new ways to serve the often invisible children in child welfare with incarcerated parents and to help address some of the serious challenges that these children face. Given fiscal constraints and competing demands placed on agencies at every level, however, initiatives made on behalf of these families are likely to be hindered without information about existing practices and available resources that they could leverage. Moreover, while this group of children and their parents are likely a relatively small part of the larger systems of child welfare and corrections, they are greatly affected by these systems and their practices. Without more proactive efforts to create awareness and share information about these families, opportunities to improve their future may be easily overlooked. We are making two recommendations to the Secretary of Health and Human Services: 1. To better understand the magnitude of the population and inform federal or state initiatives that affect children in foster care with incarcerated parents, the Secretary of HHS should identify ways to strengthen the completeness of state-reported data on those children. For example, in implementing new reporting requirements for the AFCARS system, the agency could take into consideration its 2008 proposed changes in which states would be required to provide additional information on each foster care child and his or her family circumstances, including a caretaker’s incarceration, at several times during the child’s stay in foster care and not only when a child first enters care. 2. To improve outcomes for these children, the Secretary of HHS should take steps to more systematically increase awareness among state and local child welfare agencies about available resources for children in child welfare with incarcerated parents. For example, HHS could take steps to update and more centrally organize relevant information posted on the Child Welfare Information Gateway, which is meant to serve as a comprehensive information resource for the child welfare field, such as by regularly updating the information listed under the Gateway’s relevant topic areas (e.g., “Children in Out-of-Home-Care With Incarcerated Parents”) with links to more recent material posted on other HHS-supported websites; identify or provide additional information on promising approaches, such as those listed by the Office of Assistant Secretary for Planning and Evaluation;  use relevant findings from the CFSR process as an opportunity to remind states about available resources and post information on promising approaches identified in the reviews; or facilitate awareness among all child welfare agencies about HHS’s available resources through an e-mail or a teleconference/webinar that would allow state and local agencies to share information on practices or strategies. We are also making two recommendations to the U.S. Attorney General: 1. To better address the needs of children with incarcerated parents, including those in foster care, the U.S. Attorney General should consider including—among DOJ’s ongoing and future information collection and dissemination efforts—activities that would assist state and local corrections agencies share promising practices for these children, including those that involve communication and coordination with child welfare agencies. For example, using some of the informational resources it already makes available to state and local corrections agencies, DOJ could compile and publicize examples of successful collaboration between corrections and child welfare agencies. 2. To improve collaboration between federal correctional facilities and state and local child welfare agencies and help federal inmates maintain important family relationships, the U.S. Attorney General should direct BOP to consider developing protocols for facilities regarding offenders who have children in the child welfare system. These protocols could include: responses/actions when child welfare agency workers contact BOP facilities to confirm an inmate’s location, request to communicate directly with inmates, or inquire about inmates’ current or future participation in programs or services that may be part of a child welfare case plan;  processes for responding to requests for inmates’ participation in child welfare hearings or ways to facilitate participation when desired by the inmate, such as setting up teleconferencing abilities; or  whether facilities could designate a specific staff position to address all such inquiries or questions, including those from child welfare agencies, dependency courts, or offenders. If developed, these protocols could be shared with states and local corrections agencies as examples. We provided a draft of this report to HHS and DOJ for review and comment. HHS’ comments are reproduced in appendix IV. DOJ did not provide written comments; however, in an e-mail dated September 13, 2011, from the agency liaison, DOJ agreed with our two recommendations for the department. HHS and DOJ also provided written technical comments which we incorporated as appropriate. In its comments, HHS concurred with our two recommendations for the department. Specifically, HHS agreed that it was important to better understand the circumstances and needs of foster care children with incarcerated parents and would consider our recommendation on strengthening state-reported data in developing the final rule for AFCARS. HHS also agreed with our recommendation to more systematically increase awareness of available resources to improve outcomes for these children. For example, HHS said it would take steps to update and more centrally organize relevant information posted on the Child Welfare Information Gateway, as well as facilitate awareness among child welfare agencies and states about available resources, such as through newsletters or links to new information. HHS also agreed that it would use relevant findings from the CFSR process as an opportunity to remind states about available resources and post information about promising approaches. Finally, both HHS and DOJ noted that, as part of their participation on the Federal Interagency Reentry Council, they would continue to collaborate to clarify policies, remove barriers, and promote promising practices in order to help ex-offenders reintegrate into their communities. Both agencies noted that addressing issues on children and families with an incarcerated parent was a core part of this collaboration and that they would work together to help criminal justice and child welfare systems make well-informed decisions for affected families. We will send copies of this report to appropriate congressional committees and the Secretary of HHS, the U.S. Attorney General, and other interested parties. The report also will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VI. To address the objectives of this study, we used a variety of methods. Specifically, we  examined pertinent data from two federal data sources; conducted phone interviews with 10 state child welfare and corrections agencies and the Federal Bureau of Prisons (BOP), and reviewed relevant state laws and policies pertaining to children in foster care with incarcerated parents; conducted site visits in 4 of the 10 phone interview states; and conducted interviews with federal agencies, as well as professionals from a range of national organizations, including family resource centers, corrections associations, and child welfare organizations. To examine the extent to which the Department of Health and Human Services (HHS) collects information on the number of foster care children with incarcerated parents, we reviewed relevant national data on children in foster care from HHS’s Adoption and Foster Care Analysis and Reporting System (AFCARS). HHS uses AFCARS to capture, report, and analyze information collected by the states concerning all foster care children for whom the state child welfare agency has responsibility for placement, care, or supervision, and all adopted children who were placed by the state agency or for whom the state agency is providing adoption assistance, care, or services. We looked at the AFCARS variable that denotes “parental incarceration” as a reason for a child’s removal from the home and entry into foster care, which is the only variable in AFCARS that captures information about parental incarceration. We reviewed AFCARS data for all cases that were active in fiscal year 2009 and had useable information on reason codes (615,040 in all), the most recent data available, and identified cases in which children had been removed from their home and entered foster care for reasons including a reason of parental incarceration. For all of these cases active in 2009—regardless of when the child most recently entered foster care— 42,890 cases (about 7 percent) were children who were removed solely or in part due to the incarceration of a parent. We analyzed active 2009 cases by the year that the child entered foster care, to get an indication of how prior years’ cases that involved an incarcerated parent as a reason for entry could accumulate. (See table 3.) We excluded from our analyses any case that did not contain data on the reason the child was removed from the home, those cases with problematic entry dates (such as entry dates occurring subsequent to exit dates), and data from three states that contained almost no cases that identified “parental incarceration” as a reason. Taken together, we excluded about 11 percent of all cases from our analyses. To confirm the reliability of these data, social science methodologists at GAO reviewed documentation about the collection and reporting of AFCARS data and conducted electronic testing of AFCARS data. We also interviewed relevant HHS officials to clarify data elements, procedures, and reasons for missing information. The AFCARS data were found to be sufficiently reliable for the purposes of this engagement. In addition to our review of the AFCARS data, we also reviewed relevant national data on incarcerated parents and their children from surveys of inmates in state and federal prisons and local jails, administered by the Department of Justice (DOJ) through its Bureau of Justice Statistics (BJS). We used these surveys to estimate inmate characteristics, such as the percentage of inmates with minor children reported to be in foster care or in other placement settings. Specifically, we estimated numbers and characteristics of inmate populations using the 2004 Survey of Inmates in Federal Correctional Facilities, the 2004 Survey of Inmates in State Correctional Facilities, and the 2002 Survey of Inmates in Local Jails. We also used these surveys to estimate a conservative lower bound on the number of children of inmates who are in foster care. Based on our analysis of the 2004 surveys, we are 95 percent confident that the number of state and federal inmates’ children in foster care in 2004 exceeded about 22,800. Further, based on the 2002 survey of jail inmates, we are 95 percent confident that between 4,634 and 19,060 inmates had at least one child in a foster care setting in 2002. While the jail inmate survey covers a different time period than the federal and state inmate survey, it does provide an indication that additional children of inmates (beyond what was found in the state and federal inmate surveys) may be in foster care settings. In addition, for background purposes, we present BJS published estimates of the number of inmates and children of inmates for 1991, 1997, 2004, and 2007. Although the BJS report describes its estimation methodology and several adjustments that were made to produce estimates that would be comparable over several years, it does not include estimates of sampling error for those estimates. However, we were able to calculate and report the confidence intervals for other estimates produced from the 2004 surveys elsewhere in this report. Since the 1991–2007 estimates are based on similar surveys and on information developed from the 2004 survey, we report these BJS estimates for background purposes only and without accompanying confidence intervals. BJS data are limited because they do not distinguish between children’s temporary or permanent living arrangements, including various types of relative care, such as relatives who provide foster homes overseen by the child welfare system, relatives who are informally caring for children with no involvement of the child welfare system, and relatives who serve as permanent legal guardians. BJS data also do not fully distinguish children’s current living arrangements when inmates are reporting on multiple children. Additionally, as noted in this report, some prisoners may be inclined to under report how many minor children they have for various reasons, such as avoiding having to pay child support, according to several state and DOJ officials we interviewed. Finally, BJS surveys are conducted intermittently, limiting our ability to compare results across years. A GAO social science analyst with expertise in survey methods and a statistician reviewed the methods and survey design used in these studies and, through interviews with knowledgeable DOJ and BJS officials and our own analyses, we determined that the data we used were sufficiently reliable for the purposes of this engagement. We administered structured telephone interviews to both the state child welfare and corrections agencies in 10 selected states. We selected these states based on several criteria (see table 4). First, states were selected to represent nearly half of the total foster care and prison populations in the United States (47 and 48 percent, respectively). We selected the six states with the largest child welfare population, which are also among the highest in terms of state prison populations. Other states with smaller populations of foster care children and prisoners were selected for variation. Additionally, selected states differed in their geographic location and whether child welfare services in the state were administered at the state or local level. Finally, some states were selected because they were identified in our interviews with researchers and professionals knowledgeable on these topics as having policies, programs, or practices aimed at supporting parent-child ties at the state level or in localities within the state. We also administered the corrections phone interview to officials from BOP’s Central Office. For our interviews, we developed two structured protocols—one for child welfare officials and one for corrections officials. Using these protocols, we asked officials about the extent their agencies track whether foster care children have an incarcerated parent or whether inmates have children and if their children are in foster care. Additionally, we asked about relevant statewide policies, challenges to supporting family contact or reunification, and strategies employed in their state that may help address challenges. Last, we inquired about relevant types of federal assistance received and areas in which additional assistance might be useful. We developed our protocols by interviewing researchers, professionals, and associations, as well as reviewing their documents and other literature. In addition, we asked several researchers and professionals we interviewed to review our protocols and pretested these protocols with child welfare and corrections officials in one state. We asked these parties for input on the clarity and objectivity of the questions and whether respondents could provide the information we sought and revised the protocols, accordingly. In addition to our interviews with state officials, we reviewed selected child welfare statutes and policies of our 10 selected states. For example, we examined whether state child welfare statutes related to federal requirements, such as efforts to reunify children in foster care with their families and timelines to file for termination of parental rights, included specific guidelines for incarcerated parents. Our review was limited to state child welfare statutes pertaining to termination of parental rights and reasonable efforts to preserve and reunify the family; we did not examine other statutes, regulations, or case law, unless specifically identified as relevant by state officials or other experts. See appendix III for summaries of the selected provisions of the 10 states’ child welfare statutes and more detailed information on our methodology in conducting and verifying this research. We also verified other relevant corrections and child welfare policies identified through our state phone interviews by reviewing agency documents. To gather more in-depth information from local child welfare agencies, correctional facilities, and others, we conducted site visits to four of the ten states we interviewed: California, New York, Oregon, and Texas. We selected these states because they capture a large portion of the foster care and prison populations nationally, represent geographic variation, and include some states with promising or innovative strategies at the state or local level, as identified by researchers and professionals knowledgeable on the subject. We also based these selections on the type of child welfare program administration (state administered and locally administered with state supervision); the number of children in foster care; the number and security level of inmates in the facility; and recommendations from experts we interviewed. In each state, we spoke with local child welfare officials from at least two localities, one large urban area and one non-urban county when possible. Specifically, we met with local child welfare officials and staff in San Francisco and Stanislaus counties in California; Dutchess county and New York City in New York; Marion, Multnomah, and Washington counties in Oregon; and Bell and Harris counties in Texas. During these interviews, we collected information on state and local processes for collecting and reporting data, policies and procedures, and challenges and strategies related to cases specifically involving children in foster care with incarcerated parents. We also interviewed several dependency court judges, attorneys, and community organizations that provided services for foster care children. Across the states, we interviewed officials at nine state prisons (seven women’s and two men’s), two federal women’s prisons, and three local city or county correctional facilities or jails. At most correctional facilities we were able to tour the facility, and in a few instances we observed their implementation of strategies such as nursery programs and parenting classes. At a few facilities, we also interviewed inmates about contact with their children and, if children were in foster care, their interactions with child welfare agencies or the courts. On the basis of our site visit information, we cannot generalize our findings beyond the states or localities we visited. Information we gathered on our site visits represents only the conditions present in the states and local areas at the time of our site visits. We cannot comment on any changes that may have occurred after our fieldwork was completed. We interviewed officials from HHS and DOJ about their programs pertaining to foster care children with incarcerated parents, and reviewed relevant federal laws, regulations, guidance, and other agency documentation. Additionally, we interviewed researchers and professionals from a variety of national organizations, including family resource centers, corrections associations, and child welfare organizations, and reviewed available literature from these groups. These included the American Bar Association Center on Children and the Law, the American Public Human Services Association, the Annie E. Casey Foundation, the National Association of Social Workers, American Correctional Association, the National Center on Substance Abuse and Child Welfare, the National Council of Juvenile and Family Court Judges, the National Resource Center for Children and Families of the Incarcerated, National Resource Center on Permanency and Family Connections, the Rebecca Project for Human Rights, and the Sentencing Project, among others. We also interviewed two former foster care youth whose parents had been incarcerated. In addition, two analysts, one with specialized expertise in social science, reviewed several studies (one unpublished) and found them to be sufficiently reliable for our purposes. To describe the approaches and outcomes of residential drug treatment programs that may support family reunification presented in appendix II, we interviewed staff from four family-centered residential drug treatment programs. We conducted site visits to three of the programs and their community partners in Maryland and Illinois and interviewed officials with the fourth program in California via telephone. During the site visits, we toured program facilities; spoke with representatives from the programs’ community partners, such as social services agencies and transitional housing providers; and also spoke with some program clients. In selecting these four family-centered residential drug treatment programs, we considered criteria including expert recommendations, receipt of federal grants, and geographic location. We obtained expert recommendations on specific programs to interview from a number of federal and nonprofit organizations. Those organizations include several offices within HHS— such as the Substance Abuse and Mental Health Services Administration (SAMHSA), the Administration for Children and Families (ACF), the Assistant Secretary for Planning and Evaluation (ASPE)—and nonprofit organizations, such as the Rebecca Project for Human Rights. Staff with SAMHSA, ACF, ASPE, and the Rebecca Project for Human Rights provided examples of family-centered treatment programs that emphasized family reunification or program evaluation. In addition, during our interviews with officials from SAMHSA, ACF, ASPE, and the Rebecca Project for Human Rights, we discussed the practices of family-centered residential drug treatment programs and federal efforts to fund and evaluate them. We reviewed relevant HHS reports on substance abuse and child welfare, family-centered treatment for women with substance abuse disorders, and best practice guidance for substance abuse treatment. We reviewed grant documentation for two federal grant programs that fund and evaluate family-centered residential drug treatment programs: the Services Grant Program for Residential Treatment for Pregnant and Postpartum Women administered by SAMHSA and the Regional Partnership Grant Program administered by ACF. We chose to focus on these programs because they target family-based treatment for parents and their children, as opposed to other grant programs that provide funds for different treatment types and populations. To describe the outcomes that these programs track and assess, we reviewed grant documentation, including the notices of funding availability, grant evaluations, and the Regional Partnership Grant program’s First Annual Report to Congress. We also reviewed documents from the four residential treatment programs that we contacted, which included descriptions of program rules, practices, and outcome studies. We conducted this performance audit from July 2010 through September 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. HHS estimates that approximately one-third to two-thirds of children involved in the child welfare system have at least one parent with a substance abuse problem, such as alcohol abuse or drug addiction. In addition, a study of 2,639 clients from 44 drug treatment programs in California reported that 29 percent of these parents had one or more children removed from their custody by child welfare services. Children whose parents have substance use disorders may experience parental neglect and be at risk of social, emotional, and behavioral disorders. Parents with substance use disorders, including those who come to the attention of the child welfare system—predominately mothers—may face additional challenges such as co-occurring mental disorders and involvement with the criminal justice system. Successfully addressing the multiple needs of these parents and their children takes time, which, as with children with incarcerated parents, can conflict with the timelines set by the Adoption and Safe Families Act of 1997 to make decisions about a child’s permanent placement and to file for termination of parental rights. Historically, women with children have faced barriers to entering substance abuse treatment programs. In our past work, we noted that state child welfare directors were dissatisfied with the low level of services, including substance abuse treatment services, provided to at- risk families in the child welfare system. In addition, we noted that, according to state child welfare directors, families living in impoverished neighborhoods often do not have access to substance abuse treatment services, which can in turn influence their children’s entry into the child welfare system. HHS has funded programs that allow eligible parents with substance use disorders to bring their children into treatment with them, such as SAMHSA’s Services Grant Program for Residential Treatment for Pregnant and Postpartum Women (PPW). According to SAMHSA officials, this program is designed to expand the availability of sustainable, comprehensive quality treatment, recovery support, and family services for pregnant and postpartum women and their children age 17 and under. This program, which SAMHSA funds and oversees, is implemented by private nonprofit and public drug treatment providers and targets low-income women. In contrast to corrections facilities, some residential drug treatment programs allow mothers to bring at least some of their children to live with them during treatment. Some of these programs employ a family- centered treatment approach, more formally known as the Comprehensive Substance Abuse Treatment Model for Women and their Children, which SAMHSA describes as:  often long-term and residential; focusing on an individualized treatment plan for each woman;  addressing the full range of each woman’s needs, in addition to focusing on the relationships in the woman’s life, including her role as mother; including a wide variety of integrated services, some of which may be available to children and other family members; and sensitive to culture and gender. Family-centered residential drug treatment programs use a variety of approaches to strengthen and reunite families. Officials from four family- centered residential drug treatment programs we interviewed told us that these programs help strengthen and reunite families by, among other things:  Allowing children to reside with their mothers. According to drug treatment program officials, the possibility that women can bring at least some of their children with them removes a significant barrier to treatment: reluctance to enter treatment if their children do not have a safe place to stay. In addition, some women are reluctant to enter treatment because they fear that as a result of doing so, they will lose custody of their children. Having them close by, such as at an on-site childcare center, decreases these fears and makes it more likely that a woman will stay in treatment and overcome her substance abuse, according to program officials.  Focusing on long-term recovery. In contrast to short-term drug treatment programs, which may consist of a brief, hospital-based inpatient phase and some outpatient follow-up, family-centered residential drug treatment programs can last up to 24 months. During this extended time, the programs attempt to address long-term, underlying issues in an effort to foster lasting recovery and thus heighten the chances of family reunification. In this effort, these programs aim to help women build new coping strategies and social networks, as well as strengthen their relationship with their children by teaching them parenting skills. By recognizing that addiction is cyclical and chronic, these programs help women learn how to overcome relapses and move toward long-term recovery. In addition, once the women graduate, some programs continue to provide extended assistance to help them transition out of the program, such as temporary housing or access to ongoing support networks and therapy.  Addressing mental health needs, including trauma. Extensive mental health services offered by the family-centered treatment programs we examined better position women for the work needed to help them recover and rebuild their families, according to program officials. For example, such programs help women identify, acknowledge, and appropriately respond to traumatic events in their lives. According to treatment program staff and federal officials, many women in long- term residential drug treatment have experienced some form of trauma or suffer from other mental health problems, which in turn can influence their substance use. Programs may also help children, who may also be traumatized from living in an environment where there is substance abuse or from having been removed from their homes by child welfare officials.  Offering a variety of supportive services to children and other family members. According to federal and drug treatment program officials, offering a variety of services to family members can help promote a more stable recovery since a woman’s recovery is often dependent on the health of her family, broadly defined. Some programs offer services specifically aimed at children, such as early intervention programs for preschool children and parenting programs that enable both mothers and fathers to hone their parenting skills. Other services, such as education and employment programs, aim to help families by making family members stronger and more self-sufficient.  Collaborating extensively with other state and local agencies. Because family-centered residential drug treatment programs collaborate extensively with other agencies and organizations with which women come into contact (see fig. 9), they are able to better address complex family needs, according to program and federal officials. According to an official from one treatment program, the program’s collaboration—joint monitoring and assessment of women’s progress— with a local family dependency court helps heighten the prospects for family reunification. Drug treatment program staff and state officials also told us that drug treatment programs and child welfare agencies frequently collaborate, and that child welfare and court officials tend to view a woman’s participation in the family-centered treatment programs positively for the woman. In addition to collaborating around the needs of the women and their children, treatment programs may work closely with child welfare agencies to educate them about the nature of substance abuse and to provide insight into the extent to which a woman’s relapse may endanger her children. Finally, program officials told us that their collaboration with other service providers, such as the public school system and agencies specializing in children’s developmental disabilities, also helps them better leverage their own skills and resources to support the whole family. The federal government has funded a number of grants that support and assess family-centered residential drug treatment programs. For example, SAMHSA’s PPW grants support the development of treatment programs, including residential treatment programs, to serve mothers with substance use disorders and their children aged 17 and under. In the PPW program, grantees are required to track information about, among other things, the woman’s substance use, involvement with the criminal justice system, mental health, and living arrangements. Grantees also collect limited information on the women’s children, including the total number of children per woman, the number of children living with someone besides the woman due to a child protection order, and the number of children for whom the woman’s parental rights have been terminated. SAMHSA funded a cross-site analysis of the PPW program and an earlier grant program, the demonstration grant program for Residential Treatment for Women and Their Children (RWC), that examined data collected from 1996 to 2001 from more than 1,000 women at 50 RWC and PPW programs. To assess the treatment outcomes, the study compared women’s responses at admission interviews to their responses at follow-up interviews, which were administered 6 months after their treatment ended. The study found that 6 months after treatment ended women reported fewer instances of substance use, fewer arrests, fewer mental health problems, and higher rates of employment. Regarding child outcomes, the study found fewer children living in foster care and that most of the children who accompanied their mothers to the RWC or PPW programs were still living with their mothers 6 months after treatment. Although these findings suggest that RWC- and PPW-funded drug treatment programs may lead to some positive outcomes for women and their children, according to study’s authors, the cross-site study was not designed to demonstrate that the treatment actually caused those effects. In 2006, ACF began implementing the Regional Partnership Grant (RPG) program, which provides 3- or 5-year grants to support partnerships among child welfare and other organizations, including drug treatment agencies, to increase well-being, enhance safety, and improve permanency outcomes for children placed in or at risk of being placed in out-of-home care because of a parent’s substance abuse. Among the 53 partnerships that received RPG funding in 2007, 21 include programs that provide family-centered residential drug treatment services. The drug treatment programs that received RPG funding must also collect information related to a subset of 23 performance indicators pertaining to the women, children, and families in their programs (see table 5). HHS uses those performance indicators to gauge grantees’ progress on meeting their programs’ intended goals. HHS requires RPG grantees to conduct evaluations to determine program outcomes, and most grantees designed evaluations that use treatment and comparison groups, allowing them to compare outcomes of families in family-centered residential treatment to outcomes of families in other forms of substance abuse treatment. Of the 21 RPG grantees that provide family-centered residential drug treatment services, 16 designed evaluations that use treatment and comparison groups. Since the grant period for the RPG program began in 2007 and may last up to 5 years, ACF officials anticipate that all RPG grantees will submit final evaluation results by December 31, 2012. Subsequently, the agency plans to present the evaluation results in a series of reports to Congress. This appendix provides summaries of selected statutory provisions that specifically address termination of parental rights and reasonable efforts to preserve and reunify families for child welfare cases involving incarcerated for the 10 states included in our study. The 10 selected states were Alabama, California, Colorado, Florida, Michigan, Nebraska, New York, Oregon, Pennsylvania, and Texas. The information contained in this appendix is not intended to be an exhaustive summary of all laws, regulations, or case law related to children in foster care with incarcerated parents for these states. To compile this appendix, we searched legal databases for state statutes on termination of parental rights and reasonable efforts that specifically refer to incarcerated parents. The provisions we identified are summarized briefly in tables 6 and 7. These summaries may omit some details from the cited provisions and are not intended to reflect all aspects of state law. In addition, these summaries do not reflect the federal requirements for states that receive federal child welfare funding. They also do not include the requirements of other state statutes, regulations, or case law that may directly or indirectly apply to families with incarcerated parents. We provided these summaries to knowledgeable state officials in each state for their verification, and the information in this table was verified to be accurate as of August 2011. Gale Harris, Assistant Director, and Theresa Lo, Analyst-in-Charge, managed this assignment. Sara Schibanoff Kelly and Eve Weisberg managed the portion on residential drug treatment centers presented in appendix II. Analysts Miriam Hill, Melissa Jaynes, Andrew Nelson, and Rebecca Rose made important contributions to this report. James Bennett and Mimi Ngyuen provided graphic assistance, and Susan Bernstein and David Chrisinger provided writing assistance. Kirsten Lauber, Jean McSween, Mark Ramage, Beverly Ross, and Shana Wallace provided data analysis and methodological assistance, and Sarah Cornetto provided legal assistance.

Federal law sets timelines for states' decisions about placing foster care children in permanent homes, and, in some cases, for filing to terminate parental rights. Some policymakers have questioned the reasonableness of these timelines for children of incarcerated parents and expressed interest in how states work with these families. GAO was asked to examine: (1) the number of foster care children with incarcerated parents, (2) strategies used by child welfare and corrections agencies in selected states that may support contact or reunification, and (3) how the Department of Health and Human Services (HHS) and the Department of Justice (DOJ) have helped these agencies support affected children and families. GAO analyzed national data, reviewed federal policies, interviewed state child welfare and corrections officials in 10 selected states that contain almost half of the nation's prison and foster care populations, and visited local child welfare agencies and prisons. Foster care children with an incarcerated parent are not a well-identified population, although they are likely to number in the tens of thousands. HHS data collected from states show that, in 2009 alone, more than 14,000 children entered foster care due at least partly to the incarceration of a parent. This may be an undercount, however, due to some underreporting from states and other factors. For instance, the data do not identify when a parent is incarcerated after the child entered foster care--a more common occurrence, according to case workers GAO interviewed. HHS is currently developing a proposal for new state reporting requirements on all foster care children; however, officials had not determined whether these new requirements would include more information collected from states on children with incarcerated parents. In 10 selected states, GAO found a range of strategies that support family ties. Some state child welfare agencies have provided guidance and training to caseworkers for managing such cases; and local agencies have worked with dependency courts to help inmates participate in child welfare hearings by phone or other means. For their part, some corrections agencies ease children's visits to prisons with special visitation hours and programs. In several cases, corrections agencies and child welfare agencies have collaborated, which has resulted in some interagency training for personnel, the creation of liaison staff positions, and video visitation facilitated by non-profit providers. HHS and DOJ each provide information and assistance to child welfare and corrections agencies on behalf of these children and families. For example, both federal agencies post information on their websites for practitioners working with children or their incarcerated parents, with some specific to foster care. The HHS information, however, was not always up to date or centrally organized, and officials from most of the state child welfare and corrections agencies GAO interviewed said they would benefit from information on how to serve these children. Further, DOJ has not developed protocols for federal prisons under its own jurisdiction for working with child welfare agencies and their staff, although GAO heard from some state and local child welfare officials that collaboration between child welfare and corrections agencies would facilitate their work with foster care children and their parents. This would also be in keeping with a DOJ agency goal to build partnerships with other entities to improve services and promote reintegration of offenders into communities. GAO recommends that HHS improve its data on the foster care children of incarcerated parents and that it more systematically disseminate information to child welfare agencies. GAO also recommends that DOJ consider ways to promote collaboration between corrections and child welfare agencies, including establishing protocols for federal prisons to facilitate communication between these entities. HHS and DOJ agreed with GAO's recommendations.

You are an expert at summarizing long articles. Proceed to summarize the following text: The LCS was intended to be a comparatively low-cost surface combatant that could address the challenges of operating U.S. military forces in the shallow waters close to shore, known as the littorals. The ship is designed for three principal missions: surface warfare, mine countermeasures, and antisubmarine warfare—to address threats posed by small surface boats, mines, and submarines, respectively. Its design concept consists of two distinct parts—the ship itself (seaframe) and the interchangeable mission modules it is expected to carry and deploy. These mission modules consist of containers carrying various unmanned systems, sensors, and weapons that provide different combat capabilities for the ship’s three principal missions. These mission modules are intended to give the Navy the flexibility to change equipment to meet different mission needs while forward deployed. The mission modules, when combined with the mission-module crew and an aviation detachment—consisting of an MH- 60 helicopter and its flight and support crew, as well as vertical takeoff unmanned aerial vehicles—make up a mission package. The LCS is designed to embark with only one mission package at a time. The Navy envisioned the LCS as a ship that could operate with a much smaller crew size than other surface combatants, with preventative maintenance duties performed primarily by contractors. This concept would in turn lead to lower operations and support costs, which traditionally account for about 70 percent of the total cost over a ship’s lifetime. The Navy planned the LCS to have a core crew of 40 sailors and mission-module crews of 15 to 20 sailors—far fewer than the crew of approximately 170 sailors for a frigate and approximately 250 sailors for a destroyer. To meet its operational, maintenance, support, and administrative needs with these reduced manning levels, the Navy is developing a new maintenance and support concept. Unlike other ships, the LCS would have no onboard administrative personnel and a limited ability to conduct maintenance at sea; instead, it would rely heavily on shore-based support, including flyaway maintenance teams made up of contractors flown in to conduct scheduled maintenance. The Navy also opted to use a rotational crewing concept, whereby three crews rotate between two ships, one of which is forward deployed. The Navy has used a different form of rotational crewing on ballistic missile submarines for years but has not used it widely on surface combatants. As of July 2014, the Navy has accepted delivery of four LCS seaframes— two of each variant—and has already contracted for 20 more seaframes (10 of each variant). The Navy plans to award contracts for up to eight additional seaframes. at the same time the Navy is in the process of incrementally developing and procuring the three mission packages. The Navy had planned to contract for up to 28 additional seaframes, but on February 24, 2014, the Secretary of Defense announced that as part of its fiscal year 2015 budget proposal the Navy would contract for no more than 32 LCS—instead of the 52 ships previously planned—(a further reduction from the original 55-ship plan), until the Navy evaluates potential courses of action, including the current LCS program and provides a report to the Secretary of Defense, which is due by July 31, 2014. across the program.description of how the council tracks progress through the LCS Plan of Action and Milestones, and a status update on the LCS Plan of Action and Milestones can be found in appendix II. The USS Freedom’s deployment to Singapore was an opportunity for the Navy to learn lessons about the feasibility and sustainability of unique LCS operational support and sustainment concepts in an operational environment. The Navy was able to collect data during the deployment on items such as systems usage and reliability and crew sleep hours. However, several factors, such as mechanical failures during the deployment, limited the operational lessons learned and the extent to which they are projectable across the LCS class. Additionally, the Navy continues to lack overseas deployment data for the Independence variant ships and for additional operational and warfighting concepts—such as overseas mission-package swaps and deployment with the mine countermeasures and antisubmarine-warfare mission packages. In March 2013, the Navy deployed its first LCS—USS Freedom—to Singapore with an increment 2 surface-warfare mission package for the first-ever overseas-based operational deployment of an LCS.officials saw the deployment as an opportunity to examine the feasibility of LCS manning, training, maintenance, and logistics concepts in an operational environment including, among other things, using a minimally sized crew, swapping out one crew with another while forward deployed, and maintaining the ship primarily with private contractors. Although the Navy concept of operations envisioned 40 sailors in the LCS core crew, the core crew was increased to 50 for the Singapore deployment as a pilot program to address crew fatigue and workload concerns that the Navy Navy was already aware of before the deployment. USS Freedom deployed for 10 months and conducted one crew swap midway through the deployment, operating in 7th Fleet’s area of responsibility and using Singapore as a logistics and maintenance hub (see fig. 1). During its 10-month deployment to the 7th Fleet area of responsibility, USS Freedom participated in joint exercises with regional partners, maritime security operations, and disaster-relief efforts in the Philippines following Typhoon Haiyan. Figure 2 provides an overview of the operational area for the USS Freedom deployment and shows the sites of selected events. The ship and crew implemented some of the LCS-specific operational support and sustainment concepts, including a crew swap that took place in August 2013 as well as the use of contractor teams for scheduled maintenance periods in Singapore. Additionally, several commands and organizations responsible for analyzing lessons learned from the deployment—including the Commander Naval Surface Forces Pacific, the Naval Warfare Development Command, and the Center for Naval Analyses—collected data during the USS Freedom deployment on equipment reliability rates and crew-reported sleep statistics, among other things. For example, the Freedom crew provided daily reports on the amount of time they spent sleeping, training, and completing preventative and corrective maintenance. After USS Freedom returned to San Diego, nearly every LCS stakeholder—including the operational commander of the ship in Singapore (Commander, Destroyer Squadron Seven) and each of the USS Freedom crews—produced lessons-learned summaries. According to Navy officials, they were able to learn some operational lessons from the 10-month deployment. For example: The Freedom deployment demonstrated the LCS’s ability to participate in theater security-cooperation activities, such as joint exercises with regional navies, and helped carry out the Navy’s forward-presence mission in Southeast Asia—thereby freeing larger multimission warships to carry out other high-priority Navy duties. Navy officials are implementing a condition-based maintenance system on the LCS, whereby sensors provided some useful data on system usage and reliability. For example, medium-pressure air compressors had seen high casualty rates on USS Freedom prior to the deployment. However, Navy officials reported that USS Freedom did not experience significant failures of these compressors during the Singapore deployment because they were constantly monitored by sensors and were replaced before they could fail. Navy officials reported that data and lessons learned collected during the USS Freedom deployment will be used to develop and refine the concept of operations for the USS Fort Worth (Freedom variant) deployment and the LCS wholeness concept of operations. USS Fort Worth (LCS 3) is scheduled to deploy to Singapore in late 2014, and the next revision of the wholeness concept of operations is scheduled for completion in November 2014. Although the Navy collected some useful data from the deployment, mechanical issues reduced time at sea with 55 total mission days lost, limiting the operational lessons learned. The operational effect of these lost mission days was that the ship had to cut short its participation in two joint exercises and did not complete at least two of its planned presence operations. Our analysis of USS Freedom’s actual executed schedule showed that these mechanical failures contributed to limiting the ship’s underway time to 35 percent of its deployment in the 7th Fleet area of responsibility (see table 1). Underway time includes all time the ship operated outside of port in the 7th Fleet area of responsibility including time spent transiting to and from Singapore. The 7th Fleet concept of operations for the USS Freedom deployment stated that the ship should spend more time outside of Singapore (i.e., greater than 50 percent) than in port in Singapore. However, during its 10-month deployment, USS Freedom spent 58 percent of its time in port in Singapore (see fig. 3). According to 7th Fleet officials, other ships deployed to the 7th Fleet area of responsibility typically spend about 20 percent of their time in port. LCS program officials explained that the unique LCS maintenance concept—USS Freedom returned to port every 25 days to undergo a 5-day preventative maintenance availability and every 120 days for more-intensive 2-week intermediate maintenance— resulted in a rigid deployment schedule with more port time than other deployed Navy ships. However, Navy officials acknowledged that the mechanical issues on this deployment extended the ship’s time in port. LCS program officials told us that while equipment problems limited operational lessons learned, the Navy gained experience conducting emergent repairs overseas and putting stress on the LCS maintenance concept. Additionally, some Freedom systems, such as several water-jet components and the satellite communication system, are unique to that hull, and their performance data cannot be generalized even to other Freedom variant ships. USS Freedom is different in several respects from later (follow-on) ships of its own variant, since some major equipment has been changed. As a result, learning about these systems’ performance during deployment cannot be directly applied to predict how the replacement systems might perform on other ships of the Freedom variant. According to the Navy, improving these systems should mean that future deployments of other ships from the Freedom variant will not incur the same number of equipment problems as USS Freedom did. However, as the Department of Defense’s Director of Operational Test and Evaluation noted, no formal operational testing has been conducted to verify and quantify the effect of these changes, so further deployments or additional underway time, or both, will be necessary before the effects of these improvements on ship availability can be determined. The Navy continues to lack operational data, specifically overseas deployment data, on the other LCS variant—the Independence variant— which, under current plans, is expected to comprise half of the LCS ship class (see fig. 4). In September 2013, we reported that the Navy had not scheduled an overseas operational deployment for an Independence variant LCS and therefore would not have comparable actual data and lessons learned for this variant. We recommended that the Navy collect actual operational data on this variant and the Navy concurred, stating that it would identify the actions and milestones needed to collect additional actual operational data on the Independence variant. However, the Department of Defense’s Director of Operational Test and Evaluation noted in January 2014 that the core combat capabilities of the Independence variant seaframe remain largely untested and that equipment reliability problems have degraded the operational availability of USS Independence (LCS 2). While the Navy deployed a Freedom variant LCS to Singapore for nearly all of 2013, our analysis found that, over the same period, USS Independence spent about 8 months, or 65 percent, of 2013 in port or dry dock maintenance periods, limiting any operational data that the Navy could obtain when operating the ship out of its homeport in California. In addition, according to Navy officials, from October 2012 to December 2013, USS Independence spent only 44 days under way. Navy officials told us that an Independence variant LCS needs to deploy to Singapore to determine whether the LCS operational support and sustainment concepts will be feasible and effective in supporting this variant, since not only does it have different systems than the Freedom variant that require different logistical support, but Singapore presents unique environmental conditions such as high humidity and warm ocean temperatures. At the time of our review, the Navy stated that it has notional plans to deploy an Independence variant LCS sometime before 2017. Navy officials also noted that an extended test period is planned in 2014 for the mine countermeasures mission package for USS Independence. This testing will take place in the Gulf of Mexico near Florida, and the ship will use Pensacola to exercise the maintenance concept outside of homeport. LCS operational and warfighting concepts that require demonstration in an operational environment include overseas mission-package swaps, deployments of the mine countermeasures and antisubmarine warfare mission packages, and tests of warfighting concepts in exercises related to operational plans, among others.Freedom deployment concept of operations, the Freedom deployment was intended to support validation of warfighting and wholeness concepts. However, the deployment largely focused on sustainment concepts, and key warfighting concepts were not demonstrated. Table 2 shows the key LCS systems and concepts demonstrated during the USS Freedom deployment to Singapore and those that require future deployments to demonstrate their feasibility. Although the Navy is adjusting some operational support and sustainment concepts based on data collected and lessons learned during the USS Freedom deployment, it has not yet addressed some risks that remain in executing and sustaining key manning, training, maintenance, and logistics concepts. Federal standards for internal controls state that decision makers should comprehensively identify risks associated with achieving program objectives, analyze them to determine their potential effect, and decide how to manage the risk and identify what actions should be taken. This is an ongoing process, since operating conditions continually change. In 2010, we reported that the Navy faced several risks in implementing new LCS concepts for manning, training, and maintenance necessitated by the small crew size, and recommended that the Navy conduct and consider the results of a risk assessment to identify operational limitations if the Navy’s approach to manning, training, and maintenance cannot be implemented as envisioned; develop possible alternatives to these concepts; and make policy and process changes to reduce risks to the LCS program. At the time of this review, the Navy had not fully addressed our prior recommendation, although Navy officials told us that they have undertaken a number of activities to manage risks in the LCS program. For example, the LCS program office convenes a risk-management board on a regular basis to identify potential program risks. As the program attempts to manage and mitigate these risks, the maiden deployment of USS Freedom identified additional issues with the manning, training, maintenance, and logistics concepts that have not been fully addressed by the Navy. Key observations from the deployment, the actions the Navy has taken to address them, and the outstanding risks that still remain in further implementing LCS operational support and sustainment concepts are summarized below in table 3. Our work shows that the Navy has not fully identified, analyzed, and mitigated the risks associated with LCS concepts. Having such a risk assessment would enable decision makers to identify and assess the operational effects if these concepts cannot be implemented as envisioned; alternatives to mitigate these risks; and information to link the effectiveness of these new operational concepts with decisions on program investment. If the operational concepts for manning, training, maintenance, and logistics cannot be implemented as desired, the Navy may face operational limitations, may have to reengineer its operational concept, or may have to make significant design changes to the ship after committing to building most of the class. The 2013 deployment of USS Freedom to Singapore highlighted that these risks remain. Therefore, we continue to believe that our 2010 recommendation is valid. For additional details and information on our observations from the deployment, actions the Navy has taken to address them, and the outstanding risks that still remain in further implementing LCS concepts in the areas of manning, training, maintenance, and logistics, see appendix III. Although the Navy’s life-cycle cost estimates for the LCS seaframe and mission modules contain uncertainty, they indicate that the annualized per ship costs for the LCS may be approaching those of other multimission surface ships with larger crews. The Navy planned to use data collected during USS Freedom’s deployment, particularly data on maintenance costs, to update and improve the life-cycle cost estimates for the LCS seaframe. The Navy collected cost data during USS Freedom’s deployment to Singapore; however, Navy officials explained that much of the data may be of limited usefulness for projection across the LCS ship class. We reported in September 2013 that a lack of operational data had prevented the Navy from developing life-cycle cost estimates for the LCS seaframe above a relatively low confidence level. Although the Navy’s LCS cost estimates contain uncertainty, especially in regard to operations and support costs, and there are inherent difficulties associated with comparing the life-cycle costs of various surface ships with differing capabilities and mission sets, we found that the per ship per year cost estimates for the LCS program are nearing or may exceed the costs of other surface ships, including multimission ships with greater size and more crew members, such as guided-missile frigates and destroyers. During the course of our prior review, Navy officials explained that they planned to update and improve life-cycle cost estimates for the LCS seaframe, in part by using data collected during USS Freedom’s deployment to Singapore. The deployment provided additional data associated with actual operations and support costs specific to USS Freedom, including maintenance and emergent repair costs. However, according to Navy officials, much of these data may be of limited usefulness for projection across the LCS ship class. In early 2014, Navy officials said that they were evaluating the deployment data but that first- time deployments on any ship class include costs related to issues that are not representative of the entire ship class and will therefore limit their ability to update the LCS life-cycle cost estimate for the seaframes. Two such factors are described below: Certain problematic engineering systems that required emergent repairs and increased the overall deployment cost figures have been or will be replaced on future LCSs. The fuel capacity and efficiency of USS Freedom will differ from other Freedom and Independence variant ships. In September 2013, we recommended that the Navy identify actions and milestones to collect additional actual operational data on the Independence variant and to update operations and support cost estimates for both variants. Navy officials said that an updated life-cycle cost estimate for the LCS seaframe would likely be available in the fall of 2014. However, based on the Navy’s LCS deployment schedule, this update will likely not include additional overseas deployment-related cost data for either LCS variant; USS Fort Worth will not deploy until late 2014, and the Navy has only notional plans to deploy an Independence variant Navy officials explained that the Navy will LCS sometime before 2017.not have a life-cycle cost based on actual deployment data for the LCS until it is operating multiple LCSs from a forward location such as Singapore in accordance with employment and operational concepts. The Navy estimated in 2011 that operations and support costs for the LCS seaframes would be about $50 billion over the life of the ship class. In 2013, it estimated that operations and support costs for the mission modules would be about $18 billion. Both of these estimates were calculated in fiscal year 2010 dollars. However, as we reported in September 2013, the seaframe estimate is at the 10 percent confidence level, meaning that there is 90 percent chance that costs will be higher than this estimate. We reported that those estimates were at a low level of confidence due to overall lack of operational data on both LCS seaframes and operating concepts that are unique among the surface fleet. In lieu of actual LCS data, the Navy used operations and support data from other surface ships, such as frigates, and modified them to approximate LCS characteristics (referred to by the Navy as modified analogous data) to build the LCS cost estimate. For example, maintenance cost estimates were calculated by modifying analogous data from frigates and destroyers, among other ships, even though the maintenance concepts for these ships differ from those for the LCS. Moreover, since the time when the Navy developed the seaframe estimate in 2011, it has made several programmatic changes to LCS concepts that will increase the overall cost to operate and sustain the ship class. The number of shore personnel to support the ship has more than tripled—from 271 to 862—since the estimate was developed in 2011, as support requirements have become better understood. The Navy has increased the total number of core crew members onboard each ship from 40 to 50 in order to better address workload and watch-standing requirements. As the Navy continues to better understand the work requirements associated with the ship class, the required numbers of shore support and ship crew have risen. Navy officials explained that such changes are necessary for the success of the program and acknowledged that those changes would increase the overall costs of the LCS and should be included in future LCS life-cycle cost estimates. From the outset of the program, the Navy has described the LCS as a low-cost alternative to other ships in the surface fleet, yet the available data indicate that the per year, per ship life-cycle costs are nearing or may exceed those of other surface ships, including multimission ships with greater size and larger crews. The LCS consists of two distinct parts—the ship itself (seaframe) and the interchangeable mission modules it is expected to carry and deploy. These mission modules consist of various unmanned systems, sensors, and weapons that provide different combat capabilities for the ship’s three principal missions. Many LCS cost estimates only refer to the acquisition cost of individual seaframes rather than the total life-cycle cost of the seaframe and mission modules. The operations and support costs for the LCS seaframe that are included in the life-cycle cost estimates are significant—due in part to unique LCS operational concepts—while the LCS mission modules that provide each ship with operational capability account for a significant component of the costs for the ship class. As we noted above, the cost estimates for both the seaframe and the mission modules contain uncertainty; however, we believe that when combined they provide the best available estimate to date of the overall life-cycle costs for the LCS program. Moreover, because the Navy has acknowledged it has made several programmatic changes to LCS concepts that will increase the overall costs to operate and sustain the ship class, it is likely that the per ship, per year life-cycle costs for the program will be higher than this current estimate. We analyzed the Navy’s life-cycle cost estimates for LCS seaframes (2011) and mission modules (2013), which the Navy adjusted for inflation to fiscal year 2014 dollars, and used updated Navy life-cycle cost estimates provided in April 2014 by Naval Sea Systems Command for patrol coastal ships, mine countermeasures ships, frigates, destroyers, and cruisers. These ships were selected for comparison because they have been in the surface fleet for decades and historical cost data are readily available, and they all conduct at least one mission that the LCS is also expected to perform. We calculated the life-cycle costs on a per ship annualized basis to account for differences in the number of ships and expected service life of each class. As shown in figure 5, we found that per ship life-cycle costs per year for the LCS program are nearing or may exceed those for other surface ships, including guided-missile frigates and multimission destroyers. We are providing a descriptive comparison of annual life-cycle costs per ship using available data and are not assessing the relative benefits and capabilities of these various ship classes. Navy officials point out that the below estimates may not include the full costs of developing, modernizing, and sustaining software and combat systems installed on the surface ships we use for comparative purposes (e.g., Aegis ballistic missile defense system used on cruisers and destroyers). Additionally, officials stated that the acquisition costs presented are not to be interpreted as replacement costs since a replacement value for the specific ship would have to take into account changes in productivity, design specifications, and legislative and contracting environments. Despite the inherent difficulties associated with comparing the life-cycle costs of various surface ships with differing capabilities and mission sets, and at different points in their respective service lives, we believe this analysis is useful because it provides a framework for comparing the life- cycle cost estimates of various surface ships on a per ship, per year basis, thereby accounting for variations in expected service life and the number of ships. For an overview of the surface ships used in figure 5, including their missions and crew sizes, see appendix IV. We used the Navy’s expected ship service lives of record, although the Navy has made decisions to retire vessels before they’ve reached their expected service lives in some instances and has extended the service lives of other vessels, such as destroyers. For LCS seaframes, the Navy used a 25- year expected service life to calculate life-cycle costs, which is an average of the 20-year service-life threshold and 30-year service-life objective outlined in key performance parameters. Although the LCS has been identified by the Navy as a low-cost alternative to other surface ship classes, the available data indicate that the costs of the LCS may exceed or closely align with the costs of other multimission surface ships with larger crews. Without comprehensive life- cycle cost estimates, the Navy may be hindered in its ability to evaluate the merits of investing in LCS ships compared with other alternatives, conduct long-term budgetary planning, or determine the level of resources required to implement the program in accordance with the LCS concept of operations. In 2013, we recommended that the Navy collect actual operational data on the Independence variant and update operations and support cost estimates for both variants prior to contracting for additional LCS ships in 2016. Our work shows that the Navy still lacks operational data and that life-cycle cost estimates are still not comprehensive. We continue to believe that the Navy should have greater clarity on the performance of its operational concepts and greater confidence in its cost estimates before it enters into contracts for additional LCS ships. In written comments on a draft of this report, the Department of Defense (DOD) noted it is concerned with the conclusions drawn from the analysis of life-cycle cost data across ship classes. DOD added that due to known gaps in existing ship class cost data, the available data do not allow for an accurate comparison of the life cycle costs among LCS and other existing surface ship classes. DOD’s comments are summarized below and reprinted in their entirety in appendix V. DOD also provided technical comments, which we have incorporated as appropriate. In its comments, DOD noted differences in the scope of cost data across the ship classes and differences in life-cycle phases among the ship classes included in our life-cycle cost analysis. For example, DOD commented that there are gaps in the Navy’s record keeping for operations and support costs, so that some potential costs may not be captured in the estimates the Navy provided us, such as system modernization, software maintenance, and program startup, which could understate the costs of the other surface ships. However, these data are the most comprehensive operations and support cost data that the Navy could provide us. As we noted in the report, the Navy also has used these data from other surface ship classes to build its LCS life-cycle cost estimates. Moreover, we discussed in the report the known limitations to comparing the life-cycle costs of these ship classes, including that the estimates may not include the full costs of developing, modernizing, and sustaining software and combat systems installed on the ships, as well as past acquisition costs not aligning with what current production costs would be, and the ships being at different points in their service lives. Despite the known limitations, we believe our analysis uses the best available data to provide a reasonable comparison of the life-cycle costs across the ship classes. Consequently, we have made no revisions to the report, as suggested by DOD. Finally, DOD provided us with additional information to clarify that the Navy’s mission-module program life-cycle cost estimate is at the 50 percent confidence level. We verified this information and updated the report to include this confidence level. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, and the Secretary of the Navy. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3489 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. Key contributors to this report are listed in appendix VI. To address the benefits and limitations of the operational data that have been collected on Littoral Combat Ships (LCS), we analyzed and compared the planned USS Freedom deployment schedule with the actual executed schedule. We reviewed documentation related to operational activities while deployed including execution orders, concepts of operations such as the 7th Fleet USS Freedom deployment concept of operations, and exercise briefings. We also analyzed operational data from the deployment, including readiness data and equipment casualty reports. We interviewed forward-deployed crew members in Singapore as well as Navy officials responsible for the ship’s operational employment at 7th Fleet in Japan to discuss the successes and challenges of the deployment, including any limitations. Further, we analyzed the operational activities of USS Independence and interviewed Navy officials to determine what operational data has been collected on Independence variant ships. Finally, we reviewed and analyzed the LCS wholeness and warfighting concepts of operations to determine any additional LCS operational and warfighting concepts that still require demonstration. To assess the extent to which the Navy has evaluated risk in its operational support and sustainment concepts for the LCS in the areas of manning, training, maintenance, and logistics, we reviewed relevant data- collection and analysis plans and mid-point and final reports on the Freedom deployment to Singapore in 2013 from Commander Naval Surface Forces Pacific, 7th Fleet, and the Center for Naval Analyses, and we interviewed officials from organizations responsible for collecting and analyzing data from this deployment. We reviewed the LCS wholeness concept of operations, the life-cycle sustainment plans for the LCS, LCS manpower estimate report, LCS training plans, and various other Navy documents associated with LCS manning, training, maintenance, and logistics, and interviewed USS Freedom crews who participated in the 2013 deployment, to obtain their perspectives on the implementation of these concepts. We also reviewed the extent to which the Navy has analyzed the costs and benefits associated with the use of contractor flyaway maintenance teams. Finally, we discussed with LCS program office officials and other LCS stakeholders any actions that were being taken to analyze potential risks or mitigate them for future LCS deployments. To assess how LCS life-cycle cost estimates compare with those for other surface-ship classes, we modified a framework used in an earlier and similar comparison conducted by the Congressional Budget Office. To do this, we reviewed cost estimates in the current LCS Seaframe Program Life Cycle Cost Estimate (2011) and the LCS Mission Module Program Life Cycle Cost Estimate (2013), both prepared by the cost- estimating division of the Naval Sea Systems Command, and determined that these are the latest estimates available from the Navy. Although the Navy to date has not updated these life-cycle cost estimates (which were estimated using fiscal year 2010 dollars) to reflect changes in the program or the number of ships to be purchased, the Navy adjusted the estimates for inflation to fiscal year 2014 dollars. Using these data, we calculated an annual per ship life-cycle cost estimate for the combined LCS seaframes and mission modules to account for differences in the number of ships and mission modules and their respective expected service lives. We also obtained life-cycle cost data in fiscal year 2014 dollars from the Navy for five surface ships (patrol coastal ships, mine countermeasures ships, frigates, destroyers, and cruisers) and used these data to calculate an annual per-ship life-cycle cost estimate for each of these five surface ships so as to account for differences in the number of ships and their expected service lives. We then compared these data with the annual per ship life-cycle cost data we calculated for the LCS seaframes and mission modules. We analyzed and assessed these data and found them to be sufficiently reliable for the purposes of reporting the estimated life-cycle costs of these surface ships. The five non-LCS surface ships we used for our comparison were selected because historical cost data were readily available and they all conduct at least one mission that the LCS is also expected to perform. Further, we interviewed Navy LCS program officials and cost estimating officials to determine the extent to which data from the USS Freedom deployment in 2013 may be used to refine future life-cycle cost estimates. We interviewed officials, and where appropriate obtained documentation, at the following locations: Office of the Chief of Naval Operations Naval Sea Systems Command Program Executive Office Littoral Combat Ship, Fleet Introduction Program Executive Office, Ships U.S. Fleet Forces Command Naval Warfare Development Command Navy Manpower Analysis Center Southwest Regional Maintenance Center Commander, Naval Surface Force, U.S. Pacific Fleet Commander, Naval Air Force, U.S. Pacific Fleet Naval Supply Systems Command Commander, Logistics Force Western Pacific Commander, Destroyer Squadron Seven Navy Region Center, Singapore LCS Class Squadron Forward Liaison Element Center for Naval Analyses We conducted group discussions with USS Freedom blue and gold crew officer and enlisted personnel who participated in the 2013 Singapore deployment. The discussions involved small-group meetings designed to gain more in-depth information about specific issues that cannot easily be obtained from single or serial interviews. Our design included multiple groups with varying characteristics but some homogeneity—such as rank and responsibility—within groups. For example, with few exceptions we met with officers separately from enlisted personnel and we met separately with personnel from each major ship department such as engineering, combat systems, and operations. Most groups involved three to five participants. Participants were selected based on their availability by USS Freedom commanding and executive officers in Singapore and the LCS Class Squadron in San Diego to ensure we had at least three members from each major ship function. Discussions were held in a semistructured manner using a broad list of discussion topics to encourage participants to share their thoughts and experiences related to the crew-swap experience, crew integration, maintenance, systems reliability, training, logistics support, quality of life, and overall satisfaction with the LCS experience. We assured participants that we would not link their names to their responses. To gain a broad perspective of crew experience during the USS Freedom deployment, we conducted 17 small-group sessions with USS Freedom officers and enlisted personnel across all ship departments. Table 4 provides a summary of the composition of the group discussions held by GAO analysts in Singapore (during deployment) and in San Diego (postdeployment). All discussions were held aboard USS Freedom. Our group discussions were not designed to (1) demonstrate the extent of a problem or to generalize results to the entire USS Freedom crew population or to other LCS variants, (2) develop a consensus to arrive at an agreed-upon plan or make decisions about what actions to take, or (3) provide statistically representative samples or reliable quantitative estimates. Instead, they were intended to generate in-depth information about the discussion group participants’ attitudes and reasons for their attitudes toward specific topics and to offer insights into the range of concerns and support for an issue. The generalizability of the information produced by our discussion groups is limited for several reasons. First, the information represents the responses of USS Freedom officers and enlisted personnel from the 17 groups described above. Second, while the composition of the groups was designed to assure a distribution of Navy officers, enlisted personnel, seniority, and ship departments, the group participants were not probabilistically sampled. Third, participants were asked questions about their specific experiences on the Singapore deployment. The experiences of other USS Freedom personnel who did not participate in our group discussions may have varied. Because of these limitations, we did not rely entirely on group discussions, but rather used several different methodologies to corroborate and support our conclusions. We conducted this performance audit from September 2013 to July 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In 2012, the Chief of Naval Operations received the results of four internal studies he requested to assess, among other things, the Littoral Combat Ship (LCS) across aspects of manning, training, and maintenance to assist in preparing the USS Freedom for deployment in March 2013. Two of the four studies were independent Navy studies—one conducted by the Board of Inspection and Survey (the Navy’s ship-inspection entity) and one conducted by the office of the Chief of Naval Operations. These two studies identified concerns with, among other things, LCS manning, training, and maintenance, and recommended steps to improve aspects of the program. The other two studies were two war game reports, which identified findings and made recommendations on LCS operations and sustainment. All four of these reports identified numerous operational support and sustainment issues, such as insufficient manning of ships leading to crew fatigue, inadequate training of crews, incomplete maintenance plans, and insufficient shore support, and culminated in about 170 recommendations for improvement. The LCS Council developed a Plan of Action and Milestones document as directed by the Chief of Naval Operations to address the findings and recommendations from the four internal Navy reports. The Plan of Action and Milestones is organized around lines of operation (e.g., fleet introduction and sustainability, platform and capabilities evolution, and developing and aligning concept of operations and other documentation) and has over 1,000 action items and milestones—many directly addressing operational support and sustainment issues. Each of the lines of operation has subordinate action items, with a stakeholder assigned responsibility for each action item, and both a start date and expected finish date for the tasking. Table 5 below provides an update on the number of discrete (nonrecurring) subtasks that the Navy has completed as of March 2014. The Navy is adjusting some operational support and sustainment concepts based on data collected and lessons learned during the USS Freedom deployment, but it has not yet addressed some risks that remain in executing and sustaining key manning, training, maintenance, and logistics concepts. The Littoral Combat Ship (LCS) manning concept calls for a relatively small crew to operate the ship. The minimal crew size drives many of the other LCS concepts, since LCS sailors are expected to spend most of their time operating the ship rather than performing training, maintenance, or administrative functions. The last revision of the LCS wholeness concept of operations, approved in January 2013, called for a core crew size of 40 and mission-module crews of 15 to 19 sailors. The maximum number of core crew members allowed by LCS key performance parameters is 50.beyond 50, the ships would require significant design changes. A number of internal Navy reports issued in 2012 raised concerns about the adequacy of a 40-member core crew size, with crew fatigue and overwork To add berthing spaces for additional crew members as potential negative effects of this manning concept. In response to these concerns, the Navy added 10 sailors to the USS Freedom core crew deploying to Singapore as part of a pilot program. Navy leadership determined early in the deployment that these additional crew members were helpful in performing maintenance and watch-standing duties, and decided to permanently increase LCS core crews to 50 sailors. The Navy also added three ensigns to the Freedom crews prior to deployment, and intends on continuing and expanding this program to attach four ensigns In addition to the core and mission-module crews, to each LCS crew.contractors were also onboard during the course of the deployment to assist with equipment troubleshooting and repair. Despite the addition of 10 sailors to the core crew and contractor support, data collected from the Freedom’s deployment show that sailors’ sleep hours did not increase compared to the sleep hours reported in studies that examined LCS with 40-member crews; this suggests that the Navy has not fully addressed crew fatigue issues by increasing crew size. Specifically, the Center for Naval Analyses found that Freedom crews averaged about 6 hours of sleep per day compared to the Navy standard of 8 hours; some key departments, such as engineering and operations, averaged even fewer. While Navy officials told us that sailors do not realistically expect 8 hours of sleep while they are under way and may choose to have more down time rather than sleep, the LCS must adhere to Navy manpower standards, including those for crewmember fatigue levels and workload hours found in Navy standard workweeks. These standards are set to minimize potential adverse effects on morale, retention, and safety. Crew members told us that their sleep hours decreased significantly during major equipment casualties, particularly those affecting the ship’s diesel generators and other engineering systems. Navy officials said that follow-on ships have been outfitted with different systems that are supposed to be more reliable than those on Freedom, which should decrease the amount of corrective maintenance required, and thereby decrease crew fatigue on future deployments. However, as previously discussed, these systems have not been fully tested or operated on the LCS, and their reliability has yet to be proven by actual experience. Additionally, we found that core crews depended heavily on sailors from the surface warfare mission-module crew to perform watch standing, training drills, and engineering maintenance over the course of the deployment. This is a departure from what was envisioned in the concept of operations, and creates a situation that may not be sustainable under a different pace of operations or with a different mission module deployed. Officers and enlisted sailors from both core and mission-module crews told us that mission-module sailors were heavily leveraged to help complete core crew functions and that the crews were fully integrated. The crews added that the surface warfare mission module is uniquely qualified to help with core crew functions, since these sailors’ billet structure—their mix of skills and expertise—completely aligns with that of the core crew. For example, there are engineers in the surface-warfare mission-module crew to operate and maintain the motors on the module’s rigid-hull inflatable boats. Since these boats are not part of the antisubmarine warfare mission modules, there are no engineers in those crews. Sailors from the core crews’ engineering department told us they depended on the qualified mission-module engineers to assist them and were at a loss as to how the engineering department would function effectively if deployed with the other mission modules. Figure 6 shows the extent of overlap between the core crew billets and the three mission- module crew billets. Core crews also relied heavily on support from the maintenance contractors embarked during the course of the deployment. Program officials and crew members cited these contractors’ expertise with engineering systems and said they were of great assistance, essentially becoming additional highly experienced engineers always on watch in the engineering space. Engineering department crew members told us that the ship would not have gotten under way if not for these contractors. Program officials do not yet know whether contractors will always be embarked during future LCS deployments, but they said that the Navy utilizes contractors on other surface combatants when they are deployed and underway. Navy officials noted that USS Fort Worth, deploying in late 2014, will have two contractor personnel onboard. NAVMAC leads the manpower requirements-determination process, which identifies multiyear manpower requirements to support the budgeting process. that they expect some changes to the LCS manning structure based on their initial observations. Manpower requirements for the other variant and mission modules have not yet been validated. A similar study to determine the requirements for Independence variant crews is scheduled to begin in 2016. Since the mine countermeasures and antisubmarine warfare mission modules are still being developed, validation of their crews has not been scheduled. Without validating the optimal crew size and billet structure for all LCS crews and without accounting for the full scope and distribution of work performed by sailors across all ship departments, the Navy risks that crew fatigue will exceed Navy standards and could negatively affect crew members’ performance as well as morale, retention, safety, and ultimately the operational readiness of the ship class. The LCS training concept calls for sailors to report to a core or mission- module crew qualified to stand watch and carry out their other duties. Most LCS training is conducted off the ship in a classroom or simulator setting as operational demands do not allow sufficient time for training during operational periods. Crews are expected to be fully trained (qualified and certified) prior to deployment, and there is no training department embedded within the crew and no training required while under way. During discussions with Freedom crews, we found that not all sailors had completed training prior to deploying to Singapore. The 10 sailors added to the crew as part of the “plus-up” pilot program were identified in the months leading up to the March 2013 deployment date and did not undergo LCS-specific training or complete their qualifications prior to deploying. Some of these 10 additional crew members were junior sailors and told us they had limited sailing experience but were ultimately able to earn their qualifications over the course of the deployment. More- experienced core crew members who completed LCS training were in part responsible for instructing and training these additional 10 sailors, a collateral duty not accounted for within the standard LCS workday or envisioned in the LCS concept of operations. The Navy is in the process of reviewing and defining training needed for the 10 additional sailors, but since the training pipeline for LCS service can take about 2 years to complete, the Navy risks repeating this situation on upcoming deployments. While the Navy is reviewing training for the late-addition ensigns and the 10 “plus-up” sailors, it considers the training process to have been validated by the Freedom deployment, since no major training omissions or deficiencies were identified. However, we found that in addition to the 10 “plus-up” sailors not receiving all training prior to deployment, sailors from the original 40-person crews were training over the course of the deployment as well. The Center for Naval Analyses found that more than half of the qualification and instructed training that occurred during the deployment was for the original core crews, not the crew plus-ups. The Center for Naval Analyses added that sailors will train no matter what—at times out of necessity but also to maintain proficiency and in support of career development and well-being—and that time must be made available for training during deployments. The Center for Naval Analyses calculated the average amount of training conducted by all crew members over the course of the deployment to be about an hour a day. However, this hour is unaccounted for in the Navy’s expected LCS workday and detracts from the time a sailor could otherwise be resting or performing other collateral duties. The most common reasons for performing training, drills, and underway instruction while deployed were to cover training that was not provided prior to the deployment or to maintain proficiency. LCS program officials explained that much of this training was planned to be conducted during the deployment, and that underway training will likely continue until the new curriculum is fully implemented over the next several years. However, requiring LCS sailors to train while deployed was not envisioned in the LCS wholeness concept of operations, and it can exacerbate crew fatigue levels and negatively affect performance, morale, retention, safety, and the operational readiness of the ship. In addition to sailors not being fully trained prior to deployment, we heard concerns about the quality of the training the sailors received. The Navy is aware of this and is investing heavily in virtual reality–based training simulations and a curriculum to prepare sailors for LCS service as envisioned in the concept of operations. Specifically, the Navy has budgeted for construction of another LCS training facility in Mayport, Florida, and awarded several contracts valued up to $300 million to develop training simulations. While the final LCS training infrastructure is being developed, the program is training sailors through a combination of classroom instruction, vendor training (whereby contractors or original- equipment manufacturers train sailors on how to operate certain equipment), shore-based trainers, and very limited on-hull “school ship periods” to complete the qualification and certification process. Enlisted sailors from both core crews across ship departments expressed general dissatisfaction with the LCS training they received prior to the deployment. Some cited the obsolescence of vendor training and the limited utility of the 3-week LCS Academy in preparing them to serve on the LCS, and others stated that insufficient training left them ill-prepared to deal with contingencies on the deployment. Freedom officers said that it will take time for training to adapt to the needs of LCS sailors, but that it would make sense to cut the training that is not proving useful to LCS sailors in the short term until a more-tailored curriculum is developed. Navy training officials told us that they are aware of some of the quality issues with the current training and are attempting to make reasonable improvements that are cost-effective, but they pointed out that this interim training will be phased out over the next several years. While the program seeks to have useful and applicable training available for sailors progressing through the training pipeline now, the officials added that it would not be prudent to make major investments to overhaul temporary training. Navy officials told us that they are in the process of reviewing a revised LCS training plan that should be released in 2014. The training plan will lay out the schedule and process for replacing current training with the new simulations being developed. While this plan was not released early enough for inclusion in our review, earlier versions of LCS training plans did not include measures of effectiveness or training effectiveness- evaluation plans. In light of crew feedback on the inadequacy of current training, and unless the Navy acts on this feedback and builds effectiveness measures into its new training plan, it risks making significant investments to develop training that will not meet LCS sailors’ training needs. Additionally, the Navy risks deploying LCS crews that are not properly qualified and certified, which in turn could negatively affect the crews’ ability to operate and maintain the ship and perform warfighting duties as expected. Because of the relatively small size of LCS crews, the maintenance concept calls for contractors to perform most preventative maintenance during regularly scheduled in-port periods. During the Singapore deployment, USS Freedom executed this concept, returning to port every 25 days to undergo a 5-day preventative maintenance availability and every 120 days for a more-intensive 2-week intermediate maintenance availability. Flyaway maintenance teams of about 30 contractors were flown to Singapore for the 5-day maintenance periods, and about 60-70 contractors for the 2-week periods. Because of the regular returns to Singapore for maintenance availabilities, the USS Freedom had a somewhat limited range in theater, and Navy officials noted that this rigid maintenance periodicity limited operational flexibility. Navy officials explained that this was a deliberate decision and that future deployments will have a longer, more-flexible interval for scheduling in-port maintenance. During the maintenance availabilities, there were some maintenance checks that could not be completed because the needed parts, tools, or equipment were not prepositioned by the contractor in time. The Navy attributes some of these issues to changing the maintenance schedule without enough lead time for the contractor to adequately respond. The Navy notes that contractor execution rates improved over the course of the deployment, and the Navy has established an improved maintenance scheduling process that should help prevent this problem on future deployments. Although contractors reportedly improved their positioning of materiel in time for the scheduled maintenance periods, Navy officials and Freedom crews said that lack of continuity in contractor personnel is an issue. They said that it is not unusual to see different contractors sent every month to perform scheduled maintenance. This presents a problem, since there is a learning curve associated with new maintainers coming onboard to execute their assigned maintenance checks. Freedom sailors told us that the burden of teaching new contractors how to complete their checks often falls on them, as does the task of repairing any equipment broken in the course of an inexperienced or unqualified contractor trying to maintain it. While Navy officials said that quality-assurance provisions will be included in the maintenance contracts expected to be awarded later in 2014, officials acknowledged that these provisions may not address this problem. Although contractors perform much of the preventative maintenance on LCS, the crews are still responsible for performing limited checks between scheduled maintenance periods. Sailors are largely responsible for performing more-frequent daily or weekly maintenance checks, and contractors for those that are required monthly or quarterly. During the deployment, the Center for Naval Analyses reported that Freedom sailors performed both scheduled and corrective maintenance actions each day (see fig. 7). However, crew members told us that unexpected levels of maintenance activities impacted crew fatigue levels. Navy officials stated this maintenance effort reflects the materiel reliability issues that they say have been remedied for follow-on LCS ships. Yet crew members told us of several instances where some of their preventative maintenance responsibilities would be better suited to contractors and other examples of how some routine maintenance activities could be shifted from contractors to crew. For example, members of the combat systems department crew reported that approximately 90 percent of combat systems spaces are sensitive and therefore require the presence of LCS crew members in the workspace while contractors complete maintenance on department systems. Crew members must essentially “shadow” contractors as they perform such basic tasks as changing batteries and cleaning filters. Each maintenance activity has a tag that specifies the amount of time it should take to perform the check, and crew members voiced frustration over having to watch contractors take the full amount of time to perform the check even if they could have performed it in a fraction of the time specified on the tag. A major action item in the LCS Plan of Action and Milestones calls for developing an integrated and coordinated plan for the planning, executing, tracking, reporting, and quality assurance of planned maintenance between the ship’s force, shore sailors, the LCS Squadron, and contractors on both variants. However, this broad action item, as well as another action item calling for the continuous review of maintenance requirements, extends out to December 2015 for completion. Program officials said that the current process for refining maintenance requirements—where changes in the frequency or responsibility for maintenance actions is reviewed and approved by the Navy’s in-service engineering agents or through maintenance effectiveness reviews—is adequate, but added that the program is still working to develop a tool that would allow better management and coordination of maintenance activities. For example, greater visibility into the full scope of planned maintenance work performed by both crew and contractor personnel would allow program managers greater foresight into how and when certain parts should be repaired or replaced. The Navy is implementing a pilot condition-based maintenance program, whereby sensors installed on ship systems collect usage and reliability data, with the intention of conducting maintenance based on the condition of the equipment rather than according to a predetermined schedule. As more data are collected on equipment failure rates by condition-based maintenance sensors and as knowledge of LCS systems grows, the Navy intends for some maintenance requirements to be eventually phased out without increasing the risk of failure or sacrificing reliability. For example, there are a number of shut-off valves on the Freedom variant with a scheduled maintenance requirement to check them every month. These could be continuously monitored by sensors rather than being checked by a contractor or crew member on a monthly basis. The LCS program office has plans to expand the condition-based maintenance program on other LCS ships; for example, USS Fort Worth is being fitted with additional sensors in preparation for its late 2014 deployment. The maintenance concept for LCS may be changed in the future. The LCS program office requested that a business-case analysis be conducted to develop a sustainment strategy that will provide the most cost-effective solution for providing LCS maintenance outside the continental United States. The analysis, completed in April 2013, compared five alternatives to the current contractor-based maintenance approach and recommended shifting responsibility from contractors to shore-based Navy personnel to achieve cost savings and other improvements. The Navy is exploring options to enact this recommendation under different scenarios and plans to do so as more LCSs are deployed to more forward operating stations. For example, the Navy plans to use reservists to conduct some LCS maintenance in lieu of contractors and intends to shift more maintenance responsibility to shore- based Navy personnel. However, program officials said that they may be somewhat limited in carrying out the recommendation by statutory maintenance requirements that govern how maintenance is performed abroad for ships, such as the LCS, that are homeported in the United The Navy is planning to award 5-year maintenance contracts States.later this year, and officials said there will be enough flexibility built into the contracts to allow experimentation with different maintenance alternatives. Shore-based support networks perform LCS logistics functions such as administrative tasks, emergent repairs, and management of ship support needs. Primary support is provided by the LCS Squadron in San Diego. For the USS Freedom deployment, several entities based in Singapore provided additional support, including the LCS Squadron Forward Liaison Element—12 LCS Squadron personnel sent to Singapore for the course of the deployment to provide local support and coordination on maintenance activities and ship reporting—and the Commander, Logistics Group, Western Pacific—7th Fleet’s principal logistics group stationed in Singapore, which was responsible for emergent maintenance on USS Navy officials noted several command and control–related Freedom.challenges associated with this distance support concept during the Freedom deployment. For example, the ship’s crew did not follow established distance support processes to address emergent maintenance needs, resulting in significant opportunity costs and duplication of effort. The LCS Squadron is revising its written instructions to resolve this issue for future deployments. However, some of the reporting duties that were supposed to be performed by shore support teams under original distance support concepts—such as reporting of equipment casualties—have now become crew responsibilities. Officials said the time difference between San Diego and Singapore was creating a lag in reporting and response times and cited this as a reason for shifting some reporting duties back to the crew. As mentioned earlier, adding additional responsibilities to an LCS sailor’s already-full workday may exacerbate crew fatigue and may require reallocation of workloads or other revisions to the LCS concept of operations. We found several additional limitations of the LCS support infrastructure over the course of the deployment. For example, the Navy noted that existing Internet resources ashore were insufficient for managing maintenance, and the Navy continues to explore options with the host nation for improving connectivity. Another issue still being resolved is finding adequate providers for facilities maintenance and ship cleaning, as the services contracted for Freedom’s deployment were not up to sailors’ expectations. The Navy would also prefer to have LCS hulls cleaned while deployed and is in the process of determining a cost- effective way to execute this task in compliance with statutory maintenance requirements. Finally, USS Freedom required nearly three times as many underway refuelings as were scheduled. Navy logisticians in Singapore scheduled seven at-sea refuelings for the deployment but 18 were eventually required. LCS program officials say that this was a scheduling error rather than an indication of higher-than- expected fuel burn rates. As the Navy gains more operational experience in an overseas environment, it expects to learn additional lessons about more-accurately scheduling LCS refuelings. Additionally, Navy officials acknowledged that the logistics footprint needed to support four LCSs in Singapore by 2017 must be defined and expanded over the next several years. The Navy is in the process of determining the final logistics requirements to support additional ships at Singapore and other forward operating stations; these efforts are scheduled to be completed by April 2014. Currently, there is only a temporary tension-fabric structure in Singapore to house spare parts, tools, and working space for maintenance contractors, but this temporary structure does not have adequate space to house support elements for four LCS of both variants, according to Navy officials. Permanent support facilities have not been built in Singapore or other potential forward operating stations, and the lack of operational data on the Independence variant limits the Navy’s ability to accurately plan for logistics support when both variants deploy. Without a clear understanding of the logistics needs of both variants, the Navy risks being underprepared to support both while forward deployed. In addition to the contact named above, Suzanne Wren, Assistant Director; Steven Banovac; Kristine Hassinger; Joanne Landesman; Carol Petersen; Michael Silver; Amie Steele; Sabrina Streagle; Grant Sutton; and Chris Watson made key contributions to this report. Navy Shipbuilding: Significant Investments in the Littoral Combat Ship Continue Amid Substantial Unknowns about Capabilities, Use, and Cost. GAO-13-738T. Washington, D.C.: July 25, 2013. Navy Shipbuilding: Significant Investments in the Littoral Combat Ship Continue Amid Substantial Unknowns about Capabilities, Use, and Cost. GAO-13-530. Washington, D.C.: July 22, 2013. Defense Acquisitions: Realizing Savings under Different Littoral Combat Ship Acquisition Strategies Depends on Successful Management of Risks. GAO-11-277T. Washington, D.C.: December 14, 2010. Navy’s Proposed Dual Award Acquisition Strategy for the Littoral Combat Ship Program. GAO-11-249R. Washington, D.C.: December 8, 2010. Defense Acquisitions: Navy’s Ability to Overcome Challenges Facing the Littoral Combat Ship Will Determine Eventual Capabilities. GAO-10-523. Washington, D.C.: August 31, 2010. Littoral Combat Ship: Actions Needed to Improve Operating Cost Estimates and Mitigate Risks in Implementing New Concepts. GAO-10-257. Washington, D.C.: February 2, 2010. Defense Acquisitions: Realistic Business Cases Needed to Execute Navy Shipbuilding Programs. GAO-07-943T. Washington, D.C.: July 24, 2007. Defense Acquisitions: Plans Need to Allow Enough Time to Demonstrate Capability of First Littoral Combat Ships. GAO-05-255. Washington, D.C.: March 1, 2005.

The LCS was intended to be a low-cost surface combatant that uses innovative operational concepts, such as minimal crew size, to lower operations and support costs. In 2013, the Navy deployed USS Freedom , one of two LCS variants, to Singapore to “prove its concept,” demonstrate operational capabilities, and collect data on the ship's manning, training, maintenance, and logistics needs. The House report accompanying the National Defense Authorization Act for Fiscal Year 2014 mandated that GAO analyze the Navy's sustainment plans for its LCS program—including lessons from the USS Freedom deployment. This report addressed (1) the benefits and limitations of the operational data that have been collected on LCS ships; (2) the extent to which the Navy has evaluated risk in its operational support and sustainment concepts for LCS; and (3) how LCS life-cycle cost estimates compare with those for other surface-ship classes. GAO analyzed documents from the 2013 deployment, and LCS and surface-ship life-cycle costs, and interviewed program officials and USS Freedom crews. The USS Freedom deployment provided beneficial data on operational support and sustainment concepts for the Littoral Combat Ship (LCS), but these data have limitations, and the Navy still lacks key data on LCS ships and concepts. The USS Freedom deployed for 10 months with a surface-warfare mission package, and the Navy collected data on items such as systems reliability and crew sleep hours. However, several factors limited the operational lessons learned. For example, mechanical problems prevented the ship from spending as much time at sea as planned. Further, the Navy continues to lack operational data for key operational and warfighting concepts, such as deployment with the other mission packages—mine countermeasures and antisubmarine warfare—and data on the other LCS variant which, under current plans, will comprise half the ship class. Although the Navy is adjusting some operational support and sustainment concepts, it has not yet addressed risks that remain in executing key concepts. Manning: The crew experienced high workload and fell short of the Navy's sleep standards despite adding personnel for the deployment. Training: Gaps remain in fully training LCS sailors prior to deployment. Maintenance: The Navy is adjusting maintenance requirements and has not yet determined the optimal mix of contractor and crew workload to perform preventative maintenance. Logistics: The Navy is reallocating duties among crew and shore support, but the infrastructure needed to support both variants is incomplete. Without fully analyzing risks in key concepts, the LCS may have operational limitations, deficits in personnel and materiel readiness, and higher costs. The Navy has produced life-cycle cost estimates for the LCS seaframes and mission modules. Although those estimates contain uncertainty and there are inherent difficulties in comparing the life-cycle costs of ships with differing capabilities and missions, the best available Navy data indicate that the annual per ship costs for LCS are nearing or may exceed those of other surface ships, including those with greater size and larger crews, such as frigates. GAO is emphasizing its prior recommendations that, before buying more LCS ships, the Navy (1) conduct and consider the results of a risk assessment and (2) collect additional data and update cost estimates. The Department of Defense expressed concerns that its life-cycle cost data are not comparable across ship types. GAO believes the analysis provides a reasonable comparison using the best available data from the Navy, as discussed in the report.

You are an expert at summarizing long articles. Proceed to summarize the following text: The Deputy Assistant Secretary of Defense (Installation Energy), under the Office of the Assistant Secretary of Defense (Energy, Installations and Environment), has the role and responsibility for, among other things, overseeing DOD’s installation energy program. The office also is responsible for issuing installation energy policy and guidance to the DOD components and serving as the primary adviser for matters regarding facility energy policy. In addition, the office provides management for energy conservation and resources, including establishing goals for the department’s energy conservation program, developing procedures to measure energy conservation, and developing policy guidance for reporting energy use and results of conservation accomplishments against goals for federal energy conservation and management. These goals and requirements are found in, but are not limited to, the Energy Independence and Security Act of 2007, the Energy Policy Act of 2005, and Executive Order 13693, Planning for Federal Sustainability in the Next Decade. Also, the military departments have established goals related to developing renewable energy projects. For example, the Secretary of the Navy has established goals to obtain half of the Navy’s energy from alternative sources and to produce at least half the shore- based energy requirements from renewable sources, such as solar, wind, and geothermal. Further, each military department has issued department-level guidance to develop 1 gigawatt of renewable energy, for a total of 3 gigawatts by 2025. In addition, DOD’s instruction on energy management states that the Secretary of a military department is responsible for developing an energy program management structure to meet DOD requirements, with the primary objectives of improving energy efficiency and eliminating energy waste, while maintaining reliable utility service. Each military service has assigned a command or headquarters to provide guidance and funding, with regional commands or military installations managing site-specific energy programs. According to DOD’s instruction, DOD component heads are to provide facilities with trained energy program managers, operators, and maintenance personnel for lighting, heating, power generating, water, ventilating, and air conditioning plants and systems. At the installation level, the departments of public works, general facilities, or civil engineering oversee and manage the day-to-day energy operations. Each year, DOD is to submit the Annual Energy Management Report to the congressional defense committees, as required by section 2925 of title 10 of the United States Code. This report describes the department’s progress toward meeting its energy performance goals and, among other items, provides information on all energy projects financed with alternative financing arrangements. The Annual Energy Management Report is required to contain the following information on DOD’s alternatively financed projects: the length of the contract, an estimate of the financial obligation incurred over the contract period, and the estimated payback period. The DOD components maintain a utility energy reporting system to prepare the data for submission of this report, which DOD describes as the primary vehicle by which it tracks and measures its performance and energy efficiency improvement. DOD has used partnerships with the private sector as a tool for alternative financing arrangements to further energy efficiency efforts and allow installations to improve infrastructure through upgrades to existing systems and the purchasing of new equipment. Each financing arrangement leveraged by private capital has distinct requirements and legal authorities, and sometimes DOD components combine arrangements to finance the same project. Table 1 summarizes the main alternative financing arrangements that are available to DOD for funding its energy projects. In December 2011, the President challenged federal agencies to enter into $2 billion in performance-based contracts, including ESPCs and UESCs, through the President’s Performance Contracting Challenge to meet the administration’s goals of cutting energy costs in agency facilities as part of a broader effort to reduce energy costs, cut pollution, and create jobs in the construction and energy sectors. In May 2014, the President expanded the challenge by an additional $2 billion, bringing the total goal to $4 billion in performance-based contracts across the federal government by the end of calendar year 2016. According to DOD, as of December 31, 2016, the three military departments and the other defense agencies combined had awarded 194 ESPCs and UESCs that totaled over $2.28 billion. DOD reported that these results exceeded its target of awarding over $2.18 billion in such contracts over this period. DOD and military service audits have examined the development and management of DOD’s alternative financing arrangements. For example, in May 2016, the DOD Inspector General found that the Air Force Civil Engineer Center did not effectively manage the Air Force’s existing ESPCs and made recommendations to improve controls and validate energy savings. In January 2017, the DOD Inspector General found that the Naval Facilities Engineering Command did not effectively manage the Navy’s 38 ongoing ESPCs that were in the performance phase. The DOD Inspector General stated that management was not effective because the command did not appoint contracting officer’s representatives for 31 of the ongoing projects and did not develop a quality assurance surveillance plan for any of them. Additionally, the DOD Inspector General reviewed five other projects in more detail and found questionable contract payments. The DOD Inspector General recommended the appointment of contracting officer’s representatives for ESPCs and that the Naval Facilities Engineering Command Expeditionary Warfare Center—which oversees the Navy’s ESPCs—document the validity of prior year energy savings for the selected ESPCs. In addition, in September 2014, the Army Audit Agency found that the Army’s renewable energy projects were generally operational and contributed to renewable energy goals. However, the audit also identified the need for improvements to ensure projects were performing as intended and that installations were reporting renewable energy output sufficiently to help the Army meet federal mandates and the DOD goals for renewable energy. At the time of the Army Audit Agency review, the Army was not meeting the federal and DOD renewable energy goals. Since 2005, the military services have used alternative financing arrangements for hundreds of energy projects to improve energy efficiency, save money, and meet energy goals; however, the military services have not collected and provided DOD complete and accurate data to aid DOD and congressional oversight of alternatively financed energy projects. Based on the data provided by the military services, the services have used alternative financing arrangements for 464 energy projects or contracts since 2005, entering into about 38 contracts annually from fiscal year 2005 through fiscal year 2016. The Army entered into the most alternatively financed contracts (305), followed by the Navy (90), the Air Force (50), and the Marine Corps (19). Military service officials attributed the continued use of alternative financing to three separate factors. First, officials cited the President’s Performance Contracting Challenge, issued in December 2011, which challenged federal agencies to enter into $2 billion in performance contracts, such as ESPCs and UESCs. Second, officials stated that they did not have sufficient appropriated funds to accomplish many of these projects, making alternative financing an attractive option for addressing needed repairs, obtaining new equipment designed to improve operations, and reducing energy consumption. Third, service officials stated that alternative financing reduces the risk for equipment maintenance and budgeting. Specifically, many contracts include a cost-savings guarantee, which requires that the contractor maintain the equipment in good working order over the life of the contract. Additionally, many contracts have fixed annual payments regarding projects, so the services have certainty in terms of budgeting for portions of an installation’s annual energy costs. The alternative financing contracts the military services awarded have obligated the government to pay billions of dollars to contractors over the next 25 years, as shown in table 2. According to military service officials, these contractual obligations are must-pay items from their annual budgets. In order to account for these must-pay items in their budgets, they said that the military service headquarters must have visibility into certain data, such as the costs of such projects. We found that from fiscal years 2005 through 2016, the military services have used UESCs more often than the other types of alternative financing arrangements we reviewed. Specifically, the military services have entered into contracts for 245 UESCs compared to 201 ESPCs. In addition to ESPCs and UESCs, the military services have also entered into financing agreements through PPAs. We found that of the 18 PPAs that either we or the military services identified as being awarded since 2005, 10 have been awarded since 2014. In these military power purchase agreements, a private entity will purchase, install, operate and maintain renewable energy equipment, and the military service will purchase the electricity generated by the equipment. Since 2005, the Army, Navy, and Marine Corps have reported contractor project investment costs totaling almost $1.46 billion for PPAs. Some of these projects, such as solar arrays, can have significant project investment costs to the contractor, and the military services compensate the contractors over time, either in part or in full, through payments for their energy usage. However, we identified challenges in determining the true costs of these PPA projects to the government for several reasons. First, the future cost to the government could exceed $1.46 billion because some of the PPAs are still in the design and construction phase and cost data are not known. Second, minimum purchase agreements are typically set in the contracts, but in some cases the service could purchase more than the minimum amount of energy required, which would increase the costs. Third, the energy providers have other ways of recouping their project investment costs, which means the military services may not be responsible for repaying all of the costs. In addition to possible rebates and tax incentives, energy developers may be able to take advantage of renewable energy credits, which can lower the up-front costs of projects by reimbursing either the military or the energy provider. Lastly, in some cases, the energy provider can take excess energy produced by the equipment and sell it to other customers as another means of recouping its investment costs and reducing the costs to the military services. Since 2005, the military services have not collected and provided complete and accurate project data to DOD on alternatively financed energy projects. Specifically, the military services provided partial data on total contract costs, savings, and contract length related to their respective alternatively financed energy projects during this time frame. However, we were unable to identify and the military services could not provide complete data on the range of their alternatively financed projects, to include data on total contract cost for 196 of 446 ESPC and UESC projects. In particular: The Army could not provide total contract costs for about 42 of its 131 ESPCs. Moreover, the Army could not provide total contract costs for about 142 of its 167 UESCs. The Navy could not provide total contract costs for 1 of its 59 UESCs and 2 of its 27 ESPCs. The Navy also provided a list of Marine Corps projects and relevant data related to total contract costs for those projects. However, we identified discrepancies between the list of projects provided to us and those that DOD reported receiving. The Air Force could not provide total contract costs for 8 of its 38 ESPCs and 1 of its 8 UESCs. Additionally, the military services could not provide data related to either cost savings for 195 contracts or contract length for 232 contracts. Furthermore, some of the data provided by the Army and Navy on their alternatively financed energy projects did not include the level of accuracy needed for better or improved planning and budgeting purposes. For example, we contacted three installations where the Army had identified UESCs in the Annual Energy Management Report to Congress, but officials from two of those installations told us that no UESC existed. The Navy provided data on most of its projects, but Navy headquarters officials acknowledged that they had low confidence in the accuracy of the data on three specific ESPCs because they had not actually reviewed the contract documents, which were awarded by one of the Navy’s subordinate commands. Also, cost and other data reported by Navy headquarters for UESC projects at one of its installations did not match the cost data and project details provided by the regional command overseeing the installation’s contracts. Additionally, military service headquarters and installations or other service entities provided information that did not always match. For example, an Army official told us about discrepancies in the service’s internal tracking documents that officials had to resolve prior to providing their data to us. According to the DOD instruction, the military services are required to track and store data on energy projects, including data on all estimated and actual costs, interest rates, and mark-ups, among others, as well as any changes to project scope that may affect costs and savings. Moreover, section 2925 of title 10 of the United States Code requires DOD to report to Congress after each fiscal year on its alternatively financed energy projects, to include information on the projects’ duration and estimated financial obligations, among other things, which requires that DOD have reliable information about these projects so that DOD and the Congress will be better able to conduct oversight and make informed decisions on programs and funding. Furthermore, Standards for Internal Control in the Federal Government state that management should obtain quality information that is, among other things, complete and accurate in order to make informed decisions. During the course of this review, military service and DOD officials stated that one reason that the military departments and DOD headquarters levels did not always have complete and accurate data is because the military services have decentralized authority for entering into alternatively financed projects and for maintaining associated data. Given this decentralized authority, the data maintained are not always tracked in a manner that captures the full range of data needed at the headquarters level for oversight, nor are they consistently reported to the headquarters level. Therefore, the military departments and DOD do not have complete and accurate information on the universe of active alternatively financed energy projects to aid oversight and to inform Congress. Specifically, complete and accurate data are also necessary for DOD to meet its requirement to report annually to Congress on the department’s alternatively financed energy projects through the Annual Energy Management Report, to include data on projects’ respective duration, financial obligation, and payback period. Having complete data on total contract costs, cost savings, and contract length are all necessary data points in order for the military departments to also formulate accurate cost estimates for annual budget requests and project expenses. Without these data, the military departments also will not have a full understanding of the cumulative impacts of these alternative financing arrangements on their installations’ utility budgets over periods of up to 25 years. Furthermore, if the military departments do not provide complete and accurate data to DOD, decision makers within the department and in Congress may not have all information needed for effective oversight of the projects, which could hinder insight into future budgetary implications of the projects. DOD reported achieving expected savings or efficiencies on the operational alternatively financed energy projects we reviewed; however, the military services have not consistently verified project performance on its ESPC and UESC projects to confirm that the reported savings were achieved. Without more consistent verification of performance for all alternatively financed projects, DOD cannot be certain that all projects are achieving their estimated savings. In our review of a nongeneralizable sample of 17 alternatively financed energy projects across the military services, we found DOD reported that 13 were considered operational and that all 13 of these projects—8 ESPCs, all 3 of the UESCs, and 2 PPAs—achieved their expected savings. Installation officials measured savings for these projects differently, depending on which type of alternatively financed arrangement was used. For the 8 ESPCs in our sample, we reviewed the most recent measurement and verification reports provided by the contractors and found that each project reported achieving its guaranteed savings. The measurement and verification reports provided by the contractors reported guaranteed savings of between 100 and 145 percent for the ESPC projects we reviewed, as shown in table 3. For the three UESCs in our sample, we found that installation officials used various performance assurance methods to maintain energy savings by ensuring that the installed equipment was operating as designed. For UESCs, identification of project savings can include either annual measurement and verification or performance assurance. The authority for UESCs, unlike that for ESPCs, does not have a requirement for guaranteed savings, but the agency’s repayments are usually based on estimated cost savings generated by the energy-efficiency measures. At Fort Irwin, California, officials stated that they used efficiency gauges installed on the equipment to verify that the equipment was operating properly. At Naval Air Weapons Station China Lake, California, officials stated that operation and maintenance personnel performed systems checks to ensure the installed equipment is functioning properly. At Naval Base Kitsap- Bangor, Washington, officials used the energy rebate incentives issued by the utility company as a proxy to ensure that savings were being met. The officials stated that if they received the rebate, then they were achieving the requisite energy and cost savings. For the two PPA solar array projects that we reviewed, officials reported that purchasing power through the contract remained cheaper than if they had to purchase power from non-renewable energy sources. For PPAs, savings measurement does not include annual measurement and verification. PPAs are an agreement to purchase power at an agreed-upon price for a specific period of time, and as such, they do not require continuous measurement and verification. However, DOD officials informed us that their contracts require such projects to be metered so that they can validate the receipt of electrical power before payment for the service. Officials also reported that they periodically assessed and reported on whether the utility rates remained at levels that were profitable for the project. Projects remained profitable when the prices to generate electricity from the solar panels were below the market rate for electricity obtained through the utility company. For example, through monitoring of utility rates, one official reported that the installation’s PPA project obtained a favorable rate for electricity of 2.2 cents per kilowatt hour, well below the prevailing market rate of 7.2 cents per kilowatt hour. This rate is fixed over the course of this 20-year contract, whereas the current market rate fluctuates, and the official estimated that the project saved the installation approximately $1 million in utility payments in fiscal year 2016. For the other PPA project we reviewed, installation officials reported that the project terms were still profitable and estimated that without the PPA, the cost for electricity would be about 80 percent higher than the cost they were getting through the PPA. However, according to the officials, a state regulation governing electricity usage requires that the installation obtain a specific amount of electricity from the utility company. Installation officials told us that they had to curtail some of the project’s own energy production to meet this requirement, which resulted in the project not always operating at the capacity they had planned. For example, contractor documents show that from September 2013 through August 2014, the electricity generated monthly by the project was curtailed by between 0.1 percent to 14.2 percent. In our review of eight military service ESPC projects that had reported achieving or exceeding their guaranteed cost savings, we found that the cost savings may have been overstated or understated in at least six of the eight projects. Expected cost and energy savings for ESPC projects are established during project development, finalized when the contract is awarded, and measured and verified over the course of a project’s performance period. These savings can include reductions in costs for energy, water, operation and maintenance, and repair and replacement directly related to a project’s energy conservation measures. ESPC projects generally include two types of expected savings: (1) proposed cost and energy savings, which contractors estimate will result from the energy conservation measures installed, and (2) guaranteed cost savings, which must be achieved for the contractor to be fully paid. For five of the six projects where we found that cost savings may have been overstated or understated, we identified two key factors that have affected reported savings—project modifications and agency operation and maintenance actions. Project modifications—We found that the installations had modified some of the energy conservation measures in at least 4 of the ESPC projects for which cost savings may have been overstated or understated. Specifically, we found instances where officials had completed demolitions or renovations to facilities where energy conservation measures were installed or had demolished equipment. For example, at one installation, the most recent measurement and verification report indicated that buildings associated with the project savings were demolished or scheduled to be demolished in four of the nine years following the project’s completion. Based on the contractor’s report, we calculated that the building demolitions, closings, and renovations negated approximately 30 percent of the project’s annual cost savings for 2016. According to the report, these changes have compromised the project to such an extent that the contractor recommended the service modify the contract with a partial termination for convenience to buy out portions of the project where changes have occurred and savings were affected. At another installation, the measurement and verification report indicated that cost savings came directly from those cost savings that were established in the contract and did not reflect equipment that had been demolished or required repair. In its report, the contractor verified that the equipment was in place and documented issues that negatively affected the energy conservation measures, but it did not adjust the savings to account for those issues. In both of these cases, the contractor continues to report meeting guaranteed cost savings levels and the service is required to continue making its full payment. Project modifications can occur, such as when missions change at an installation, but we found that these changes may prevent the project’s cost savings from being fully realized. Agency operation and maintenance actions—We found that such agency actions were identified as an issue for the ESPCs in our review and may have reduced the savings realized for five of the six ESPC projects for which cost savings may have been overstated or understated. Specifically, we found instances where the measurement and verification reports identified that some replacement items were installed incorrectly or left uninstalled and some light fixtures and sensors were poorly maintained or removed. For example, at one installation, the most recent measurement and verification report showed that base personnel disabling installed energy conservation measures, such as installing incorrect lamps or removing lighting control sensors, coupled with abandoned or faulty equipment, have reduced cost savings for this project. Contractors are not generally required to reduce the amount of savings they report or measure the effect of project changes for which the contractor is not responsible. The contractor stated that the energy and cost savings in its measurement and verification report were derived directly from the calculated energy and cost savings negotiated as a part of the original contract and do not reflect reductions due to abandoned equipment or other factors outside of the contractor’s control. At another installation, the most recent contractor measurement and verification report indicated that some bulbs were burned out and lighting fixtures were dirty. As a result, the contractor lowered the calculated savings for the lighting energy conservation measure for that year, while also noting that the savings still exceed the proposed savings for that measure. Officials at one installation described the challenge of preventing installation personnel from acting in ways that detract from the projects’ energy savings, such as by removing low-flow shower head controls, adjusting water temperatures, or removing or adjusting heating and cooling controls. In June 2015, we described similar factors as potentially reducing energy savings on select ESPC projects in seven federal agencies, including the Air Force, Army, and Navy. In that review, we found that the contractor is generally not required to either reduce the amount of savings they report or to measure the effects of such factors on reported savings when factors beyond their control reduce the savings achieved. Further, we reported that agencies were not always aware of the amount of expected savings that were not being achieved among their projects, in part because contractors generally do not provide this information in their measurement and verification reports. In the 2015 report, the savings estimates that were reported but not achieved ranged from negligible to nearly half of a project’s reported annual savings. As a result, we recommended then that the Secretary of Defense specify in DOD guidance or ESPC contracts that measurement and verification reports for future ESPC projects are to include estimates of cost and energy savings that were not achieved because of agency actions, and DOD agreed with our recommendation. Given similar findings with respect to the ESPC projects we examined as part of this review, we continue to believe that our 2015 recommendation is valid. The military departments have varying approaches for verifying whether all of their alternatively financed UESCs are achieving expected savings. Army, Navy, and Air Force officials described their processes and guidance for verifying savings for their UESCs, and we found that they did not consistently follow all requirements in both DOD and Office of Management and Budget guidance. Alternatively financed UESCs must meet certain requirements in order to allow the use of private sector funding to develop the project and to have the ability to repay the project, generally using appropriated funds over the contract term instead of having to fund the entire project cost up front. Additionally, according to DOD’s 2009 instruction, repayments for UESCs are based on estimated cost savings generated by the energy conservation measures, although energy savings are not necessarily required to be guaranteed by the contractors. This instruction further requires DOD components to verify savings to validate the performance of their energy efficiency projects, thereby providing assurance that such projects are being funded with generated savings or as agreed to in specified contracts. Specifically, the instruction requires the military departments to track all estimated and verified savings and measurement and verification information for its energy projects. Tracking and verifying savings associated with such alternatively financed energy projects is necessary because the projects require a long-term investment from the department—in some cases allowing the military services to budget for these projects for a period of up to 25 years—and it is not until contractors have been fully repaid for the costs of the energy conservation measures and related contract costs that agencies retain any savings the project continues to generate. In addition, DOD uses guidance issued by the Office of Management and Budget. Specifically, in 2012, the Office of Management and Budget updated guidance, stating that UESCs may be scored on an annual basis if the UESC requires performance assurance or savings guarantees and measurement and verification of savings through commissioning or retro-commissioning. According to officials from the Office of the Secretary of Defense, the department has interpreted the Office of Management and Budget guidance as giving federal agencies the option of requiring either performance assurance, savings guarantees, or measurement and verification for UESCs. Each of the various techniques provides a different level of assurance that the installed equipment is functioning as designed and the project is performing as expected, but the Office of Management and Budget’s guidance does not specify the type of measurement technique required. Also, Office of the Secretary of Defense officials stated that the military services are required to adhere to the Office of Management and Budget’s guidance in order to determine whether they can enter into an alternatively financed agreement, and then adhere to the requirements for determining whether the project is performing as expected. As noted earlier, energy savings for UESCs are not necessarily required to be guaranteed by contractors, and repayments are usually based on estimated cost savings generated by the energy conservation measures. We found that the guidance issued by both DOD and the Office of Management and Budget require a verification of savings for UESCs, though the requirements differ. The DOD instruction requires the military services to track all estimated and verified savings and measurement and verification information for its energy projects, while the Office of Management and Budget requirement is for measurement and verification through commissioning and retro-commissioning rather than ongoing through the life of the project. We found that DOD’s interpretation of this Office of Management and Budget requirement—which DOD officials said gives the military departments the option of having either performance assurance, savings guarantees, or measurement and verification at certain points for UESCs—differs from the department’s own guidance. Additionally, DOD’s interpretation of this guidance has resulted in the military departments developing varying approaches for verifying savings of their UESC projects. The Navy has taken and the Air Force is taking steps to require that all UESC projects be assessed to determine actual savings, with approaches focused more on measurement and verification as opposed to performance assurance, whereas Army officials told us that they do not plan to require measurement and verification for their UESCs. Specifically, Navy: The Commander, Navy Installations Command, issued guidance in March 2015 requiring Navy installation officials to assess all Navy UESC projects to verify energy project savings through measurement and verification. According to the guidance, the installations will report on their energy and cost savings each year to enable the Commander, Navy Installations Command, to monitor the effectiveness of UESC projects because the Navy has significantly increased its investment in ESPC and UESC projects and will use this analysis to help manage risk. The Navy’s assessment will be conducted with the Navy’s energy return-on-investment tool, which is a set of project tools used to conduct analysis and track project requirements. Air Force: The Air Force has engineering guidance that addresses management of UESCs, but headquarters officials told us that this guidance requires only the standard requirement of performance assurance for these projects. According to officials, the Air Force is developing a UESC manual, which it expects to complete in September 2017, to replace the existing guidance. These officials stated that the manual will include a measurement and verification requirement for UESCs that will adhere to the same levels required for ESPCs. However, headquarters and engineering center officials stated that the two alternative financing arrangements may continue to have some differences in requirements. Army: The Army had not issued guidance for its UESCs at the time of our review, according to an Army headquarters official, and instead was relying on its ESPC policy manual to guide its UESC projects. The official told us that the Army is working to issue UESC guidance that is similar to that for ESPCs, but stated that the guidance will not include a requirement to perform measurement and verification of these projects. The official stated that although the Army cannot be completely certain that savings levels are being achieved using performance assurance, the current approach provides an acceptable level of assurance while avoiding the increased costs associated with performing measurement and verification. We found that the military services have taken different approaches to verifying the savings associated with UESCs because DOD has not clarified requirements in guidance that reflect the intent of the department and the Office of Management and Budget. Verification of savings to validate project performance of all alternatively financed energy projects across the department is necessary to ensure that the projects are meeting expected energy and costs savings required to fulfill DOD’s requirement that these projects be paid for entirely through the projects’ generated cost savings. This verification would help the military services ensure they are appropriately budgeting for the projects over the life of the contract, which are expected to increase in number. Specifically, in 2016, DOD issued a rule amending the Defense Federal Acquisition Regulation Supplement that authorizes a contract term limit for UESCs for a period up to 25 years, which is also the limit allowed for ESPCs. Without updated and clear guidance about requirements on how the military departments should verify savings associated with UESCs, the military services will likely continue to interpret DOD guidance differently and are likely to take inconsistent approaches to assuring the performance of UESC projects, which could limit DOD’s visibility over projects that commit the departments to long-term payments. Alternative financing arrangements provide the military services the opportunity to partner with the private sector to finance energy projects; however, there are benefits and disadvantages to these projects. DOD and military service officials we contacted regarding their renewable energy generation, energy efficiency, power generation, and energy security projects identified benefits to financing energy projects through alternative arrangements, including funding projects that otherwise would not be funded through appropriated funding, shorter time frames, and the availability and expertise of personnel to implement and manage such projects, as described below. Funding Projects—At the military department level, officials told us that alternative financing arrangements enabled them to fund energy projects they might not otherwise have been able to pay for due to limited appropriated funding for developing and implementing such projects and the need to use their service budgets for mission requirements. We previously reported that implementing projects to meet energy requirements and goals can be costly, and obtaining up- front appropriations for such projects has been particularly challenging for agencies because of constrained federal budgets. The military services’ reliance on alternative financing arrangements has enabled them to more easily take on larger projects and combine several different energy conservation measures or installations into one contract rather than undertaking them individually over time. Of the eight installations we contacted whose contracts had a renewable energy component, officials at six of those installations told us that they would not have been able to undertake those projects without the use of alternative financing arrangements or would have had to scale down the scope of the projects. For example, one official told us that the military service’s ability to fund its large solar arrays, which cost over $1 million to develop, would not have been a viable option for the installation with up-front appropriations because mission requirements take priority over energy conservation or renewable energy production. Some officials also said that power purchase agreements are useful from a budget standpoint because the installation does not have to provide financing for the project but rather pays for the energy that is produced through its energy bill. According to agency officials, alternative financing arrangements may also save operation and maintenance costs because, in many cases, using alternative financing arrangements results in the contractor installing new equipment and sustaining that equipment during the contract performance period. Officials from one service told us that energy efficiency does not decline over the life of the project because the contractor brings the project to industry standards and then maintains the project over the course of the contract. Officials at two military service headquarters told us that it would be challenging to operate and fully maintain the equipment installed for energy projects funded through up-front appropriations because funds for maintaining equipment are also limited. Some officials at the installation level stated that alternatively financed energy projects can assist with budget certainty, as many of the contracts require the utility or energy company to cover operation and maintenance costs for installed equipment and equipment replacement costs over the life of the contract, compared to funding those ongoing costs each year through their appropriated funding. Further, some installation officials noted that the initial assessments for large energy projects were generally rolled into the costs of the contracts and the installation would have had to pay those costs up front if they had to fund those aspects of the projects. Other installation officials commented on the budgeting certainty these alternative financing arrangements provide. For example, according to one Marine Corps official, ESPCs provide a benefit during the utility budgeting and programming process. With an ESPC, a large portion of the utility budget is constant for many years out, which decreases the number of variables, such as weather conditions and usage, in the utility budget that must be considered in the budget forecasting process, resulting in more accurate budgeting. Time frames—We previously reported that officials told us, for renewable energy projects funded through military construction appropriations, it can take a military service three to five years from project submission through the beginning of construction because of the length of the budget and appropriations cycle. Some officials representing installations in our sample also considered the reduced time frames for developing an energy project to be another benefit of using alternative financing arrangements. For example, through these arrangements, officials can bundle several smaller projects together into a single package as opposed to implementing the projects individually over the course of several years. In addition, according to some officials, working with a local utility or energy company to develop large energy-saving projects can take much less time than attempting to achieve the same results through the military construction process. For example, officials at Naval Base Kitsap- Bangor, Washington, said its multiphase UESC, which includes replacing exterior, street, and parking lot lighting on several installations with new energy-efficient technology, has been implemented faster than it could through another approach. Some other installation officials said that using the indefinite-delivery, indefinite-quantity ESPC contract vehicles awarded through the Department of Energy or the U.S. Army Corps of Engineers or working through the service engineering commands for ESPCs and UESCs took much less time and is less cumbersome than going through the services’ acquisition process for new equipment. Expertise or Availability of Personnel—Officials we met with at six installations said they often did not have personnel at the installation level with the needed expertise or in sufficient numbers to assist in the development, operation, and maintenance of such projects. For example, officials at one installation said that the energy service company had personnel with the technical expertise to do some things, such as development of life-cycle cost analyses and measurement and verification, better than installation officials. Officials at another installation cited a shortage of personnel at the time the contract was awarded that made it challenging to operate and maintain energy projects. Installation energy managers were able to work around some of these personnel constraints by including requirements for contractors to operate and maintain the installed energy conservation measures, including repairing and replacing equipment as needed during the performance period. We reported in 2016 that working with private developers allows DOD to leverage private companies’ expertise in developing and managing projects and limits the number of personnel DOD has to commit to projects. In addition to some of the benefits they described, officials identified some disadvantages of using alternative financing arrangements for their energy projects, including higher overall costs, a delay in their ability to take advantage of savings initially through funding with up-front appropriations, and risks associated with long-term financial obligations. First, some officials said that the overall costs over the contract term are generally higher than those funded using up-front appropriations. For example, for one of the ESPCs we reviewed, we found that the estimated cost for using alternative financing was about 15 percent higher than if the project had been funded using up-front appropriations. In 2004, we reported that alternative financing arrangements may be more expensive over time than full, up-front appropriations since the federal government’s cost of capital is lower than that of the private sector. Second, some officials noted that they would prefer to use appropriated funds for projects because with alternative financing arrangements, the installation pays the energy service company out of the savings rather than retaining those savings. As a result, when relying on alternative financing for energy projects, installations do not actually realize the savings until after the contract is completed, which could be up to 25 years later for ESPCs and UESCs. Similarly, although spreading costs over 25 years may provide greater certainty for installation utility budgets, these arrangements also tie up those funds over that period, resulting in less flexibility in managing future budgets. Third, officials at one service headquarters stated that the risk associated with a 20- to 25-year contract can pose a disadvantage, such as in cases where a base realignment or closure action occurs. There are different costs associated with the implementation of the ESPCs and UESCs we selected for our review, and some potential costs may affect the overall cost of a project or may not always be included in total contract payments. However, we found some potential costs that may add to the overall cost of a project or may not always be included in total contract payments. In our review of the life-cycle cost analyses and contract documentation for the selected ESPCs and UESCs in our sample, we found that contracts varied in how they funded other potential costs associated with the projects, such as operation and maintenance and the repair and replacement of installed equipment, as well as some other energy project costs that may or may not be included in the payment to contractors. Operation and maintenance costs—Officials representing installations in our sample identified different approaches for how they manage the costs for operation and maintenance of their alternatively financed energy projects, and those costs may not always be included in the total contract costs. As noted earlier, one benefit of alternative financing arrangements that military service officials identified is the reduced risk and savings in operation and maintenance costs that can be achieved when a contractor installs and sustains the energy conservation measures. According to officials, the ongoing and periodic maintenance of the equipment by the contractor that is generally provided by ESPCs can free limited installation budgets for other maintenance requirements. Further, with UESCs, operation and maintenance costs associated with the project may decrease, but it is usually the responsibility of the agency, not the utility, to pay for these decreased costs. Further, depending on the contract terms, contractors are not always responsible for operation and maintenance of all of the energy conservation measures for a project. In these cases, an installation would provide manpower, spare parts, and potentially replacement equipment during the life of the contract. Based on our review of select projects, we found different ways in which the installations approached the funding for these costs. For example, officials at one installation decided not to include the costs for operation and maintenance services in the contract. The officials instead opted to have the contractor that was already providing operation and maintenance support for the facility continue to provide these services for all of the equipment. They also reported that the cost of that operation and maintenance contract was reduced due to the efficiencies that came with some of the measures installed through the ESPC, which resulted in manpower savings. At another installation, however, officials opted to have the ESPC contractor take over maintenance not only of equipment installed as part of the contract, but also of existing equipment in the same buildings that had been maintained by the base operating support contractor so that the installation would not have two contractors maintaining different parts of systems within the same building. Repair and replacement funds—Some contracts also establish and manage repair and replacement accounts using either an installation’s operation and maintenance funding or the savings from the energy conservation measures. These accounts may allow the installation to ensure the continued operation and maintenance of equipment installed as part of the alternatively financed project for which the contractor or utility may not have responsibility, such as items not covered under their warranty or that are manufactured by another company, by setting aside funds to cover the costs to repair or replace equipment that fails during the contract performance period. These accounts are included in the total contract costs. In our review of select ESPC projects, we found different ways in which these accounts were established and operated. For example, at one installation, officials told us they set up two repair and replacement accounts that are part of their monthly payments, which cover repairs to installed equipment not covered under the contract, such as equipment that was not manufactured by the contractor and controls components that were integrated onto the existing system. Funding for these two accounts is included in the installation’s annual payment to the contractor, and unused funds in the larger contractor equipment repair and replacement account roll over into the next year to cover any required maintenance as well as the replacement of equipment at the end of the contract term, if needed. At another installation, the ESPC was established with an account for repair and replacement funds to cover costs other than normal preventive maintenance, and this account is also funded annually as part of the payment to the contractor. According to installation officials, the purpose of this account is to have funding available to pay for a larger piece of equipment in case it needed to be replaced, and unused funding for this account is also expected to roll over and be available in future years. Installation officials told us that because labor is a large part of the repair and replacement of equipment, the account has generally been drawn down in full each year and there generally have not been funds available to roll over into the next year. Other energy project costs—There are some costs associated with energy projects that installations may incur regardless of the funding arrangement used—some of which may not be included in the total contract costs—and potential other costs installations may pay to bring down the total contract payments. For example, despite the funding source used, a project may require land valuations or environmental assessments. There are also project development costs, such as design and engineering services, as well as preliminary energy surveys for identifying potential energy conservation measures, which the contractor or utility may prepare and fund. Additionally, officials from the military service headquarters told us that some alternatively financed energy projects are managed by other DOD or federal entities, such as the Army Corps of Engineers or the Department of Energy, which may require contract administration fees that are paid either through a one-time up-front payment or at least annually through the life of the contract. For example, at two installations we visited, officials told us they would be paying either the U.S. Army Corps of Engineers or the Naval Facilities Engineering Command for items such as developing a request for proposal; conducting life-cycle cost analyses; and providing supervision, inspection, and overhead services whether they used up-front appropriations or alternative financing arrangements for their energy projects. These costs would not be included in the total costs because they are paid to the contracting officer at the federal agency rather than to the energy service company or utility. For example, officials at one installation told us they paid approximately $23,000 to the Naval Facilities Engineering Command for project management and oversight of the installation’s UESC. Finally, we found instances where installations used some up-front funds to reduce the amount financed for their projects. These up-front payments were still included in the total payments to the contractors, but the installations were able to reduce the amount on which they had to pay interest, thereby reducing the total amount they would have owed had they not made the up-front payments. For example, at one installation, we found that the total amount financed for the project was less than the cost to implement the project because the installation paid almost $2 million up front in pre-performance payments. According to an installation official, the installation had planned to repair some mechanical systems and had already set aside Facilities Sustainment, Restoration, and Modernization funds for this project. With the ESPC, the installation was able to use those funds to instead pay for more energy-efficient technologies to replace rather than repair those systems, using the funds to reduce the amount to be financed for the ESPC. DOD has taken various actions to meet its needs as the largest energy consumer in the federal government, including diversifying power sources, implementing conservation and other efficiency actions to reduce demand, and relying on private-sector contracts through alternative financing arrangements in lieu of using up-front appropriations to fund energy projects. Since 2005, DOD has awarded 464 contracts for alternatively financed energy projects. While DOD guidance requires the military services to track and store data related to energy projects, the military services have not collected complete and accurate data or consistently provided the data to the military department or DOD headquarters level on an annual basis to aid DOD oversight and to inform Congress. If DOD does not require the military services to provide DOD with complete and accurate data on all alternatively financed energy projects, decision makers within the department and Congress may not have all information needed for effective oversight of these projects, which represent long-term budgetary commitments for periods of up to 25 years. Confirming savings and validating project performance of all alternatively financed energy projects are necessary to ensure that the projects are meeting expected energy and costs savings and that the military services are appropriately budgeting for the projects over the life of the contract. The military services have taken some steps to verify project performance and confirm savings, and the alternatively financed energy projects we reviewed that were operational reported achieving expected savings or efficiencies. However, because guidance on when verification of savings is required is not clear, the military services have taken varying approaches for confirming UESC savings and lack full assurance that expected savings are being realized for the entirety of their UESC projects. DOD’s guidance requires the military departments to track estimated and verified savings and measurement and verification information for all energy projects, whereas the Office of Management and Budget guidance states that UESCs may be scored on an annual basis if the UESC requires performance assurance or guarantees and measurement and verification of savings at specific points in time— commissioning and retro-commissioning—rather than ongoing through the life of the project. However, DOD’s interpretation of this Office of Management and Budget requirement assumes that the military departments have the option of conducting either performance assurance, savings guarantees, or measurement and verification for UESCs, which differs from the department’s own guidance on verification of savings for all energy projects. Without updated and clear guidance on how the military departments should be taking steps to verify savings associated with UESC projects to validate project performance, the military services will likely continue to interpret DOD guidance differently and are likely to take inconsistent approaches to assuring the performance of UESC projects, which could limit DOD’s visibility over projects that commit the departments to long-term payments. To assist DOD and Congress in their oversight of DOD’s alternatively financed energy projects, we recommend that the Secretary of Defense direct the military services to collect complete and accurate data on their alternatively financed energy projects, including data on the services’ financial obligations and cost savings, and provide the data to DOD at least annually to aid departmental oversight. To help ensure that the military departments conduct the level of assessment required to assure the performance of their UESC projects over the life of the contract, we recommend that the Secretary of Defense direct the Office of the Assistant Secretary of Defense (Energy, Installations and Environment) to update its guidance to clarify the requirements for the verification of savings for UESC projects. We provided a draft of this report for review and comment to DOD and the Department of Energy. In written comments, DOD concurred with our first recommendation and nonconcurred with our second recommendation. DOD’s comments on this report are summarized below and reprinted in their entirety in appendix II. In an e-mail, the audit liaison from the Department of Energy indicated that the department did not have formal comments. DOD and the Department of Energy also both provided technical comments, which we incorporated as appropriate. DOD concurred with our first recommendation that the Secretary of Defense direct the military services to collect complete and accurate data on their alternatively financed energy projects, including data on the services’ financial obligations and cost savings, and provide the data to DOD at least annually to aid departmental oversight. DOD nonconcurred with our second recommendation that the Secretary of Defense direct the Office of the Assistant Secretary of Defense (Energy, Installations and Environment) to update its guidance to clarify the requirements for the verification of savings for UESC projects. In its response, DOD stated that UESCs are service contracts for utility services and that the only financial requirement on federal agencies is the obligation of the annual costs for these contracts during each year that the contract is in effect. The department stated that there is no statutory requirement for annual measurement and verification of the energy, water, or cost savings, or a contractual guarantee of those savings as there is for ESPCs. However, the department noted that DOD will continue to require its components to accomplish necessary tasks to assure continuing performance of the equipment or systems installed in a UESC to ensure expected energy and/or water consumption and cost reductions. We agree that UESCs do not include guaranteed cost savings. In response to DOD’s comments, we made changes to the draft report to emphasize that, while UESCs do not include guaranteed cost savings, repayments for UESCs—which can commit the department to a contract term limit for a period of up to 25 years—are based on estimated cost savings generated by the energy conservation measures. Thus, verification of savings to validate project performance is necessary to ensure that the projects are meeting expected energy and costs savings required to fulfill the requirement that these projects be paid for entirely through the projects’ generated cost savings. We further noted in our report that guidance from DOD does not align with that of the Office of Management and Budget, and this misalignment results in the military services taking different approaches to validating achievement of benefits expected from these UESC projects. In addition, we did not recommend that the department annually measure and verify UESC projects. Rather, we recommended that DOD clarify and update its guidance for verifying savings for these projects to help the military services appropriately budget for the projects over the contract’s life. Without updated and clear guidance about requirements on how to verify savings associated with UESCs, the military services will likely continue to interpret DOD guidance differently and take inconsistent approaches to assuring the performance of UESC projects. Doing so could limit DOD’s visibility over projects that commit the departments to long-term payments. We are sending copies of this report to appropriate congressional committees; the Secretary of Defense; the Secretaries of the Air Force, Army, and Navy; the Commandant of the Marine Corps; and the Secretary of Energy. 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) 512-4523 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 major contributions to this report are listed in appendix III. To evaluate the extent to which the military services have financed energy projects with alternative financing arrangements since 2005 and collected and provided the Department of Defense (DOD) complete and accurate data on those projects, we reviewed available data and documentation on the alternatively financed energy projects that had previously been either reported by DOD or the Department of Energy in its published documents or collected by us or other audit agencies during previous reviews. Based on these criteria, we scoped our review to focus on the following types of alternatively financed energy projects for which the military services had awarded contracts from fiscal years 2005 through 2016: Energy Savings Performance Contracts (ESPC), Utility Energy Service Contracts (UESC), and Power Purchase Agreements (PPA). We focused on this time frame because with the passage of the Energy Policy Act of 2005, the military services began contracting for more alternatively financed energy projects. Moreover, we reported in 2005 that data prior to this time was incomplete. We included 2016 data as they capture the most recent full fiscal year of data. We reviewed data on projects awarded for installations in the United States and excluded the territories and other overseas installations. We developed a data collection instrument to confirm the completeness and accuracy of data we already had on existing alternatively financed energy projects, obtain any missing or revised data on those projects, and gather information on projects that had been awarded since our previous reviews. We pre-populated our data collection instrument for each of the military services using data from the following sources: Project level data from DOD’s Annual Energy Management Reports for fiscal years 2011 through 2015; A list of 10 USC 2922a PPA projects provided by Office of the Secretary of Defense officials; Data from our prior reviews on renewable energy project financing using both appropriated funding and alternative financing arrangements and on ESPCs for the military services; and Publicly available data from the Department of Energy on DOD projects funded using its indefinite-delivery, indefinite-quantity contract. In order to obtain consistent data among the services, for each spreadsheet in the data collection instrument, we developed separate tabs containing the pre-populated data on the three types of alternative financing arrangements on which we focused our review. For each type of arrangement, we also developed a separate definitions sheet that explained the data we were requesting so that the services would be responding with consistent data. We provided these pre-populated spreadsheets to the military services and requested that they verify existing information, provide additional information, and add new projects, as appropriate, in order to obtain data on the universe of these projects for the specified time period. We then discussed with those officials any questions we had about the quality and completeness of the data that were provided. While we took these steps to identify all of DOD’s alternatively financed energy projects since 2005, the data reflected may not represent the entire universe of projects. In addition to the data above, we reviewed key guidance that DOD provides to the DOD components on managing installation energy, including DOD Instruction 4170.11, Installation Energy Management, and DOD guidance letters on developing energy projects. We also reviewed the DOD instruction to learn about the requirement for the military departments to maintain a utility energy reporting system to prepare data, including data on energy consumption and costs, for the Annual Energy Management Report to determine DOD’s visibility over the energy projects. We reviewed guidance from the Department of Energy’s Federal Energy Management Program on alternative financing arrangements, including its overviews of the different arrangements and national lab reports on agencies’ use of these arrangements. We reviewed the relevant statute to determine what, if any, requirements applied to DOD’s data collection efforts related to energy projects. We then reviewed the project information provided by the military services for the presence of certain data points, such as total contract costs, estimated cost savings, and the length of the contract, and compared the military services’ tracking of their data on alternatively financed energy projects to DOD’s guidance and statutory requirements for tracking such data. We reviewed the data we collected for completeness and accuracy and estimated the total number of ESPCs, UESCs, and PPAs for each of the military services as well as the total contract costs, where available. We excluded from our analysis those UESCs for which the military departments had identified a contract term of one year or less or for which a project had previously been identified in DOD reporting but had not ultimately been funded as an alternatively financed energy project. We assessed the reliability of the data we received by interviewing DOD officials and comparing the multiple data sets we received from the military services with data reported in the Annual Energy Management Report and obtained through prior reviews to ensure that there was consistency in the data provided. We determined that the data were sufficiently reliable for meeting our objective. We compared DOD’s data collection efforts with Standards for Internal Control in the Federal Government, which identify standards for collecting and providing accurate and complete data. We also reviewed guidance documentation from the military services on developing and managing energy projects, including the Army’s guide for developing renewable energy projects, the Air Force’s instructions on cost analyses and business case analyses, and the Navy and Marine Corps energy project management guide. We met with officials from Office of the Secretary of Defense; the military departments; and the military departments’ engineering, installation, or contracting commands to discuss their guidance and policies on how they managed and tracked their alternatively financed energy projects and the availability of data on such projects. Finally, we spoke with Office of the Secretary of Defense officials about the President’s Performance Contracting Challenge, which challenged federal agencies to enter into a total of $4 billion in performance-based contracts, including ESPCs and UESCs, by the end of calendar year 2016, to gain an understanding of the results of DOD’s participation in this effort. To assess the extent to which the military services reported achieving expected savings and verified the reported performance of selected projects, we reviewed agency-level guidance on the different levels of measurement and verification or performance assurance that are required for alternatively financed energy projects, such as DOD’s instruction on installation energy management and the Department of Energy’s most recent guidelines for measurement and verification and performance assurance, to determine requirements for measuring savings for the different types of projects. Using the data on the alternatively financed energy projects that we obtained from the military services, we selected a nongeneralizable sample of 17 projects as case studies to discuss during our site visits and to evaluate how those projects reported achieving their estimated savings and the extent to which installation officials verified those reported savings. We then compared measurement and verification efforts for the 13 projects in our nongeneralizable sample that were already in operation with DOD guidance requiring measurement and verification for all energy projects to determine the extent to which installation officials followed guidance requiring verification of savings. We also collected and analyzed data and documentation on the expected and reported savings for the 17 projects in our sample to assess the extent to which the estimated savings compared to the savings that were reported and we documented reasons for any differences. We assessed the reliability of the project data by reviewing the internal controls DOD officials used to observe and corroborate the data contractors reported in their annual measurement and verification reports; the data collection and monitoring the officials did for performance assurance; and the data the officials used to assess project savings. We determined that the data were sufficiently reliable for our purposes of describing the extent to which the military services reported achieving expected savings and verified the reported performance of selected projects. For the eight ESPC projects in our sample that were operational, we collected and analyzed the most recent measurement and verification report to identify the guaranteed savings that were expected and the savings that were being reported by the contractor. We then interviewed military service officials at the installations we visited to discuss these projects and the reported results of their latest measurement and verification report or other assessment. We also talked with officials from the installations and, in some cases, also with officials from the installations’ supporting engineering or contracting commands, about how they verified the savings for the three UESC projects and the two PPAs in our sample and to learn about how they developed, managed, and tracked these alternatively financed projects. For UESCs, we reviewed DOD guidance outlining requirements to conduct measurement and verification and compared that with the requirements outlined in Office of Management and Budget guidance. We also contacted officials from the Office of the Secretary of Defense and the military departments to discuss their current and planned guidance related to measuring, verifying, and reporting the performance of UESCs during the contract performance period to assure that savings are being achieved. To describe the benefits and disadvantages reported by the military services, as well as potential other costs, of using alternative financing arrangements for selected energy projects rather than using up-front appropriations, we reviewed previously discussed DOD, Department of Energy, and military service guidance on the use of alternative financing arrangements and their cost-effectiveness to determine the requirements for life-cycle cost analyses and how project costs are identified in contracts and other documents. For the 17 selected projects in our nongeneralizable sample, we collected project planning documentation and reviewed available life-cycle cost analyses and contract documentation for those projects to obtain information on how costs were identified and where they were documented. Additionally, we interviewed officials at the installations in our sample, their contracting or engineering commands, or their military service headquarters to discuss the projects in our sample, including the benefits and disadvantages of using alternative financing arrangements for those energy projects. We also discussed how the individual contracts identified the costs to operate and maintain the energy conservation measures or power-generating equipment for the selected energy projects in our sample as well as any costs associated with the projects that might not be reflected in the total contract costs. For one ESPC in our sample, we also compared the costs of the alternative financing arrangement with the use of up-front appropriations by calculating the present value of the costs had the government directly incurred the debt to finance the amount that had instead been financed by the energy service company. In addition, the team interviewed officials from the Department of Energy’s Federal Energy Management Program about federal policies and guidance related to alternative financing arrangements for energy projects and from the General Services Administration about that agency’s area-wide contracts with utility companies to gain an understanding of issues related to the benefits and costs of such projects. In order to select installations and identify case studies from which we gathered information for our objectives, we used data collected in response to our request to the military services. We developed a nongeneralizable sample representing 17 projects at 11 installations that had awarded an ESPC, a UESC, or a PPA between fiscal years 2005 and 2016. Our case studies included 11 ESPCs, 3 UESCs, and 3 PPAs. We selected our case studies to identify projects representing: Each of the military services, including one from the reserve The different types of alternative financing arrangements (ESPC, UESC, and PPA); The year the contract was awarded; The different types of contracting vehicles (Army or Department of Energy, General Services Administration area-wide, or standalone contract); and Different project types (energy efficiency, energy cost savings, and power generation). We included at least three large-scale renewable energy projects, which we defined as projects with a generating capacity of 10 megawatts or greater. We also attempted to include projects that were both operational and had not been included in other recent audits by us or other audit agencies. Finally, we considered geographic variation when selecting sites. In addition to discussing these alternatively financed projects with installation officials, we also observed selected energy conservation measures that had been installed. Table 4 outlines the installations we visited or contacted during our review. In addition, for each of our objectives, we contacted officials and, when appropriate, obtained documentation from the organizations listed below: Office of the Secretary of Defense: Office of the Assistant Secretary of Defense, Energy, Installations and Assistant Secretary of the Army (Installations, Energy and Environment), Deputy Assistant Secretary of the Army for Energy and Sustainability and its Office of Energy Initiatives Assistant Chief of Staff for Installation Management Headquarters, U.S. Army Corps of Engineers Director, Shore Readiness Division (N46) Assistant Secretary of the Navy for Energy, Installations and Environment, Deputy Assistant Secretary of the Navy (Energy) Renewable Energy Program Office Headquarters, Naval Facilities Engineering Command, and two Facilities Engineering Commands–Northwest and Southwest Air Force Installations, Environment and Energy Air Force Civil Engineer Center Marine Corps Installations Command, Facility Operations and Energy We conducted this performance audit from June 2016 to June 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. In addition to the contact named above, Kristy Williams (Assistant Director), Edward Anderson, Karyn Angulo, Michael Armes, Tracy Barnes, William Cordrey, Melissa Greenaway, Carol Henn, Amanda Miller, Richard Powelson, Monica Savoy, Matthew Spiers, Karla Springer, and Jack Wang made key contributions to this report. Defense Infrastructure: Actions Needed to Strengthen Utility Resilience Planning. GAO-17-27. Washington, D.C.: November 14, 2016. Renewable Energy Projects: Improved Guidance Needed for Analyzing and Documenting Costs and Benefits. GAO-16-487. Washington, D.C.: September 8, 2016. Defense Infrastructure: Energy Conservation Investment Program Needs Improved Reporting, Measurement, and Guidance. GAO-16-162. Washington, D.C.: January 29, 2016. Defense Infrastructure: Improvement Needed in Energy Reporting and Security Funding at Installations with Limited Connectivity. GAO-16-164. Washington, D.C.: January 27, 2016. Defense Infrastructure: DOD Efforts Regarding Net Zero Goals. GAO-16-153R. Washington, D.C.: January 12, 2016. Defense Infrastructure: Improvements in DOD Reporting and Cybersecurity Implementation Needed to Enhance Utility Resilience Planning. GAO-15-749. Washington, D.C.: July 23, 2015. Energy Savings Performance Contracts: Additional Actions Needed to Improve Federal Oversight. GAO-15-432. Washington, D.C.: June 17, 2015. Electricity Generation Projects: Additional Data Could Improve Understanding of the Effectiveness of Tax Expenditures. GAO-15-302. Washington, D.C.: April 28, 2015. Defense Infrastructure: Improved Guidance Needed for Estimating Alternatively Financed Project Liabilities. GAO-13-337. Washington, D.C.: April 18, 2013. Renewable Energy Project Financing: Improved Guidance and Information Sharing Needed for DOD Project-Level Officials. GAO-12-401. Washington, D.C.: April 4, 2012. Defense Infrastructure: DOD Did Not Fully Address the Supplemental Reporting Requirements in Its Energy Management Report. GAO-12-336R. Washington, D.C.: January 31, 2012. Defense Infrastructure: The Enhanced Use Lease Program Requires Management Attention. GAO-11-574. Washington, D.C.: June 30, 2011. Defense Infrastructure: Department of Defense Renewable Energy Initiatives. GAO-10-681R. Washington, D.C.: April 26, 2010. Defense Infrastructure: DOD Needs to Take Actions to Address Challenges in Meeting Federal Renewable Energy Goals. GAO-10-104. Washington, D.C.: December 18, 2009. Energy Savings: Performance Contracts Offer Benefits, but Vigilance Is Needed to Protect Government Interests. GAO-05-340. Washington, D.C.: June 22, 2005. Capital Financing: Partnerships and Energy Savings Performance Contracts Raise Budgeting and Monitoring Concerns. GAO-05-55. Washington, D.C.: December 16, 2004.

DOD, the largest energy consumer in the federal government, has been addressing its power needs by diversifying its power resources, reducing demand, and implementing conservation projects. To address its goals for energy projects, DOD also has been using alternative financing from private-sector contracts rather than relying solely on annual federal appropriations to fund projects upfront. The House and Senate reports accompanying their respective bills for the National Defense Authorization Act for 2017 included provisions that GAO review DOD's alternatively financed energy projects. This report (1) evaluates the military services' use of alternative financing arrangements since 2005 and data collected and provided to DOD on those projects; (2) assesses reported project savings and verification of reported performance, and (3) describes benefits and disadvantages and potential other costs of using alternative financing rather than up-front appropriations. GAO analyzed and reviewed DOD data, relevant guidance, and project documentation; interviewed cognizant officials; and reviewed a nongeneralizable sample of projects. The military services have used alternative financing arrangements—entering into about 38 private-sector contracts annually from 2005 through 2016—to improve energy efficiency, save money, and meet energy goals. However, the military services have not collected and provided the Department of Defense (DOD) complete and accurate data, such as total contract costs and savings. For example, GAO was unable to identify and the military services could not provide total contract costs for 196 of the 446 alternatively financed energy projects since 2005. Furthermore, some data provided on select projects did not include the level of accuracy needed for planning and budgeting purposes. According to officials, the military services did not always have complete and accurate data because authority for entering into these projects has been decentralized and data have not been consistently maintained. As such, neither the military departments, which include the military services, nor DOD have complete and accurate data on the universe of these projects. Without complete and accurate data on all alternatively financed energy projects, decision makers will not have the information needed for effective project oversight or insight into future budgetary implications of the projects, including impacts on utility budgets. DOD's alternatively financed energy projects that GAO reviewed reported achieving expected savings. Specifically, GAO's review of 13 operational alternatively financed energy projects found that all 13 projects reported achieving their expected savings. However, the military services have varying approaches for verifying whether projected savings were achieved for all utility energy service contracts (UESC)—an arrangement in which a utility arranges financing to cover the project's costs, which are then repaid by the agency over the contract term. DOD guidance requires the military services to track estimated and verified savings and measurement and verification information for all energy projects, but DOD's guidance is inconsistent with more recent Office of Management and Budget guidance. This inconsistency and DOD's interpretation of Office of Management and Budget guidance have resulted in the military departments developing varying approaches for verifying savings of UESC projects. Without clear guidance from DOD on how the military services should be taking steps to verify savings associated with UESC projects, the military services will continue to interpret guidance differently and are likely to take inconsistent approaches to verifying the savings of UESC projects spanning potentially a 25-year duration. DOD and military service officials identified benefits and disadvantages, as well as other potential costs, of using alternative arrangements to finance energy projects rather than using up-front appropriations. According to officials, benefits include the ability to fund projects that would not otherwise be funded due to budgetary constraints, to complete projects more quickly, and to have expert personnel available to implement and manage such projects. However, officials also identified disadvantages, including higher costs and the risks associated with long-term financial obligations. In addition, GAO found that some potential costs for these alternatively financed energy projects, such as costs associated with operation and maintenance and repair and replacement of equipment, add to overall project costs and may not be included in the total contract payments. GAO recommends that the military services collect and provide DOD complete and accurate data on all alternatively financed energy projects and that DOD update its guidance to clarify requirements for verifying UESC savings. DOD concurred with the first recommendation and nonconcurred with the second. GAO continues to believe its recommendation is valid, as discussed in this report.

You are an expert at summarizing long articles. Proceed to summarize the following text: Although MAOs are responsible for collecting and transmitting encounter data to CMS, they rely on the cooperation of providers to submit complete and accurate data that conform to agency requirements. MAOs gather encounter data—which originate from the information in an enrollee’s medical record—for their own management and payment purposes. While Medicare pays MAOs a fixed monthly amount per enrollee, MAOs may compensate providers for services rendered to enrollees under different contractual arrangements. Providers paid by their plans on a FFS basis submit claims for payment that include the amounts to be reimbursed by the MAO.basis—that is, that receive a designated amount to cover all services for an assigned enrollee—record a zero if no payment amount information is available. MAOs may include provisions in their contracts with providers that require submission of complete and accurate encounter data. In contrast, providers paid by their plans on a capitated After collecting and reviewing these data, MAOs transmit the data to CMS. CMS adopted the health insurance industry’s standard claims format for reporting MA encounter data. MAOs must use the Health Insurance Portability and Accountability Act of 1996-compliant Accredited Standards Committee X12 Version 5010 format, which all providers and private and public health plans are required to use for electronic claim By using this standard format, CMS generally avoided submissions.placing a new requirement on MAOs. In January 2012, CMS began phasing-in MA encounter data collection by type of provider. It began by receiving data on professional encounters (such as services performed by physicians), then institutional encounters (such as services performed during an inpatient hospital stay), and finally durable medical equipment (such as hospital beds and wheelchairs). By August 2012, MAOs were submitting data from all types of providers. Although CMS requires that MAOs submit encounter data for all items and services provided to enrollees, the file formats that CMS currently uses preclude MAOs from transmitting data on the utilization of certain supplemental MA benefits, such as dental and vision services. Agency officials told us they are considering how to address this discrepancy. To risk adjust payments to MAOs, CMS calculates a risk score—the expected health care expenditures for an enrollee compared with the average health care expenditures of all beneficiaries—for each MA enrollee and Medicare FFS beneficiary. CMS calculates risk scores for MA enrollees using diagnosis information provided by MAOs along with cost and utilization information from Medicare’s FFS claims systems. This approach assumes that diagnostic coding practices are the same in MA and FFS. Risk scores for beneficiaries with the same diagnoses and characteristics should be identical, regardless of whether the beneficiaries are in MA or Medicare FFS. However, MAOs have a greater incentive than FFS providers to make sure that all diagnoses are coded, as this can increase enrollees’ risk scores and ultimately the payments plans receive. In part because of this incentive, risk scores for MA enrollees may tend to be higher relative to the risk scores of FFS beneficiaries who are in similar health and have identical characteristics. To help ensure that MAOs are not overpaid as a result of these differences in diagnostic coding, CMS makes a separate adjustment to payments to MAOs. In 2012 and 2013, we reported inaccuracies in CMS’s methodology for adjusting MA payments. Specifically, we estimated in 2013 that MAOs received excess payments of between $3.2 billion and $5.1 billion from 2010 through 2012 because CMS’s adjustment to account for differences in risk scores was too low. We recommended that the CMS Administrator take steps to improve the accuracy of the adjustment made for differences in diagnostic coding practices between MA and Medicare FFS. The agency did not formally comment on this recommendation and, as of March 2014, it has not improved the accuracy of this adjustment. Consistent with our finding that this adjustment was too low, Congress has taken steps to increase the statutory minimum annual adjustment. State Medicaid agencies that contract with MCOs typically require them to report encounter data to the state for various purposes.encounter data collection, the agencies may also establish requirements regarding the timeliness, completeness, and accuracy of Medicaid encounter data in contracts with MCOs. For example, to encourage timely submission and promote data quality, they may require MCOs to submit data within a certain time frame and attest that the data submitted are complete and accurate. State Medicaid agencies may then use these data for a variety of purposes, such as setting payment rates, evaluating the performance of MCOs, and providing reports to their legislatures and the public. State Medicaid agencies may assess encounter data to determine whether MCOs meet requirements for complete and accurate reporting. For example, they may calculate the proportion of encounter data files denied or examine the rates of services used per enrollee against specific benchmarks—target rates. As another example, they may require MCOs to list encounter data that were corrected or voided and provide reasons for these actions. They may also have the medical records examined to verify that the information submitted in encounter data is complete and accurate. For example, this review may determine whether services submitted in encounter data were performed or confirm that enrollees have specific diagnoses. Compared with information available in RAPS data, MA encounter data, with more elements reported, provide CMS with more comprehensive information on all enrollee diagnoses as well as the cost and types of services and items provided to enrollees. Each RAPS data file—an electronic record that contains an enrollee’s diagnosis information from one or more providers—contains between 1 and 10 diagnosis groupings. Although all diagnoses are included in these groupings, not all groupings are used in CMS’s risk adjustment model. For each diagnosis grouping, there are 9 RAPS data elements, including the “from” and “through” dates of service, the diagnosis code, and the provider type. Each RAPS data file also includes 31 other elements that are used for data processing and other purposes. Thus, depending on the number of diagnosis groupings, each RAPS data file contains between 40 and 121 data elements. In contrast, each encounter data file—an electronic record that contains detailed information for each medical service and item provided to an enrollee—includes approximately 200 data elements. These elements include information on the patients, providers, and payers of services and items, as well as the dates of service and procedure codes. They also include information on the primary and supplemental diagnoses associated with the service or item. Whereas RAPS data are limited to 10 diagnosis groupings, encounter data can include up to 12 diagnoses for professional services and 25 diagnoses for institutional services. Table 1 summarizes the types and number of encounter data elements. In addition, MA encounter data are more comprehensive than RAPS data because they include information that originates from a wider range of provider types. Specifically, only physicians and hospital inpatient and outpatient facilities report enrollee diagnoses for RAPS data collection. Of these provider types, physicians provide approximately 80 percent of the diagnostic information used for risk adjustment, according to one estimate. As a result, CMS’s current risk adjustment model relies primarily on diagnoses that physicians report. In contrast, more provider types report encounter data, significantly expanding the scope of sources for diagnosis and other information. In addition to physicians and hospital inpatient and outpatient facilities, many other provider types—including ambulance providers, clinical laboratories, durable medical equipment suppliers, home health providers, mental health providers, rehabilitation facilities, and skilled nursing facilities—report encounter data. The fact that CMS has taken a comprehensive approach in collecting encounter data has raised concerns for some MAOs. Because MAOs generally gather such data from certain providers for payment and plan management purposes, the CMS encounter data reporting requirements may not have significantly added to their ongoing data gathering activities. However, industry representatives noted that submitting encounter data from a broad array of provider types may not add to information on diagnoses CMS uses for risk adjustment. Agency officials acknowledged that many encounter data elements MAOs report will not be used for risk adjustment but will allow CMS to more completely identify the services furnished to enrollees. Finally, CMS requires MAOs to submit encounter data more frequently than RAPS data. MAOs submit RAPS data at least quarterly to CMS, with each submission representing approximately one-fourth of the RAPS data an MAO submits during the year. In contrast, CMS requires MAOs to submit encounter data weekly, biweekly, or monthly depending on their number of enrollees. MAOs with more than 100,000 enrollees must submit encounter data on a weekly basis, those with between 50,000 and 100,000 enrollees on a biweekly basis, and those with fewer than 50,000 enrollees on a monthly basis. CMS also requires MAOs to submit encounter data within 13 months from the date of service. Representatives of MAOs noted that they are able to meet CMS’s encounter data frequency requirements, and one MAO told us that it sometimes chooses to submit encounter data more frequently—three times a week rather than once a week—to reduce the size of each submission. CMS is receiving MA encounter data from nearly all MAOs on all types of services at the monthly volume that CMS officials told us they expected. After increasing significantly from August 2012—the first month that MAOs submitted encounter data on services from all provider types— through May 2013, the volume of MA encounter data has had some fluctuations from month to month. (See fig. 1.) Specifically, the volume of encounter data files—electronic records containing detailed information for each medical service and item provided to an enrollee—rose sharply from 2.0 million data files in August 2012 to 49.6 million data files in May 2013. From June 2013 through April 2014, the volume has fluctuated between 34.2 and 54.2 million data files each month. CMS officials told us that they expect to continue receiving encounter data files at a rate of approximately 40 to 50 million files per month throughout 2014. In total, MAOs submitted about 497.9 million encounter data files in 2013 comprising approximately 416.5 million professional encounter data files, 64.9 million institutional files, and 16.5 million durable medical equipment files. In April 2014, CMS announced that it will use MA encounter data as part of risk adjustment and no longer rely solely on RAPS data. The agency will start using the diagnosis information from MA encounter data as well as the diagnoses in RAPS data from 2014 dates of service when calculating 2015 enrollee risk scores.both data sources to obtain diagnoses reported from hospital inpatient and outpatient facilities and physicians. Further, the agency announced Specifically, CMS intends to use that it will use all diagnoses equally, whether they came from RAPS data or MA encounter data, when calculating risk scores. CMS officials said that RAPS data generally have all MA enrollees’ diagnoses, so they do not anticipate receiving a significant amount of additional diagnoses from MA encounter data. CMS officials described these efforts to begin using diagnoses from MA encounter data as a key step in making full use of the data in risk adjusting payments. Furthermore, officials stated that 2015— and perhaps subsequent years—will serve as a time to transition from using RAPS data to using MA encounter data to calculate risk scores. Once MA encounter data are deemed sufficiently complete and accurate for use in risk adjusting payments, CMS plans to discontinue RAPS data collection and transition entirely to using MA encounter data. Although CMS identified a number of other potential uses for MA encounter data in the 2008 final rule, how it would use the data for any of these additional purposes. Adequately developing plans for encounter data, and communicating them to MAOs, may improve CMS’s efforts to manage aspects of the Medicare program. Agency officials told us that they have deferred planning efforts to use MA encounter data for any purposes besides using it as a different way to collect diagnosis information for the current risk adjustment model. Accordingly, CMS’s plans remain undeveloped and it has not established specific time frames for any of the following potential uses outlined in 2008: the agency has yet to determine Revise CMS’s risk adjustment model for MA payments. CMS intends to improve its model for risk adjustment using MA enrollee cost, diagnoses, and utilization information. However, agency officials noted that developing such a model is an involved process and would take a number of years to complete. In the 2008 final rule, CMS listed the following potential data uses without further explanation: (i) updating risk adjustment models, (ii) calculating Medicare disproportionate share percentages, (iii) conducting quality review and improvement activities, and (iv) Medicare coverage purposes. 73 Fed. Reg. 48434 (Aug. 19, 2008). Conduct quality review and improvement activities. Such activities refer to assessing the performance of providers and MAOs in delivering care. For example, CMS could use encounter data to develop new MA quality measures. Calculate Medicare disproportionate share hospital percentages. CMS increases payments to hospitals serving a disproportionate number of low-income patients through the disproportionate share hospital adjustment. The agency currently incorporates the number of hospital days for MA enrollees in its calculation of disproportionate share hospital percentages. CMS officials have not specified how the agency could use MA encounter data to modify how it calculates the disproportionate share hospital percentages. Monitor Medicare coverage. Such monitoring may refer to using encounter data to determine whether an MA enrollee has reached the maximum out-of-pocket limit for an enrollee’s cost sharing each year. Without developing plans for these additional uses of encounter data, CMS cannot determine whether it is gathering the proper amount and types of information required for these purposes. Additionally, the agency would not be able to establish management priorities, and therefore cannot ensure that it is using the data to their full potential. In a May 2014 proposed rule, CMS identified a number of additional uses of encounter data designed to strengthen program management and increase transparency in the MA program. These were the following: Conduct program evaluations. CMS noted that it may use encounter data to assess the MA program and demonstration designs. The data could also be used for government-sponsored public health initiatives and academic health care research. Support program integrity efforts. CMS indicated that encounter data could be used to conduct audits, investigations, and other efforts to combat waste, fraud, and abuse undertaken by the Office of Inspector General or CMS. Aid program administration. CMS stated that it may use encounter data in reviewing the validity of MAO bid submissions—projected revenue for providing standard Medicare services to an average enrollee in an MAOs’ service area. It may also use the data to verify MAO information on medical loss-ratios—the percentage of revenue used for patient care, quality improving activities, and reduced premiums—to determine whether MAOs have met minimum requirements. As of May 2014, CMS had taken some, but not yet all, appropriate actions—as outlined in its Medicaid encounter data validation protocol— to ensure that MA encounter data are complete and accurate before they are used. (See fig. 2.) CMS’s actions to date have focused on communicating with MAOs about data submission requirements, certifying MAOs’ capability to transmit the data, and conducting automated checks for completeness and accuracy of the data. However, the agency has not yet conducted statistical analyses, reviewed medical records, and provided MAOs with summary reports on data quality referenced in its Medicaid encounter data validation protocol. Although CMS intends to perform these additional quality assurance activities, CMS officials have not specified a time frame for doing so. CMS has established certain requirements for the MAOs’ collection and submission of encounter data. The initial step in CMS’s Medicaid encounter data validation protocol is to establish such features as the data submission format, the data elements to be reported, the time frames for data submission, and the benchmarks—target rates—for completeness and accuracy of the data. CMS required that MAOs use the reporting format that is standard in the health insurance industry, and MAOs began submitting files in that format in January 2012. CMS also required that MAOs submit encounter data—including any corrections to the data—within specified time frames and at intervals determined by their size. To enhance compliance with its encounter data requirements and thus promote complete and accurate data submissions, CMS has engaged in regular and open communication with MAOs since 2010. Agency officials have regularly held meetings with MAOs to discuss encounter data system enhancements, changes in data submission requirements, and concerns on specific encounter data topics. Although MAOs noted that they would like to continue receiving detailed information frequently— particularly on the more complex aspects of the encounter data submission process—CMS reduced the frequency of the encounter data user group meetings during the summer of 2013. According to CMS officials, MAOs’ increased familiarity with data submission requirements reduced the need for ongoing guidance. Other outreach methods the agency has used include newsletters and bulletins with information such as the most common data errors, a technical assistance support desk to address specific reporting circumstances, and a website for posting summaries and questions from meetings with MAOs. To maintain detailed guidance on data submission requirements, CMS produced and updates an encounter data manual. (See app. I for more information about CMS’s outreach efforts with MAOs.) While it has focused its efforts on educating plans about reporting requirements, CMS has not yet established benchmarks for encounter data completeness and accuracy and does not have a timeline for developing such benchmarks. As stated in the Medicaid encounter data validation protocol, each data field submitted for each encounter type should have an acceptable rate of completeness and accuracy. The protocol states that each plan’s target error rate should be below 5 percent, composed of the percentage of missing, duplicate, or incorrect records. In 2012, CMS stated it would develop error frequency benchmarks but has yet to do so. In May 2014, agency officials told us that as they gain more experience with the data submissions they will use that information to develop such performance benchmarks. In contrast, state Medicaid agencies have established various benchmarks for Medicaid encounter data, which could help inform the development of similar benchmarks for MA encounter data. For example, New Jersey permits MCOs to have no more than 2 percent of encounter data submissions denied each month. Alternatively, Arizona does not allow the payment information in MCOs’ encounter data submissions to vary from the financial reports submitted by MCOs by more than 3 to 5 percent.Without benchmarks, as suggested by the protocol, the agency has no objective standards against which it could hold MAOs accountable for complete and accurate data reporting. CMS has certified nearly all MAOs to verify their capability for collecting Under CMS’s protocol for validating and submitting encounter data.Medicaid encounter data, each MCO’s information system should be assessed to see whether it is likely to successfully capture and transmit the encounter data. Such a review would determine where the plan’s information system may be vulnerable to incomplete or inaccurate data capture, storage, or reporting. To become certified for submitting encounter data, CMS requires an MAOs’ information system undergo complete end-to-end testing. MAOs needed to separately demonstrate that they can successfully transmit encounter data collected from institutional, professional, and durable medical equipment providers. During official testing, MAOs had to achieve at least a 95 percent acceptance rate for each type of encounter. Also, MAOs were required to sign an agreement with CMS attesting that they will ensure that data in every submission can be supported by a medical record and that the data are complete and accurate. CMS performs automated checks to determine encounter data quality and identify submission issues, such as whether certain data elements are missing, and sends automated notifications to MAOs. According to CMS’s protocol for validating Medicaid encounter data, performing electronic checks on encounter data is a key step in verifying data quality. Such a data review should include basic checks of the data files by provider type and for each of the data elements in the files. Under the protocol, the standard data review process should be automated to verify that, among other things, critical data elements are not missing and are in the correct format, data values are consistent across data elements and are within the volume of data aligns with enrollment figures. CMS performs over 1,000 automated checks to verify that data elements are present, the values of data elements are reasonable, and the data are not duplicated. According to CMS, the number of errors returned to MAOs and the number of duplicate data files submitted per MAO can illustrate, at least in part, the completeness and accuracy of the encounter data submitted. For example, CMS performs automated checks to flag missing data elements—such as a contract ID number or a date of service—in encounter data files and returns files with missing elements to MAOs. CMS also determines whether encounter data elements have the correct alphanumeric values (e.g., that zip codes contain only numeric characters) and verifies whether the values are consistent across data elements (e.g., the date of service is before the date of data submission). In addition, CMS ensures that the same data file is not accepted into the Encounter Data System more than once, which would result in duplicate data files. After performing these automated checks, CMS sends MAOs up to five types of automated reports with details about the encounter data submission, including information on the data received. These reports provide information on whether errors occurred and whether encounter data processing can continue so that MAOs can identify problems with their data. CMS may provide additional reports if MAOs need to resubmit the data to meet CMS’s requirements. (See app. II for a summary of CMS’s automated reports for MAOs.) Although representatives from MAOs noted that CMS has not always produced the automated reports on a timely basis, CMS officials told us that they now produce the reports within 1 week of encounter data submission. According to the MAO representatives, the reports are generally useful, straightforward, and easy to understand. CMS plans to develop four other automated reports related to data submission and processing but has not established a time frame for doing so. These reports are expected to determine the number of encounter data files accepted and rejected identify encounter data submission errors and summarize the type of errors found, provide additional details on rejected encounter data submissions, ascertain diagnoses that CMS accepted and will use to calculate risk scores. Although CMS has had plans since at least October 2010 to develop a report that identifies those diagnoses that it will use to calculate risk scores, it still has not produced the report. MAOs we interviewed expressed concern that CMS has not developed this report, which could help them understand how encounter data will be incorporated into CMS’s risk score calculation. Although CMS is aware of the need to perform statistical analyses of MA encounter data, the agency has not yet conducted these analyses. According to CMS’s protocol for validating Medicaid encounter data, analyzing values in specific data elements, generating basic statistics on the volume and consistency of data elements, and periodically compiling and reviewing statistics on utilization rates can help detect data validity issues. In March 2014, CMS officials told us that they were able to only summarize the volume of encounter data files by MA plan. The officials stated that they would like to be able to determine the frequency of diagnoses per encounter data file, examine the dates of service on encounter data files, and compare MA encounter data with FFS claims data by the summer of 2014. However, the officials noted that they have not developed a specific time frame for performing statistical analyses and that determining which analyses to perform will be an iterative process over the next year or two. It appears that CMS will use encounter data to calculate 2015 risk scores and pay MAOs before it performs statistical analyses of the data. As CMS begins to analyze the quality of MA encounter data, several types of statistical analyses outlined in its Medicaid validation protocol may help detect potentially inaccurate or unreliable data. Such analyses include the following: Determining whether the frequency of values within an encounter data element is reasonable. For example, a frequency distribution for the place of service variable would be expected to include a reasonable distribution between inpatient hospital, outpatient hospital, and physician office visits. This type of analysis can help detect whether a value is missing, underreported, or overreported. Generating basic statistics from the encounter data. For example, analyzing the rates of outpatient services by provider zip code could help discover that encounter data files are missing certain zip codes, indicating a certain amount of underreporting. To examine the completeness of Medicaid encounter data, a CMS contractor assessed the average number of encounter data files per enrollee and the percentage of enrollees with data files. As another example, MAOs reporting an unexpectedly large number of a particular service may suggest overreporting. Analyzing encounter data elements by demographic group, provider type, and service type. For example, analyzing encounter data by enrollees’ gender would enable CMS to verify that data files for gender-specific diagnoses and procedures are logical. Analyzing encounter data by provider type helps identify missing or erroneous data for specific provider types or discover fluctuations in enrollee visits. For example, dramatic changes in utilization from one time period to another may indicate erroneous data. Finally, analyzing encounter data by service type also helps to examine the relationship between (1) ancillary services (e.g., laboratory tests and x-rays) and enrollee visits, (2) primary care and specialty care visits, or (3) outpatient services and inpatient admissions. Comparing encounter data with other Medicare data sources, MAOs’ financial reports, or other benchmarks. Comparing MA encounter data with Medicare FFS data may help determine whether differences exist in hospital admission rates between the MA and FFS programs. In addition, comparing the volume of encounter data to financial reports helps reveal gaps in the data.monitoring MAOs’ encounter data volumes for various service types against established benchmarks helps identify data submission problems, according to an actuarial firm that assessed Medicaid Furthermore, Moreover, New Jersey examines the encounter data for California.rate of services used per 1,000 MCO enrollees against benchmarks for 28 service categories, such as laboratory services, to assess data completeness. CMS has not yet performed MA enrollees’ medical record reviews, which typically involve comparing a sample of encounter data with the clinical information contained in enrollees’ medical records. According to CMS’s protocol for validating Medicaid encounter data, medical record reviews can help confirm the findings generated in the encounter data analyses. Use of Medical Record Reviews in a Medicaid Encounter Data Validation Study In a 2010 Medicaid encounter data validation study for Georgia, the Health Services Advisory Group examined the extent to which services documented in enrollees’ medical records were absent in their encounter data and the extent to which services documented in enrollees’ encounter data were absent from their medical records. It also evaluated the accuracy of the diagnosis and procedure codes in encounter data by comparing them with documentation in enrollees’ medical records. The findings showed that enrollees’ medical records generally supported encounter data files in Georgia. Specifically, 93.9 percent of the dates of service, 86.7 percent of the diagnosis codes, and 78.5 percent of the procedure codes from the encounter data had supporting evidence in the medical records. However, not all services documented in the medical records were found in encounter data files. Specifically, 20.5 percent of the dates of service, 49.3 percent of the diagnosis codes, and 40.1 percent of the procedure codes documented in enrollees’ medical records were omitted from encounter data files. Acknowledging the necessity of medical record reviews, CMS officials noted that the agency plans to review medical records as part of its MA risk adjustment data validation auditing process when it begins using encounter data for risk adjustment purposes. However, as of May 2014, the agency has not developed specific plans or time frames to include these data in this auditing process. CMS currently uses this auditing process to validate the accuracy of RAPS data. Specifically, CMS requires MAOs to provide medical records to substantiate the information in a selected sample of MA enrollees’ RAPS data. On the basis of the clinical information contained in enrollees’ medical records that substantiates the information in their RAPS data, CMS calculates corrected risk scores and calculates payment errors—which can represent a net overpayment or underpayment. Some MAOs may have been overpaid and may need to refund Medicare payments when enrollees’ medical records do not provide evidence for the risk-adjusted payment they had received from CMS. Because CMS has not yet conducted statistical analyses and reviewed medical records, it cannot report information from these activities to each MA plan. CMS’s protocol for validating Medicaid encounter data highlights the importance of summarizing information, reporting findings, and providing recommendations to plans for improving the completeness and accuracy of encounter data. Once the data are validated, MAOs could use summary reports from CMS in several ways, such as monitoring quality improvement and service utilization and managing their enrollees and providers. For example, the Health Services Advisory Group’s 2010 encounter data validation study for Georgia evaluated the completeness and accuracy of encounter data submitted by three MCOs. The study included plan-specific tables on the number and percentage of encounter files by place of service with statewide comparisons, the number and percentage of valid encounter files for age- and gender-appropriate diagnoses and services, and the number of encounter files by month of service. Without this type of information, CMS and MAOs cannot ensure the completeness and accuracy of MA encounter data. The collection of MA encounter data provides CMS with the opportunity to improve the accuracy of Medicare payments to MAOs and to monitor specific health care services used by enrollees. For MA encounter data to reach its full potential, it is critical that CMS develop a clearly defined strategy—which includes specific actions, priorities, and milestones—for using the information and validating the completeness and accuracy of the data. Deciding how the data are to be used influences which data elements need to be collected and, in turn, the extent of data reporting. However, CMS has yet to develop specifics on how or when it will use encounter data for a variety of program management purposes. Although CMS has decided to use MA encounter data to supplement RAPS data in calculating risk scores in 2015, this use may inappropriately increase payments to MAOs. Using diagnoses from both sources can only increase the number of diagnoses reported for MA enrollees. This has the potential to widen the existing discrepancy between FFS and MA in the coding of diagnoses. As we previously recommended, CMS should take steps to improve the accuracy of the adjustment made for differences in diagnostic coding practices between FFS and MA to help ensure appropriate payments to MAOs. As of March 2014, CMS has not acted on our recommendation. To the extent that CMS continues to pay MAOs under its current risk adjustment system and not adequately account for diagnostic coding differences, excess payments to MAOs could grow. Furthermore, CMS’s decision to use MA encounter data in 2015 may be premature because the agency has not yet fully validated the data. CMS has taken steps to validate the data, such as establishing certain reporting requirements and performing automated data checks. However, the agency has not yet completed other steps in assessing whether the data are suitable for use, such as performing statistical analyses, reviewing medical records, and providing MAOs with summary reports of its findings. Without fully validating the completeness and accuracy of MA encounter data, CMS and MAOs would be unable to confidently use these data for risk adjustment or any other program management or policy purposes. Until CMS determines that encounter data are sufficiently complete and accurate to be used for risk adjustment and other intended purposes, the potential benefits of using these data will be delayed. To ensure that MA encounter data are of sufficient quality for their intended purposes, the Administrator of CMS should establish specific plans and time frames for using the data for all intended purposes in addition to risk adjusting payments to MAOs and complete all the steps necessary to validate the data, including performing statistical analyses, reviewing medical records, and providing MAOs with summary reports on CMS’s findings, before using the data to risk adjust payments or for other intended purposes. We provided a draft of this report to HHS for comment. In its written response, HHS agreed that establishing plans for using encounter data and performing steps to validate the data are important activities. However, it did not address the specific recommendations we made. (See app. III.) Regarding our first recommendation—to establish specific plans and time frames for all uses of MA encounter data—HHS stated that it agreed that the agency should establish plans for using the data. HHS noted that it has developed lists of the purposes for which it intends to use the data. Current regulations authorize four purposes—risk adjustment, quality improvement, Medicare disproportionate share percentages, and Medicare coverage monitoring. HHS recently published a proposed rule that outlines several additional purposes—program evaluation, program integrity, program administration, and others. HHS stated that once the proposed rule is finalized, CMS will be in a position to establish specific plans and time frames for the list of additional permissible uses of MA encounter data. However, CMS has had the authority since 2008 to use MA encounter data for the initial four purposes, thus it remains unclear if and when CMS will develop detailed plans for these earlier authorized uses. Regarding our second recommendation—to fully validate MA encounter data before use for any purpose—HHS stated that it will continue its data validation activities while it uses the data for risk adjusting payments to MAOs. HHS agreed that performing statistical analyses and providing summary reports are important elements of data validation. HHS stated that it will undertake medical record reviews—which are used to verify encounter data—through its ongoing risk adjustment validation audits of RAPS data. We remain concerned, however, that CMS intends to use 2014 MA encounter data to support its risk score calculations for 2015 before it completes all data validation activities suggested by the Medicaid protocol. Furthermore, CMS’s reliance on risk adjustment validation audits of RAPS data may not be adequate to confirm the completeness and accuracy of encounter data given significant differences—in the volume and breadth of data elements—between the two data collection efforts. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Administrator of CMS, interested congressional committees, and others. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. Description CMS organized this meeting with Medicare Advantage organizations (MAO) to disseminate information on the requirements for encounter data submission, the transition to submitting encounter data, and the schedule for encounter data implementation. CMS prepared this reference guide to provide MAOs with information about collecting encounter data from health care providers and submitting encounter data to CMS. The reference guide also includes information about encounter data processing that CMS performs. CMS prepared these guides, which it regularly updates, to provide technical assistance on conducting Health Insurance Portability and Accountability Act of 1996- compliant electronic transactions. December 2010 through March 2011 CMS organized these meetings between CMS and MAOs to discuss specific MA encounter data topics and concerns. CMS also published questions and answers from these meetings. CMS organized these meetings to provide MAOs with continued guidance on submitting encounter data. CMS also published questions and answers from these meetings. CMS organized these meetings to provide updates regarding decisions the agency made regarding encounter data implementation. CMS prepares bulletins with updated information on encounter data processing, such as the most common errors in submitting encounter data. CMS also prepares newsletters with information on policy updates. The CSSC help line provides encounter data assistance to MAOs by a toll-free telephone number. MAOs receive updated information about encounter data submission through the CSSC website. Palmetto GBA is CMS’s contractor that manages the collection of MA encounter data and the CSSC help line. Appendix II: Summary of Automated Reports for Medicare Advantage (MA) Encounter Data Submissions Report developer The Accredited Standards Committee X12 Notify MA plans about problems with the submission of encounter data files. Example The Centers for Medicare & Medicaid Services (CMS) rejects an encounter data file that contains an error in a processing- related data element. Determine the syntactical accuracy of encounter data elements. CMS alerts an MA plan that letters appear in a numeric-only data element. Acknowledge the acceptance or rejection of encounter data files. CMS notifies an MA plan about a problem with an encounter data submission. Provide information on whether encounter data files and service-related data elements have been accepted or rejected for further processing. CMS informs an MA plan that an encounter data file was rejected for further processing while another one was accepted. Notify MA plans about duplicate encounter data files and service-related data elements. CMS tells an MA plan that an encounter data file includes duplicate services or is the duplicate of another data file. In addition to the contact named above, Rosamond Katz, Assistant Director; Manuel Buentello; David Grossman; Elizabeth T. Morrison; and Hemi Tewarson made key contributions to this report. Medicare: Contractors and Private Plans Play a Major Role in Administering Benefits. GAO-14-417T. Washington, D.C.: March 4, 2014. Medicare Advantage: 2011 Profits Similar to Projections for Most Plans, but Higher for Plans with Specific Eligibility Requirements. GAO-14-148. Washington, D.C.: December 19, 2013. High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 2013. Medicare Advantage: Substantial Excess Payments Underscore Need for CMS to Improve Accuracy of Risk Score Adjustments. GAO-13-206. Washington, D.C.: January 31, 2013. Medicare Advantage: CMS Should Improve the Accuracy of Risk Score Adjustments for Diagnostic Coding Practices. GAO-12-51. Washington, D.C.: January 12, 2012. Medicare Advantage: Changes Improved Accuracy of Risk Adjustment for Certain Beneficiaries. GAO-12-52. Washington, D.C.: December 9, 2011.

Medicare Advantage—the private plan alternative to the traditional Medicare program—provides health care for nearly 15.5 million enrollees, about 30 percent of all Medicare beneficiaries. After a multiyear rollout, CMS began collecting encounter data in January 2012. GAO was asked to review CMS's plans for using MA encounter data and its efforts to validate the data's quality. This report examines (1) how the scope of MA encounter data compare with CMS's current risk adjustment data, (2) the extent to which CMS has specified plans and time frames to use encounter data for risk adjustment and other purposes, and (3) the extent to which CMS has taken appropriate steps to ensure MA encounter data's completeness and accuracy. In addition to reviewing laws, regulations, and guidance on MA encounter data collection and reporting, GAO interviewed CMS officials and representatives of MAOs. GAO also compared CMS's activities to the protocol CMS developed to validate Medicaid encounter data—comparable data collected and submitted by entities similar to MAOs. The Centers for Medicare & Medicaid Services (CMS) is collecting Medicare Advantage (MA) encounter data—information on the services and items furnished to enrollees—that are more comprehensive than the beneficiary diagnosis data the agency currently uses to risk adjust capitated payments to MA organizations (MAO). CMS, an agency within the Department of Health and Human Services (HHS), makes these adjustments to reflect the expected health care costs of MA enrollees. Encounter data have many more elements—including procedure codes and provider payments—from a wider range of provider types—such as home health agencies and skilled nursing facilities—thus expanding the scope of sources for diagnosis and other information. CMS has not fully developed plans for using MA encounter data. The agency announced that it will begin using diagnoses from both encounter data and the data it currently collects for risk adjustment to determine payments to MAOs in 2015. However, CMS has not established time frames or specific plans to use encounter data for other potential purposes. CMS has taken some, but not yet all, appropriate actions to ensure that MA encounter data are complete and accurate. (See figure.) The agency has established timeliness and frequency requirements for data submission, but has not yet developed requirements for completeness and accuracy. Also, the agency has certified nearly all MAOs to transmit encounter data. Although CMS performs automated checks to determine whether key data elements are completed and values are reasonable, it has not yet performed statistical analyses that could detect more complex data validity issues. For example, CMS has not yet generated basic statistics from the data by demographic group or provider type to identify inconsistencies or gaps in the data. Also, it has not yet reviewed medical records to verify diagnoses and services listed in encounter data or reported what it has learned about data quality to MAOs. Agency officials told GAO they intend to perform these additional quality assurance activities but have not established time frames to do so. CMS should establish specific plans for using MA encounter data and thoroughly assess data completeness and accuracy before using the data to risk adjust payments or for other purposes. While in general agreement, HHS did not specify a date by which CMS will develop plans for all authorized uses of encounter data and did not commit to completing data validation before using the data for risk adjustment in 2015.

You are an expert at summarizing long articles. Proceed to summarize the following text: DHS’s mission is to lead the unified national effort to secure America by preventing and deterring terrorist attacks and protecting against and responding to threats and hazards to the nation. DHS also is to ensure safe and secure borders, welcome lawful immigrants and visitors, and promote the free flow of commerce. Created in 2003, DHS assumed control of about 209,000 civilian and military positions from 22 agencies and offices specializing in one or more aspects of homeland security. The intent behind the merger creating DHS and expected transformation was to improve coordination, communication, and information sharing among the multiple federal agencies responsible for protecting the homeland. Not since the creation of the Department of Defense in 1947 has the federal government undertaken a transformation of this magnitude. As we reported before the department was created, such a transformation is critically important and poses significant management and leadership challenges. For these reasons, we designated the implementation of the department and its transformation as high-risk in 2003, and we continue to do so today. In this regard, we have stated that failure to effectively address DHS’s management challenges and program risks could have serious consequences for our national security. Among DHS’s transformation challenges, we highlighted the formidable hurdle of managing the acquisition and integration of numerous mission- critical and mission support systems and associated IT infrastructure. For the department to overcome this hurdle, we emphasized the need for DHS to establish an effective IT governance framework, including controls aimed at effectively managing system acquisition and IT-related people, processes and tools. To accomplish its mission, the department is organized into various components, each of which is responsible for specific homeland security missions and for coordinating related efforts with its sibling components, as well as external entities. Figure 1 shows DHS’s organizational structure; table 1 shows DHS’s principal organizations and their missions. Within the Management Directorate is the Office of the Chief Information Officer (CIO). Among other things, this office is to leverage best available technologies and IT management practices, provide shared services, coordinate acquisition strategies, maintain an enterprise architecture that is fully integrated with other management processes, and advocate and enable business transformation. Other DHS entities also are responsible or share responsibility for IT management activities. For example, DHS’s major organizational components (e.g., directorates, offices, and agencies) have their own CIOs and IT organizations. Under this structure, control over the department’s IT management functions is shared by the DHS CIO and the component CIOs. Also within the Management Directorate is the Office of the Chief Procurement Officer (CPO). The CPO is the department’s senior procurement executive who has leadership and authority over DHS acquisition and contracting, including major investments. This office’s responsibilities include issuing policies and implementing instructions, overseeing acquisition and contracting functions, and ensuring that a given acquisition’s contracting strategy and plans align with the intent of the Acquisition Review Board, DHS’s highest investment review board. Similar to the department and component CIOs, DHS relies on a structure of dual accountability and collaboration between the CPO and the heads of DHS components to carry out the acquisition function. To promote coordination across DHS component boundaries, the DHS CIO and CPO have each established management councils. For example, the DHS CIO established the department’s CIO council, which is chaired by the DHS CIO and composed of component-level CIOs. According to its charter, the specific functions of the council include establishing a strategic plan, setting priorities for departmentwide IT, identifying opportunities for sharing resources, coordinating multi-bureau projects and programs, and consolidating activities. To accomplish their respective missions, DHS and its component agencies rely on and invest heavily in IT systems and supporting infrastructure. For example, in fiscal year 2009, DHS IT-related funding totaled about $6.2 billion. Of DHS’s principal component organizations, Customs and Border Protection (CBP) represents the largest IT investor (about $1.7 billion or 28 percent). The next largest single investment in IT transcends DHS organizations and is for DHS-wide IT infrastructure ($1.5 billion), which includes, among other things, development of a replacement for the system used to share homeland security information with its federal, state, and local partners. The U.S. Citizenship and Immigration Services and the National Protection and Programs Directorate are the next largest investors in IT ($561 and $556 million, respectively). See figure 2 for more information on DHS components and their fiscal year 2009 funding. According to DHS, the $6.2 billion in funding supports 279 major IT acquisition programs. Examples of these programs are described below. Automated Commercial Environment (ACE): ACE is a CBP program that was begun in 2001 to modernize trade processing and support border security by, among other things, fully automating commercial import and export data processing and facilitating information sharing among federal agencies with a trade-related mission. ACE capabilities are being delivered in a series of increments, and thus far operational capabilities include screening cargo and conveyances, analyzing data to support targeting of high-risk entities, and processing truck manifests electronically. Future increments are to provide additional screening and combined manifest processing across all types of transportation. Through fiscal year 2009, DHS has been appropriated about $2.7 billion for ACE, and for fiscal year 2010, the department has requested about $268 million. United States Visitor and Immigrant Status Indicator Technology (US-VISIT): This program dates to 2002 and is within the National Protection and Programs Directorate. It is to enhance the security of our citizens and visitors, ensure the integrity of the U.S. immigration system, protect privacy, and facilitate legitimate trade and travel. The program is to achieve these goals by, among other things, (1) collecting, maintaining, and sharing information on certain foreign nationals who enter and exit the United States; (2) identifying foreign nationals who have overstayed or violated the terms of their visit or who can receive, extend, or adjust their immigration status; (3) detecting fraudulent travel documents, verifying visitor identity, and determining visitor admissibility through the use of biometrics (digital fingerprints and a digital photograph); and (4) facilitating information sharing and coordination within the immigration and border management community. DHS has delivered US-VISIT capabilities in a series of increments. As a result, a biometrically enabled entry capability has been operating at about 300 air, sea, and land POEs since December 2006 (115 airports, 14 seaports, and 154 of 170 land ports). Since 2004, DHS has evaluated a number of biometric exit solutions, and several exit pilot evaluations are currently underway. However, an exit capability is not yet operational. Through fiscal year 2009, DHS had been appropriated about $2.5 billion for US-VISIT, and for fiscal year 2010, the department has requested about $356 million. Rescue 21: This is a Coast Guard program to modernize a 30-year-old search and rescue communications system used for missions 20 miles or less from shore, referred to as the National Distress and Response System. Among other things, it is to increase communications coverage area, allow electronic tracking of department vessels and other mobile assets, and enable secure communication with other federal and state entities. As of June 2009, Rescue 21’s initial operating capability has been deployed and accepted at 23 of 42 regions. Additional system capability (e.g., the ability to track vessels) remains to be developed, as does a system to meet the unique needs of the Alaska region. Through fiscal year 2009, DHS has been appropriated about $723 million for Rescue 21, and for fiscal year 2010, the department has requested about $117 million. Secure Flight: This is a Transportation Security Administration (TSA) program to allow the federal government to assume from airlines the responsibility of prescreening passengers for domestic flights by matching of passenger biographic information against watch lists. Among other things, Secure Flight is to prevent people suspected of posing a threat to aviation from boarding commercial aircraft in the United States, protect passengers’ privacy and civil liberties, and reduce the number of people unnecessarily selected for secondary screening. TSA is currently in the process of phasing in its use of Secure Flight for domestic flights. Through fiscal year 2009, DHS has been appropriated about $326 million for Secure Flight, and for fiscal year 2010, the department has requested about $84.4 million. SBInet: SBInet is the technology component of a CBP program known as SBI, which is to help secure the nation’s borders and reduce illegal immigration through physical infrastructure (e.g., fencing), surveillance systems, and command, control, communications, and intelligence technologies. As of 2009, a pilot of SBInet capabilities referred to as Project 28 has been deployed and is currently operating along 28 miles of the southwest border in Tucson, Arizona. Through fiscal year 2009, DHS has been appropriated about $3.6 billion for SBI, and for fiscal year 2010, the department has requested about $779 million. The department has continued to work to establish effective corporate IT and acquisition management controls and capabilities, but progress across these disciplines has been uneven, and more remains to be done. Until DHS fully institutionalizes these controls and capabilities, it will be challenged in its ability to effectively and efficiently acquire large-scale IT systems and thereby leverage technology to support transformation and achieve mission goals and results. Leading organizations recognize the importance of having and using an enterprise architecture (EA)—a corporate blueprint that describes—in useful models, diagrams, tables, and narrative—how a given entity operates today and how it plans to operate in the future, and provides a road map for transitioning from today to tomorrow. Our experience with federal agencies has shown that attempting to acquire systems without an EA often results in investments that are duplicative, not well integrated, unnecessarily costly to maintain, and limited in terms of optimizing mission performance. Since 2003, DHS has issued annual updates to its EA that have improved on prior versions by adding previously missing content. Specifically, we reported in November 2003 that DHS’s initial version of its EA was not sufficiently mature to guide and constrain investments. For example, while the department had established the management foundation for developing, maintaining, and implementing its EA and had issued an initial version of its target architecture, it had yet to develop products that fully described its current and target architectural environments, as well as a plan for transitioning from the current to the target environment. In August 2004, we reported that the initial version of the department’s architecture provided a useful foundation on which to build a more complete architecture, but that it was still missing important content that limited its utility. For example, the content of this version was not systematically derived from a DHS or national corporate business strategy; rather it was an amalgamation of the existing architectures of the DHS predecessor agencies, along with their portfolios of systems investment projects. To assist DHS in evolving its architecture, we made 41 recommendations aimed at adding needed content. In May 2007, we reported on the third version of DHS’s EA, concluding that while this version partially addressed each of our prior recommendations, it did not fully address them, and thus important content was still missing. Further, we reported that DHS organizational components were not adequately involved in its development. Accordingly, we made additional recommendations. To the department’s credit, recent versions of its EA largely address our prior recommendations aimed at adding needed architectural depth and breadth. For example, in response to our prior recommendation that the architecture include a technical reference model (TRM) that describes, among other things, the technical standards to be implemented for each enterprise service, the 2008 version of the EA included a TRM that identified such standards. It also adopted an approach for extending the architecture through segments, which is a “divide and conquer” approach to architecture development advocated by OMB. To implement this approach, OMB guidance states that agencies should define and prioritize enterprise segments, focusing first on those segments that will help it perform its mission most effectively, and that they should first focus on developing architectures for high priority segments. However, while the 2008 EA identified 22 segments, it did not prioritize the segments. DHS recently issued the latest version of its EA, and this version continues to improve on the prior version. For example, it contains a revised DHS business model that decomposes functional areas into business functions, describes information exchanges that support information sharing across organizational boundaries, and provides updated information security profiles for existing systems. It also updates the transition strategy for migrating to the target architecture by including planned 2010 investments. However, this version still does not contain prioritized segments and does not include OMB required architecture information for each segment (e.g., information exchanges between the critical business processes, conceptual solution architecture for each segment). Instead, the EA states that future versions will include revised segmented architectures within the context of its newly developed functional areas. As we have previously reported, segment architectures serve as a bridge between the corporate frame of reference captured in the EA and each individual system investment. Without well-defined segment architectures, DHS does not have a sufficient basis for investing in IT programs in a manner to ensure that they investments are properly sequenced, well integrated, and not duplicative. Through effective corporate acquisition and investment management, organizations can make informed decisions when selecting among competing investment options and when controlling them throughout their acquisition life cycles. Based on our research, we issued an IT investment management framework that encompasses, among other things, best practices of successful public and private sector organizations relative to selecting and controlling individual investments as well as portfolios (segments) of investments. During the select phase, organizations are to (1) identify and analyze program/project risks and value before committing significant funds and (2) select those that will best support its mission needs. In the control phase, they are to ensure that programs/projects are meeting cost, schedule, and performance expectations at key milestone events, and that actions are taken to address deviations. Since 2003, DHS has attempted to define and implement a corporate approach to overseeing its acquisition of major system investments, and we have continued to report limitations in its efforts to do so. Specifically, in August 2004, we reported that DHS had established an investment management process that provided for departmental oversight of major IT programs at key milestones, but that most programs (about 75 percent) had not undergone defined milestone reviews in a timely manner. At that time, DHS attributed this to the newness of the process. Based on our findings, we made recommendations aimed at strengthening the process. In March 2005, we again reported on the department’s acquisition and investment review process, noting that while it incorporated some best practices and provided for senior management having information required to make well-informed investment decisions at key points in the acquisition life cycle, the process did not require senior management attention and oversight at all key decision points. For example, management reviews were not required prior to investment in a prototype or prior to passing a key acquisition milestone. Accordingly, we made further recommendations to improve the process. In April 2007, we assessed DHS’s investment management structures, policies, and procedures against our ITIM framework, and concluded that while DHS had established investment decisionmaking bodies (e.g., investment review board) to oversee its IT investments, it had yet to fully define 8 of 11 key policies and procedures associated with selecting investments and controlling their acquisition. For example, procedures for selecting among competing investment options did not cite either the specific criteria or the steps for prioritizing and selecting investments at either the individual program level or the portfolio of programs level. In addition, the department had yet to document a methodology, with explicit criteria, for determining a given investment’s alignment to the EA. Instead, it relied on the undocumented and subjective determinations of individuals. We also reported that DHS had not fully implemented the key practices needed to control programs and portfolios of programs. For example, DHS investment review boards were not conducting regular investment reviews, and while program-specific control activities were sometimes performed, they were not performed consistently and thoroughly across investments.. Accordingly, we made recommendations aimed at establishing and implementing mature investment management processes. In November 2008, we again reported that DHS was not effectively implementing its acquisition and investment review process. Specifically, while DHS’s review process called for its decision-making bodies to review investments at key points in their life cycles—including program authorization—45 of the 48 major investments that we examined were not reviewed in accordance with this process. In addition, DHS was unable to enforce decisions made by these investment bodies because it did not track whether its component organizations took actions called for in the decisions. Further, many of these major investments lacked basic acquisition documents necessary to inform the investment review process, such as program baselines; and two of nine components—which managed a total of 8 major investments—did not have required component-level investment management processes in place. Moreover, almost a third of the 48 major investments received funding without having validated mission needs and requirements, and two-thirds did not have life cycle cost estimates. Finally, DHS had not conducted regular reviews of its investment portfolios to ensure effective performance and minimize unintended duplication of effort. We concluded that without validated requirements, life cycle cost estimates, and regular portfolio reviews, DHS could not ensure that its investment decisions were appropriate and would ultimately address capability gaps. To address these weaknesses, we made a number of recommendations. To strengthen its institutional approach to acquisition and IT investment management, DHS established the Acquisition Program Management Division (APMD) within the Office of the CPO, and assigned it responsibility for developing and maintaining the department’s acquisition policy and providing support and assistance to the department’s acquisition workforce. To that end, DHS issued a new departmental directive and related guidance in November 2008, which together provide the framework for departmental management, support, review, and approval of programs, including IT acquisitions. The directive established a revised acquisition review process, including roles and responsibilities of DHS approving authorities, threshold levels for acquisitions, and acquisition decision events and the corresponding documentation required. Specifically, it established the Acquisition Review Board as the department’s highest review body and charged it with reviewing and approving all programs at key milestone decision points that are above $300 million in life cycle costs. It also described working groups and other boards, such as the Enterprise Architecture Board, and Program Review Board, to provide subject matter expertise to the Acquisition Review Board and DHS executives, and to review and approve investments that meet lower dollar thresholds. Recently established, according to a DHS official, was the DHS Asset Board (to provide lead technical authority on acquisition of real property and acquisition of vehicles). Finally, it is establishing the Joint Requirements Council (to validate the results of the strategic requirements planning process). DHS has also reinstated regular acquisition review board meetings and acquisition decision memorandums. Specifically, DHS’s acquisition review board reports that it completed 14 acquisition reviews in 2008, and has thus far completed 18 reviews in 2009, including reviews of SBInet, US- VISIT, and Secure Flight. DHS also reports that 7 additional reviews are scheduled to occur by the end of the fiscal year. In addition, DHS components have designated Component Acquisition Executives (CAEs) to serve as the senior acquisition officials within the components and to be responsible for implementation of management and oversight of all component acquisition processes. DHS has also begun to make use of a new system to track program cost, schedule, and performance information, as well as action items that result from acquisition oversight board decisions. To support acquisition oversight, the CPO has identified a need for 58 additional positions. As an initial step, DHS’s fiscal year 2010 budget request included 10 additional full time equivalent positions for acquisition oversight support. Notwithstanding these actions, the department’s acquisition and investment management processes still do not meet some of the program- and portfolio-level management practices in our ITIM framework, which are based on the investment management requirements in the Clinger- Cohen Act. With respect to program-level practices, DHS has not defined specific criteria for selecting and prioritizing new programs or for reselecting and reprioritizing existing ones. Without such criteria, it is unlikely that investment selection and prioritization decisions will be made consistently and will best support mission needs. Without proper management controls in place, it is unlikely that investment oversight decisions will be made consistently and will best support mission needs. In addition, DHS has yet to adequately address how it determines and ensures that an investment is aligned with its EA. Specifically, while it has recently chartered its Enterprise Architecture Board and assigned it responsibility for ensuring that each investment is architecturally aligned throughout its life cycle, and while its new acquisition guidance specifies the architecture products that investments are to be aligned with (e.g., the business functions within the EA business model, the data objects in the conceptual data model, and the technical standards in the reference model), it has yet to define a methodology, including explicit criteria, for making a risk-based alignment determination. Also, the new directive and other DHS guidance do not provide for development of action plans for addressing areas of misalignment. DHS, in its comments, stated that they do not believe a methodology for alignment determinations is needed and that having subject matter experts involved in each determination is preferable given the wide range of IT programs at DHS; however, we believe that without such a methodology, it is not possible for the department to ensure that such alignment determinations are made consistently and repeatably. Without such acquisition and investment management controls, architecture alignment assessments will continue to largely be based on subjective and unverifiable judgments, and thus will not provide a sufficient basis for ensuring that systems are not duplicative and are interoperable. With respect to portfolio-level practices, DHS does not have policies and procedures for evaluating or controlling its investment portfolios. Further, while post-implementation reviews are mentioned in DHS guidance, the guidance lacks specific procedures that would, for example, define roles and responsibilities for conducting these reviews and specify how the lessons learned and results of such reviews would be shared and used. Without such policies and procedures for portfolio management, DHS is at risk of not selecting and controlling the mix of investments in a manner that best supports the department’s mission needs. We are continuing to monitor DHS’s efforts to more fully define its acquisition and investment management processes, as well as the extent to which acquisition reviews are performed regularly and consistently. Managing IT projects and programs throughout their life cycles requires applying engineering discipline and rigor when defining, designing, developing, integrating, testing, deploying, and maintaining IT systems and services. Our evaluations and research show that applying such rigorous management practices improves the likelihood of delivering expected capabilities on time and within budget. In other words, the quality of IT systems and services is greatly influenced by the quality of the management processes involved in developing and acquiring them. According to leading practices, institutional system engineering maturity requires life cycle management processes that are clearly defined and applied on a repeatable basis across an organization. A system life cycle management process normally begins with initial concept development and continues through requirements definition to design, development, various phases of testing, implementation, and maintenance. More specifically, during requirements definition, functional requirements are delineated in terms of system functionality (what the system is to do), performance (how well the system is to execute functions), data (what data are needed by what functions, when, and in what form), interfaces (what interactions with related and dependent systems are needed), and security (what controls are needed to address the assessed level of risk). As part of requirements definition, activities and documentation are produced to ensure that requirements are unambiguous, consistent with one another, linked (that is, traceable from one source level to another), verifiable, understood by stakeholders, and fully documented. The steps in the life cycle process each have important purposes and they have inherent dependencies among themselves. Thus, if earlier life cycle steps are omitted or not performed effectively, later steps will be affected, potentially resulting in costly and time-consuming rework. For example, a system can be effectively tested to determine whether it meets requirements only if these requirements have been completely and correctly defined. To the extent that interdependent life cycle management steps or activities are not effectively performed, or are performed concurrently, a system acquisition or development program will be at risk of cost, schedule, and performance shortfalls. Since 2004, we have reported that DHS lacked a standard and repeatable life cycle management process, and instead was relying on the processes that each of its components had in place. In 2008, DHS issued an interim life cycle management guide to introduce a standard system development methodology that can be tailored to specific projects. To the department’s credit, this guide addresses important aspects of effective system acquisition and development. For example, the guide requires that business objectives and systems requirements, as well as baseline performance goals, be defined and used as the measures of success for each program, and it requires that all programs be aligned with the HLS EA. Further, it requires acquisition management oversight and defines the roles and responsibilities of key stakeholders, including component CIOs and DHS IT portfolio managers, and to accomplish this it requires checkpoint reviews (i.e., stage reviews) throughout the program’s life cycle. In addition, it specifies key activities associated with each life cycle stage (planning, requirements definition, design, development, integration and test, implementation, operation and maintenance, and disposition). However, the interim guide does not address all key activities for each life cycle phase. For example, it does not address key practices associated with acquiring commercial products or services, such as evaluating commercial product and supplier viability and assessing commercial product dependencies/interoperability before purchasing the products. Also, while it does identify a list of work products that are to be created and updated to record the results of the activities performed for each life cycle stage, it does not address the content of all of these work products. For example, it does not provide a sample document or content template for a quality assurance plan, a configuration management plan, or a service reuse plan. Thus, opportunities remain to further define the SDLC. Moreover, it is unclear when and how this SDLC will be implemented. Until addressed, DHS will remain challenged in its ability to acquire and develop systems in a defined and repeatable manner. A strategic approach to human capital management is critical to ensuring that an organization has the right people with the right skills at the right time to perform a given function. Based on our research of leading organizations, we issued a model for strategic human capital management in which strategic human capital planning was one cornerstone. Through such planning, organizations can remain aware of its current workforce capabilities and its future workforce needs, and can be prepared for meeting these needs. According to our guidance, key practices for effective strategic human capital planning are generic, applying to any organization or component, such as an agency’s acquisition or IT organization. They include: Involving top management, employees, and other stakeholders in developing, communicating, and implementing a strategic workforce plan; Determining the critical skills and competencies needed to achieve current and future programmatic results; Developing strategies tailored to address gaps between the current workforce and future needs; Building the capability to support workforce strategies; and Monitoring and evaluating an agency’s progress toward its human capital goals and the contribution that human capital results have made to achieving programmatic goals. As is summarized below, DHS has yet to address either its acquisition or IT workforce needs in a manner that is fully consistent with these practices. Until DHS does so, it will continue to be at risk of not having sufficient people with the right knowledge, skills, and abilities to effectively and efficiently acquire key system investments. In November 2008, we reported that DHS had not developed a comprehensive strategic acquisition workforce plan to direct the department’s future acquisition workforce efforts, and that the department lacked several elements that are key to developing such a plan. More specifically, we reported that DHS lacked an overall direction for acquisition workforce planning, and notwithstanding some recent actions, had not fully involved key stakeholders, such as the CHCO and component procurement and program offices, both of which have been shown to increase the likelihood of success for workforce planning; excluded some acquisition-related career fields from its definition of acquisition workforce, thus limiting the scope of its planning efforts, and while it intended to expand its definition, it had yet to identify which positions should be included; lacked sufficient data to fully assess its acquisition workforce needs, including the gaps in the number of employees needed or the skills of these employees; and lacked sufficient insight into the number of contractors supporting its acquisition function or the types of tasks that contractors were performing. DHS has undertaken several initiatives to begin addressing its acquisition workforce challenges. For example, its recruiting, hiring, and training initiatives have allowed it to hire new contract specialists and expand workforce access to acquisition-related training. Specifically, in January 2008, the CPO implemented the Acquisition Professional Career Program, and as of September 2008, had hired 49 contract specialist interns. In addition, CPO established an Acquisition Training Program in 2008 that included DHS-specific training for program managers, and it formed a council to coordinate acquisition workforce training opportunities across components. In November 2008, we reported on several challenges that DHS faced in managing these initiatives. For example, most initiatives aimed at defining and identifying the acquisition workforce and assessing acquisition workforce needs had yet to produce results, and in some cases were progressing more slowly than originally projected. DHS’s initiatives also primarily focused on contract specialists despite other identified acquisition workforce shortages, and DHS had not determined how it would expand the initiatives. Further, DHS generally lacked documented performance goals and implementation steps—such as actions to be taken, needed resources, and milestones—for these initiatives. Since that time, DHS has taken steps to expand two of its recruiting and hiring initiatives to additional acquisition-related career fields. Specifically, DHS developed plans to include career fields such as program management and engineering in its fall 2009 Acquisition Professional Career Program cohort. According to a CPO representative, DHS also plans to add acquisition career fields to its centralized hiring program and has recently hired a recruitment coordinator to carry out this expansion. In June 2004, we reported that DHS had begun strategic planning for IT human capital at the headquarters level, but it had not yet systematically gathered baseline data about its existing IT workforce across the department. Moreover, the DHS CIO had expressed concern at that time about staffing and acknowledged that progress in this area had been slow. In our report, we recommended that the department analyze whether it had appropriately allocated and deployed IT staff with the relevant skills to obtain its institutional and program-related goals. In response, the CIO established an IT human capital Center of Excellence to deliver, plans, processes, and procedures to execute an IT human capital strategy and to conduct an analysis of the skill sets of DHS IT professionals. In September 2007, we reported that DHS had developed a IT human capital plan and related documents that were largely consistent with federal guidance and associated best practices. For example, they provided for developing a complete inventory of existing IT staff skills, identifying IT skills needed to achieve agency goals, determining skill gaps, and developing plans to address such gaps. They also provided for involving key stakeholders—such as the CIO, Chief Human Capital Officer (CHCO), and component agency CIOs and human capital directors—in carrying out the skill gap analyses and follow on workforce planning. However, we also reported that the plan did not fully address twelve key practices. For example, although the plan and supporting documents described the department’s IT human capital goals and steps necessary to implement them, most steps did not include associated milestones. In addition, although the plan and supporting documents provided for involving key stakeholders, they did not assign those stakeholders specific responsibilities against which to hold them accountable for results. We also reported at that time that DHS had made limited progress in implementing its IT human capital plan. In particular, DHS CIO and CHCO officials, as well as officials from the three DHS agencies that we examined (CBP, FEMA, and the Coast Guard), all told us that they had yet to begin implementing the plan. Accordingly, we made recommendations aimed at strengthening and implementing the plan. DHS has made limited progress in addressing our recommendations. For example it has not established implementation milestones, assigned stakeholder responsibilities and accountability, or begun to track, document, and report on human capital risks. Also, while DHS reported in 2007 that it intended to analyze its IT workforce makeup every 2 years, CIO and CHCO officials told us that this will not be done until after a planned 2010 Federal CIO Council-sponsored survey of the governmentwide IT workforce. Further, these officials stated that implementation of the 2007 IT human capital plan has been limited because the department’s focus has been on strengthening its executive leadership team and its acquisition workforce, and that it only recently became engaged on departmentwide IT workforce issues. However, they added that DHS component organizations have been working to strengthen staff core competencies in four IT disciplines—Project Management, Security/Information Assurance, Enterprise Architecture, and Solutions Architecture. According to officials from CBP, FEMA, and the Coast Guard, none of these component organizations have taken specific actions to implement the 2005 DHS IT human capital plan because they have not received any departmental instruction or guidance for doing so. Moreover, the extent to which they are each proactively and strategically addressing their respective human capital needs varies. For example, CBP’s Office of Information Technology Workforce Management Group has a strategic IT human capital plan that defines goals (e.g., creating and enabling a team of leaders who have both the technical expertise and skills to manage and motivate employees, and providing education, training and development opportunities to allow employees to grow in their jobs and their careers), and the group has taken actions to achieve the goals (i.e., identifying employees with leadership potential, developing a leadership curriculum for them, establishing an internship program, and creating a skills inventory). In contrast, FEMA’s Office of Information Technology does not have a strategic IT human capital plan, although officials report that one is to be completed in fiscal year 2010, and in the interim, this office is assessing its workforce competency gaps, among other things. Further, while the Coast Guard has an IT strategic human capital plan, this plan is more than a decade old, as officials report that they have no immediate plans to update it. The success of a major IT program can be judged by the extent to which it delivers promised system capabilities and mission benefits on time and within schedule. As our research and evaluations show, a key determinant of program success is the extent to which the earlier discussed institutional acquisition and IT management controls are appropriately employed in managing each and every IT investment. In this regard, our reviews of a number of large-scale DHS IT investments have disclosed a range of program management control weaknesses that have increased the risk of cost, schedule, and performance shortfalls. In many cases, DHS has since taken steps to address the weaknesses that we identified. However, some weaknesses have lingered, and we continue to identify issues on other programs. Moreover, these weaknesses are contributing to programs falling short of their capability, benefit, cost, and schedule expectations. To illustrate the prevalence and significance of these acquisition and IT management weaknesses, as well as DHS’s progress in addressing them, we discuss work related to five large-scale programs—ACE, US-VISIT, Rescue 21, Secure Flight, and SBInet. ACE is a multi-billion dollar program to incrementally modernize trade processing and support border security. Since 1999, we have issued a series of reports that have disclosed a number of acquisition and investment management weaknesses that have contributed to ACE performance shortfalls, including program costs increasing from $1 billion to about $3.1 billion, and ACE schedule slipping from fiscal year 2007 to fiscal year 2010. To address the weaknesses, we have made a number of recommendations. CBP has largely agreed with our recommendations, and continues to work to implement many of them. Below we provide a brief summary of ACE-related efforts to implement effective acquisition and IT management controls. Beginning in May 1999, we reported that ACE was not being defined in the context of an enterprise architecture, and that its life cycle cost estimates and cost/benefit analysis were inadequate. Further, ACE was not being acquired in accordance with disciplined investment management processes. As a result, CBP was not positioned to know that it was pursuing the right system solution for its needs and to deliver a defined a solution on time and schedule. Subsequently, CBP adopted an incremental approach to acquiring ACE, which we supported as a proven risk reduction measure for acquiring large-scale systems, but as we reported in June 2001, ACE was being pursued separate from another trade-related system (known as the International Trade Data System), which was duplicative of and not aligned with ACE. Subsequently, this related system was merged with ACE. Between May 2002 and February 2003, we continued to report on ACE challenges and weaknesses. Specifically, we reported that ACE was risky for a variety of reasons, including cost overruns, implications for changing how trade processing was performed, and known key acquisition and IT management control weaknesses associated with, for example, program office human capital and software management processes. Subsequently, we reported that CBP was working to implement our previous recommendations aimed at addressing acquisition and IT management control weaknesses, but that problems continued. For example, ACE cost estimates were not reliable because they were not derived in accordance with estimating best practices. The next year we again reported that ACE was not following rigorous and disciplined acquisition and IT management controls, such as those related to managing the program office human capital, risks, and contract management. For example, while initial ACE test results were positive, CBP had not taken steps to independently oversee the contractor’s testing. In May 2004, we reported that the first two ACE system increments were operating, but that CBP’s approach to incrementally acquiring and deploying ACE involved excessive overlap among increments. Moreover, the scheduling of increments had allowed for considerable overlap and concurrency among them, and this had produced a pattern of having to borrow resources from later increments to complete earlier increments. We concluded that this pattern had and would continue to result in ACE cost overruns and schedule delays. The next year, we reported that while CBP had revised its cost baselines in light of ACE overruns, this was not sufficient because the number of ACE increments had increased and system quality standards had been relaxed to allow increments to proceed through key milestones despite the presence of material system defects. We concluded that this practice, combined with the concurrency of increments, would exacerbate the program’s cost and schedule shortfalls. We also reported that previously identified management control weaknesses remained, such as in system testing and in cost estimation, and that progress in addressing our recommendations had been slow. In May 2006, we reported that CBP had begun to make progress in addressing our recommendations through the establishment and use of a program-wide performance and accountability framework, as we had also recommended. However, control weaknesses remained. For example, considerable concurrency still remained among increments, thus increasing the risk of continued cost and schedule overruns. Also, while earned value management was an OMB requirement, CBP discontinued its use on two ACE increments, thus limiting its ability to measure performance and progress. In October 2007, we reported that CBP had continued to take steps to establish an accountability framework grounded in measuring and disclosing progress against program performance measures and targets. However, ACE costs were likely to increase further because prior limitations in how system requirements were defined had resulted in an increase requirements and the need to replace a key software product, even though the new product may reduce user productivity. In addition, the inventory of ACE-related risks was incomplete and that information needed to make informed decisions on these risks was not being maintained. We plan to continue to monitor CBP’s progress in implementing our ACE- related recommendations. US-VISIT is a multi-billion dollar program to collect and maintain biographic and biometric information on certain foreign nationals who enter and exit the United States through over 300 air, sea, and land ports of entry. Since 2003, we have continued to report on US-VISIT acquisition and IT management control weaknesses that increased the risk of delivering less system capabilities and mission benefits than envisioned, and taking longer and costing more than expected. To the department’s credit, it has addressed many of the recommendations that we have made for addressing these weaknesses, and as a result the program is better positioned today for success than it has been in the past. However, these weaknesses have contributed to instances of the program not living up to expectations, and some weaknesses still remain that pose future risks. Below we provide a brief summary of US-VISIT-related efforts to implement effective acquisition and IT management controls. We first reported on US-VISIT in June 2003, finding that program plans did not sufficiently define what specific system capabilities and benefits would be delivered, by when, and at what cost, and how US-VISIT intended to manage the acquisition to provide reasonable assurance that it would meet their commitments. Without defining such commitments, it was not possible to measure program performance and promote accountability for results. Shortly thereafter, in September 2003, we concluded that the program was high risk because, among other things, its size, complexity, mission criticality, and enormous potential costs, coupled with a range of program management control weaknesses, including an immature governance structure, lack of clarity about its operational environment, facility implications, and mission value. In May 2004, we reported that US-VISIT did not have a current life-cycle cost estimate or a cost benefit analysis, and that testing of an initial increment of system capabilities was not well-managed, and was not completed until after the increment became operational. Moreover, the test plan used was not completed until after testing was concluded. In February 2005, we reported that DHS had hired a prime integration contractor to augment its ability to deliver US-VISIT, but that acquisition management weaknesses continued. For example, we found that an effort to pilot alternative system solutions for delivering the capability to track persons exiting the U.S. was faced with a compressed time line, missed milestones, and a reduced scope that limited its value. In February 2006, we reported that the DHS’s progress in implementing 18 GAO recommendations made in previous reports was mixed, but overall slow in critical areas, including completing cost-benefit analyses for increments, determining whether proposed increments would produce mission value consistent with costs and risks, developing well-defined and traceable test plans prior to testing, and assessing workforce and facility needs for new functionality. In February 2007, we reported that DHS had not adequately defined and justified its proposed investment in planned and ongoing exit pilot and demonstration projects, and that it continued to invest in US-VISIT without a clearly defined operational context (enterprise architecture) that included explicit relationships with related border security and immigration enforcement initiatives. At the same time, program management costs had risen sharply, while costs for development had decreased, without any accompanying explanation of the reasons. We also reiterated our prior findings concerning a lack of program transparency and accountability due to inadequate definition and disclosure of planned expenditures, timelines, capabilities, and benefits, as well as limited measurement and reporting on progress against each. In August 2007, we reported that while US-VISIT entry capabilities were operating at over 300 ports of entry, exit capabilities were not, and that DHS did not have a comprehensive plan or a complete schedule for delivering a biometric exit solution. In addition, DHS continued to invest heavily in program management activities without adequate justification for doing so, and it continued to propose spending tens of millions of dollars on US-VISIT exit projects that were not well-defined, planned, or justified on the basis of costs, benefits, and risks. In February 2008, we reported that while DHS had partially defined a strategic solution for meeting US-VISIT goals, including defining and beginning development of a key capability known as “Unique Identity,” which was to establish a single identity for all individuals at their earliest possible interaction with any U.S. immigration and border management organization by capturing the individual’s biometrics, including 10 fingerprints and a digital image. However it had not defined and economically justified a comprehensive strategic solution for controlling and monitoring the exit of foreign visitors, which was critical to accomplishing the program’s goals. DHS was also taking a range of evolving actions, partially at the department level, to coordinate relationships among US-VISIT and other immigration and border control programs; however, this evolution had yet to progress to the point of reflecting the full scope of key practices that GAO previously identified as essential to enhancing and sustaining collaborative efforts that span multiple organizations. As a result, the department was at increased risk of introducing inefficiencies and reduced effectiveness resulting from suboptimizing these programs’ collective support of immigration and border management goals and objectives. In December 2008, we reported on a lack of effective DHS executive oversight of the program, including involvement from the DHS CPO and the CHCO. In addition, we again reported that DHS lacked a detailed schedule for implementing an exit capability, and that, among other things, cost estimates for the then proposed exit solution were not reliable, risk management was not being effectively performed, and the program’s task orders were frequently rebaselined, thus minimizing the significance of earned value management-based schedule variances. Currently, we have work underway for the Chairman of the House Homeland Security Committee on the US-VISIT Comprehensive Exit project, including the extent to which the project’s component efforts are being managed in an integrated fashion. In addition, we are required by statute to review the results of an ongoing pilot of exit solutions at airports. Rescue 21 is a billion dollar Coast Guard program to replace its existing search and rescue communications system—installed in the 1970’s. Among other things, Rescue 21 is to allow continuous, uninterrupted communications on the primary ship-to-shore channel, limit communications gaps to less than 10 percent in the United States, provide direction finding and digital selective calling to better locate boaters in distress, allow communication with other federal and state systems, and protect communication of sensitive information. We have issued reports citing a number of acquisition and investment management weaknesses that have contributed to Rescue 21 performance shortfalls, including program costs increasing from $250 million to about $1 billion, and the schedule slipping from fiscal year 2006 to fiscal year 2017. To address the weaknesses, we have made a number of recommendations. Coast Guard has largely agreed with our recommendations, and continues to work to implement many of them. Below we provide a brief summary of Rescue 21-related efforts to implement effective acquisition and IT management controls. In September 2003, we reported that Rescue 21’s initial operating capability milestone of September 2003 had been postponed, and that a new schedule had yet to be finalized. Also, while the program had established processes for managing system requirements and managing risks, the processes were not being followed. For example, key deliverables for testing, such as test plans, were not yet defined and approved. In May 2006, we reported that Rescue 21 continued to experience acquisition management weaknesses relative to requirements management, project monitoring and oversight, risk management, cost and schedule estimating, and executive oversight, and that these weaknesses had contributed to program cost overruns and schedule delays. Specifically, Rescue 21’s total acquisition cost had risen from $250 million to $710.5 million, an increase of 184 percent, and its timeline for achieving full operational capability had been delayed from 2006 to 2011. Moreover, the most recent cost and schedule estimates were not reliable, and the program faced a possible future cost overrun of $161.5 million, which would bring the total acquisition cost to $872 million. Finally, the schedule estimate was uncertain due to ongoing contract renegotiations for the remaining sites, and pending decisions regarding vessel tracking functionality. Since then, the Coast Guard estimates that the program’s total acquisition cost will exceed $1 billion; deployment of Rescue 21 to the 48 continuous states will be delayed to 2012; deployment of the vessel tracking capability will be delayed to 2015; and deployment to Alaska will not occur until 2017. Secure Flight is a multi-billion dollar TSA program to allow DHS to assume from airlines the responsibility of prescreening passengers for domestic flights by matching of passenger biographic information against terrorist watch lists. Among other things, Secure Flight is to prevent people suspected of posing a threat to aviation from boarding commercial aircraft in the United States, protect passengers’ privacy and civil liberties, and reduce the number of people unnecessarily selected for secondary screening. TSA is currently in the process of phasing in its use of Secure Flight for domestic flights. Since 2005, we have reported on a number of acquisition and investment management weaknesses, such as requirements, testing, cost and schedule estimation, and security management, and made recommendations to address them. To TSA’s credit, it has addressed most of the recommendations. Below we provide a brief summary of TSA efforts to implement effective acquisition and IT management controls. We first reported on Secure Flight in March 2005, finding that TSA had not yet completed key development activities needed to successfully deliver an operational system, such as finalizing requirements documents or completing required test activities. In addition, TSA had not developed performance goals and measures to gauge the effectiveness of the Secure Flight program, nor had it developed life-cycle cost estimates, which limited oversight and accountability. In February 2006, we reported that while TSA had made some progress in developing and testing Secure Flight, it had not followed a disciplined life cycle approach and, as a result, some project activities were conducted out of sequence, requirements were not well defined, and documentation contained contradictory information or omissions. Further, while TSA had taken steps to implement an information security management program for protecting information and assets, its efforts were incomplete, and that the program lacked schedule and cost estimates. Accordingly, we made recommendations to address these limitations. Later that year we reported that TSA had begun taking actions to address our recommendation, including suspending development and undertaking a rebaselining, of the program. In February 2007, we reported that despite 4 years of effort, TSA had been unable to develop and implement Secure Flight, in large part, because it had not employed a range of acquisition and IT management control disciplines to effectively manage cost, schedule, performance, and privacy risks. At that time, TSA officials stated that they intended to put in place a new management team; rebaseline the program’s goals, capabilities, costs, and schedule; and establish more structured and controlled acquisition and IT management processes. In February 2008, we reported that TSA had made substantial progress in instilling more discipline and rigor into Secure Flight’s development and implementation. For example, TSA had developed a detailed concept of operations, established a cost and schedule baseline, and drafted key management and systems development documents, among other systems development efforts. However, TSA had not followed established risk management processes and it had not followed key practices for developing reliable cost and schedule estimates. Further, TSA had yet to incorporate end-to-end testing into its testing strategy, and had not addressed all system security requirements and vulnerabilities. On January 7, 2009, we reported that TSA had not demonstrated Secure Flight’s operational readiness and had generally not achieved several conditions set forth in the Department of Homeland Security (DHS) Appropriations Act, 2005. These conditions related to, among other things, performance of stress testing and estimation of cost and schedule. For example, we found that despite provisions for stress testing in Secure Flight test plans, stress testing had not been performed. Further, while TSA had made improvements to its life-cycle cost estimate and schedule, neither were developed in accordance with key best practices. As a result, the life-cycle cost estimate did not provide a meaningful baseline from which to track progress, hold TSA accountable, and provide a basis for sound investment decision making. To TSA’s credit, we recently reported that it had made notable progress in developing Secure Flight, including meeting nine out of ten key legislative conditions, including conducting performance and stress testing. As a result, TSA was poised at the time to begin incremental deployment of Secure Flight. Since then, Secure Flight has begun operating at selected airports and for selected airlines. SBInet is a multi-billion dollar program that involves the acquisition, development, integration, and deployment of surveillance systems and command, control, communications, and intelligence (C3I) technologies to create a “virtual fence” along our nation’s borders. Since 2007, we have reported on a number of SBInet acquisition and IT management weaknesses that increased the risk that the SBInet system will not perform as intended and meet user needs and expectations. For example, our first report identified weaknesses in how CBP was defining system requirements and managing program risks, including risks associated with acquiring SBInet through a series of concurrent task orders. In October 2007 and again in February 2008, we reported that the SBInet pilot, known as Project 28, was almost 8 months behind schedule in part because requirements were not adequately defined, contractor oversight was limited, and testing was not sufficiently performed. Later in 2008, we again reported on limitations in how SBInet risks were being managed, as well as areas in which SBInet had yet to demonstrate alignment to DHS’s enterprise architecture. In September 2008, we reported that after investing about 3 years in acquiring and developing SBInet, important aspects of the program remained ambiguous and were in a continued state of flux, making it unclear and uncertain what technology capabilities would be delivered, when and where they would be delivered, and how they would be delivered. Also, the program did not have an approved integrated master schedule to guide the execution of the program, and that assimilation of available information indicated that the schedule had continued to change. Further, we reiterated that the program had not effectively performed key requirements development and management practices, such as ensuring alignment between different levels of requirements. Finally, we reported that SBInet testing had not been effectively managed; individual system components to be deployed to the initial deployment locations had not been fully tested, a test management strategy had not yet been finalized and approved, and the draft plan contained omissions in content. We made a series of recommendations to address these weaknesses, including assessing SBInet development, testing, and deployment risks and disclosing them to DHS leadership and the Congress, and defining and implementing relevant system deployment, requirements management, and testing weaknesses guidance. DHS largely agreed with our recommendations. We currently have work underway for the Chairman, House Homeland Security Committee, relative to SBInet risks and recommendation implementation, SBInet test management, planning, execution, and results, and SBInet contract management and oversight. In closing, the department has made progress in establishing key institutional acquisition and IT investment management-related controls and implementing them on large-scale programs, including its recent efforts to increase corporate oversight of major investments and its recent deployment and operation of Secure Flight. However, considerable work remains to be accomplished before the department can be considered a mature IT system acquirer and investor. For example, the department has yet to address longstanding challenges in, among other things, sufficiently defining its enterprise architecture and strategically managing its acquisition and IT workforce. Moreover, while program-specific weaknesses that we have identified have in many cases eventually been addressed, our concern is that these types of weaknesses were allowed to exist and in some cases took years to address, and that we continue to find them on other programs that we later review. Such a pattern of inconsistency across major programs is indicative of institutional acquisition and IT management immaturity. Unless this changes, ongoing and future DHS major acquisitions will likely fall short in delivering promised capabilities and benefits on time and on budget. Our existing recommendations continue to provide the department with a framework for maturation, and thus we encourage the department to move swiftly in implementing both our institutional and program-specific recommendations. To this end, we look forward to working constructively with the department in doing so and thereby maximizing the role that IT can play in DHS’s mission performance and transformation. Madame Chairwoman, this concludes my statement. I would be happy to answer any questions you have at this time. For future information regarding this testimony, please contact Randolph C. Hite, Director, Information Technology Architecture and Systems Issues, at (202) 512-3439, or [email protected]. Other individuals who made key contributions to this testimony were Kathleen Agatone, Mathew Bader, Justin Booth, James Crimmer, Deborah Davis, Elena Epps, Ash Huda, John P. Hutton, Tonia Johnson, Neela Lakhmani, Anh Le, Anne McDonough-Hughes, Gary Mountjoy, Sabine Paul, Tomas Ramirez, Jr., Amelia Shachoy, and Teresa Smith. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Department of Homeland Security (DHS) invested more than $6 billion in 2009 on large-scale, information technology (IT) systems to help it achieve mission outcomes and transform departmentwide operations. For DHS to effectively leverage these systems as mission enablers and transformation tools, it needs to employ a number of institutional acquisition and IT management controls and capabilities, such as using an operational and technological blueprint to guide and constrain system investments (enterprise architecture) and following institutional policies, practices, and structures for acquiring and investing in these systems. Other institutional controls and capabilities include employing rigorous and disciplined system life cycle management processes and having capable acquisition and IT management workforces. As GAO has reported, it is critical for the department to implement these controls and capabilities on each of its system acquisition programs. GAO has issued a series of reports on DHS institutional controls for acquiring and managing IT systems, and its implementation of these controls on large-scale systems. GAO was asked to testify on how far the department has come on both of these fronts, including its implementation of GAO's recommendations. To do this, GAO drew from its issued reports on institutional IT controls and IT systems, as well as our recurring work to follow up on the status of our open recommendations. Since its inception, DHS has made uneven progress in its efforts to institutionalize a framework of interrelated management controls and capabilities associated with effectively and efficiently acquiring large-scale IT systems. To its credit, it has continued to issue annual updates to its enterprise architecture that have added previously missing scope and depth, and further improvements are planned to incorporate the level of content, referred to as segment architectures, needed to effectively introduce new systems and modify existing ones. Also, it has redefined its acquisition and investment management policies, practices, and structures, including establishing a system life cycle management methodology, and it has increased its acquisition workforce. Nevertheless, challenges remain relative to, for example, implementing the department's plan for strengthening its IT human capital, and fully defining key system investment and acquisition management policies and procedures. Moreover, the extent to which DHS has actually implemented these investment and acquisition management policies and practices on major programs has been at best inconsistent, and in many cases, quite limited. For example, recent reviews by GAO show that major acquisition programs have not been subjected to executive level acquisition and investment management reviews at key milestones and have not, among other things, employed reliable cost and schedule estimating practices, effective requirements development and test management practices, meaningful performance measurement, strategic workforce management, proactive identification and mitigation of program risks, and effective contract tracking and oversight, among other things. Because of these weaknesses, major IT programs aimed at delivering important mission capabilities have not lived up to expectations. For example, full deployment of the Rescue 21 "search and rescue" system had to be extended from 2006 to 2017; development and deployment of an "exit" capability under the US-VISIT program has yet to occur; and the timing and scope of an SBInet "virtual border fence" initial operating capability has been delayed and reduced from the entire southwest border to 28 miles of the border. To assist the department in addressing its institutional and system-specific challenges, GAO has made a range of recommendations. While DHS and its components have acted on many of these recommendations, and as a result have arguably made progress and improved the prospects for success on ongoing and future programs, more needs to be done by DHS's new leadership team before the department can ensure that all system acquisitions are managed with the rigor and discipline needed to consistently deliver promised capabilities and benefits on time and on budget.

You are an expert at summarizing long articles. Proceed to summarize the following text: Strategic workforce planning—an integral part of human capital management—is an iterative, systematic process that helps organizations determine if they have staff with the necessary skills and competencies to accomplish their strategic goals. We have previously reported that having the right workforce mix with the right skill sets is critical to achieving DOD’s mission, and that it is important for DOD, as part of its workforce planning, to conduct gap analyses of its critical skills and competencies. Since 2001, GAO has included strategic human capital management as a government high-risk area. In 2002, we reported that DOD recognized that human capital strategic planning is fundamental to effective overall management. Further, we reported that DOD was working to identify and address problems that have been hampering this effort, which included a lack of accurate, accessible, and current workforce data; mature models to forecast future workforce requirements; a link between DOD’s planning and budgeting processes; and specific planning guidance. In 2015, we reported that DOD has demonstrated sustained leadership commitment to address its acquisition workforce challenges, underscored by the department’s emphasis on growing and training the acquisition workforce through its Better Buying Power initiatives. As part of our larger body of work examining human capital management issues, we and the Office of Personnel Management have identified six key principles of strategic workforce planning that organizations should incorporate in their processes, including: aligning workforce planning with strategic planning and budget formulation; involving managers, employees, and other stakeholders in planning; identifying critical gaps and competencies and analyzing workforce gaps; developing workforce strategies to address gaps in numbers, skills, building the capabilities needed to support workforce strategies through steps that ensure the effective use of human capital flexibilities; and monitoring and evaluating progress toward achieving workforce planning and strategic goals. Several offices within DOD play key roles in strategic planning activities, such as determining the size and makeup of the acquisition workforce, budgeting for the workforce, assessing workforce competencies, and addressing skill gaps (see table 1). Pursuant to the Defense Acquisition Workforce Improvement Act, DOD identified 13 career fields and designated acquisition-related positions held by military or civilian personnel. DOD also established certification requirements that included education, training, and experience elements for each acquisition position. Certification is the procedure through which DOD components determine that an employee meets these requirements for one of three levels in each acquisition career field. DOD components fund their acquisition workforce personnel through a variety of accounts, including (1) operation and maintenance; (2) research, development, test and evaluation; and (3) working capital. Additionally, Congress established the Defense Acquisition Workforce Development Fund in 2008 to provide funds dedicated to recruiting, training, and retaining the acquisition workforce. There are two boards that oversee acquisition workforce programs, including the Fund and related initiatives. The Senior Steering Board is expected to meet quarterly and provide strategic oversight, while the Workforce Management Group is expected to meet bimonthly and oversee the fund’s operations and management (see table 2). DOD has increased the size of its workforce since September 2008, exceeding its 20,000 personnel growth target by over 7,000 as of March 2015. The growth varied within individual components. For example, the Air Force and Navy, as well as the other DOD agencies collectively, have more acquisition personnel now than in fiscal year 2008. Conversely, the Army has experienced an 8 percent decrease in the size of its acquisition workforce since fiscal year 2008 due to Army-wide cost savings measures that have impacted the size of the civilian workforce. The reported increase in DOD’s acquisition workforce was accomplished through hiring of additional personnel, converting functions previously performed by DOD contractors to performance by DOD civilian personnel (referred to as insourcing), adding military personnel to the acquisition workforce, and administratively recoding existing personnel, the last of which does not result in an increase in DOD’s workforce capacity. Shortfalls, however, exist in certain career fields. For example, 6 of DOD’s 13 acquisition career fields, including 3 priority career fields— contracting, engineering, and business—did not meet growth goals. DOD increased the size of its military and civilian acquisition workforce by 21 percent, from about 126,000 to about 153,000, between September 2008 and March 2015. This equates to a nearly 27,000 personnel increase and 7,000 personnel more than identified in DOD’s April 2010 acquisition workforce plan. Figure 1 shows that most of this growth occurred in fiscal years 2009 and 2010. Acquisition workforce growth outpaced losses between fiscal years 2008 and 2012. However, in fiscal years 2013 and 2014, the department experienced a small decrease. During this time, DOD components were faced with sequestration and other cost-cutting measures. In preparation for these cuts, the Under Secretary of Defense for Acquisition, Technology and Logistics issued a memorandum in September 2012 that specified that DOD components were to take a strategic view in workforce decisions and protect the rebuilding investments, especially in light of ongoing contractor support reductions. For the most part, components were able to sustain the acquisition growth levels they had already achieved, with the exception of the Army, which lost several thousand personnel. In fiscal year 2015, each component again experienced an increase, with the exception of the Army. According to Army Defense Acquisition Career Management officials, the Army’s cost-cutting efforts have affected all aspects of Army operations, including acquisition. Since 2008, the number of overall Army military and civilian personnel has decreased by 91,000, or 12 percent, from 790,000 to 699,000. The acquisition portion of this reduction was almost 3,400 personnel. The department grew the acquisition workforce through a combination of hiring and insourcing actions, as originally planned, as well as by adding military personnel and administratively recoding existing positions. Figure 2 shows how DOD increased the acquisition workforce through fiscal year 2014, the most recent year for which DOD could provide complete data. About 72 percent of the workforce growth has been achieved through hiring new civilian employees, with more than half of this increase attributable to funds provided through the Defense Acquisition Workforce Development Fund. Since 2009, DOD has spent about $1.8 billion from the fund to recruit and hire about 10,400 new civilian employees. DOD used the majority of the funding to pay their salaries for a 2- to 3-year period, after which the components fund the personnel through their own budget accounts. The hiring actions generally were in the career fields that DOD indicated were a priority in the 2010 acquisition workforce plan. For example, about three-quarters of all Defense Acquisition Workforce Development Fund hiring was targeted toward five priority career fields— contracting, business, engineering, program management, and auditing— identified in DOD’s April 2010 acquisition workforce plan. DOD components used their own funds to hire the balance of the new civilian and military employees identified in the figure above. Overall, insourcing accounted for about 14 percent of the workforce growth. DOD originally planned to insource 10,000 contractor positions for the acquisition workforce by fiscal year 2015. Components insourced about 3,400 positions prior to a March 2011 revision to DOD’s insourcing policy. According to the memorandum revising the policy, which was issued jointly by the Under Secretary of Defense for Acquisition, Technology and Logistics and the Under Secretary of Defense Comptroller/Chief Financial Officer, a case-by-case approach would be used for additional insourcing of acquisition functions based on critical need, whether a function is inherently governmental, and the benefit demonstrated by a cost-benefit analysis. DOD officials stated that the revised policy effectively curtailed any additional efforts. Based on data provided by DOD’s Human Capital Initiatives Directorate, we estimate that recoding accounted for at least an 11 percent increase in DOD’s overall acquisition workforce. Acquisition officials stated that administrative recoding efforts, which resulted in both increases and decreases to the acquisition workforce, were made to ensure that all acquisition personnel were properly accounted for within each component and career field. According to acquisition officials, recoding was necessary because some personnel were performing acquisition functions the majority of the time, but were not counted as a part of the acquisition workforce. These personnel generally continued to perform the same duties and do not equate to an increase in the capacity of the organization. The recoded personnel are required to meet acquisition professional certification standards, including training, education, and experience requirements. According to Human Capital Initiatives and DOD component officials, recoding primarily occurred in three career fields—facilities engineering, life cycle logistics, and science and technology manager. For example, Air Force Materiel Command estimated that it recoded approximately 3,600 personnel at its maintenance depots as acquisition personnel, some of which were recoded to the life cycle logistics career field. Increases in the number of military positions accounted for 3 percent of the workforce growth. According to Army and Air Force acquisition officials, one of the primary reasons DOD increased the number of military personnel serving in the acquisition workforce was to provide increased capacity. Much of this growth was in the contracting career field during contingency operations in Iraq and Afghanistan. Overall, Human Capital Initiatives statistics show that growth efforts have helped DOD reshape the civilian workforce. In fiscal year 2008, DOD found that about half of its civilian acquisition workforce had 10 years or less before they were eligible for retirement, with far fewer mid-career individuals ready to take their place or provide mentoring and supervision to those workforce members who were early in their career. Defense Acquisition Workforce Development Fund hiring has helped strategically reshape the workforce by bolstering critical functions and building early and mid-career workforce size. Although no specific goals were set, figure 3 shows the progress DOD has made increasing the number of early- career staff (those eligible to retire in 20 years or more) and mid-career staff (those eligible to retire in 11 to 20 years). There have also been improvements in the training and qualifications of the workforce. For example, the percent of the workforce that met certification requirements increased from 58 percent to 79 percent between fiscal years 2008 and 2014. In addition, the number of acquisition personnel with a bachelor’s degree or higher increased from 77 to 83 percent. However, DOD still faces the challenge of an aging workforce, as statistics also show that the average age of the workforce has been static since 2008 at about 45 years, and the percentage of retirement eligible personnel has remained at 17 percent. Defense acquisition officials recognize the risks associated with the loss of very experienced members of the acquisition workforce. These officials noted they are concerned about retaining an adequate number of personnel in the senior career group to provide leadership and continuity for the workforce between 2020 and 2030. While DOD met the overall acquisition growth goal, it did not accomplish the goals set for some career fields. The 2010 acquisition workforce plan identified growth goals, expressed in terms of a percent increase from fiscal year 2008 to fiscal year 2015, for each of the 13 acquisition career fields. The plan indicated that targeted growth in 5 of these priority career fields—auditing, business, contracting, engineering, and program management—would help DOD strategically reshape its acquisition workforce. As of March 2015, our analysis shows that DOD exceeded its planned growth for 7 career fields by about 11,300 personnel, including the priority career fields of auditing and program management. The department did not, however, reach the targets in its growth plan for the other 6 career fields by about 4,400 personnel, including the priority career fields of contracting, business, and engineering (see figure 4). According to military department acquisition officials, shortfalls in contracting and engineering career fields are largely the result of high attrition rates and difficulty in hiring qualified personnel. Despite these challenges, the engineering career field was within 1 percent of its hiring goal. The business career field did not meet its overall growth goal in part because of recoding actions that resulted in a loss to the career field, greater than expected attrition, and Army cost-cutting efforts. Leaders in some of these areas are trying to identify ways to complete activities more efficiently to reduce the impact of shortfalls. For example, the Cost Assessment and Program Evaluation office, which is responsible for completing independent cost estimates for acquisition programs, has started an initiative to develop a centralized database and virtual library of cost and acquisition data so that cost analysts spend less time gathering data and more time analyzing it. Increasing the number of people performing acquisition work is only part of DOD’s strategy to improve the capability of its workforce; another part is ensuring that the workforce has the requisite skills and tools to perform their tasks. DOD developed a five-phased process that included surveys of its employees to assess the skills of its workforce and to identify and close skill gaps. Efforts to complete the process were hindered by low survey response rates and the absence of proficiency standards. Further, DOD has not established time frames for when career fields should conduct another round of competency assessments to assess progress towards addressing previously identified gaps and to identify emerging needs. In October 2009, section 1108 of the National Defense Authorization Act for Fiscal Year 2010 required DOD to include certain information as a part of its acquisition workforce plan, including an assessment of (1) the critical skills and competencies needed by the future DOD workforce for the 7-year period following the submission of the report, (2) the critical competencies of the existing workforce and projected trends in that workforce based on expected losses due to retirement and other attrition, and (3) gaps in DOD’s existing or projected workforce that should be addressed to ensure that DOD has continued access to critical skills and competencies. Subsequently, the April 2010 acquisition workforce plan outlined a five-phased process that each of the 13 career fields was to use to assess the skills of its workforce and to identify and close skill gaps (see figure 5). DOD functional leaders generally relied on input from senior experts to identify the baseline competencies for phase 1, used subject matter experts to identify work situations and competencies contributing to successful performance for phase 2, and solicited feedback on the models through limited testing with the workforce for phase 3. To validate models and assess workforce proficiency in phase 4, career field leaders relied on surveys that were sent to all or a sample of personnel to solicit their assessment of (1) the criticality of each competency, (2) how frequently they demonstrated each competency, and (3) how proficient they were at each competency. For phase 5, among other things, DOD planned to report on the progress made to identify and close skill gaps and ensure that the competencies remained current. As of October 2015, 12 of the 13 career fields had completed at least an initial competency assessment. The production, quality, and manufacturing career field is the only career field that had not completed all of the phases at least once, due primarily to turnover in leadership, according to an Office of the Secretary of Defense official. According to DOD’s Human Capital Initiatives officials, this career field intends to complete its initial competency assessment by the end of 2017. In the interim, this official noted that the functional leader and the functional integrated product team will continue to actively assess workforce gaps and needs and will use other resources, such as the Defense Acquisition University, to address known skill gaps. Until such time, however, this career field may not have the necessary information to fully identify and assess skill gaps, as statutorily required. Assessing workforce proficiency, according to the Office of Personnel Management’s human capital assessment guidance, allows agencies to target their recruitment, retention, and development efforts. DOD planned to collect data on workforce proficiency as a part of the competency assessment process by pairing supervisor and employee responses to questions included in the surveys, but this effort was hindered by low response rates. In a separate, but related, effort DOD has not yet completed efforts to develop proficiency standards for the acquisition career fields, which would ultimately allow leaders to measure employee proficiency against standards that are specific to each career field. Contracting and auditing were the two career fields that were able to pair supervisor and employee responses collected in competency assessments to make observations about workforce proficiency. These results helped senior leaders identify areas where the workforce did not possess the same level of proficiency as supervisors expected. For example, senior contracting leaders determined that, among other things, fundamental contracting skills were needed across entry and mid-career levels of the contracting workforce and currency, breadth and depth of knowledge were needed across mid-career and senior levels. Leaders emphasized the importance of not only mastering the “what,” but in being able to use critical thinking and sound judgment to apply the knowledge, thus mastering the “how.” In response, the contracting senior leaders worked together with the Defense Acquisition University to develop a 4- week research-intensive fundamentals course that provides new hires practical experience using the Federal Acquisition Regulation and the Defense Federal Acquisition Regulation Supplement. The auditing career field overhauled its training curriculum for new auditors to closely tie with government auditing standards, which career field officials stated would play a large role in addressing gaps in the auditing competencies. The new hire curriculum consists of a 2-week onboarding session, followed by a 2-week class in basic contract audit skills, plus another 2-week class focused on applying the skills in specific types of audits. The other 10 career fields that completed a competency assessment relied on staff self-assessments to make observations about workforce proficiency because of low survey response rates, particularly by supervisors. As a result, the Center for Naval Analysis, which conducted surveys for these 10 career fields, generally stated in its reports that the results were less verifiable because they were not validated against supervisor responses and that leaders should exercise caution when extrapolating the results. Overall response rates for these career fields ranged from 13 to 37 percent. Five of the career field leaders we met with stated that they used other reviews and input from functional integrated product teams to complement the survey results and then worked with the Defense Acquisition University to develop or update training classes. The program management career field, for example, conducted two studies, one in 2009 and another in 2014. The studies included interviews of program managers and program executive officers to identify opportunities to improve the proficiency of programs managers through additional training or experience requirements for program management candidates. The studies identified, among other things, the need to improve program managers’ awareness of earned value management, which is a project management technique for measuring performance and progress, and business acumen. In response, the Defense Acquisition University developed a class called “Understanding Industry” which covers such issues as how contractors align their business strategies, finances, and operations to meet corporate goals. The Center for Naval Analysis reported that it did not explicitly identify proficiency gaps as a part of conducting the competency assessment surveys for most career fields because no proficiency standards exist. The Center for Naval Analysis strongly encouraged leadership to set standards based on baseline data gathered in the surveys. DOD began efforts to establish department-wide proficiency standards in 2012 under the Acquisition Workforce Qualification Initiative. Overall, DOD estimated that it would require establishing up to 2,000 standards across the acquisition career fields. However, the project leader stated that it proved difficult to develop a set of standards whose applicability would be common across all personnel, including those with the same position title, because employees perform different acquisition activities across or even within the DOD components. Further, the project leader stated that it became apparent that developing a single database to collect and track experiences of the acquisition workforce would take considerable time and expense and would contribute to the proliferation of systems that an organization would have to support and maintain. The goal of this initiative is now to map competencies for each career field to on-the-job outcomes, with a focus on assessing the quality versus the quantity of the experiences, according to the project leader. Initiative officials are working with the Defense Contract Management Agency to leverage a database that the agency uses to track employee experiences. For now, initiative officials are creating a computer-based tool using Excel software that employees can use to track their individual acquisition experience. The tool is designed to be used by employees to facilitate career development conversations with supervisors. The project leader expects that the tool should be available for use in 2016. According to the Office of Personnel Management, as part of their workforce planning activities, agencies should monitor and evaluate their efforts to address competency gaps on a continuous basis. DOD has not determined how often competency assessments should be conducted; however, five career field leaders we met with stated that assessments should be completed every 3 to 5 years. They stated that this would allow leadership time to gauge the success of efforts to address previous skill gaps, identify current skill gaps, and identify emerging needs. In that regard, the business and contracting career fields recently completed a second round of workforce assessments and are in the process of analyzing results or identifying actions to address gaps. The other 10 career fields that completed an initial competency assessment did so between 2008 and 2012, but have not completed another round of workforce assessments to determine if their workforce improvement efforts were successful and what more needs to be done. Half of these 10 career field leaders indicated that they plan to complete another assessment between 2016 and 2019, or about 5 to 8 years after the initial assessment was conducted for most career fields. Without establishing appropriate time frames to conduct follow-up assessments and completing those assessments, acquisition workforce leaders will not have the data needed to track improvement in the capability of the workforce and focus future training efforts, as called for by Office of Personnel Management standards. DOD generally plans to maintain the current level and composition of the acquisition workforce. DOD has not, however, verified that the current composition of the workforce will meet its future workforce needs. Officials at the Air Force Materiel Command, Army Materiel Command, and Naval Sea Systems Command indicated that they are having difficulties meeting program office needs, especially in the contracting and engineering career fields. These two priority career fields will remain under the levels targeted by DOD’s April 2010 workforce plan, while several other career fields will continue to exceed their targeted level. Further, Human Capital Initiatives has not issued an updated workforce strategy that includes revised career field goals or issued guidance on the use of the Defense Acquisition Workforce Development Fund to guide future hiring decisions. In an April 2015 memorandum, the Under Secretary of Defense for Acquisition, Technology and Logistics stated that it is imperative for the components to sustain and build on the investment made to increase the capacity and capability of the acquisition workforce. Specifically, the components were told to responsibly sustain the acquisition workforce size and make adjustments based on workload demand and requirements. According to January 2015 workforce projections included in budget exhibits that components developed for the fiscal year 2016 president’s budget, the components generally plan to maintain the current level and composition of the civilian and military acquisition workforce through fiscal year 2020, though individual components project slight shifts. For example, these projections indicate that the Army plans to increase the size of its acquisition workforce by almost 2.5 percent by predominantly adding military personnel, while the Air Force projects a less than 1 percent decrease and the Navy projects a decrease of almost 2 percent. The other DOD components are planning to decrease the size of their current workforces collectively by about 5 percent. However, Army officials stated that in September 2015, the Army revised its projection. It now estimates that its acquisition workforce will decrease by about 1,800, or 5 percent, by fiscal year 2020 as a result of recent reductions to the Army’s entire military structure from fiscal year 2016 forward. According to DOD guidance, the component budget exhibits contain estimates of the number of authorized and funded acquisition workforce personnel through the Future Years Defense Program. The estimates do not provide information on components’ workforce projected shortfalls. Our analysis of the budget exhibits shows that to maintain the overall size of the workforce at around 150,000, DOD components collectively plan to spend between $18.5 billion and $19.4 billion annually through fiscal year 2020. This funding will be used to pay acquisition workforce salaries, benefits, training, and related workforce improvement initiatives. The total amount includes about $500 million in planned funding annually for the Defense Acquisition Workforce Development Fund, which will be used to hire about 4,900 new employees through fiscal year 2020 to help sustain the current size of the workforce and continue training and development efforts. Budget documents also indicate, however, that many career fields are projected to continue to be significantly over or under their original growth targets identified in DOD’s April 2010 acquisition workforce plan (see figure 6). Our analysis of the PB-23 submissions indicates that eight career fields will lose about 2,500 positions collectively between 2015 and 2020. One of these career fields, life cycle logistics, is projected to lose almost 1,400 of these positions, but will still be significantly over the growth target established in 2010. Five career fields are expected to grow by a total of about 1,000 positions, with the majority of this growth in the contracting and facilities engineering career fields. The growth expected between 2015 and 2020 will allow purchasing to meet its initial growth target. Despite this projected growth, however, four of the priority career fields— contracting, business, engineering, and audit—will remain under the April 2010 growth targets. Further, concerns about the levels of contracting and engineering personnel were expressed by officials at each of the three major acquisition commands we met with—Air Force Materiel Command, Army Materiel Command, and Naval Sea Systems Command. For example, Air Force Materiel Command has not been able to hire enough personnel to offset a 10 percent attrition rate in the contracting career field, according to career field leaders. It also has shortfalls in engineering personnel, which requires multiple programs to share engineers with particular technical expertise. The command manages personnel shortfalls by assessing risks for its programs and then reallocating staff from programs that are considered to have less risk to new programs or programs that have more risk. Command officials cited several reasons for the shortfalls. First, since fiscal year 2013, the command has initiated 19 new acquisition programs without budgeting for the civilian and military personnel needed to adequately support the entire portfolio of the command’s programs. Second, command officials noted that they have lost some military and civilian acquisition personnel due to DOD-wide cuts in operation and maintenance funding accounts from which these personnel are paid. Finally, officials stated that the command has made cuts to the contractor workforce that more than offset the growth in the military and civilian acquisition workforce to date. Army Materiel Command officials stated that the command is currently experiencing shortfalls in the contracting career field and the shortfall is expected to reach about 800 personnel by fiscal year 2020. The shortfalls are the result of several cost-cutting actions taken by the Army since fiscal year 2011 to implement mandated reductions and caps on future spending. For example, the command’s contracting organization was only able to fund about 3,600 of its authorized 4,000 positions. Officials from that organization stated that they have moved over $100 million in contract actions from overburdened contracting offices to other contracting offices within the command that have additional capacity. Officials estimate that they can only mitigate the impact of about one-third of planned reductions through workload realignments and process changes. In addition, the command has taken on several new missions without gaining additional resources, including contingency contract administration services that were previously performed by the Defense Contract Management Agency and lead responsibility for contracting in Afghanistan, which was previously provided through a joint contracting organization assigned to U.S. Central Command. Naval Sea Systems Command officials stated that the command is experiencing shortfalls in the contracting and engineering career fields, and they are projecting additional shortfalls by fiscal year 2020. One metric the command is tracking to assess contracting workload shows that the number of new contract awards that are delayed into the next fiscal year was approximately 100 for fiscal year 2015. This includes the contract award for the Navy’s Own Ship Monitoring System, a technology for submarine sonar systems, as well as the Aegis Weapon System Modernization production upgrades. The number of new contract awards that are delayed into the next fiscal year is expected to grow to about 430 contracts by fiscal year 2020 as a result of workload increases and shortfalls in the contracting career field. Command officials expect current shortfalls in contracting personnel to be exacerbated by DOD-wide cuts to civilian personnel. In addition, Naval Sea Systems Command engineering officials said that one-third of the command’s technical specifications and standards, which serve as the fleet’s instructional manual on routine ship maintenance, have not been reviewed in the past 20 years. They said that the backlog of specification and standard reviews indirectly contributed to two failures within 5 years of the main reduction gears on a Navy destroyer—a warship that provides multi-mission offensive and defensive capabilities. The failures resulted from an industry change in oil composition that was not addressed by corresponding changes to the Navy’s maintenance standards for the ship. In general, command officials could not provide validated data on the extent of current workforce shortfalls, but each military department is developing models to help better project acquisition program needs and quantify potential shortfalls. Specifically: The Air Force Materiel Command pilot-tested an updated Air Force workforce model in 2015 to assist with personnel planning over the life cycle of a program based on factors such as type of program and life cycle phase. The model projects that the command will have a shortfall of over 1,300 military and civilian acquisition positions by fiscal year 2017, and nearly 1,900 positions by fiscal year 2021. Command officials are working closely with acquisition program managers to validate program needs and to identify weaknesses in the model. Additional functionality is expected to be added over the next several years that will allow the command to target hiring to fill specific workforce gaps. For example, instead of soliciting applications for engineers in general, the command could more specifically target materials engineers. The Assistant Secretary of the Army for Acquisition, Logistics and Technology is in the process of developing personnel planning models that will better allow organizations to forecast their manpower requirements. The program management model was approved by the Army Manpower Analysis Agency and is beginning to be used by program managers. Army Materiel Command officials expect a new contracting model to be available for use later in fiscal year 2016. Additional models for research and development and test and evaluation are also being planned. Naval Sea Systems Command officials stated that they are in the process of developing career field-specific tools to, among other things, forecast needs, help identify skill gaps, and create demand signals for career development opportunities. No date was provided for when these tools will be available. DOD has not issued an updated acquisition workforce strategy to help guide future hiring decisions. According to Human Capital Initiatives officials, budget uncertainties have been the primary reason for the delay. The Director of Human Capital Initiatives noted that senior DOD and military department leadership regularly discuss the state of the acquisition workforce and its capacity to address emerging needs and challenges. The Director also noted that similar discussions occur at various levels within DOD components. As a result, the Director stated that while the size and composition of the workforce differs from what was called for in DOD’s 2010 acquisition workforce plan, DOD’s current and projected workforce largely reflect the decisions made during these discussions. However, according to acquisition officials we met with, DOD components and sub-components make thousands of individual hiring decisions, based not only on the need to obtain critical skills, but to also sustain growth already achieved in a career field, address emerging issues, and meet other priorities. Human Capital Initiatives officials said that they are working to issue an updated acquisition workforce plan in 2016. 10 U.S.C. Section 115b requires that DOD issue a biennial acquisition workforce strategy that, among other things, assesses the appropriate mix of military, civilian, and contractor personnel capabilities and includes a plan of action to meet department goals. Further, as we have previously reported, issuing a workforce strategy and an associated plan of action is crucial for DOD to effectively and efficiently manage its civilian workforce during times of budgetary and fiscal constraint. For example, continuing cuts to operation and maintenance budget accounts and efforts to reduce headquarters spending by 20 percent over the next few years could result in additional reductions to acquisition workforce positions in some career fields. In addition, Section 955 of the National Defense Authorization Act for Fiscal Year 2013 requires DOD to plan to achieve civilian and service contractor workforce savings that are not less than the savings in funding for military personnel achieved from reductions in military strength, which could also affect the size of the acquisition workforce. DOD may also be faced with another round of sequestration cuts, which could result in hiring freezes or workforce reductions. Without issuing an updated workforce strategy, as statutorily required, DOD may not be positioned to meet future acquisition needs. Aligning the use of the Defense Acquisition Workforce Development Fund to high priority workforce needs is also crucial. In the past, some hiring decisions made by DOD components using the Defense Acquisition Workforce Development Fund exceeded initial 2010 career field targets. In addition, over the past 7 years, about 2,700 personnel, or 26 percent of those hired with these funds, were in career fields that were not considered high priority in the 2010 acquisition workforce plan. For example, funds were used to hire about 850 personnel for the life cycle logistics career field that is significantly over its growth target. To focus use of the funds, the Assistant Secretary of the Army for Acquisition, Logistics and Technology issued guidance in March 2013 that identified critical career field priorities for the future acquisition workforce and emphasized the need to balance critical acquisition skills needed with other personnel requirements during times of constrained budgets and limited personnel resources. In fiscal year 2014, the Assistant Secretary of the Navy for Research, Development and Acquisition directed that 75 percent of Navy’s hiring using these funds should be in priority career fields such as contracting, engineering, and business. The Air Force has not issued similar guidance on how to target hiring efforts to meet critical needs. Section 1705 of Title 10, U.S. Code, requires the Human Capital Initiatives Directorate to issue guidance for the administration of the Defense Acquisition Workforce Development Fund. The guidance is to identify areas of need in the acquisition workforce, including changes to the types of skills needed. The Director of Human Capital Initiatives told us, however, that while key stakeholders involved in acquisition workforce planning, such as the Senior Steering Board and defense acquisition career managers, discuss areas of need in the workforce, the office does not issue guidance on how DOD components should prioritize their hiring decisions. Without clearly linking the use of these funds with the strategic goals of the department, components may continue to over-hire in some career fields and not be able to adequately meet critical acquisition program needs in other career fields. DOD has focused much needed attention on rebuilding its acquisition workforce and has used the Defense Acquisition Workforce Development Fund to increase hiring and provide for additional training that supports this effort. This is especially noteworthy given that the department faced sequestration and other cost-cutting pressures over the past several years. Now that the department has surpassed its overall growth goals and has moved into a workforce sustainment mode, the 2010 acquisition workforce plan needs to be updated. Focus should now be placed on reshaping career fields to ensure that the most critical acquisition needs are being met. DOD attempted to strategically reshape its acquisition workforce with the 2010 acquisition workforce plan, but fell short in several priority career fields, including contracting and engineering. An updated plan that includes revised career field goals, coupled with guidance on how to use the Defense Acquisition Workforce Development Fund, could help DOD components focus future hiring efforts on priority career fields. Without an integrated approach, the department is at risk of using the funds to hire personnel in career fields that currently exceed their targets or are not considered a priority. DOD has also made progress in identifying career field competencies, but additional steps are needed to complete this effort. For example, the production, quality, and manufacturing career field has yet to complete its initial competency assessment and DOD has not established time frames to conduct follow-up assessments for the other career fields so that it can determine if skill gaps are being addressed. Office of Personnel Management standards state that identifying skill gaps and monitoring progress towards addressing gaps are essential steps for effective human capital management. Without completing all competency assessments and establishing time frames for completing follow-up assessments, acquisition leaders will not have the data needed to track improvement in the capability of the workforce. To improve DOD’s oversight and management of the acquisition workforce, we are making four recommendations. Specifically, to ensure that DOD has the right people with the right skills to meet future needs, we recommend that the Under Secretary of Defense for Acquisition, Technology and Logistics direct the Director, Human Capital Initiatives to: Issue an updated acquisition workforce plan in fiscal year 2016 that includes revised career field goals; Issue guidance to focus component hiring efforts using the Defense Acquisition Workforce Development Fund on priority career fields; Ensure the functional leader for the production, quality, and manufacturing career field completes an initial competency assessment; and Establish time frames, in collaboration with functional leaders, to complete future career field competency assessments. We provided a draft of this report to DOD for comment. In its written comments, which are reprinted in appendix I, DOD concurred with our recommendations and described the actions it plans to take. DOD also provided technical comments, which we incorporated in the report as appropriate. In response to our recommendation that DOD issue an updated acquisition workforce plan, the department stated that it is currently working on the fiscal year 2016–2021 Defense Acquisition Workforce Strategic Plan, and that it plans to provide the draft plan for review by the end of 2015. The department, however, did not indicate specifically that the updated plan would include revised career field goals. We believe updated career field goals should be included in the plan because they can help inform future hiring decisions and rebalance the size of each career field, if necessary. The department concurred with our recommendation that the Director, Human Capital Initiatives issue guidance to focus hiring efforts using the Defense Acquisition Workforce Development Fund on priority career fields. However, it stated that determining which career fields are a priority is most appropriately determined by the components. The department indicated that the Director, Human Capital Initiatives would work with the components to issue guidance that ensures the Defense Acquisition Workforce Development Fund is used to best meet both enterprise and specific component workforce needs. We believe these actions would meet the intent of our recommendation. In response to our recommendation that the production, quality, and manufacturing career field complete an initial competency assessment, the department stated that it will complete the initial assessment by the end of 2017. In response to our recommendation to establish time frames for completing future career field competency assessments, the department agreed and indicated that it will work with acquisition workforce functional leaders to establish time frames to complete future career field competency assessments, as needed. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Under Secretary of Defense for Acquisition, Technology and Logistics, and other interested parties. The report is also available at no charge on the GAO website at http://www.gao.gov. Should you or your staff have any questions about this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff and other major contributors to this report are listed in appendix II. In addition to the contact named above, Cheryl Andrew, Assistant Director; Miranda Berry; Virginia A. Chanley; Teakoe S. Coleman; Maria Durant; Katheryn Hubbell; Heather B. Miller; Jenny Shinn; Robert Swierczek; Ozzy Trevino; and Alyssa Weir made key contributions to this report. Defense Acquisition Workforce: The Air Force Needs to Evaluate Changes in Funding for Civilians Engaged in Space Acquisition. GAO-13-638. Washington, D.C.: July 8, 2013. Defense Acquisition Workforce: Improved Processes, Guidance, and Planning Needed to Enhance Use of Workforce Funds. GAO-12-747R. Washington, D.C.: June 20, 2012. Defense Contract Management Agency: Amid Ongoing Efforts to Rebuild Capacity, Several Factors Present Challenges in Meeting Its Missions. GAO-12-83. Washington, D.C.: November 3, 2011. Defense Acquisition Workforce: Better Identification, Development, and Oversight Needed for Personnel Involved in Acquiring Services. GAO-11-892. Washington, D.C.: September 28, 2011. Department of Defense: Additional Actions and Data Are Needed to Effectively Manage and Oversee DOD’s Acquisition Workforce. GAO-09-342. Washington, D.C.: March 25, 2009. Acquisition Workforce: Department of Defense’s Plans to Address Workforce Size and Structure Challenges. GAO-02-630. Washington, D.C.: April 30, 2002. Department of Defense Contracted Services DOD Contract Services: Improved Planning and Implementation of Fiscal Controls Needed. GAO-15-115. Washington, D.C.: December 11, 2014. Defense Contractors: Additional Actions Needed to Facilitate the Use of DOD’s Inventory of Contracted Services. GAO-15-88. Washington, D.C.: November 19, 2014. Defense Acquisitions: Update on DOD’s Efforts to Implement a Common Contractor Manpower Data System. GAO-14-491R. Washington, D.C.: May 19, 2014. Defense Acquisitions: Continued Management Attention Needed to Enhance Use and Review of DOD’s Inventory of Contracted Services. GAO-13-491. Washington. D.C.: May 23, 2013. Defense Acquisitions: Further Actions Needed to Improve Accountability for DOD’s Inventory of Contracted Services. GAO-12-357. Washington, D.C.: April 6, 2012. Human Capital: DOD Should Fully Develop Its Civilian Strategic Workforce Plan to Aid Decision Makers. GAO-14-565. Washington, D.C.: July 9, 2014. Human Capital: Strategies to Help Agencies Meet Their Missions in an Era of Highly Constrained Resources. GAO-14-168. Washington, D.C.: May 7, 2014. Human Capital: Additional Steps Needed to Help Determine the Right Size and Composition of DOD’s Total Workforce. GAO-13-470. Washington, D.C.: May 29, 2013. Human Capital: Critical Skills and Competency Assessments Should Help Guide DOD Civilian Workforce Decisions. GAO-13-188. Washington, D.C.: January 17, 2013. Human Capital: DOD Needs Complete Assessments to Improve Future Civilian Strategic Workforce Plans. GAO-12-1014. Washington, D.C.: September 27, 2012. Human Capital: Further Actions Needed to Enhance DOD’s Civilian Strategic Workforce Plan. GAO-10-814R. Washington, D.C.: September 27, 2010. Human Capital: A Guide for Assessing Strategic Training and Development Efforts in the Federal Government. GAO-04-546G. Washington, D.C.: March 1, 2004. Human Capital: Key Principles for Effective Strategic Workforce Planning. GAO-04-39. Washington, D.C.: December 11, 2003. High-Risk Series: An Update. GAO-15-290. Washington, D.C.: February 11, 2015. Federal Workforce: OPM and Agencies Need to Strengthen Efforts to Identify and Close Mission-Critical Skills Gaps. GAO-15-223. Washington, D.C.: January 30, 2015. Defense Headquarters: DOD Needs to Reassess Personnel Requirements for the Office of Secretary of Defense, Joint Staff, and Military Service Secretariats. GAO-15-10. Washington, D.C.: January 21, 2015. Sequestration: Observations on the Department of Defense’s Approach in Fiscal Year 2013. GAO-14-177R. Washington, D.C.: November 7, 2013. DOD Civilian Workforce: Observations on DOD’s Efforts to Plan for Civilian Workforce Requirements. GAO-12-962T. Washington, D.C.: July 26, 2012. Defense Workforce: DOD Needs to Better Oversee In-sourcing Data and Align In-sourcing Efforts with Strategic Workforce Plans. GAO-12-319. Washington, D.C.: February 9, 2012.

GAO and others have found that DOD needs to take steps to ensure DOD has an adequately sized and capable acquisition workforce to acquire about $300 billion in goods and services annually. DOD is required by statute to develop an acquisition workforce plan every 2 years. DOD issued a plan in 2010, in which it called for the department to increase the size of the acquisition workforce by 20,000 positions by fiscal year 2015, but has not yet updated the plan. Congress included a provision in statute for GAO to review DOD's acquisition workforce plans. In the absence of an updated plan, this report examines DOD's efforts to (1) increase the size of its acquisition workforce, (2) identify workforce competencies and mitigate any skill gaps, and (3) plan for future workforce needs. GAO analyzed current and projected DOD workforce, budget, and career field data; reviewed completed competency assessments; and obtained insights on workforce challenges from the largest acquisition commands within the Army, Navy and Air Force. The Department of Defense (DOD) has increased the size of its acquisition workforce from about 126,000 in September 2008 to about 153,000 in March 2015. The growth was accomplished by hiring additional civilian personnel, insourcing work previously performed by contractors, adding more military personnel, and re-categorizing existing positions. However, 6 of the 13 acquisition career fields, including 3 priority career fields—contracting, business and engineering—did not meet growth goals. DOD has completed workforce competency assessments for 12 of the 13 acquisition career fields and added training classes to address some skill gaps. It is unclear the extent to which skill gaps remain, in part because 10 of the career fields have not conducted follow-up competency assessments to gauge progress. DOD has not established time frames for doing so. Office of Personnel Management standards state that identifying skill gaps and monitoring progress towards addressing gaps are essential steps for effective human capital management. DOD has not updated its acquisition workforce plan, which would allow it to be better positioned to meet future needs. GAO's analysis of DOD budget information indicates that many career fields will continue to be significantly over or under the growth goals DOD established in 2010, especially in priority career fields such as contracting and engineering. In the past, some hiring decisions made by DOD components using the Defense Acquisition Workforce Development Fund exceeded initial 2010 career field targets. In addition, over the past 7 years, about 2,700 personnel, or 26 percent of those hired with these funds, were in career fields that were not considered high priority in the 2010 acquisition workforce plan. An updated plan that includes revised career field goals, coupled with guidance on how to use the Defense Acquisition Workforce Development Fund, could help DOD components focus future hiring efforts on priority career fields. Without an integrated approach, the department is at risk of using the funds to hire personnel in career fields that currently exceed their targets or are not considered a priority. GAO recommends that DOD complete the remaining competency assessment, establish time frames for conducting follow-up assessments, issue an updated acquisition workforce plan, and issue guidance to prioritize the use of funding. DOD concurred with GAO's recommendations.

You are an expert at summarizing long articles. Proceed to summarize the following text: Virtually all federal operations are supported by automated systems, mobile devices, and electronic media that may contain sensitive information such as Social Security numbers, medical records, law enforcement data, national or homeland security information, and proprietary information that could be inappropriately disclosed, browsed, or copied for improper or criminal purposes. In our survey of 24 major federal agencies, 10 agencies reported having systems that contain sensitive medical information, 16 reported having systems that contain sensitive regulatory information, 19 reported having systems that contain sensitive personal information, and 20 reported having systems that contain sensitive program-specific information. It is important for agencies to safeguard sensitive information because, if left unprotected, the information could be compromised—leading to loss or theft of resources (such as federal payments and collections), modification or destruction of data, or unauthorized use of computer resources, including launching attacks on other computer systems. Many factors can threaten the confidentiality, integrity, and availability of sensitive information. Cyber threats to federal systems and critical infrastructures containing sensitive information can be intentional or unintentional, targeted or nontargeted, and can come from a variety of sources. Intentional threats include both targeted and nontargeted attacks. A targeted attack occurs when a group or individual specifically attacks an information system. A nontargeted attack occurs when the intended target of the attack is uncertain, such as when a virus, worm, or malware is released on the Internet with no specific target. Unintentional threats can be caused by software upgrades or maintenance procedures that inadvertently disrupt systems. The Federal Bureau of Investigation has identified multiple sources of threats to our nation’s critical information systems, including those from foreign nation states engaged in information warfare, domestic criminals, hackers, virus writers, and disgruntled current and former employees working within an organization. There is increasing concern among both government officials and industry experts regarding the potential for a cyber attack. According to the Director of National Intelligence, ‘‘our information infrastructure— including the Internet, telecommunications networks, computer systems, and embedded processors and controllers in critical industries—increasingly is being targeted for exploitation and potentially for disruption or destruction by a growing array of state and non-state adversaries. Over the past year, cyber exploitation activity has grown more sophisticated, more targeted, and more serious. The intelligence community expects these trends to continue in the coming year.’’ Threats to mobile devices are posed by people with malicious intentions, including causing mischief and disruption as well as committing identity theft and other forms of fraud. For example, malware threats can infect data stored on devices, and data in transit can be intercepted through many means, including from e-mail, Web sites, file downloads, file sharing, peer-to-peer software, and instant messaging. Another threat to mobile devices is the loss or theft of the device. Someone who has physical access to an electronic device can attempt to view the information stored on it. The need for effective information security policies and practices is further illustrated by the increasing number of security incidents reported by federal agencies that put sensitive information at risk. Personally identifiable information about millions of Americans has been lost, stolen, or improperly disclosed, thereby potentially exposing those individuals to loss of privacy, identity theft, and financial crimes. Reported attacks and unintentional incidents involving critical infrastructure systems demonstrate that a serious attack could be devastating. Agencies have experienced a wide range of incidents involving data loss or theft, computer intrusions, and privacy breaches, underscoring the need for improved security practices. When incidents occur, agencies are to notify the federal information security incident center—the U.S. Computer Emergency Readiness Team (US-CERT). As shown in figure 1, the number of incidents reported by federal agencies to US-CERT has increased dramatically over the past 3 years, increasing from 3,634 incidents reported in fiscal year 2005 to 13,029 incidents in fiscal year 2007 (about a 259 percent increase). Data breaches present federal agencies with potentially serious and expensive consequences; for example, a security breach might require an agency to fund the burdensome costs of notifying affected individuals and associated credit monitoring services or it could jeopardize the agency’s mission. Implementation of a risk-based framework of management, operational, and technical controls that includes controls such as encryption technology can help guard against the inadvertent compromise of sensitive information. While encrypting data might add to operational burdens by requiring individuals to enter pass codes or use other means to encrypt and decrypt data, it can also help to mitigate the risk associated with the theft or loss of computer equipment that contains sensitive data. Protecting information has become more challenging in today’s IT environment of highly mobile workers and decreasing device size. Using small, easily pilferable devices such as laptop computers, handheld personal digital assistants, thumb-sized Universal Serial Bus (USB) flash drives, and portable electronic media such as CD-ROMs and DVDs, employees can access their agency’s systems and information from anywhere. When computers were larger and stationary, sensitive information that was stored on mainframe computers was accessible by only a limited number of authorized personnel via terminals that were secured within the physical boundaries of the agency’s facility. Now, mobile workers can process, transport, and transmit sensitive information anywhere they work. This transition from a stationary environment to a mobile one has changed the type of controls needed to protect the information. Encryption technologies, among other controls, provide agencies with an alternate method of protecting sensitive information that compensates for the protections offered by the physical security controls of an agency facility when the information is removed from, or accessed from, outside of the agency location. Data breaches can be reduced through the use of encryption, which is the process of transforming plaintext into ciphertext using a special value known as a key and a mathematical process called an algorithm (see fig. 2). Cryptographic algorithms are designed to produce ciphertext that is unintelligible to unauthorized users. Decryption of ciphertext—returning the encoded data to plaintext—is possible by using the proper key. Encryption can protect sensitive information in storage and during transmission. Encryption of data in transit hides information as it moves, for example, between a database and a computing device over the Internet, local networks, or via fax or wireless networks. Stored data include data stored in files or databases, for example, on a personal digital assistant, a laptop computer, a file server, a DVD, or a network storage appliance. Encryption may also be used in system interconnection devices such as routers, switches, firewalls, servers, and computer workstations to apply the appropriate level of encryption required for data that pass through the interconnection. Commercially available encryption technologies can help federal agencies protect sensitive information and reduce the risks of its unauthorized disclosure and modification. These technologies have been designed to protect information stored on computing devices or other media and transmitted over wired or wireless networks. Because the capability of each type of encryption technology to protect information is limited by the boundaries of the file, folder, drive, or network covered by that type of technology, a combination of several technologies may be required to ensure that sensitive information is continuously protected as it flows from one point, such as a remote mobile device, to another point, such as a network or portable electronic media. For example, one product that encrypts a laptop’s hard drive may not provide any protection for files copied to portable media, attached to an e- mail, or transmitted over a network. Agencies have several options available when selecting an encryption technology for protecting stored data. According to NIST guidance on encrypting stored information, these include full disk, hardware-based, file, folder, or virtual disk encryption. Through the use of these technologies, encryption can be applied granularly, to an individual file that contains sensitive information, or broadly, by encrypting an entire hard drive. The appropriate encryption technology for a particular situation depends primarily on the type of storage, the amount of information that needs to be protected, and the threats that need to be mitigated. Storage encryption technologies require users to authenticate successfully before accessing the information that has been encrypted. The combination of encryption and authentication controls access to the stored information. Full disk encryption software encrypts all data on the hard drive used to boot a computer, including the computer’s operating system, and permits access to the data only after successful authentication to the full disk encryption software. The majority of current full disk encryption products are implemented entirely within a software application. The software encrypts all information stored on the hard drive and installs a special environment to authenticate the user and begin decrypting the drive. Users enter their user identification and password before decrypting and starting the operating system. Once a user authenticates to the operating system by logging in, the user can access the encrypted files without further authentication, so the security of the solution is heavily dependent on the strength of the operating system authenticator. When a computer is turned off, all the information encrypted by full disk encryption is protected, assuming that pre-boot authentication is required. After the computer is booted, full disk encryption provides no protection and the operating system becomes fully responsible for protecting the unencrypted information. Full disk encryption can also be built into a hard drive. Hardware and software-based full disk encryption offer similar capabilities through different mechanisms. When a user tries to boot a device protected with hardware-based full disk encryption, the hard drive prompts the user to authenticate before it allows an operating system to load. The full disk encryption capability is built into the hardware in such a way that it cannot be disabled or removed from the drive. The encryption code and authenticators, such as passwords and cryptographic keys, are stored securely on the hard drive. Because the encryption and decryption are performed by the hard drive itself, without any operating system participation, typically there is very little performance impact. A major difference between software- and hardware-based full disk encryption is that software-based full disk encryption can be centrally managed, but hardware-based full disk encryption can usually be managed only locally. This makes key management and recovery actions considerably more resource-intensive and cumbersome for hardware- based full disk encryption than for software-based. Another major difference is that because hardware-based full disk encryption performs all cryptographic processing within the hard drive’s hardware, it does not need to place its cryptographic keys in the computer’s memory, potentially exposing the keys to malware and other threats. A third significant difference is that hardware-based full disk encryption does not cause conflicts with software that modifies the master boot record, for example, software that allows the use of more than one operating system on a hard drive. File, folder, and virtual disk encryption are all used to encrypt specified areas of data on a storage medium such as a laptop hard drive. File encryption encrypts files, a collection of information logically grouped into a single entity and referenced by a unique name, such as a file name. Folder encryption encrypts folders, a type of organizational structure used to group files. Virtual disk encryption encrypts a special type of file— called a container—that is used to encompass and protect other files. File encryption is the process of encrypting individual files on a storage medium and permitting access to the encrypted data only after proper authentication is provided. Folder encryption is very similar to file encryption, except that it addresses individual folders instead of files. Some operating systems offer built-in file and/or folder encryption capabilities, and many third-party programs are also commercially available. File/folder encryption does not provide any protection for data outside the protected files or folders such as unencrypted temporary files that may contain the contents of any unencrypted files being held in computer memory. Virtual disk encryption is the process of encrypting a container. The container appears as a single file but can hold many files and folders that are not seen until the container is decrypted. Access to the data within the container is permitted only after proper authentication is provided, at which point the container appears as a logical disk drive that may contain many files and folders. Virtual disk encryption does not provide any protection for data created outside the protected container, such as unencrypted temporary files, that could contain the contents of any unencrypted files being held in computer memory. Sensitive data are also at risk during transmission across unsecured— untrusted—networks such as the Internet. For example, as reported by NIST, transmission of e-mail containing sensitive information or direct connections for the purpose of processing information between a mobile device and an internal trusted system can expose sensitive agency data to monitoring or interception. According to both NIST and an industry source, agencies can use commercially available encryption technologies such as virtual private networks and digital signatures to encrypt sensitive data while they are in transit over a wired or wireless network. According to NIST, a virtual private network is a data network that enables two or more parties to communicate securely across a public network by creating a private connection, or “tunnel,” between them. Because a virtual private network can be used over existing networks such as the Internet, it can facilitate the secure transfer of sensitive data across public networks. Virtual private networks can also be used to provide a secure communication mechanism for sensitive data such as Web-based electronic transactions and to provide secure remote access to an organization’s resources. Properly implemented digital signature technology uses public key cryptography to provide authentication, data integrity, and nonrepudiation for a message or transaction. As NIST states, public key infrastructures (PKI) can be used not only to encrypt data but also to authenticate the identity of specific users. Just as a physical signature provides assurance that a letter has been written by a specific person, a digital signature is an electronic credential created using a party’s private key with an encryption algorithm. When it is added to a document, it can be used to confirm the identity of a document’s sender since it also contains the user’s public key and name of the encryption algorithm. Validating the digital signature not only confirms who signed it, but also ensures that there have been no alterations to the document since it was signed. Digital signatures may also be employed in authentication protocols to confirm the identity of the user before establishing a session. Specifically, digital signatures can be used to provide higher assurance authentication (in comparison with passwords) when establishing virtual private networks. Digital signatures are often used in conjunction with digital certificates. A digital certificate is an electronic credential that guarantees the association between a public key and a specific entity, such as a person or organization. As specified by NIST, the signature on the document can be validated by using the public key from the digital certificate issued to the signer. Validating the digital certificate, the system can confirm that the user’s relationship to the organization is still valid. The most common use of digital certificates is to verify that a user sending a message is who he or she claims to be and to provide the receiver with a means to encode a reply. For example, an agency virtual private network could use these certificates to authenticate the identity of the user, verify that the key is still good, and that he or she is still employed by the agency. NIST guidance further states that encryption software can be used to protect the confidentiality of sensitive information stored on handheld mobile computing devices and mirrored on the desktop computer. The information on the handheld’s add-on backup storage modules can also be encrypted when not in use. This additional level of security can be added to provide an extra layer of defense, further protecting sensitive information stored on handheld devices. In addition, encryption technologies can protect data on handheld devices while the data are in transit. Users often subscribe to third-party wireless Internet service providers, which use untrusted networks; therefore, the handheld device would require virtual private network software and a supporting corporate system to create a secure communications tunnel to the agency. Table 1 describes the types of commercial encryption technologies available to agencies. While many technologies exist to protect data, implementing them incorrectly—such as failing to properly configure the product, secure encryption keys, or train users—can result in a false sense of security or even render data permanently inaccessible. See appendix II for a discussion of decisions agencies face and important considerations for effectively implementing encryption to reduce agency risks. Although federal laws do not specifically require agencies to encrypt sensitive information, they give federal agencies responsibilities for protecting it. Specifically, FISMA, included within the E-Government Act of 2002, provides a comprehensive framework for ensuring the effectiveness of information security controls over federal agency information and information systems. In addition, other laws frame practices for protecting specific types of sensitive information. OMB is responsible for establishing governmentwide policies and for providing guidance to agencies on how to implement the provisions of FISMA, the Privacy Act, and other federal information security and privacy laws. In the wake of recent security breaches involving personal data, OMB issued guidance in 2006 and 2007 reiterating the requirements of these laws and guidance. In this guidance, OMB directed, among other things, that agencies encrypt data on mobile computers or devices and follow NIST security guidelines. In support of federal laws and policies, NIST provides federal agencies with planning and implementation guidance and mandatory standards for identifying and categorizing information types, and for selecting adequate controls based on risk, such as encryption, to protect sensitive information. Although federal laws do not specifically address the use of encryption, they provide a framework for agencies to use to protect their sensitive information. FISMA, which is Title III of the E-Government Act of 2002, emphasizes the need for federal agencies to develop, document, and implement programs using a risk-based approach to provide information security for the information and information systems that support their operations and assets. Its purposes include the following: providing a comprehensive framework for ensuring the effectiveness of information security controls over information resources that support federal operations and assets; recognizing the highly networked nature of the current federal computing environment and providing effective governmentwide management and oversight of the related information security risks, including coordination of information security efforts throughout the civilian, national security, and law enforcement communities; providing for development and maintenance of minimum controls required to protect federal information and information systems; acknowledging that commercially developed information security products offer advanced, dynamic, robust, and effective information security solutions, reflecting market solutions for the protection of critical information infrastructures important to the national defense and economic security of the nation that are designed, built, and operated by the private sector; and recognizing that the selection of specific technical hardware and software information security solutions should be left to individual agencies choosing from among commercially developed products. This act requires agencies to provide cost-effective controls to protect federal information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction, and it directs OMB and NIST to establish policies and standards to guide agency implementation of these controls, which may include the use of encryption. The E-Government Act of 2002 also strives to enhance protection for personal information in government information systems by requiring that agencies conduct privacy impact assessments. A privacy impact assessment is an analysis of how personal information is collected, stored, shared, and managed in a federal system. Additionally, the Privacy Act of 1974 regulates agencies’ collection, use, and dissemination of personal information maintained in systems of records. In this regard, the Privacy Act requires agencies to establish appropriate administrative, technical, and physical safeguards to ensure the security and confidentiality of records and to protect against any threats or hazards to their security or integrity that could result in substantial harm, embarrassment, inconvenience, or unfairness to any individual on whom information is maintained. Congress has also passed laws requiring protection of sensitive information that are agency-specific or that target a specific type of information. These laws include the Health Insurance Portability and Accountability Act of 1996, which requires additional protections to sensitive health care information and the Veterans Benefits, Health Care, and Information Technology Act, enacted in December 2006, which establishes information technology security requirements for personally identifiable information that apply specifically to the Department of Veterans Affairs. Table 2 summarizes the laws that provide a framework for agencies to use in protecting sensitive information. OMB is responsible for establishing governmentwide policies and for providing guidance to agencies on how to implement the provisions of FISMA, the Privacy Act, and other federal information security and privacy laws. OMB policy expands on the risk-based information security program requirements of FISMA in its 2002 and 2004 guidance and in the wake of recent security breaches involving personal data, outlines minimum practices for implementation of encryption required by federal agencies in guidance issued in 2006 and 2007. Specifically OMB memorandum M-04-04, E-Authentication Guidance for Federal Agencies, requires that agencies implement specific security controls recommended by NIST, including the use of approved cryptographic techniques for certain types of electronic transactions that require a specified level of protection. OMB memorandum M-06-16, Protection of Sensitive Agency Information, recommends, among other things, that agencies encrypt all agency data on mobile computers and devices or obtain a waiver from the Deputy Secretary of the agency that the device does not contain sensitive information. The memorandum also recommends that agencies use a NIST checklist provided in the memorandum that states agencies should verify that information requiring protection is appropriately categorized and assigned an appropriate risk impact category. OMB memorandum M-07-16, Safeguarding Against and Responding to the Breach of Personally Identifiable Information, restated the M-06-16 recommendations as requirements, and also required the use of NIST- certified cryptographic modules. These OMB memorandums significant to the use of encryption are briefly described in table 3. In support of federal laws and policies, NIST provides federal agencies with implementation guidance and mandatory standards for identifying and categorizing information types and for selecting adequate controls based on risk, such as encryption, to protect sensitive information. Specifically, NIST Special Publication 800-53 instructs agencies to follow the implementation guidance detailed in supplemental NIST publications, including the following: NIST Special Publication 800-21, Guideline for Implementing Cryptography in the Federal Government, guides the implementation of encryption by agencies. It recommends that prior to selecting a cryptographic method, or combination of methods, agencies address several implementation considerations when formulating an approach and developing requirements for integrating cryptographic methods into new or existing systems, including installing and configuring appropriate cryptographic components associated with selected encryption technologies; monitoring the continued effectiveness and functioning of encryption technologies; developing policies and procedures for life cycle management of cryptographic components (such as procedures for management of encryption keys, backup and restoration of services, and authentication techniques); and training users, operators, and system engineers. Special Publication 800-57, Recommendation for Key Management, provides guidance to federal agencies on how to select and implement cryptographic controls for protecting sensitive information by describing cryptographic algorithms, classifying different types of keys used in encryption, and providing information on key management. Special Publication 800-60, Guide for Mapping Types of Information and Information Systems to Security Categories, provides implementation guidance on the assignment of security categories to information and information systems using FIPS 199. Special Publication 800-63, Electronic Authentication Guideline, addresses criteria for implementing controls that correspond to the assurance levels of OMB memorandum M-04-04 such that, if agencies assign a level 2, 3, or 4 to an electronic transaction, they are required to implement specific security controls, including the use of approved cryptographic techniques. Special Publication 800-77, Guide to IPsec VPNs, provides technical guidance to agencies in the implementation of virtual private networks, such as identifying needs and designing, deploying, and managing the appropriate solution, including the use of Federal Information Processing Standards (FIPS)-compliant encryption algorithms. NIST also issues FIPS, which frame the critical elements agencies are required to follow to protect sensitive information and information systems. Specifically FIPS 140-2, Security Requirements for Cryptographic Modules. Agencies are required to encrypt agency data, where appropriate, using NIST- certified cryptographic modules. This standard specifies the security requirements for a cryptographic module used within a security system protecting sensitive information in computer and telecommunication systems (including voice systems) and provides four increasing, qualitative levels of security intended to cover a wide range of potential applications and environments. Several standards describe the technical specifications for cryptographic algorithms, including those required when using digital signatures. FIPS 199 provides agencies with criteria to identify and categorize all of their information and information systems based on the objectives of providing appropriate levels of information security according to a range of risk levels. FIPS 200 requires a baseline of minimum information security controls for protecting the confidentiality, integrity, and availability of federal information systems and the information processed, stored, and transmitted by those systems. FIPS 200 directs agencies to implement the baseline control recommendations of NIST Special Publication 800-53. The following security-related areas in FIPS 200 whose controls are further detailed in Special Publication 800-53 pertain to the use of encryption: Access control—describes controls for developing and enforcing policies and procedures for access control including remote access, wireless access, and for portable and mobile devices using mechanisms such as authentication and encryption. Contingency planning—includes controls to ensure that the organization protects system backup information from unauthorized modification by employing appropriate mechanisms such as digital signatures. Identification and authentication—describes controls for developing and documenting identification and authentication policies and procedures. Maintenance—includes remote maintenance control that addresses how an organization approves, controls, and monitors remotely executed maintenance and diagnostic activities including using encryption and decryption of diagnostic communications. Media protection—describes developing policies and procedures for media protection including media storage (which may include encrypting stored data) and transport. System and communications protection—includes controls to ensure the integrity and confidentiality of information in transit by employing cryptographic mechanisms if required, including establishing and managing cryptographic keys. NIST publications pertaining to the use of encryption in federal agencies are briefly described in table 4. The extent to which 24 major federal agencies reported that they had implemented encryption and developed plans to implement encryption varied across agencies. Although all agencies had initiated efforts to encrypt stored and transmitted sensitive agency information, none had completed these efforts or developed and documented comprehensive plans to guide their implementation of encryption technologies. Our tests at 6 selected agencies revealed weaknesses in the encryption implementation practices involving the installation and configuration of FIPS-validated cryptographic modules encryption products, monitoring the effectiveness of installed encryption technologies, the development and documentation of policies and procedures for managing these technologies, and the training of personnel in the proper use of installed encryption products. As a result of these weaknesses, federal information may remain at increased risk of unauthorized disclosure, loss, and modification. All 24 major federal agencies reported varying degrees of progress in their efforts to encrypt stored and transmitted sensitive agency information. While most of the agencies reported that they had not completed efforts to encrypt stored sensitive information, they reported being further along with efforts to encrypt transmitted sensitive information. Preparing for the implementation of encryption technologies involves numerous considerations. In response to our survey, agencies reported that they had encountered challenges that hinder the implementation of encryption. See appendix III for a discussion of the hindrances identified by agencies. OMB requires agencies to encrypt all agency data on mobile computers and devices or obtain a waiver from the Deputy Secretary of the agency stating that the device does not contain sensitive information. Of 24 agencies that reported from July through September 2007 on the status of their efforts to encrypt sensitive information stored on their laptops and handheld mobile devices, 8 agencies reported having encrypted information on less than 20 percent of these devices and 5 agencies reported having encrypted information on between 20 and 39 percent of these devices (see fig. 3). Overall, the 24 agencies reported that about 70 percent of laptop computers and handheld devices had not been encrypted. In addition, 10 of 22 agencies reported having encrypted information on less than 20 percent of portable storage media taken offsite, and 3 of 22 reported having encrypted between 20 and 39 percent. Further, 9 of 17 agencies reported encrypting sensitive information on less than 20 percent of offsite backup storage media. However, while agencies were encrypting sensitive data on mobile computers and devices such as laptop computers and handheld devices (e.g. personal digital assistants), 6 agencies reported having other storage devices, such as portable storage media, that could contain sensitive data. Of the 6 agencies, 4 had not encrypted these additional devices. Further, officials at 1 agency had no plans to encrypt sensitive data contained on their portable media. In response to our query in April 2008, OMB officials stated that the term “mobile computers and devices” was intended to include all agency laptops, handheld devices, and portable storage devices such as portable drives and CD-ROMs that contain agency data. Nevertheless, this description is not clear in any of its memorandums. Until OMB clarifies the applicability of the encryption requirement so that agencies can complete encrypting sensitive agency information stored on applicable devices, the information will remain at risk of unauthorized disclosure. Most agencies reported that they had encrypted sensitive information transmitted over wired and wireless networks. Of 23 agencies reporting on their efforts to encrypt wired Internet transmissions of sensitive information, 18 agencies reported encrypting nearly all or all (80 percent to 100 percent), of their transmissions over wired Internet networks. In addition, of 21 agencies reporting on their efforts to encrypt wireless transmissions of sensitive information, 12 reported having encrypted all or nearly all such transmissions (see fig. 4). Although 24 major federal agencies reported having encryption efforts under way, none of the agencies had documented a comprehensive plan that considered the security control implementation elements recommended by NIST. According to NIST, cryptography is best designed as an integrated part of a comprehensive information security program rather than as an add-on feature and it suggests that implementing technical approaches without a plan to guide the process is the least effective approach to making use of cryptography. Specifically, as part of an effective information security program, NIST Special Publication 800-53 requires agencies to inventory and categorize information and systems according to risk as well as to document the baseline security controls— such as encryption—selected to adequately mitigate risks to information. However, of the 24 agencies we surveyed, 18 reported that they had not completed efforts to inventory sensitive information that they hold. Further, NIST recommends that agencies follow NIST Special Publication 800-21 guidance when formulating their approach for integrating cryptographic methods into new or existing systems and documenting plans for implementing encryption, such plans consist of the following minimum elements: installing and properly configuring FIPS-validated cryptographic modules associated with selected encryption technologies; monitoring the continued effectiveness of installed cryptographic controls, including the proper functioning of encryption technologies; documenting and implementing policies and procedures for management of cryptographic components, such as the effective implementation and use of FIPS-compliant encryption technologies and the establishment and management of encryption keys; and providing training to users, operators, and system engineers. Although several agencies had developed ad hoc encryption technology acquisition or deployment plans, none of the agencies had documented comprehensive plans that addressed the elements recommended by NIST. In response to our query, OMB officials stated that they monitor agencies’ progress toward implementing encryption through quarterly data submitted by the agencies as part of the President’s Management Agenda scorecard. However, OMB did not provide us with evidence to demonstrate monitoring of the agencies’ efforts to inventory the sensitive information they hold or to develop implementation plans. As previously noted, agencies did not have such plans and often did not have inventories. Until agencies develop and document comprehensive plans to guide their approach for implementing encryption, including completing an inventory of the sensitive information they hold, agencies will have limited assurance that they will be able to effectively complete implementation and manage life cycle maintenance of encryption technologies, as we observed at selected agencies and discuss later in this report. Practices for implementing encryption displayed weaknesses at the 6 federal agencies we reviewed for testing. Specifically, 2 of the 6 agencies had not installed FIPS-validated cryptographic modules encryption technologies and 4 had not configured installed encryption technologies in accordance with FIPS 140-2 specifications. In addition, all of the 6 agencies had not either developed or documented policies and procedures for managing encryption implementation, and 3 of these agencies had not adequately trained personnel in the effective use of installed encryption technologies. Protection of information and information systems relies not only on the technology in place but on establishing a foundation for effective implementation, life cycle management, and proper use of the technologies. Until agencies resolve these weaknesses, their data may not be fully protected. OMB requires agencies to protect sensitive agency data stored on mobile devices by installing a FIPS-validated cryptographic modules product, and NIST Special Publication 800-53 recommends that agencies install FIPS- compliant products when the agency requires encryption of stored or transmitted sensitive information. Agencies can now acquire FIPS- validated cryptographic module products for encrypting stored information through the General Services Administration’s (GSA) SmartBUY program (see app. IV for a description of this program). Use of encryption technologies approved by NIST as compliant with FIPS 140-2 provides additional assurance that the product implemented—if configured correctly—will help protect sensitive information from unauthorized disclosure. Laptop computers. The Department of Housing and Urban Development (HUD) had not installed encryption products on any of its laptop computers despite an agency official’s assertions to the contrary. HUD officials explained that they had planned to implement FIPS-compliant encryption in fiscal year 2008 but that implementation was delayed until late in fiscal year 2008 due to lack of funding and it is now part of their fiscal year 2009 budget request. In addition, the Department of Education had not installed a FIPS-validated cryptographic modules product to encrypt sensitive information on any of the 15 laptop computers that we tested at one of its components. Of the 4 remaining agencies, 3—the Department of Agriculture (USDA), the State Department, and GSA—had installed FIPS-compliant technologies on all 58 of the laptop computers that we tested at specific locations within each agency. At the National Aeronautics and Space Administration (NASA) location we tested, we confirmed that the agency’s selected FIPS-compliant encryption software had been installed on 27 of 29 laptop computers. Although the agency asserted that it had installed it on all 29 laptops, officials explained that they did not have a mechanism to detect whether the encryption product was successfully installed and functioning. Handheld devices. All 6 of the agencies had deployed FIPS-compliant handheld mobile devices (specifically, BlackBerry® devices) for use by personnel. BlackBerry software and the BlackBerry enterprise server software enable users to store, send, and receive encrypted e-mail and access data wirelessly using FIPS-validated cryptographic modules encryption algorithms. Virtual private networks. One of three virtual private networks installed by the Department of Education was not a FIPS-compliant product. The remaining 5 agencies had installed FIPS-validated cryptographic modules products to protect transmissions of sensitive information. Although most agencies had installed FIPS-compliant products to encrypt information stored on devices and transmitted across networks, some did not monitor whether the product was functioning or configure the product to operate only in a FIPS-validated cryptographic modules secure mode. Until agencies configure FIPS-compliant products in a secure mode as directed by NIST—for example, by enabling only FIPS-validated cryptographic module encryption algorithms—protection against unauthorized decryption and disclosure of sensitive information will be diminished. Laptop computers. Of the 4 agencies with FIPS-compliant products installed on laptop computers, 3 had configured the product to operate in a secure mode as approved by NIST on all devices that we examined. However, a component of the Department of Agriculture had not effectively monitored the effectiveness and continued functioning of encryption products on 5 of the 52 laptop computers that we examined. Agency officials were unaware that the drives of these devices had not been correctly encrypted. The drives, while having the encryption software installed, did not encrypt the data on the drive. This agency’s system administrator attributed the noncompliance to the failure of a step in the installation process; specifically, the laptop had not been connected to the agency’s network for a sufficient period of time to complete activation of the user’s encryption key by the central server, and the agency had no mechanism in place to monitor whether the installed product was functioning properly. Handheld devices. Three of the 6 agencies—the Department of Education, HUD, and NASA—had not configured their handheld BlackBerry devices to encrypt the data contained on the devices. All six of the agencies encrypted data in transit because FIPS-validated cryptographic modules encryption was built into the BlackBerry device software. However, agencies must enable the encryption to protect information stored on the device itself by making a selection to do so and requiring the user to input a password. Officials at these 3 agencies stated that they had not enabled this protective feature on all their BlackBerry devices due to operational issues with enabling content protection and that they are awaiting a solution from the vendor. Virtual private networks. Two of the 6 agencies—the Department of Education and HUD—had not configured their virtual private networking technologies to use only strong, FIPS-validated cryptographic modules encryption algorithms for encrypting data and to ensure message integrity. The use of weak encryption algorithms—ones that have not been approved by NIST or that have explicitly been disapproved by NIST— provides limited assurance that information is adequately protected from unauthorized disclosure or modification. The weaknesses in encryption practices identified at the 6 selected agencies existed in part because agencywide policies and procedures did not address federal guidelines related to implementing and using encryption. NIST Special Publication 800-53 recommends that agencies develop a formal, documented policy that addresses the system and communications controls as well as a formal, documented procedure to facilitate implementation of these controls. While policies should address the agency’s position regarding use of encryption and management of encryption keys, the implementation procedures should describe the steps for performance of specific activities such as user registration, system initialization, encryption key generation, key recovery, and key destruction. However, 4 of the 6 agencies did not have a policy that addressed the establishment and management of cryptographic keys as directed by NIST, and none of the 6 agencies had detailed procedures for implementing this control. Furthermore, according to NIST guidance, agency policies and procedures are to address how agencies will install and configure FIPS-compliant encryption products. All agencies’ policies addressed how the agency planned to comply with these requirements. However, 4 agencies did not have detailed procedures requiring installation and configuration of FIPS- compliant cryptography (see table 5). Policies and procedures for installing and configuring encryption technologies and for managing encryption keys provide the foundation for the effective implementation and use of encryption technologies and are a necessary element of agency implementation plans. Until these agencies develop, document, and implement these policies and procedures, the agencies’ implementation of encryption may be ineffective in protecting the confidentiality, integrity, and availability of sensitive information. Also contributing to the weaknesses at 3 of 6 agencies was the failure to adequately train personnel in the proper use of installed encryption technology. Specifically USDA officials stated that users had not been trained to check for continued functioning of the software after installation but that they were in the process of including encryption concepts in its annual security awareness training required for all computer users. At the conclusion of our review, USDA had not yet completed this effort. At the component of the Department of Education where testing was conducted, some users were unaware that the agency had installed encryption software on their laptop computers. These users, therefore, had never used the software to encrypt sensitive files or folders. Further, while an agency official asserted that encryption training was provided, the training documents provided pertained only to the protection of personally identifiable information and did not provide specifics on how to use the available encryption products. Users we spoke with were unaware of any available training. At NASA, several users stated that they had refused to allow the encryption software to be installed on their devices, while other users said they were unfamiliar with the product. Although NASA requires users to receive training when encryption is installed and has developed a training guide, there was no mechanism in place to track whether users complete the necessary training. Until these agencies provide effective training to their personnel in the proper management and use of installed encryption technologies, they will have limited confidence in the ability of the installed encryption technologies to function as intended. Despite the availability of numerous types of commercial encryption technologies and federal policies requiring encryption, most federal agencies had just begun to encrypt sensitive information on mobile computers and devices. In addition, agencies had not documented comprehensive plans to guide activities for effectively implementing encryption. Although governmentwide efforts were under way, agency uncertainty with OMB requirements hampered progress. In addition, weaknesses in encryption practices at six selected federal agencies— including practices for installing and configuring FIPS-validated cryptographic modules products, monitoring the effectiveness of these technologies, developing encryption policies and procedures, and training personnel—increased the likelihood that the encryption technologies used by the agencies will not function as intended. Until agencies address these weaknesses, sensitive federal information will remain at increased risk of unauthorized disclosure, modification, or loss. We are making 20 recommendations to the Director of the Office of Management and Budget and six federal departments and agencies to strengthen encryption of federal systems. To assist agencies with effectively planning for and implementing encryption technologies to protect sensitive information, we recommend that the Director of the Office of Management and Budget take the following two actions: clarify governmentwide policy requiring agencies to encrypt sensitive agency data through the promulgation of additional guidance and/or through educational activities and monitor the effectiveness of the agencies’ encryption implementation plans and efforts to inventory the sensitive information they hold. To assist the Department of Agriculture as it continues to deploy its departmentwide encryption solutions and to improve the life cycle management of encryption technologies, we recommend that the Secretary of Agriculture direct the chief information officer to take the following three actions: establish and implement a mechanism to monitor the successful installation and effective functioning of encryption products installed on devices, develop and implement departmentwide procedures for encryption key establishment and management, and develop and implement a training program that provides technical support and end-user personnel with adequate training on encryption concepts, including proper operation of the specific encryption products used. We also recommend that the Secretary of the Department of Education direct the chief information officer to take the following five actions to improve the life cycle management of encryption technologies: evaluate, select, and install FIPS 140-compliant products for all encryption needs and document a plan for implementation that addresses protection of all sensitive information stored and transmitted by the agency; configure installed FIPS-compliant encryption technologies in accordance with FIPS-validated cryptographic modules security settings for the product; develop and implement departmentwide policy and procedures for encryption key establishment and management; develop and implement departmentwide procedures for use of FIPS- develop and implement a training program that provides technical support and end-user personnel with adequate training on encryption concepts, including proper operation of the specific encryption products used. To ensure that the Department of Housing and Urban Development is adequately protecting its sensitive information and to improve the life cycle management of encryption technologies at the department, we recommend that the Secretary of Housing and Urban Development direct the chief information officer to take the following three actions: evaluate, select, and install FIPS 140-compliant products for all encryption needs and document a plan for implementation that addresses protection of all sensitive information stored and transmitted by the agency; configure installed FIPS-compliant encryption technologies in accordance with FIPS-validated cryptographic modules security settings for the product; and develop and implement departmentwide procedures for the use of FIPS- compliant cryptography and for encryption key establishment and management. To improve the life cycle management of encryption technologies at the Department of State, we recommend that the Secretary of State direct the chief information officer to take the following two actions: develop and implement departmentwide policy and procedures for encryption key establishment and management and develop and implement departmentwide procedures for use of FIPS- compliant cryptography. To improve the life cycle management of encryption technologies at the General Services Administration, we recommend that the Administrator of the General Services Administration direct the chief information officer to take the following two actions: develop and implement departmentwide policy and procedures for encryption key establishment and management and develop and implement departmentwide procedures for use of FIPS- compliant cryptography. As the National Aeronautics and Space Administration continues to plan for a departmentwide encryption solution and to improve the life cycle management of encryption technologies, we recommend that the Administrator of the National Aeronautics and Space Administration direct the chief information officer to take the following three actions: establish and implement a mechanism to monitor the successful installation and effective functioning of encryption products installed on devices, develop and implement departmentwide policy and procedures for encryption key establishment and management, and develop and implement a training program that provides technical support and end-user personnel with adequate training on encryption concepts, including proper operation of the specific encryption products used. We received written comments on a draft of this report from the Administrator, Office of E-Government and Information Technology at OMB (reproduced in app. V). OMB generally agreed with the report’s contents and stated that it would carefully consider our recommendations. We also received written comments from Education’s Chief Information Officer (reproduced in app. VI), from HUD’s Acting Chief Information Officer (reproduced in app. VII), from the Department of State (reproduced in app. VIII), from the Acting Administrator of the GSA (reproduced in app. IX), and from the Deputy Administrator of NASA (reproduced in app. X). We received comments via email from the Department of Agriculture. In these comments, the Departments of Agriculture, Education, HUD, and State; the GSA; and NASA agreed with our recommendations to their respective departments. Agencies also stated that they had implemented or were in the process of implementing our recommendations. In addition, NIST and the Social Security Administration provided technical comments, which we have incorporated as appropriate. As we agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time, we will send copies of this report to interested congressional committees and the agency heads and inspectors general of the 24 major federal agencies. We will also make copies available to others on request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions or wish to discuss this report, please contact me at (202) 512-6244 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 XI. The objectives of our review were to determine (1) how commercially available encryption technologies could help federal agencies protect sensitive information and reduce risks; (2) the federal laws, policies, and guidance for using encryption technologies to protect sensitive information; and (3) the extent to which agencies have implemented, or planned to implement, encryption technologies to protect sensitive information. To address the first objective, we reviewed prior GAO reports and reviewed documentation regarding products validated by the National Institute of Standards and Technology (NIST) Cryptographic Module Validation Program to identify commercially available encryption technologies. Additionally, we met with a vendor of an encryption product and interviewed NIST encryption experts regarding the characteristics of products that can reduce risks to agencies. To address the second objective, we reviewed prior GAO and agency inspector general reports to identify relevant laws and guidance such as the Federal Information Security Management Act of 2002 (FISMA) and the Privacy Act of 1974 to identify mandatory and optional practices for protecting sensitive information (including personally identifiable information but excluding classified national security information) that federal agencies collect, process, store, and transmit. We examined the laws to identify federal agencies responsible for promulgating federal policies and standards on the use of encryption. Additionally, we researched official publications issued by the Office of Management and Budget and NIST and interviewed officials from these agencies to identify the policies, standards, and guidance on encryption that have been issued. To address the third objective, we collected and analyzed agency-specific policies, plans, and practices through a data request and also conducted a survey of the 24 major federal agencies. A survey specialist designed the survey instrument in collaboration with subject matter experts. Then, the survey was pretested at 4 of these agencies to ensure that the questions were relevant and easy to comprehend. For each agency surveyed, we identified the appropriate point of contact, notified each one of our work, and distributed the survey along with a data request to each via e-mail in June 2007. In addition, we discussed the purpose and content of the survey and data request with agency officials when requested. All 24 agencies responded to our survey and data request from June to September 2007; results are reported as of this date. We contacted agency officials when necessary for additional information or clarification of agencies’ status of encryption implementation. We did not verify the accuracy of the agencies’ responses; however, we reviewed supporting documentation that agencies provided to corroborate information provided in their responses. We then analyzed the results from the survey and data request to identify: the types of information encrypted in data when stored and in transit; technologies used by the agency to encrypt information; whether the technologies implemented by the agency met federal the extent to which the agency has implemented, or plans to implement, encryption; and any challenges faced and lessons learned by agencies in their efforts to encrypt sensitive but unclassified information. Conducting any survey may introduce errors. For example, differences in how a particular question is interpreted, the sources of information that are available to respondents, or how the data are entered or were analyzed can introduce variability into the survey results. We took steps in the development of the survey instrument, the data collection, and the data analysis to minimize errors. In addition, we tested the implementation of encryption technologies at 6 agencies to determine whether each agency was complying with federal guidance that required agencies to use NIST-validated encryption technology. Out of 24 major federal agencies, we selected 6 that met one or more of the following conditions: they (1) had not been tested under a recent GAO engagement, (2) had reported having initiated efforts to install FIPS-validated cryptographic modules encryption technologies, (3) had experienced publicized incidents of data compromise, or (4) were reasonably expected to collect, store, and transmit a wide range of sensitive information. Specifically, we tested the implementation of encryption for BlackBerry servers, virtual private networks, or a random selection of laptop computers at specific locations at the following 6 agencies within the Washington, D.C. area: U.S. Department of Agriculture, Department of Housing and Urban Development, General Services Administration, and National Aeronautics and Space Administration At each of these agencies, we requested an inventory of laptop computers that were located at agency facilities in the Washington, D.C., metro area and that were encrypted. For each agency, we nonstatistically selected one location at which to perform testing, and thus the encryption test results for each agency cannot be projected to the entire agency. We performed the testing between September and December 2007. At each location where laptop computers were tested, there were a small number of laptop computers that were requested as part of our sample but which were not made available to us for testing. Department officials cited several reasons for this, including that the user of the device could not bring it to the location in time for our testing. In testing the laptop computers, we determined whether encryption software had been installed on the device and whether the software had been configured properly to adhere to federally required standards. Although we identified unencrypted laptop computers at each agency, we were not able to make statistical estimates of the percentage of unencrypted devices at each location. The small number of devices in each sample not made available to us for our testing compromised the randomness of each sample. Additionally, for each of the selected locations among the 6 agencies, we requested information on their BlackBerry servers, chose the server with the greatest number of users for testing, and reviewed through observation the specific security configuration settings. We also requested and examined agency-provided information for their virtual private networks to determine if encrypted networks were using products validated by NIST. Finally, we interviewed agency officials regarding their practices for encrypting stored data as well as data in transit, and for encryption key establishment and management. Furthermore, we reviewed and analyzed data on the General Services Administration’s SmartBUY program to determine the extent of savings the program provides to federal agencies and how certain agencies have already benefited from the program. We conducted this performance audit from February 2007 through 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. Encryption technology may help protect sensitive information from compromise; however, there are several important implementation and management considerations when selecting and implementing this technology. Encryption can be a powerful tool, but implementing it incorrectly—such as by failing to properly configure the product, secure encryption keys, or train users—can, at best, result in a false sense of security and, at worst, render data permanently inaccessible. Designing, building, and effectively implementing commercially available cryptographic technologies involves more than installing the technology. Decisions must be made for managing encryption keys and related cryptographic components, as well as for managing mobile devices and using public key infrastructure (PKI) technologies. Ultimately, the effectiveness of the encryption technologies used to protect agency information and reduce risk depends on how an agency implements and manages these technologies and the extent to which they are an integral part of an effectively enforced information security policy that includes sound practices for managing encryption keys. Policies and procedures. Comprehensive policies for the management of encryption and decryption keys—the secret codes that lock and unlock the data—are an important consideration. Providing lifetime management of private keys and digital certificates across hundreds of applications and thousands of servers, end-users, and networked devices can quickly strain an agency’s resources. For example, if a key is lost or damaged, it may not be possible to recover the encrypted data. Therefore, it is important to ensure that all keys are secured and managed properly by planning key management processes, procedures, and technologies before implementing storage encryption technologies. According to NIST, this planning would include all aspects of key management, including key generation, use, storage, and destruction. It would also include a careful consideration of how key management practices can support the recovery of encrypted data if a key is inadvertently destroyed or otherwise becomes unavailable (for instance, because a user unexpectedly resigns or loses a cryptographic token containing a key). An example of recovery preparation is storing duplicates of keys in a centralized, secured key repository or on physically secured removable media. Additional considerations for the encryption of removable media are how changing keys may affect access to encrypted storage on the media and what compensating controls could be developed, such as retaining the previous keys in case they are needed. Key storage location. Another consideration that NIST describes is deciding where the local keys will be stored. For some encryption technologies, such as full disk encryption and many file/folder encryption products, there are often several options for key location, including the local hard drive, a flash drive, a cryptographic token, or a trusted platform module chip. Some products also permit keys to be stored on a centralized server and retrieved automatically after the user authenticates successfully. For virtual disk encryption, the main encryption key is often stored encrypted within the disk or container itself. Access to encryption keys. Another consideration is properly restricting access to encryption keys. According to NIST, storage encryption technologies should require the use of one or more authentication mechanisms, such as passwords, smart cards, and cryptographic tokens, to decrypt or otherwise gain access to a storage encryption key. The keys themselves should be logically secured (encrypted) or physically secured (stored in a tamper-resistant cryptographic token). The authenticators used to retrieve keys should also be secured properly. Managing cryptographic components related to encryption keys. In addition to key management, NIST describes several other considerations when planning a storage encryption technology. Setting the cryptography policy involves choosing the encryption algorithm, mode of cryptographic operation, and key length. Federal agencies must also use NIST-validated cryptographic modules configured for FIPS-compliant algorithms and key lengths. In addition, several FIPS-compliant algorithms are available for integrity checking. Another consideration for managing cryptographic components is how easily an encryption product can be updated when stronger algorithms and key sizes become available in the future. Centralized management of mobile devices. NIST recommends centralized management for most storage encryption deployments because of its effectiveness and efficiency for policy verification and enforcement, key management, authenticator management, data recovery, and other management tasks. Centralized management can also automate these functions: deployment and configuration of storage encryption software to end user devices, distribution and installation of updates, collection and review of logs, and recovery of information from local failures. PKI technology. Because PKI technology uses a public key as part of its encryption system, PKI systems with key management can be used to avoid the problem of lost keys. Data encrypted with PKI relies on one public key, so the private key of the person encrypting the data isn’t necessarily required to decrypt it. However, if an unauthorized user is able to obtain a private key, the digital certificate could then be compromised. Agencies considering PKI technology must ensure that the key systems of different agencies are compatible for cross-agency collaboration on tasks such as security incident information sharing. Further, users of certificates are dependent on certification authorities to verify the digital certificates. If a valid certification authority is not used, or a certification authority makes a mistake or is the victim of a cyber attack, a digital certificate may be ineffective. Ongoing maintenance of encryption technologies. Systems administrators responsible for encryption technology maintenance should be able to configure and manage all components of the technology effectively and securely. According to NIST, it is particularly important to evaluate the ease of deployment and configuration, including how easily the technology can be managed as the technology is scaled to larger deployments. Another consideration is the ability of administrators to disable configuration options so that users cannot circumvent the intended security. Other maintenance considerations NIST describes include the effects of patching/upgrading software, changing software settings (changing cryptographic algorithms or key sizes), uninstalling or disabling encryption software, changing encryption/decryption keys, and changing user or administrator passwords. Preparing an agency for encryption presents numerous challenges to agencies, including selecting an adequate combination of cost-effective baseline security controls, properly configuring the networks and user devices within the information technology (IT) infrastructure to accommodate selected encryption technologies, providing training to personnel, and managing encryption keys. In response to our survey, agencies reported several conditions that hinder their ability to encrypt sensitive information as required by the Office of Management and Budget. In response to our survey, all 24 agencies reported hindrances with implementing encryption. These hindrances included prohibitive costs; user acceptance; user training; data backup and recovery; data archival and retrieval; interoperability; infrastructure; vendor support for encryption products acquired; availability of FIPS-compliant products to meet the needs of uncommon or unique devices, applications, or environments within the agency’s IT infrastructure; and management support for migration to encryption controls. Agencies noted the level of hindrance caused by these challenges ranged from little or no hindrance to great or very great hindrance. The most challenging conditions are discussed below. Prohibitive costs. Nine agencies reported that the cost of acquiring and implementing encryption was their greatest hindrance, and 13 agencies cited this condition as somewhat of a hindrance or a moderate hindrance. As reported in appendix IV, a governmentwide initiative (SmartBUY) has been established to assist agencies with overcoming this hindrance. User acceptance and training. Some encryption technologies can be burdensome to users and can require specialized training on encryption concepts and proper installation, maintenance, and use of encryption products. Sixteen agencies reported facing somewhat of a hindrance or a moderate hindrance in obtaining user acceptance of encryption implementations and in training personnel. Four agencies reported a great or very great hindrance from lack of user acceptance, and 2 agencies reported a great hindrance from insufficient training. Data backup, recovery, archiving, and retrieval. Agencies must establish policies and procedures for management of encryption keys, which are necessary to recover data from back-ups in the event of a service interruption or disaster, or to retrieve data in archived records, perhaps many years in the future. For example, if the key is not properly backed up and is on a server that has been destroyed in a fire or the key used to encrypt archived records changes over time, data encrypted with the key may be irretrievably lost. Sixteen agencies reported facing somewhat of a hindrance or a moderate hindrance with backup and recovery, and 15 agencies reported the same level of hindrance with data archiving and retrieval. Interoperability. Key systems and technologies of different agencies need to be compatible with each other for cross-agency collaboration. Five agencies reported that lack of interoperability was a great or very great hindrance, and 13 reported somewhat of a hindrance or a moderate hindrance. Infrastructure considerations. Six agencies reported facing a great or very great hindrance in readying their IT infrastructure for encryption and 11 reported this was somewhat of a hindrance or a moderate hindrance. Table 6 summarizes the number of agencies reporting the extent to which 10 conditions affect their agency’s ability to implement encryption. Although agencies reported facing hindrances to implementing encryption, a new program (GSA SmartBUY specific to encryption products) established after we started our review, offers agencies options to overcome key hindrances. For example, prohibitive costs and acquiring FIPS-compliant products are two hindrances that agencies may be able to address through SmartBUY. As discussed in appendix IV, discounted pricing is available for data-at-rest encryption software. In addition, all products available through SmartBUY use cryptographic modules validated under FIPS 140-2 security requirements. To help agencies comply with OMB requirements for encrypting information on mobile devices, a governmentwide acquisition vehicle was established for encryption products for stored data. Through a governmentwide program known as SmartBUY (Software Managed and Acquired on the Right Terms), agencies can procure encryption software at discounted prices. According to the General Services Administration (GSA), SmartBUY is a federal government procurement vehicle designed to promote effective enterprise-level software management. By leveraging the government’s immense buying power, SmartBUY could save taxpayers millions of dollars through governmentwide aggregate buying of commercial off-the-shelf software products. SmartBUY officially began in 2003, when OMB issued a memo emphasizing the need to reduce costs and improve quality in federal purchases of commercial software. The memo designates GSA as the executive agent to lead the interagency initiative in negotiating governmentwide enterprise licenses for software. SmartBUY establishes strategic enterprise agreements with software publishers (or resellers) via blanket purchase agreements. OMB Memorandum 04-08, Maximizing Use of SmartBUY and Avoiding Duplication of Agency Activities with the President’s 24 E-Gov Initiatives, requires agencies to review SmartBUY contracts to determine whether they satisfy agency needs—such as for products to encrypt stored data—and, absent a compelling justification for doing otherwise, acquire their software requirements from the SmartBUY program. The issuance of OMB’s May 2006 recommendation to encrypt mobile devices contributed to the addition of 11 SmartBUY agreements for stored data encryption products established in June 2007. The products offered fall into one of three software and hardware encryption product categories: full disk encryption, file encryption, or integrated full disk/file encryption products. All products use cryptographic modules validated under FIPS 140-2 security requirements. Volume discounts on encryption products are available when purchasing in tiers of 10,000, 33,000, and 100,000 users. Each of the 11 agreements has its own pricing structure, which may include maintenance and training in addition to licenses for users. Discounts on volume pricing can range up to 85 percent off GSA schedule prices. Table 7 provides an example of the discounted pricing available from 1 of the 11 SmartBUY agreements for encryption software. As of January 2008, 10 agencies had purchased encryption products—such as software licenses, annual maintenance services, and training—from the stored data SmartBUY list, realizing significant cost savings. One of those agencies—the Social Security Administration—purchased 250,000 licenses of one of the stored data products at a savings of $6.7 million off the GSA schedule prices. Additionally, USDA negotiated an agreement for 180,000 licenses at $9.63 each, as opposed to the GSA unit price of $170 per license. The large number of licenses acquired allowed USDA to negotiate the low price. Several agencies noted that considering an enterprisewide deployment of encryption can be helpful with issues of standardization, interoperability, and infrastructure readiness. While 10 agencies have already acquired encryption products through the SmartBUY program, several agencies are still in the process of assessing which encryption products (including those available under the SmartBUY program) will best suit agency needs. In addition to the individual named above, Nancy DeFrancesco (Assistant Director), James Ashley, Debra Conner; Season Dietrich, Neil Doherty, Nancy Glover, Joel Grossman, Ethan Iczkovitz, Stanley J. Kostyla, Lowell Labaro, Rebecca Lapaze, Anjalique Lawrence, Harold Lewis, Lee McCracken, and Tammi L. Nguyen made key contributions to this report. Process of determining the permissible activities of users and authorizing or prohibiting activities by each user. Process of confirming an asserted identity with a specified or understood level of confidence. Granting the appropriate access privileges to authenticated users. A system that manages life cycle maintenance tasks associated with the credentials, such as unlocking the personal identity verification cards during issuance or updating a personal identification number or digital certificate on the card. A digital representation of information that (1) identifies the authority issuing the certificate; (2) names or identifies the person, process, or equipment using the certificate; (3) contains the user’s public key; (4) identifies the certificate’s operational period; and (5) is digitally signed by the certificate authority issuing it. A certificate is the means by which a user is linked—or bound—to a public key. Data in an encrypted form. The file used by a virtual disk encryption technology to encompass and protect other files. An object, such as a smart card, that identifies an individual as an official representative of, for example, a government agency. The result of the transformation of a message by means of a cryptographic system using digital keys, so that a relying party can determine (1) whether the transformation was created using the private key that corresponds to the public key in the signer’s digital certificate and (2) whether the message has been altered since the transformation was made. Digital signatures may also be attached to other electronic information and programs so that the integrity of the information and programs may be verified at a later time. The electronic equivalent of a traditional paper-based credential—a document that vouches for an individual’s identity. The encryption of information at its origin and decryption at its intended destination without any intermediate decryption. A collection of information that is logically grouped into a single entity and referenced by a unique name, such as a file name. An organizational structure used to group files. The process of encrypting all the data on the hard drive used to boot a computer, including the computer’s operating system, that permits access to the data only after successful authentication with the full disk encryption product. Encryption that is normally performed by dedicated hardware in the client/host system. The process of determining to what identity a particular individual corresponds. A value used to control cryptographic operations, such as decryption, encryption, signature generation, or signature verification. A program that is inserted into a system, usually covertly, with the intent of compromising the confidentiality, integrity, or availability of the victim’s data, applications, or operating system or of otherwise annoying or disrupting the victim. A computer’s master boot record is a reserved sector on its bootable media that determines which software (e.g., operating system, utility) will be executed when the computer boots from the media. The program that, after being initially loaded into the computer by a boot program, manages all the other programs in a computer. Examples of operating systems include Microsoft Windows, MacOS, and Linux. The other programs are called applications or application programs. The application programs make use of the operating system by making a request for service through a defined application program interface. In addition, users can interact directly with the operating system through a user interface such as a command language or a graphical user interface. The secret part of an asymmetric key pair that is typically used to digitally sign or decrypt data. The public part of an asymmetric key pair that is typically used to verify signatures or encrypt data. A system of hardware, software, policies, and people that, when fully and properly implemented, can provide a suite of information security assurances—including confidentiality, data integrity, authentication, and nonrepudiation—that are important in protecting sensitive communications and transactions. The expectation of loss expressed as the probability that a threat will exploit a vulnerability with a harmful result. Any information that an agency has determined requires some degree of heightened protection from unauthorized access, use, disclosure, disruption, modification, or destruction because of the nature of the information, e.g., personal information required to be protected by the Privacy Act of 1974, proprietary commercial information, information critical to agency program activities, and information that has or may be determined to be exempt from public release under the Freedom of Information Act. A statement published on a given topic by organizations such as the National Institute of Standards and Technology, the Institute of Electrical and Electronics Engineers, the International Organization for Standardization, and others specifying characteristics—usually measurable ones—that must be satisfied to comply with the standard. A tamper-resistant integrated circuit built into some computer motherboards that can perform cryptographic operations (including key generation) and protect small amounts of sensitive information such as passwords and cryptographic keys. The process of encrypting a container, which can hold many files and folders, and of permitting access to the data within the container only after proper authentication is provided. In this case, the container is typically mounted as a virtual disk; it appears to the user as a logical disk drive. A virtual private network is a logical network that is established, at the application layer of the open systems interconnection model, over an existing physical network and typically does not include every node present on the physical network.

Many federal operations are supported by automated systems that may contain sensitive information such as national security information that, if lost or stolen, could be disclosed for improper purposes. Compromises of sensitive information at numerous federal agencies have raised concerns about the extent to which such information is vulnerable. The use of technological controls such as encryption--the process of changing plaintext into ciphertext--can help guard against the unauthorized disclosure of sensitive information. GAO was asked to determine (1) how commercially available encryption technologies can help agencies protect sensitive information and reduce risks; (2) the federal laws, policies, and guidance for using encryption technologies; and (3) the extent to which agencies have implemented, or plan to implement, encryption technologies. To address these objectives, GAO identified and evaluated commercially available encryption technologies, reviewed relevant laws and guidance, and surveyed 24 major federal agencies. Commercially available encryption technologies can help federal agencies protect sensitive information that is stored on mobile computers and devices (such as laptop computers, handheld devices such as personal digital assistants, and portable media such as flash drives and CD-ROMs) as well as information that is transmitted over wired or wireless networks by reducing the risks of its unauthorized disclosure and modification. For example, information stored in individual files, folders, or entire hard drives can be encrypted. Encryption technologies can also be used to establish secure communication paths for protecting data transmitted over networks. While many products to encrypt data exist, implementing them incorrectly------such as failing to properly configure the product, secure encryption keys, or train users------can result in a false sense of security and render data permanently inaccessible. Key laws frame practices for information protection, while federal policies and guidance address the use of encryption. The Federal Information Security Management Act of 2002 mandates that agencies implement information security programs to protect agency information and systems. In addition, other laws provide guidance and direction for protecting specific types of information, including agency-specific information. For example, the Privacy Act of 1974 requires that agencies adequately protect personal information, and the Health Insurance Portability and Accountability Act of 1996 requires additional protections for sensitive health care information. The Office of Management and Budget has issued policy requiring federal agencies to encrypt all data on mobile computers and devices that carry agency data and use products that have been approved by the National Institute for Standards and Technology (NIST) cryptographic validation program. Further, NIST guidance recommends that agencies adequately plan for the selection, installation, configuration, and management of encryption technologies. The extent to which 24 major federal agencies reported that they have implemented encryption and developed plans to implement encryption of sensitive information varied across agencies. From July through September 2007, the major agencies collectively reported that they had not yet installed encryption technology to protect sensitive information on about 70 percent of their laptop computers and handheld devices. Additionally, agencies reported uncertainty regarding the applicability of OMB's encryption requirements for mobile devices, specifically portable media. While all agencies have initiated efforts to deploy encryption technologies, none had documented comprehensive plans to guide encryption implementation activities such as installing and configuring appropriate technologies in accordance with federal guidelines, developing and documenting policies and procedures for managing encryption technologies, and training users. As a result federal information may remain at increased risk of unauthorized disclosure, loss, and modification.

You are an expert at summarizing long articles. Proceed to summarize the following text: Overall federal support for education includes not only federal funds, but also nonfederal funds associated with federal legislation. More than 30 departments or agencies administer federal education dollars, although the Department of Education administers the most, accounting for about 43 percent. Of the about $73 billion appropriated to support education, half supports elementary and secondary education. Overall, six program areas account for almost two-thirds of all budgeted education funding. Many departments and programs may target funds to the same target groups, such as poor children. Although some coordination takes place and some programs have been consolidated, much more needs to be done to coordinate the multiple education programs scattered throughout the federal government. NCES estimates federal support for education, excluding tax expenditures, as approximately $100.5 billion in fiscal year 1997. This figure is an estimate of the value of the assistance to the recipients—not the cost to the government. NCES describes this support as falling into two main categories: funds appropriated by the Congress (on-budget) and a combination of what NCES calls “off-budget” funds and nonfederal funds generated by federal legislation. Appropriated funds include items such as grants, federal matching funds, and the administration and subsidy costs for direct and guaranteed student loans. Off-budget funds are the portion of direct federal loans anticipated to be repaid. Nonfederal funds generated by federal legislation include nonfederal (generally state or local) funds provided to obtain federal matching funds and capital provided by private lenders for education loans. According to NCES, in fiscal year 1997, appropriated funds constituted approximately three- quarters of the total: $73.1 billion. To ensure that all Americans have equal access to educational opportunities, the federal government often targets its education funds to groups, such as poor children, that for various reasons have not had equal access to educational opportunities. The government may also target funds to ensure that all children have access to vital resources—such as well-trained teachers and technology. These concerns have helped disperse federal education programs to over 30 departments or agencies. The Department of Education spends the most, accounting for about 43 percent of appropriations or an estimated $31 billion in fiscal year 1997. (See fig. 2.) The Department of Health and Human Services (HHS) spends the next largest amount, with about 18 percent or an estimated $13 billion. Over half of this amount ($7.1 billion) funded research; another $4 billion funded the Head Start program. Other Departments with federal education dollars include the Departments of Agriculture, Labor, and Defense, with 13, 6, and 5 percent, respectively. The remaining 15 percent is spent by more than 30 additional departments or agencies. (A) T I (Educaon) Pll G (Educaon) (Lbo) HS) (Educaon) Elementary and secondary education programs account for half of all budgeted federal education dollars. (See fig. 5.) In addition, the federal government provides funds for postsecondary education (generally as grants and loan guarantees), research (through such Departments as HHS, Energy, and Defense, along with the National Science Foundation), and other activities such as rehabilitative services. Federal funds are generally targeted to specific groups. However, many education programs administered by separate agencies may target any single group. Although we have no comprehensive figures on the number of programs targeted to different groups, figure 6 shows the number of programs in various agencies targeted to three specific groups—young children, at-risk and delinquent youth, and teachers. Teachers (FY1993) (FY1992 & 1993) (FY1996) services. For example, in 1996, 47 federal programs provided substance abuse prevention, 20 provided substance abuse treatment, and 57 provided violence prevention. Thirteen federal departments and agencies administered these programs and received about $2.3 billion. In addition, the same department or agency administered many programs providing similar services. Justice, for example, had nine programs providing substance abuse prevention services to youth in 1996. Furthermore, many individual programs funded multiple services: about 63 percent of the programs funded four or more services each in 1996, according to our review. We also examined programs that provide teacher training. For this target group, multiple federal programs exist in a number of federal agencies. For example, the federal government funded at least 86 teacher training programs in fiscal year 1993 in nine federal agencies and offices. For the 42 programs for which data were available, Department officials reported that over $280 million was obligated in fiscal year 1993. Similarly, in fiscal years 1992 and 1993, the government funded over 90 early childhood programs in 11 federal agencies and 20 offices, according to our review. Our analysis showed that one disadvantaged child could have possibly been eligible for as many as 13 programs. Many programs, however, reported serving only a portion of their target population and maintained long waiting lists. Secretary of Education Riley testified recently before this Task Force that the Department of Education has made progress in both eliminating low-priority programs and consolidating similar programs. He noted, for example, that the reauthorization of the Individuals With Disabilities Education Act reduced the number of programs from 14 to 6. In addition, the Department has proposed eliminating or consolidating over 40 programs as part of the reauthorization of the Higher Education Act. difficulty for those trying to access the most appropriate services and funding sources. Federal programs that contribute to similar results should be closely coordinated to ensure that goals are consistent and, as appropriate, program efforts are mutually reinforcing. Uncoordinated program efforts can waste scarce funds, confuse and frustrate program customers, and limit the overall effectiveness of the federal effort. The large numbers of programs and agencies supporting education activities and target groups make management and evaluation information critical to the Congress and agency officials. Information about the federal education effort is needed by many different decisionmakers, for different reasons, at different times, and at different levels of detail. Much of that information, however, is not currently available. To efficiently and effectively operate, manage, and oversee programs and activities, agencies need reliable, timely program performance and cost information and the analytic capacity to use that information. For example, agencies need to have reliable data during their planning efforts to set realistic goals and later, as programs are being implemented, to gauge their progress toward reaching those goals. In addition, in combination with an agency’s performance measurement system, a strong program evaluation capacity is needed to provide feedback on how well an agency’s activities and programs contributed to reaching agency goals. Systematically evaluating a program’s implementation can also provide important information about the program’s success or lack thereof and suggest ways to improve it. nationwide. Finally, the Congress needs the ability to look across all programs designed to help a given target group to assess how the programs are working together and whether the overall federal effort is accomplishing a mission such as preventing substance abuse among youths. In addition, for specific oversight purposes, congressional decisionmakers sometimes want specific kinds of information. For example, this Task Force has indicated that two types of information would be particularly useful to its mission: knowing which federal education programs target which groups and knowing what characterizes successful programs. Some information is available about preK-12 programs that do not appear to be achieving the desired results and others that appear to be successful. Secretary Riley, for example, has testified that the Department will be doing more to disseminate the latest information on what works in education. Our clearest evidence about a lack of positive effect from federal expenditures comes from one of the largest programs: title I. Title I of the Elementary and Secondary Education Act is the largest federal elementary and secondary education grant program. It has received much attention recently because of an Education Department report showing that, overall, title I programs do not ultimately reduce the effect of poverty on a student’s achievement. For example, children in high-poverty schools began school academically behind their peers in low-poverty schools and could not close this gap as they progressed through school. In addition, when assessed according to high academic standards, most title I students failed to exhibit the reading and mathematics skills expected for their respective grade levels. The study concluded that students in high-poverty schools were the least able to demonstrate the expected levels of academic proficiency. strategies in several areas: school violence, substance abuse prevention,and school-to-work transition. In 1995, we also prepared an overview of successful and unsuccessful practices in schools and workplaces. Our reviews identified several important program characteristics: strong program leadership, linkages between the program and the community, and a clear and comprehensive approach. The Department of Education also has contracts for evaluating what works. For example, the Prospects study—in addition to providing the data on the overall limited effect of title I—analyzed the five high- performing, high-poverty schools in its sample of 400 schools. Although the number of schools is too small for conclusive generalizations, the study described the characteristics of these schools as “food for thought” for future research on successful programs. These schools had an experienced principal; low teacher and pupil turnover; an emphasis on schoolwide efforts that seek to raise the achievement of every student; a greater use of tracking by student ability; a balanced emphasis on remedial and higher order thinking in classroom involvement; and higher parent support and expectations than low-performing, high-poverty schools. Significant information gaps exist, however, about both programs and their outcomes. Currently, no central source of information exists about all the programs providing services to the same target groups among different agencies or about those providing a similar service to several target groups. Instead, we have had to conduct the specific analyses previously described for at-risk and delinquent youth, young children, and teachers—as well as others—to obtain this information. Moreover, in our evaluations of specific programs—some of which get billions of federal dollars each year—the most basic information is lacking. For example, our study of the Safe and Drug-Free Schools Program revealed that the program has no centralized information about what specific services the funds pay for—much less whether the money is being spent effectively. In our ongoing work on Head Start, we found that no list of Head Start classrooms and their locations existed. Urban and Suburban/Rural Special Strategies for Educating Disadvantaged Children: Findings and Policy Implications of a Longitudinal Study, Department of Education (Washington, D.C.: Apr. 1997). changes and changes in the population served. We have recommended that HHS include in its research plan an assessment of the impact of regular Head Start programs. Although the Department believes that clear evidence exists of the positive impacts of Head Start services, it does have plans to evaluate the feasibility of conducting such studies. More promising, but still incomplete, is the information available for Safe and Drug-Free Schools programs. Information on effectiveness and impact has not been collected, although overall evaluations of the Safe and Drug-Free Schools program have not been completed. However, Education’s evaluative activities focus on broader aspects of program implementation and not the effectiveness of all Safe and Drug-Free Schools programs nationwide. Moreover, the lack of uniform information requirements on program activities and effectiveness may create a problem for federal oversight. If (1) process information is critical for program, agency, and interagency management of federal elementary and secondary programs, and (2) outcome and impact information is needed to assess results and focus efforts on what works, why is information not readily available? The challenges to collecting that information include competing priorities—such as reducing paperwork and regulatory burden and promoting flexibility in program implementation—that restrict data collection and evaluation activities; the cost of data collection; the secondary role of education in many programs; the difficulty of obtaining impact evaluation information (under any circumstances); the special challenge to assessing overall effects on federal efforts involving multiple federal programs in multiple agencies; and until recently, a lack of focus on results and accountability. approving collections of information done by the federal government, whether through questions, surveys, or studies. This can limit the burden on state and local governments and others; however, it can also limit the amount of information collected by the Department of Education. Similarly, the challenge of balancing flexibility and accountability is apparent in efforts to provide certain federal education funds as block grants. Agencies face the challenge of balancing the flexibility block grants afford states to set priorities on the basis of local need with their own need to hold states accountable for achieving federal goals. For example, the Safe and Drug-Free Schools program allows a wide range of activities and permits states to define the information they collect on program activities and effectiveness. With no requirement that states use consistent measures, the Department faces a difficult challenge in assembling the triennial state reports to develop a nationwide picture of the program’s effectiveness. One promising strategy as an alternative to traditional block grants is the use of Performance Partnership Grants (PPG). Under PPGs, the states and the federal government negotiate an arrangement that identifies specific objectives and performance measures regarding outcomes and processes. This approach gives the states more control over their funding decisions, while encouraging them to accept greater accountability for results. Obtaining and analyzing information to manage and evaluate programs requires significant resources. For example, the Department of Education’s strategic plan cites the need to improve the quality of performance data on programs and operations and to promote the integration of federal programs with one another as well as with state and local programs. Towards this end, in fiscal year 1997, the Department of Education was appropriated about $400 million for educational research and improvement. Education estimates an additional $367 million was obligated by the Department for information technology for Department operations. In addition, evaluation research is costly. For example, in fiscal year 1993, the Department awarded 38 contracts totaling more than $20 million for evaluating elementary and secondary education programs. Contract amounts ranged from $38,000 to fund a program improvement conference to $6.8 million for implementing the chapter 1 longitudinal study (Prospects). But this accounted for only 1 year of this multiyear study: this longitudinal study to assess the impact of significant participation in title I programs on student and young adult outcomes cost about $25 million over a 4-year period. The median cost for an evaluation contract was about $180,000 in fiscal year 1993. In our testimony last spring on challenges facing the Department of Education, we noted that the Department needed more information to determine how its programs are working and that additional departmental resources may be needed to manage funds and provide information and technical assistance. For example, title I is intended to promote access to and equity in education for low-income students. The Congress modified the program in 1994, strengthening its accountability provisions and encouraging the concentration of funds to serve more disadvantaged children. At this time, however, the Department does not have the information it needs to determine whether the funding is being targeted as intended. Although the Department has asked for $10 million in its fiscal year 1998 budget request to evaluate the impact of title I, it has only just begun a small study of selected school districts to examine targeting to identify any necessary mid-course modifications. The ultimate impact of the 1994 program modifications could be diminished if the funding changes are not implemented as intended. Many federal programs involving education have other primary purposes. For example, the Department of Agriculture’s child nutrition program provides school breakfast and school lunch programs. The Head Start program also emphasizes health and nutrition as well as parenting skills; cognitive development is only one of six program goals. In addition, Safe and Drug-Free Schools Act money can be used to provide comprehensive health education, whose major goals and objectives are broader than just drug and violence prevention. Good evaluative information about program effects is difficult to obtain. Each of the tasks involved—measuring outcomes, ensuring the consistency and quality of data collected at various sites, establishing the causal connection between outcomes and program activities, and distinguishing the influence of extraneous factors—raises formidable technical or logistical problems. Thus, evaluating program impact generally requires a planned study and, often, considerable time and expense. Program features affect the relative difficulty of getting reliable impact information. The more varied the program activities and the less direct the connection between the provider and the federal agency, the greater the difficulty of getting comparable, reliable data on clients and services. For example, a federal agency whose own employees deliver a specified service can probably obtain impact data more easily than one that administers grants that states then pass on to several local entities to be used different ways. Also, due to the absence of contrasting comparison groups, it is extremely difficult to estimate the impact of a long-standing program that covers all eligible participants. The sheer number of departments and agencies that spend federal education dollars makes it hard to aggregate existing information among federal programs for certain issues or target groups. Each program may have its own measures on the federal, state, and local levels. Even for a single program, each state may use different measures (as mentioned earlier regarding the Safe and Drug-Free Schools and Communities Act programs), creating difficult challenges to developing a nationwide picture of the program’s effectiveness. Yet this is just 1 of the 127 programs administered by 15 agencies that target at-risk and delinquent youth. If the Congress wanted to know the overall effectiveness of the federal effort in helping at-risk and delinquent youth, the task would be even more daunting than that the Department of Education faces in developing a nationwide picture of one flexibly administered program. Federally funded programs have historically placed a low priority on results and accountability. Therefore, until recently, the statutory framework has not been in place to bring a more disciplined approach to federal management and to provide the Congress and agency decisionmakers with vital information for assessing the performance and costs of federal programs. In recent years, however, governments around the world, including ours, have faced a citizenry that is demanding that governments become more effective and less costly. These two demands are driving the move to a performance-based approach to managing public-sector organizations. GPRA is the centerpiece of a statutory framework provided by recent legislation to bring needed discipline to federal agencies’ management activities. Other elements are the expanded Chief Financial Officers Act, the Paperwork Reduction Act of 1995, and the Clinger-Cohen Act of 1996. These laws each responded to a need for accurate, reliable information for executive branch and congressional decision-making. In combination, they provide a framework for developing (1) fully integrated information about an agency’s mission and strategic priorities, (2) performance data for evaluating the achievement of these goals, (3) the relationship of information technology investments to meeting performance goals, and (4) accurate and audited financial information about the costs of meeting the goals. GPRA requires that agencies clearly define their missions, establish long-term strategic goals as well as annual goals linked to them, measure their performance according to the goals they have set, and report on their progress. In addition to ongoing performance monitoring, agencies are also expected to perform discrete evaluations of their programs and to use information obtained from these evaluations to improve their programs. Agencies are also expected to closely coordinate with other federal agencies whose programs contribute to similar results to ensure that goals are consistent and, as appropriate, that program efforts are mutually reinforcing. Each agency was required to submit to OMB and the Congress a strategic plan explaining its mission, long-term goals, and strategies for meeting these goals by September 30, 1997, and the Department of Education did so. needed to meet any unmet goals. In addition, by early 1998, OMB must submit to the Congress governmentwide performance plans based on agencies’ plans as part of the president’s fiscal 1999 budget. For federal education programs, this shift to a focus on results can help inform decisionmakers about effective program models and the actual activities and characteristics of individual federal programs. GPRA provides an incentive for agency and program personnel to systematically assess their programs and identify and adapt successful practices of similar programs. The act also provides an early warning system for identifying goals and objectives that are not being met so that agency and program staff can replace ineffective practices with effective ones. The act’s emphasis on coordination among similar programs and linking results to funding also provides a way to better understand the overall effect of federal activities and to identify programs that might be abolished, expanded, or consolidated with others. If agencies and OMB use the annual planning process to highlight crosscutting program issues, the individual agency performance plans and the governmentwide performance plan should provide the Congress with the information needed to identify agencies and programs addressing similar missions. Once these programs are identified, the Congress can consider the associated policy, management, and performance implications of crosscutting program issues. This information should also help identify the performance and cost consequences of program fragmentation and the implications of alternative policy and service delivery options. These options, in turn, can lead to decisions about department and agency missions and allocating resources among those missions. Achieving the full potential of GPRA is a particularly difficult challenge because of the multiple programs and many departments involved in the federal effort to improve public K-12 education. Meanwhile, this challenge—combined with the current limited data available about the programs and their effectiveness—is precisely why GPRA is needed. It is also why we believe it holds promise to help improve the information available to decisionmakers and, thus, the federal effort in this important area. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or members of the Task Force may have. Managing for Results: Building on Agencies’ Strategic Plans to Improve Federal Management (GAO/T-GGD/AIMD-98-29, Oct. 30, 1997). Safe and Drug-Free Schools: Balancing Accountability With State and Local Flexibility (GAO/HEHS-98-3, Oct. 10, 1997). Education Programs: Information on Major Preschool, Elementary, and Secondary Education Programs (GAO/HEHS-97-210R, Sept. 15, 1997). Education Programs: Information on Major Postsecondary Education, School-to-Work, and Youth Employment Programs (GAO/HEHS-97-212R, Sept. 15, 1997). At-Risk and Delinquent Youth: Fiscal Year 1996 Programs (GAO/HEHS-97-211R, Sept. 2, 1997). Managing for Results: Using the Results Act to Address Mission Fragmentation and Program Overlap (GAO/AIMD-97-146, Aug. 29, 1997). Substance Abuse and Violence Prevention: Multiple Youth Programs Raise Questions of Efficiency and Effectiveness (GAO/T-HEHS-97-166, June 24, 1997). The Government Performance and Results Act: 1997 Governmentwide Implementation Will Be Uneven (GAO/GGD-97-109, June 2, 1997). Head Start: Research Provides Little Information on Impact of Current Program (GAO/HEHS-97-59, Apr. 15, 1997). Department of Education: Challenges in Promoting Access and Excellence in Education (GAO/T-HEHS-97-99, Mar. 20, 1997). Schools and Workplaces: An Overview of Successful and Unsuccessful Practices (GAO/PEMD-95-28, Aug. 31, 1995). Block Grants: Issues in Designing Accountability Provisions (GAO/AIMD-95-226, Sept. 1, 1995). Multiple Teacher Training Programs: Information on Budgets, Services, and Target Groups (GAO/HEHS-95-71FS, Feb. 22, 1995). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. 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GAO discussed: (1) the amount and complexity of federal support for education; (2) additional planning, implementation, and evaluative information needed by agencies and the Congress on federal education programs; and (3) some of the challenges of obtaining more and better information. GAO noted that: (1) billions in federal education dollars are distributed through hundreds of programs and more than 30 agencies; (2) agencies and the Congress need information to plan, implement, and evaluate these programs; (3) to gauge and ensure the success of these programs, the Congress and agencies need several kinds of information; (4) they need to know which specific program approaches or models are most effective, the circumstances in which they are effective, and if the individual programs are working nationwide; (5) they also need to be able to look across all programs that are designed to help a given target group to see if individual programs are working efficiently together and whether the federal effort is working effectively overall; (6) GAO believes a close examination of these multiple education programs is needed; (7) the current situation has created the potential for inefficient service and reduced overall effectiveness; (8) basic information about programs and program results is lacking and there are many challenges in obtaining this important information; and (9) the Government Performance and Results Act of 1993 (GPRA) holds promise as a tool to help agencies manage for results, coordinate their efforts with other agencies, and obtain the information they need to plan and implement programs and evaluate program results.

You are an expert at summarizing long articles. Proceed to summarize the following text: For decades, we and DOD auditors have reported that DOD has not promptly or accurately charged its appropriation accounts for all of its disbursements and collections. Instead, DOD has recorded billions of dollars in suspense and other accounts that were set up to temporarily hold disbursements and collections until the proper appropriation account could be identified. But, rather than being a temporary solution, amounts accumulated and remained in suspense for years because DOD did not routinely research and correct its records. Over time, DOD lost the ability to identify the underlying disbursement and collection transactions in suspense because they had been summarized and netted over and over. Also, in many cases the documentation necessary to properly account for the transactions was lost or destroyed. It is important that DOD charge transactions to appropriation accounts promptly and accurately because these accounts provide the department with legal authority to incur and pay obligations for various kinds of goods and services. DOD has hundreds of current and closed appropriation accounts that were authorized by law over the years. In some ways, appropriation accounts are similar to an individual’s checking account— the funds available in DOD’s appropriation accounts must be reduced or increased as the department disburses money or receives collections that it is authorized to retain. Just as an individual who maintains multiple checking accounts must be sure that transactions are recorded to the proper account, DOD also must ensure that the proper appropriation account is charged or credited for each specific disbursement and receipt. DOD’s failure over the years to promptly and correctly charge and credit its appropriation accounts has prevented the department and Congress from knowing whether specific appropriations were over- or underspent, whether money was spent for authorized purposes, and how much money was still available for spending in individual appropriation accounts. Many disbursements and collections remained in DOD suspense accounts well beyond the date that the associated spending authority expired and canceled. DOD’s inability to properly record its financial transactions has also created an environment conducive to fraud, waste, and mismanagement. Auditors have issued numerous reports over the years that identify specific problems related to DOD’s poor controls over its accounting for disbursements and collections. But DOD’s ability to improve its accounting has historically been hindered by its reliance on fundamentally flawed financial management systems and processes and a weak overall internal control environment. Complex disbursement processes, missing information, and errors often combine to prevent DOD from promptly and accurately charging its appropriation accounts. In general, DOD’s disbursement process begins with military service or defense agency personnel obligating funds in specific appropriations for the procurement of various goods and services. Once the goods or services are received, DFAS personnel pay for them using electronic funds transfers (EFT), manual checks, or interagency transfers. Although the bill for goods and services received should be matched to the relevant obligation to ensure that funds are available for payment before any disbursement is made, DFAS, military service, or defense agency personnel often do not identify the correct appropriation and perform the match until after making the payment. If the appropriation and obligation then cannot be identified based on the available information, the disbursement is recorded in a suspense account until research is performed, additional information is received, or any errors are corrected. If DFAS staff cannot determine the correct appropriation account to charge, DOD policies allow DFAS staff to request approval for charging current funds. Several military services and DOD agencies can be involved in a single disbursement, and each has differing financial policies, processes, and nonstandard nonintegrated systems. As a result, millions of disbursement transactions must be keyed and rekeyed into the vast number of systems involved in any given DOD business process. Also, DOD disbursements must be recorded using an account coding structure that can exceed 75 digits, and this coding structure often differs by military service in terms of the type, quantity, and format of data required. The manual entry and reentry of the account code alone often results in errors and missing information about transactions. Automated system edit checks identify transaction records with invalid or missing account coding information, such as the appropriation account number or the chargeable entity, and refuse to process the faulty records. DFAS then records the problem disbursements in suspense accounts until the individual transactions can be corrected and reprocessed by the accounting systems. Other reasons for disbursement transactions to be recorded to suspense accounts include no valid obligation data identified, DOD disbursement records and Treasury disbursement records differ, unsupported charges between DOD services and defense agencies. DOD uses suspense accounts to hold several different kinds of collections until they can be properly credited to the relevant appropriation account or organization. For example, contractors often return overpayments they received for the goods and services they provided without including sufficient information for DOD to identify which account or which service location should be credited for the reimbursement. DOD also routinely accumulates estimated payroll tax withholding amounts in suspense accounts until the payments must be transferred to the Internal Revenue Service. If the estimates are higher than actual payments, amounts can be left in suspense indefinitely. Similarly, DOD records user fees collected for various purposes, such as grazing rights and forestry products, to suspense accounts until the accumulated funds are credited to the correct appropriation account or organization. DOD has recognized that using suspense accounts for accumulating withholding taxes and user fees is not appropriate and exacerbates its problems with these accounts but has stated that system and other problems prevent establishment of proper holding accounts for these collections. Check differences refer to differences between the summary and detail amounts reported by DOD for the paper checks it issued as well as differences with the amounts reported by banks for the paper checks that were cashed. Monthly, Treasury compares the DOD summary and detail amounts and bank discrepancy reports, identifies check issue and payment differences, and sends a report to DOD with the cumulative difference amount. While the check issue and payment differences could occur for various reasons, some of the common reasons are check issue records excluded from DOD detail reports but included in DOD summary reports to Treasury, erroneous check amount reported by DOD, check paid by the bank but not reported by DOD, voided check erroneously reported by DOD as check issued, and check dated and paid by the bank in a previous month but DOD reported its issuance in the current month. DOD does not record these differences in a suspense account or any other holding account. However, Treasury continues to track and report aged check differences monthly to DOD until they are cleared. DOD recognized that it would never be able to correctly account for billions of dollars of aged, unidentifiable, and unsupportable amounts recorded in its suspense accounts or reported as check payment differences. Therefore, DOD management requested and received statutory authority to write off these problem transactions. The NDA Act authorized DOD to cancel long-standing debit and credit transactions that could not be cleared from the department’s books because DOD lacked the supporting documentation necessary to record the transactions to the correct appropriations. The legislation specified that the write-offs include only suspense account disbursement and collection transactions that occurred prior to March 1, 2001, and that were recorded in suspense accounts F3875, F3880, or F3885; include only check payment differences identified by Treasury for checks issued prior to October 31, 1998; be supported by a written determination from the Secretary of Defense that the documentation necessary for correct recording of the transactions could not be located and that further research attempts were not in the best interest of the government; be processed within 30 days of the Secretary’s written determination; be accomplished by December 2, 2004. DOD officials estimated the value of the suspense account and check payment write-offs to be an absolute amount of nearly $35 billion, or a net amount of $629 million. However, neither of these amounts accurately represented the total value of all the individual transactions that DOD could not correctly record to appropriations and, therefore, left in suspense for years. Many DOD accounting systems and processes routinely offset individual disbursements, collections, adjustments, and correcting entries against each other and record only the net amount in suspense accounts. Over time, amounts might even have been netted more than once. Because DOD had not developed effective tools for tracking or archiving the individual transactions that had been netted together, there was no way for DOD to know how much of the suspense amounts recorded prior to March 1, 2001, represented disbursements and collections versus how much represented adjustments and correcting entries. In order to calculate absolute values for the suspense account write-offs, DOD could only add together the already netted disbursement, collection, adjustment, and correcting amounts. Table 1 shows the net and absolute values of the suspense write-offs as calculated by DOD and illustrates how the use of net values can present an entirely different picture than the use of absolute values. While suspense account write-offs related to Army appropriations represented nearly the total of the calculated absolute values, they represented less than 30 percent of the calculated net values—far less than the net write-off amounts related to Navy appropriations. Also, amounts that have been netted and that cannot be traced back to the underlying transactions cannot be audited. For the nearly $34 billion of suspense write-offs related to Army appropriations, DFAS had almost no transaction level information that could differentiate between individual disbursement and collection transactions that related to net reconciling adjustments that resulted from comparing monthly totals for Army records with Treasury records; net cumulative monthly charges from other military services, defense agencies, or federal agencies for goods or services provided to the Army; summarized suspense account activity reported by Army field correcting entries from center or field staff meant to clear amounts from suspense. According to DFAS officials, the system used to account for Army appropriations had accumulated about 30 years worth of individual, netted, summarized, and correcting entries that could not be identified and therefore were eligible for write-off. Unlike the accounting system used for Army, the systems used by DFAS centers to account for the other military services and the defense agencies did not accumulate billions of dollars in correcting entries that were meant to clear amounts from suspense. However, they did include significant amounts of non-transaction-level information, such as reconciling adjustments, net charges, and summarized account activity. For example, one of the write-offs processed for the Navy consisted of a single $326 million amount for which DFAS Cleveland was unable to distinguish any of the underlying individual transactions. As a result, DFAS Cleveland had no way of knowing what amounts might have been netted or summarized in order to arrive at the $326 million figure. DOD also wrote off $14.5 million of differences between what DOD reported as its check payment amounts and what Treasury reported as check amounts cleared through the banking system. Treasury had accumulated these check payment differences and reported them to DOD monthly on its Comparison of Checks Issued reports. Since the Treasury reports contained only the cumulative net check payment differences and DOD could not identify all of the underlying checks, as with suspense account write-offs, it was not possible to calculate an absolute value for all of the individual check errors. All of the monthly summary totals reported by Treasury for paper checks cashed during the period covered by the legislation were higher than the totals reported by DOD for paper checks issued during that period. To manage the suspense account write-off process, DOD developed detailed guidance and review procedures that provided reasonable assurance, given the limitations in the quality of the underlying data, that the department complied with legislative requirements. Before suspense amounts were approved for write-off, multiple layers of DOD officials and internal auditors reviewed the packages submitted by the five DFAS centers. The write-off packages varied in content but generally included a certification statement from the DFAS center director, an electronic file and a narrative description of the individual amounts that made up the package, and any additional system reports or documents that demonstrated compliance with legislative limits regarding dates and accounts. For check payment differences, DOD’s management process was less complicated—written instructions on how to submit the write-off amounts to Treasury were prepared, but there were no reviews other than those done at the DFAS centers. The check differences write-offs also met the legislative requirements except that the Secretary of Defense did not make a written determination regarding the necessity for the write-offs. The overall write-off process was not without cost to DOD, however; DOD’s lack of enforcement of proper accounting procedures and its own regulations meant that significant management and staff resources were required to prepare, support, and review the packages submitted for write-off. DOD developed guidance for the preparation of the write-off packages and implemented a series of reviews by high-ranking DOD officials. The guidance identified different types of transactions in suspense and specified the documentation requirements for each. For example, nearly a quarter of the write-offs represented disbursement transactions for which vouchers existed, but the vouchers did not contain sufficient information for the transactions to be posted to valid lines of accounting. For this type, the DFAS center director had to certify that steps were taken to obtain the missing information to clear the transactions and that further action was not warranted. For more than half of the write-off amounts, the underlying transactions could not be identified and vouchers and supporting documentation did not exist. Guidance included requirements that this write-off type be accompanied by written narrative from the DFAS center that described in detail the reason why amounts could not be cleared through normal processing. DFAS centers identified amounts to be written off in various ways depending upon the systems and processes in place at each center. Using the guidance discussed above, center officials then separated the amounts into transaction types, prepared the required supporting documentation or narratives, and grouped the amounts into “packages” to be sent forward for review. DOD’s multilayered review process served as the primary control for providing reasonable assurance that the suspense account write-offs met legislative requirements. As illustrated in figure 1, the reviews were performed sequentially by officials from the DFAS centers, the military service and defense agency FMOs, DFAS Arlington and DFAS internal review and by the DOD Comptroller, the Secretary of Defense’s designee. As each level of review was completed, the reviewing official was required to sign a certification statement or memorandum. The certification was a DOD requirement to demonstrate that reviews had been performed by various management officials and all agreed that the proposed write-off amounts met the legislative requirements. DOD’s review process was effective in identifying write-off amounts that did not appear to meet legislative requirements. DOD reviewers told us— and documentary evidence supports their claims—that additional information was requested from DFAS centers to support various questioned amounts or that packages with unsupported amounts were rejected and returned to the centers. For example, a $326 million package, consisting of a single amount supposedly representing transactions dating back to May 1992, was questioned by DFAS Arlington, DFAS internal review, and the Comptroller’s office. Because no supporting detailed transactions were identified and because the package did not clearly demonstrate that the amount had been recorded prior to March 1, 2001, the package was flagged. Reviewers contacted the originating DFAS center and requested additional documentation and explanation. The center provided the reviewers with detailed analyses demonstrating that the proposed write-off amounts had to represent transactions transferred into the center’s suspense accounts when the center was established in May 1992. Based on the additional evidence, the reviewers concluded that the proposed write-off met legislative requirements and approved the package. DOD reviewers rejected numerous proposed write-off amounts that did not comply with the legislation, including 18 of the original 116 packages submitted by the DFAS centers, often because they did not clearly support a transaction date prior to March 1, 2001. To ensure suspense write-off amounts were recorded within 30 days of the determination by the Secretary of Defense’s designee and before the legislative deadline of December 2, 2004, DFAS center officials reviewed accounting system records and requested additional information from their staff. The Columbus, Denver, and Indianapolis DFAS centers provided us with information that demonstrated the time frames were met with a few exceptions. DFAS Cleveland and DFAS Kansas City officials told us that they met the time frames for write-offs but could not provide any supporting documentation. Officials at these centers explained that as soon as the Comptroller’s office certified each write-off package, center staff sent data files to system technicians specifying the information to be deleted from suspense account records. According to officials, once the technicians had deleted the records, they sent e-mails back to the requesting center officials confirming that they had deleted the information within the required time frames. However, center officials were unable to provide us with copies of these e-mails or the deleted files. Although DOD did not establish a multilayered review process for check payment differences, the department did comply with legislative requirements for the write-offs with one exception—the Secretary of Defense did not provide the required written determination prior to Treasury’s recording of the write-off amounts. As specified in the legislation, DFAS centers used Treasury reports (the Treasury Comparison of Checks Issued reports) to identify check payment differences dated prior to October 31, 1998. DFAS staff reviewed available documents to determine that sufficient information was no longer available to identify the proper appropriation account. Even for very large differences, DOD’s accounting records provided no information to help explain the difference in checks issued and paid or to identify what records needed correction. For example, the Treasury report included a single difference of almost $6 million (over 40 percent of the total write-off amount) that represented a check issued on October 31, 1991, by DFAS Columbus payable to the U.S. Treasury. DFAS Columbus was unable to locate any documentation to support the reason for the check payment, the amount of the check, or the associated appropriation. DOD established a much abbreviated process for check payment differences write-offs. Rather than having check payment write-offs reviewed by the Comptroller’s office, DFAS Arlington, DFAS internal review, and military service and defense agency FMOs prior to submission to Treasury, DOD relied solely on DFAS center management to ensure compliance with the legislation. Our review indicated that center officials adequately documented that all amounts written off were dated prior to October 31, 1998, and were reported on the Treasury Comparison of Checks Issued report. However, DOD did not comply with the requirement in the legislation that prior to submission to Treasury, the Secretary of Defense make a written determination that DOD officials have attempted without success to locate the documentation necessary to identify which appropriation should be charged with the amount of the check and that further efforts to do so are not in the best interests of the United States. In October 2004, after DOD had submitted all of the check payment difference write-offs to Treasury and Treasury had recorded them, DOD asked DFAS internal review to look at all the submissions and determine whether they complied with the legislation. According to a DFAS Arlington official, internal review completed its work and concluded that the check payment write-offs sent to Treasury were certified by disbursing officers, DFAS centers, and the services (either in writing or orally) prior to clearing the transactions. The official also stated that this matter has been forwarded to the DOD Comptroller’s office for a formal determination to meet the legal requirements under the now expired law. Figure 2 below illustrates the write-off process for check payment differences. The write-off process itself could not and did not fix DOD’s underlying problems—outdated, nonstandard, and nonintegrated financial systems and lack of enforcement of proper accounting policies and procedures— that led to the build-up of aged, unsupported suspense transactions and check payment differences. To the extent that DOD allows large aged suspense and check difference balances to recur, the department will again be required to undertake costly procedures to try to support the proper recording of those transactions or to write them off. According to DOD officials, numerous staff members at every level were needed to prepare, support, and review the write-off packages and, in some instances, to rework previously submitted packages. For example, DOD officials told us that for the most part, the research and preparation of the write-off packages represented additional tasks that were added to the staff’s normal workload. We were told that, although staff tried to prioritize their work in order to prevent a backlog related to current suspense account balances, they could not keep up with their daily activities and current suspense account balances increased over the period. Also, several DFAS center officials told us that for much of 2003, DFAS Arlington, the Comptroller’s office, and Treasury officials tried to reach an agreement on exactly how to process the write-off amounts. Because the official guidance was not issued by DFAS Arlington until January 2004, there was a significant delay in preparing the write-off packages. Although DOD had hoped to finish the write-offs by the end of fiscal year 2004, only 24 packages had been approved by that time. DOD had to assign additional resources to enable the remaining 71 packages to be reviewed, approved, and processed by December 2, 2004, the legislative cutoff date. Writing off aged suspense account amounts and check payment differences did not change DOD’s reported appropriation account balances. Nor did the write-offs correct any of the over- and undercharges that may have been made to those appropriations over the years as a result of not promptly resolving suspense account transactions and check payment differences. DOD will never identify which, if any, of the aged underlying transactions in suspense would have resulted in Antideficiency Act violations had they been correctly charged. The suspense account write-offs also did not affect the reported federal cumulative budget deficit; however, the write-off of check payment differences increased the deficit by $14.5 million. The most significant result of the write-off process was to guarantee that current appropriation balances would not be required to cover the aged unrecorded transactions. The legislated write-off of aged suspense account amounts and check payment differences did not change DOD’s current or past appropriation account balances. Because amounts in suspense and check payment differences had never been recorded to the proper appropriation accounts, DOD had over- or undercharged these appropriations. To accomplish the write-off, Treasury reclassified the aged suspense amounts that met legislative requirements from DOD-specific suspense accounts to non-agency-specific general government suspense accounts. The check payment differences, which had never been recorded in any DOD accounts, were simply “sent” to Treasury for recording in that same general government suspense account. Although it was unlikely that DOD would ever identify individual aged transactions and the support for their proper recording, the write-off process was the final step in ensuring that the over- and undercharged DOD appropriation accounts will never be corrected. While the write-off authority did not change or correct any DOD appropriation balances, it did mean that DOD’s current appropriations would not be used to pay for the uncharged disbursements. Generally, authorized disbursements may be made only to pay valid obligations properly chargeable to an appropriation account. If the correct appropriation and obligation cannot be identified and charged with a disbursement, DOD regulations provide that the disbursement be treated as an obligation that is chargeable against current appropriations. However, using current funding authority to cover past disbursements reduces the funds available to purchase goods and services needed to support current operations. We found that the write-off of suspense amounts had no effect on the cumulative federal deficit. The suspense account transactions had already been charged to the federal surplus or deficit in the specific year that DOD reported the related collection and disbursement transactions to Treasury. The reclassification of suspense amounts from DOD accounts to general government suspense accounts did not affect Treasury’s previous recording of the underlying collection and disbursement transactions to the cumulative deficit. With regard to the write-off of check payment differences, according to Treasury, the surplus/deficit had not been adjusted to recognize differences between issued check amounts as reported by DOD and paid check amounts as reported by banks. Since the check payment differences had not previously been reported as disbursements by DOD and thus included in the deficit calculation, the cumulative federal deficit was increased by DOD’s write-off amount of $14.5 million. We found that, even though DOD policies require that most suspense account transactions and check differences be resolved within 60 days, DFAS centers were reporting an absolute value of $1.3 billion in aged suspense account amounts and an absolute value of $39 million in aged check differences as of December 31, 2004. DFAS knows that the reported suspense amounts are not complete and accurate because DFAS center officials are still not performing the required reconciliations of their appropriation accounts, including suspense accounts, with Treasury records; some field sites are not reporting any suspense activity to the centers or are reporting inaccurate suspense account information; and some of the reported amounts for suspense and check differences still reflect netted and summarized underlying transaction information. Given these deficiencies with suspense account reporting, the actual value of aged problem transactions could be significantly understated. DFAS centers are not performing effective reconciliations of their appropriation activity, including suspense account activity, even though DOD policies have long required them. Similar to checkbook reconciliations, DFAS centers need to compare their records of monthly activity to Treasury’s records and then promptly research any differences in order to identify and correct erroneous or missing transactions. When we reviewed the DFAS centers’ December 31, 2004, reconciliations of suspense account activity, we found that all of the centers had unexplained differences between their records and Treasury records—differences for which they could not identify transaction-level information. DFAS excluded transactions related to the unexplained differences from its reports on suspense account activity. In addition, we noted that amounts recorded in DFAS suspense accounts often reflected transactions that had been netted or summarized at a field site level. As illustrated by the recent write-off activity, netting transactions often obscures the underlying transactions, makes it more difficult for the centers to identify and correct errors and omissions, and understates the magnitude of suspense account problems. In 1999, DFAS Arlington issued guidance that instructed each of its centers to develop their own procedures for preparing a monthly suspense account report (SAR) that would show the net value, absolute value, and aging of amounts charged to each suspense account. Because the systems and processes are not uniform across the centers, they were instructed to develop their own procedures for obtaining the necessary information from their systems, reconcile their suspense account records to Treasury records to help ensure accuracy and completeness, and explain any improper charges or overaged amounts. However, as discussed previously, we found that the centers were not effectively reconciling their suspense accounts and, therefore, could not demonstrate that their SARs were complete and accurate. In fact, center officials told us that some field sites did not report any of their suspense information or they reported inaccurate information in the SAR; however, those officials could not quantify the missing information or inaccuracies. As discussed above, the SARs also did not include transactions related to the unreconciled differences between center and Treasury records, including residual balances from prior to March 2001 that DOD was unable to write off. Figure 3 shows the aging of the $1.3 billion of suspense amounts reported on the December 31, 2004, SAR. We also found that DFAS Arlington officials had not performed any comprehensive reviews to determine whether the centers were compiling the SARs in accordance with their own guidance. DFAS Arlington officials and other center officials told us that it would be an overwhelming task to review the information submitted by the hundreds of DFAS field sites responsible for compiling the SARs. Although not required, some centers have documented the processes they are following to gather suspense account information and prepare the SARs; however, DFAS Arlington officials have not reviewed the written documentation. Arlington officials also did not know whether the centers were using the same criteria for reconciling and calculating absolute values. As previously stated, as of December 31, 2004, DFAS reports identified $1.3 billion absolute value of aged suspense account amounts and Treasury reports identified $39 million in absolute value of unresolved check differences. These aged problem transactions persist despite the DOD Financial Management Regulation (FMR) that requires staff to identify and charge the correct appropriation account within 60 days. The FMR allows DFAS to charge current appropriations for suspense account transactions and problem disbursements that cannot be resolved through research if approved by the fund holder, military service assistant secretaries, or defense agency Comptroller. For suspense account transactions, DFAS officials stated that the primary reasons for not consistently following the FMR are (1) staff have been too busy processing the write-off amounts and have not had the resources to clear more recent suspense transactions promptly and (2) military service and defense agency officials are unwilling to accept charges to current appropriation accounts without DFAS supplying them with sufficient proof that the charges actually belong to them. For the $39 million of unresolved check differences, DFAS officials stated that $36 million is related to transactions initiated by Army staff overseas. DFAS officials claimed that with the exception of the $36 million, they have been able to resolve almost all check differences within 60 days due to increased oversight and staff efforts, implementation of new controls over the check reconciliation process, and the increasing use of EFTs rather than checks. Overall, the write-off process enabled DOD to clear aged, unsupported amounts from its accounting systems and records and ensured that current appropriations would not be required to cover these amounts. However, the write-off did not correct appropriation account records or fix any of DOD’s deficient systems or accounting procedures. Therefore, DOD needs to continue its focus on the keys to eliminating aged problem disbursements and preventing their future occurrence, including improved disbursement processes and better management controls. Until DOD enforces its own guidance for reconciling and resolving its suspense accounts and check differences regularly, balances will likely grow. Without adequate tools for tracking and archiving the individual transactions charged to suspense, DOD will continue to have difficulty researching and determining proper accounting treatment. DOD’s inability over the years to promptly and correctly charge its appropriation accounts has prevented the department and Congress from knowing whether specific appropriation accounts were overspent or underspent and from identifying any potential Antideficiency Act violations. Unless DOD complies with existing laws and its own regulations, its appropriation accounts will remain unreliable and another costly write-off process may eventually be required. To prevent the future buildup of aged suspense accounts and check payment differences, we recommend that the Secretary of Defense take the following three actions: enforce DOD’s policy that DFAS centers and field-level accounting sites perform proper reconciliations of their records with Treasury records each month, use the results of the monthly reconciliations to improve the quality of DFAS suspense account reports, and enforce guidance requiring that disbursements in suspense be resolved within 60 days or be charged to current appropriations if research attempts are unsuccessful. In written comments on a draft of the report, the Principal Deputy Under Secretary of Defense (Comptroller) stated that the department concurred with our recommendations and described actions that are being taken to address them. DOD’s comments are reprinted in appendix II. We are sending copies of this report to other interested congressional committees; the Secretary of the Treasury; the Secretary of Defense; the Under Secretary of Defense (Comptroller); the Director, Defense Finance and Accounting Service; and the Assistant Secretaries for Financial Management (Comptroller) for the Army, the Navy, and the Air Force. Copies will be made available to others upon request. In addition, this report is available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-9505 or [email protected] if you or your staffs have any questions about this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Other GAO contacts and key contributors to this report are listed in appendix III. As required by the conference report (H.R. Conf. Rep. No. 107-772) that accompanied the Bob Stump National Defense Authorization Act for Fiscal Year 2003 (Pub. L. No. 107-314 § 1009, 116 Stat. 2458, 2635), we undertook a review of the Department of Defense’s (DOD) use of authority to write off certain aged suspense account transactions and check payment differences. Our objectives were to determine (1) what amount DOD wrote off using the legislative authority, (2) whether DOD had effective procedures and controls to provide reasonable assurance that amounts were written off in accordance with the legislation, (3) how the write-offs affected Treasury and DOD financial reports, and (4) what aged DOD suspense account balances and check payment differences remain after the write-offs have been accomplished. In conducting this work, we identified prior audit reports and other background information to determine the events that led DOD to request write-off authority. We visited DOD Comptroller offices, visited DFAS centers in Arlington, Indianapolis, Cleveland, and Denver, and contacted officials in DFAS Columbus and Kansas City to perform the following: Interviewed Comptroller and DFAS officials to obtain a general understanding of DOD’s use of suspense accounts and the department’s request for write-off authority. Gathered, analyzed, and compared information on how write-off amounts were identified and processed. Compared DOD’s policies and practices for the write-offs (including those policies and practices in effect at the relevant DFAS centers) to the specific provisions contained in the legislation and with any Treasury requirements. Identified DOD’s primary controls over the suspense account write-offs—a series of reviews performed by DOD/DFAS management and DFAS internal review—and tested the effectiveness of these controls by reviewing all certification statements resulting from the control procedures, comparing amounts reviewed to amounts written off, inquiring about and reviewing examples of rejected write-off amounts, and reviewing all of the support available for selected individual write-off amounts. Compared all check payment difference write-offs to Treasury reports to ensure the amounts were in compliance with the legislative requirements. To determine the impact of the suspense account and check payment write-offs on DOD’s budgetary and financial reports, we determined which specific DOD/Treasury accounts were affected by the write-off entries. We asked DOD and Treasury officials how the write-off entries affected DOD budgetary accounts and the federal deficit. We also reviewed financial reports, journal vouchers, and other documents provided by DOD and Treasury. To identify the current outstanding suspense account balances and check payment differences, we reviewed amounts disclosed in DOD’s fiscal year 2004 financial statements and obtained relevant performance metrics as of September 30, 2004, and December 31, 2004. We identified any remaining aged suspense account or check differences being monitored by DOD management. To determine whether DOD reconciles its records to Treasury, we requested proof of DOD’s most current suspense account reconciliations and check difference reports. We performed our work from June 2004 through April 2005. Because of serious data reliability deficiencies, which the department has acknowledged, it was not our objective to—and we did not—verify the completeness and accuracy of DOD reported amounts, including current suspense account report amounts. We requested comments from the Secretary of Defense or his designee. We received written comments from the Principal Deputy Under Secretary of Defense (Comptroller), which are reprinted in appendix II. We also sent the draft report to the Secretary of the Treasury. Treasury sent us a few technical comments, which we have incorporated in the report as appropriate. We performed our work in accordance with generally accepted government auditing standards. Staff making key contributions to this report were Shawkat Ahmed, Rathi Bose, Molly Boyle, Sharon Byrd, Rich Cambosos, Francine Delvecchio, Gloria Hernandez-Saunders, Wilfred Holloway, Jason Kelly, and Carolyn Voltz.

Over the years, the Department of Defense (DOD) has recorded billions of dollars of disbursements and collections in suspense accounts because the proper appropriation accounts could not be identified and charged. DOD has also been unable to resolve discrepancies between its and Treasury's records of checks issued by DOD. Because documentation that would allow for resolution of these payment recording problems could not be found after so many years, DOD requested and received legislative authority to write off certain aged suspense transactions and check payment differences. The conference report (H.R. Conf. Rep. No. 107-772) that accompanied the legislation (Pub. L. No. 107-314) required GAO to review and report on DOD's use of this write-off authority. After decades of financial management and accounting weaknesses, information related to aged disbursement and collection activity was so inadequate that DOD was unable to determine the true value of the write-offs. While DOD records show that an absolute value of $35 billion or a net value of $629 million of suspense amounts and check payment differences were written off, the reported amounts are not reliable. Many of the write-offs represented transactions that had already been netted together (i.e., positive amounts offsetting negative amounts) at lower level accounting sites before they were recorded in the suspense accounts. This netting or summarizing of transactions misstated the total value of the write-offs and made it impossible for DOD to locate the support needed to identify what appropriations may have been under- or overcharged or determine whether individual transactions were valid. In particular, DOD could not determine whether any of the write-off amounts, had they been charged to the proper appropriation, would have caused an Antideficiency Act violation. It is important that DOD accurately and promptly charge transactions to appropriation accounts since these accounts provide the department with legal authority to incur and pay obligations for goods or services. DOD has hundreds of current and closed appropriation accounts that were authorized by law over the years. Similar to a checking account, the funds available in DOD's appropriation accounts must be reduced or increased as the department spends money or receives collections that it is authorized to retain for its own use. Just as an individual who maintains multiple checking accounts must be sure that transactions are recorded to the proper account, DOD also must ensure that the proper appropriation account is charged or credited for each specific disbursement and collection. Our review found that DOD's guidance and processes developed to ensure compliance with the legislation provided reasonable assurance that amounts were written off properly except that check payment differences did not have the required written certification. The write-off process did not correct underlying records and significant DOD resources were needed to ensure that write-off amounts were properly identified and handled. Also, using staff resources to process old transactions resulted in fewer staff to research and clear current problems. At December 31, 2004, DOD reports showed that after the write-offs, more than $1.3 billion (absolute value) of suspense amounts and $39 million of check differences remained uncleared for more than 60 days. However, DOD has acknowledged that its suspense reports are incomplete and inaccurate. Until DOD complies with existing laws and enforces its own guidance for reconciling, reporting, and resolving amounts in suspense and check differences on a regular basis, the buildup of current balances will likely continue, the department's appropriation accounts will remain unreliable, and another costly write-off process may eventually be required.

You are an expert at summarizing long articles. Proceed to summarize the following text: Congress first provided a general definition of homeless individuals in 1987 in what is now called the McKinney-Vento Act. In 2002, Congress added a definition for homeless children and youths to be used in educational programs. Prior to the enactment of the HEARTH Act, the McKinney-Vento Act generally defined a homeless individual (McKinney- Vento Individual) as someone who lacks a fixed, regular, and adequate nighttime residence and has a nighttime residence that is a supervised shelter designed to provide temporary accommodations; an institution providing a temporary residence for individuals awaiting institutionalization; or a place not designed for, nor ordinarily used as, a regular sleeping accommodation. However, in the provisions on education of children and youths, the McKinney-Vento Act also specifically included children and youths who are sharing the housing of other persons due to loss of housing, economic hardship, or a similar reason (that is, are doubled up); living in motels, hotels, trailer parks, or camping grounds due to the lack of alternative adequate accommodations awaiting foster care placement; or living in substandard housing (McKinney-Vento Children and Youth). For its homeless assistance programs, HUD has interpreted the McKinney- Vento Act definitions so that a homeless individual is someone who resides in places not meant for human habitation, such as in cars, abandoned buildings, housing that has been condemned by housing officials, or on the street, in an emergency shelter or transitional or supportive housing, or any of these places, but is spending a short time (up to 30 consecutive days) in a hospital or other institution. Additionally, individuals are considered homeless if they are being evicted within a week from a private dwelling and no subsequent residence has been identified and the person lacks the resources and support networks needed to obtain housing; discharged within a week from an institution in which the person has been a resident for 30 or more consecutive days and no subsequent residence has been identified; or fleeing a domestic violence situation. The HEARTH Act includes changes in the general definition of homelessness, but the new definition and associated regulations had not taken effect by June 2010. The HEARTH Act broadened the general definition and provided greater statutory specificity concerning those who should be considered homeless but did not change the McKinney-Vento Children and Youth definition. For example, the HEARTH Act definition includes individuals and families that will be evicted in, or who can otherwise demonstrate that they will not be able to remain in their current living place for more than, 2 weeks. The HEARTH Act definition includes some individuals, families, and youths who would have been considered homeless under the McKinney-Vento Children and Youth definition but not under the prior individual definition. Some federal programs that were authorized outside of the McKinney- Vento Act use other definitions of homelessness. For example, the Runaway and Homeless Youth Act, first introduced as the Runaway Youth Act of 1974, defined a homeless youth as being generally from the ages of 16 to 22, unable to live in a safe environment with a relative, and lacking any safe alternative living arrangements. Within various programs, the definition of homelessness determines whether individuals are eligible for program benefits. For the Education of Homeless Children and Youth program, meeting the definition entitles the student to certain benefits; however, in other cases, such as HUD’s homeless assistance programs or HHS’s Runaway and Homelessness Youth programs, benefits are limited by the amount of funds appropriated for the program. For these programs, meeting the definition of homelessness does not necessarily entitle individuals or families to benefits. In addition, programs have other eligibility criteria, such as certain income levels, ages, or disability status. As illustrated in table 1, programs that provide targeted assistance primarily to those experiencing homelessness have different purposes, definitions of homelessness, and funding levels. One of these programs, HUD’s Homeless Prevention and Rapid Rehousing Program, was created under the American Recovery and Reinvestment Act (Recovery Act) of 2009, and many others received additional funding under that act. HUD’s Homeless Assistance Programs comprise a number of individual programs. These include the Emergency Shelter Grant Program, under which funding is provided on a formula basis, and competitive programs funded under the umbrella of the Continuum of Care (Continuum). The latter include the Supportive Housing, Shelter Plus Care, and Single Room Occupancy Programs. A Continuum is a group of providers in a geographical area that join to provide homeless services and apply for these grants. The Continuum is also responsible for planning homeless services, setting local priorities, and collecting homelessness data. Additionally, many federally-funded mainstream programs provide services for which those experiencing homelessness may be eligible. Some of these programs are required to provide services to those experiencing homelessness and may define it, others allow local providers to choose to target certain services to those experiencing homelessness or provide homelessness preferences using locally determined definitions, and still other programs do not distinguish between those experiencing homelessness and those not experiencing it (see table 2). The McKinney-Vento Act also authorized the creation of the U. S. Interagency Council on Homelessness (Interagency Council). Initially, the main functions of the Interagency Council revolved around using public resources and programs in a more coordinated manner to meet the needs of those experiencing homelessness. The McKinney-Vento Act specifically mandated the council to identify duplication in federal er programs and provide assistance to states, local governments, and oth public and private nonprofit organizations to enable them to serve those experiencing homelessness more effectively. In the HEARTH Act, the council, which includes 19 agencies, was given the mission of coordinat the federal response to homelessness and creating a national partnersh at every level of government and with the private sector to reduce and end ip homelessness. This act also mandates that the Interagency Council develop and annually update a strategic plan to end homelessness. Several agencies overseeing targeted homelessness programs are required to collect data on segments of the homeless population. As illustrated in table 3, HUD, HHS, and Education all have met their requirements through their own data collection and these sources differ in housing data collected and level of aggregation. In addition, the data collected necessarily reflect the definitions of homelessness included in the statutes that govern the relevant programs. Under the McKinney-Vento Act, HUD is to develop an estimate of homeless persons in sheltered and unsheltered locations at a 1-day point in time, so HUD requires Continuums to conduct a count of the sheltered and unsheltered homeless in their jurisdictions in January of every other year. Additionally, pursuant to the 2001 amendments to the McKinney-Vento Act, HUD was to develop a system to collect and analyze data on the extent of homelessness and the effectiveness of McKinney-Vento Act programs. As a result, HUD developed a set of technical data standards for the Homelessness Management Information System (HMIS), which sets minimum privacy, security, and technical requirements for local data collection on the characteristics of individuals and families receiving homelessness services. HMIS data standards allowed communities to continue using locally developed data systems and adapt them to meet HUD standards. Local Continuums are responsible for implementing HMIS in their communities, and Continuums can choose from many HMIS systems that meet HUD’s data standards. HUD officials said that by allowing Continuums to choose from multiple systems, more service providers participate and Continuums and service providers can modify existing systems to meet HUD standards and the community’s goals. Continuums report aggregated data to HUD annually. Results from analysis of the point-in-time count and HMIS data are reported in HUD’s Annual Homelessness Assessment Report to Congress. Pursuant to the Runaway and Homeless Youth Act, HHS requires all service providers to collect data on youths who receive services through the Runaway and Homeless Youth Program. Grantees submit these data every 6 months to the Runaway and Homeless Youth Management Information System (RHYMIS), a national database that includes unidentified individual-level data. To demonstrate compliance with the Elementary and Secondary Education Act of 1965, Education requires states to complete Consolidated State Performance Reports that include data on homeless children and youths being served by Elementary and Secondary Education Act programs and the Education of Homeless Children and Youth Program, as amended. The McKinney-Vento Act requires local school districts to have homelessness liaisons, who work with other school personnel and those in the community to identify homeless children and youths, provide appropriate services and support, and collect and report data. States aggregate local data and report to Education annually cumulative numbers of homeless students enrolled in public schools by grade and primary nighttime residence. As part of its decennial population and housing census, the U.S. Census Bureau has programs designed to count people experiencing homelessness. The Census counts people at places where they receive services (such as soup kitchens or domestic violence shelters), as well as at targeted nonshelter outdoor locations. While the Census makes an effort to count all residents, including those experiencing homelessness, the 2010 Census does not plan to report a separate count of the population experiencing homelessness or a count of the population who use the services. Although federal agencies collect data on those experiencing homelessness, these data have a number of shortcomings and consequently do not capture the true extent and nature of homelessness. Some of these shortcomings derive from the difficulty of counting a transient population that changes over time, lack of comprehensive data collection requirements, and the time needed for data analysis. As a result of these shortcomings, the data have limited usefulness. Complete and accurate data are essential for understanding and meeting the needs of those who are experiencing homelessness and to prevent homelessness from occurring. According to HUD, communities need accurate data to determine the extent and nature of homelessness at a local level, plan services and programs to address local needs, and measure progress in addressing homelessness. HUD needs accurate data to fulfill its reporting obligations to Congress and to better understand the extent of homelessness, who it affects, and how it can best be addressed. HUD’s point-in-time count is the only data collection effort designed to obtain a national count of those experiencing homelessness under the McKinney-Vento Individual definition, and approximately 450 Continuums conduct a point-in-time count in January of every other year. However, service providers and researchers we interviewed expressed concerns about the ability of HUD’s point-in-time count to fully capture many of those experiencing homelessness for reasons including the following: People experiencing homelessness are inherently difficult to count. They are mobile, can seek shelter in secluded areas, and may not wish to attract the notice of local government officials. Point-in-time counts do not recognize that individuals and families move in and out of homelessness and can experience it for varying lengths of time. These counts more likely count those experiencing homelessness for long periods rather than those experiencing it episodically or for short periods. Although homelessness can be episodic, the count is done biennially in January, which might lead to an undercount of families because landlords and others may be reluctant to evict families when the weather is cold or school is ongoing. Count methodologies vary by Continuum, can change from year to year, and might not be well implemented because counters are volunteers who may lack experience with the population. Large communities do not necessarily attempt to count all of those experiencing homelessness but rather may use estimation procedures of varying reliability. HUD provides technical assistance to communities, which helps them to develop and implement point-in-time count methodologies, and HUD officials said that methodologies and the accuracy of the count have improved. Additionally, HUD officials said that as part of their quality control efforts, they contacted 213 Continuums last year to address errors or inconsistencies in their data from fiscal year 2008. A communitywide point-in-time count demands considerable local resources and planning, and communities rely on volunteers to conduct counts of the unsheltered population. Continuums do not receive any funding from HUD to conduct the point-in-time counts, and using professionals or paid staff to conduct the count could be costly. Other federal data collected on those experiencing homelessness primarily or only captures clients being served by federally-funded programs. As a result, federal data do not capture some people seeking homeless assistance through nongovernmental programs, or others who are eligible for services but are not enrolled. For instance, while HUD grantees are required to participate in HMIS, participation is optional for shelters that do not receive HUD funding. HUD can use the annual Continuum funding application to assess the extent to which those shelters not receiving HUD funding participate in HMIS. In their funding applications Continuums provide an inventory of shelter beds in their community and also provide the percentage of those beds that are located in shelters that participate in HMIS. HMIS participation rates vary widely across communities and shelter types. For example, one of the locations we visited reported data for less than 50 percent of its beds for transitional shelters, while another reported data for more than 75 percent of its beds. HUD officials said that while some Continuums have been slower to implement HMIS and receive full participation from their providers than others, according to HUD’s 2009 national housing inventory data of homeless programs, 75 percent of all shelter beds were covered by HMIS, including programs that do not receive HUD funding. The Violence Against Women Act prohibits service providers from entering individual-level data into HMIS for those in domestic violence shelters. Similarly, RHYMIS collects data on those clients using its residential systems, but these serve only a small percentage of the estimated number of youths experiencing homelessness. HHS officials stated that nationwide, they only fund approximately 200 transitional living centers for young adults. Education also does not fully capture the extent of homelessness among school-aged children because all of the districts we visited used a system of referrals and self-reporting to identify those children. In one of the school districts we visited, an official said that, based on estimates of the number of children experiencing homelessness under the McKinney-Vento Children and Youth definition, the district was serving about half of those students. Many of the school officials and advocates with whom we spoke said the term homelessness carried a stigma that made people reluctant to be so identified, and two school systems had removed the word from the name of their programs. Additionally, federal data systems on homelessness may count the same individual more than once. HUD designed HMIS to produce an unduplicated count—one that ensures individuals are counted only once— of those experiencing homelessness within each Continuum. Providers in the same Continuum use the same HMIS system and some Continuums have designed an open system, where providers can view all or part of an individual’s record from another provider within the Continuum. This is useful to providers because it helps them to understand an individual or family’s service needs. It also allows them to produce an unduplicated count of those using services in the Continuum because every person receiving services in the Continuum has a unique identifier in HMIS. However, it is difficult to share data across Continuums and this can be done only if Continuums have signed agreements that protect privacy and are using the same HMIS system. Thus, clients may be entered into HMIS in more than one Continuum and counted more than once. Nonetheless, some states have constructed statewide HMIS systems to help avoid duplication in the data. Because RHYMIS has individual data on all program recipients in a single database, HHS can obtain an accurate count on the number of youths served by its residential programs. Education data also may be duplicative. Because students generally are counted as homeless if they experience homelessness at any point during the school year, if they change school districts during the year, they could be counted as homeless in both systems. While each agency makes efforts to avoid duplication in its data, it is not possible to determine how many total unique individuals federal homelessness programs have served because HUD, HHS, and Education data systems generally do not interface or share data. Further, the data in HMIS may not always accurately reflect the demographic information on families and individuals seeking shelter. For example, HMIS provides data for individuals and families but the system may not accurately identify family members and track the composition of families over time. Using HMIS, service providers associate individuals entering into a shelter with a family if family members enter the shelter together. However, some families split up to obtain shelter, so the system would not track all families over time. In one of our site visit locations, we met a mother and son who were split up and placed in separate shelters. Because the mother was in an individual shelter, and the son was in a youth shelter, HMIS would not associate these two as a family. Further, one service provider we spoke with said that HMIS may not always accurately track demographic information on individuals seeking emergency shelter. Some researchers and advocates told us that HMIS’s design limited its usefulness, and the extent to which service providers found that the HMIS system their Continuum had implemented was useful varied across the four locations we visited. For example, a researcher who has extensively used HMIS told us that if service providers used the data they collected for HMIS to manage their programs, they would implement processes to help ensure data quality. But in three of the four locations we visited, many providers said they were unable to use HMIS for program administration and client case management. Many providers noted that they often had to enter information in several different databases, and they generally used their own database to administer their programs. Additionally, we found only two providers who developed data export tools that allowed their private systems to upload data to HMIS, and in both cases, the providers were unable to use their new tools after the Continuum switched HMIS software. HHS officials told us that they support providers’ development of tools to link data systems, but they do not provide funding for this endeavor. In contrast, service providers in one location we visited reported that the HMIS system they had adopted had options that allowed them to conduct comprehensive case management for clients and produce all of the reports required by the various organizations funding their programs and operations. HUD officials said that a community’s success in using HMIS for program administration and client case management depends on a variety of factors including staff capability and the quality of the HMIS software that they chose to purchase or develop. HUD and Education data also have shortcomings and limited usefulness because of the time lag between initial data collection and the reporting of the data. HUD published the most recent report to Congress, which provided data for October 2008–September 2009, in June 2010. Education expected to publish data for the 2008–2009 school year in June 2010. Because of the time lag in availability of HUD and Education data, they have limited usefulness for understanding current trends in homelessness and the ongoing effects of the recession. However, HUD officials report that they have made progress in reducing the time it takes to analyze data and publish its annual report to Congress. The time lag from data collection to report issuance has decreased from almost 2 years to less than 1 year, but collecting data on homelessness and producing national estimates takes time, and HUD officials said there will always be some time lag. Additionally, in recognition of these shortcomings, HUD recently introduced the Homeless Pulse Project, which collects quarterly homeless shelter data from nine communities. These communities volunteered to submit data on a more frequent basis, but they are not representative of Continuums nationwide. HUD plans to expand the Pulse Project and add approximately 30 Continuums that have volunteered to participate. HHS’ RHYMIS data are more timely because grantees submit data every 6 months, and HHS makes the data available online approximately 1 month after the end of the reporting period. Although a researcher with special expertise in HMIS and several advocates we interviewed cited some examples of incompleteness or inaccuracy in HMIS data, agencies and Continuums have been trying to improve the completeness and accuracy of their data. For example, HUD provides incentives for Continuums to increase HMIS participation rates. In its competitive grant process, HUD evaluates the level to which Continuums participate in HMIS. HUD officials have also provided technical assistance to Continuums to assist them in increasing local HMIS participation rates. HMIS rates have increased over time. Several Continuums we contacted have been conducting outreach to private and faith-based providers to encourage them to use HMIS to improve data on homelessness. Additionally, according to HUD officials, HMIS data have been used to conduct research on the prevalence of homelessness, the costs of homelessness, and the effectiveness of interventions to reduce homelessness. Further, HUD supplements HMIS data with point-in-time data to enhance the information available on those experiencing homelessness. HHS has begun a project to get some of its homelessness programs to use HUD’s HMIS system. For example, as discussed in more detail further on, in December 2009, HHS established an agreement with HUD requiring PATH providers to use HMIS. To address the issues faced by emergency shelters in quickly collecting and entering data on individuals, some Continuums issue identification cards containing demographic information to clients during their initial intake into the shelter system. Clients can swipe the cards as they enter a facility, and HMIS automatically captures the data. Despite the limitations discussed above, HUD uses data from point-in-time counts to estimate the number of those experiencing homelessness on a single night in January. HUD reported that approximately 660,000 individuals and persons in families experienced sheltered and unsheltered homelessness on a single night in January 2008. However, this estimate does not include people who do not meet the definition of homelessness for HUD’s programs but do meet definitions of homelessness for other programs. For example, HUD’s counts would not include families living with others as a result of economic hardship, who are considered homeless by Education. Figure 1 shows the count of sheltered and unsheltered persons s experiencing homelessness on a single night in January for the past 4 years. experiencing homelessness on a single night in January for the past 4 years. HUD also samples a number of communities and uses their HMIS data to estimate those experiencing homelessness in shelters during the year. HUD estimated that in 2008, 1.18 to 2 million people met HUD’s definition of homelessness and were sheltered at some time in the year. The estimate has a broad range because HUD uses a sample of 102 communities and not all of those communities can provide usable data. For those Continuums related to the communities that can provide data on at least half of the beds in their inventory, HUD assumes that the remaining beds would be occupied in similar ways to estimate shelter use for those Continuums that cannot provide such data. HUD officials noted that response rates have been steadily improving and the estimate’s range has decreased. For example, in 2008, 87 of the 102 communities in HUD’s sample provided usable data and another 135 communities voluntarily submitted data; while in 2005, 55 communities in a sample of 80 communities provided usable data and another 9 communities contributed data voluntarily. HUD estimates that individuals without children make up about two-thirds and families with children under 18 about one-third of the estimate. However, HMIS only captures individuals and families who are defined as homeless under the McKinney-Vento Individual definition. Additionally, as previously noted, concerns exist about HMIS’s ability to accurately record family status. HUD, HHS, and Education also report on other populations experiencing homelessness. HUD estimated that over the course of 2008, unaccompanied youths accounted for 2 percent of the sheltered homeless population, or approximately 22,000 unaccompanied youth who were homeless and sheltered. According to HHS, over the course of fiscal year 2008, approximately 48,000 youths experienced homelessness and received services from HHS’ Basic Center Program or Transitional Living Program, which have different eligibility criteria from HUD’s programs. Some youths may be in shelters funded by both HHS and HUD, and therefore be counted in both HMIS and RHYMIS, while others might be in shelters funded only by HUD or only by HHS and only included in the corresponding database. As shown in figure 2, Education reported that more than 770,000 homeless children received services in the 2007–2008 school year, but less than one quarter of these children—about 165,000—were living in shelters. HUD reported for that same year that approximately 150,000 children aged 6 to 17 were in shelters. Federally-funded mainstream programs, whose primary purpose is to provide a range of services and funds to low-income households, often provide these services and funds to those who are experiencing or have experienced homelessness or to those defined as being at risk of becoming homeless. Thus, while homelessness is not the primary focus of these programs, data collected by them could be useful for understanding the nature of homelessness. Further, several researchers and advocates with whom we spoke noted that they could better understand the dynamics of homelessness if these programs collected individual client-level data on homelessness and housing status as part of their routine data collection activities. However, these programs have not consistently collected data on homelessness and housing status. A few programs have collected individual data, some have collected aggregate data, and others collect no data on housing status at all. We identified several federally-funded mainstream programs that collect or are beginning to collect and report client-level data on persons experiencing homelessness to the federal agency overseeing the mainstream program. Public Housing Authorities (PHA) collect data on homelessness status of households at the time the PHA admits the household to a housing assistance program, which includes both Public Housing and Housing Choice Voucher programs; they report these data to HUD’s Office of Public and Indian Housing. HHS’s Substance Abuse Prevention and Treatment Block Grant program requires grantees to report participants’ living arrangements at entry and exit. DOL’s WIA Adult and Youth grantees also collect and report individual-level data on enrolled participants including whether the client is homeless. HHS’s John H. Chafee Foster Care Independence Program has developed a survey that states must begin using by October 2010 to gather data for the National Youth in Transition Database—a data collection required by the Foster Care Independence Act of 1999. States are required to survey foster care youths at ages 17, 19, and 21 to collect data on the services provided to, and outcomes of, youths in the foster care system. The survey includes a question asking youths if they have experienced homelessness over the relevant time period; however, as previously noted, the social stigma attached to the word homeless often limits self-identification. States administer USDA’s SNAP program, document if a person or family is homeless, and report a sample of data to USDA, which uses the data to assess the accuracy of eligibility decisions and benefit calculations. A number of other programs require that grantees report aggregate data to their funding agency on the number of persons experiencing homelessness that they served: Head Start grantees report the number of homeless families served annually to HHS. Health Center Program grantees collect limited data on the homelessness status of program participants and report the total number of participants known to be homeless to HHS. Community Mental Health Services Block Grant grantees collect and submit data to HHS on persons served by the program, including “homeless or shelter.” The Ryan White HIV/AIDS Program collects and reports to HHS limited aggregate data on the living arrangements (permanent, homeless, transient, or transitionally housed) of clients served. HHS has numerous other mainstream programs that provide funds to states to provide services to certain low-income populations, including those experiencing homelessness, but data collection and reporting on homelessness or housing status varies by program and across states. Medicaid and TANF are the two largest programs, but states are not required to collect or submit information to HHS on the number of individuals or families experiencing homelessness that they served. States determine eligibility requirements and develop program applications for TANF and Medicaid. A recent HHS study that surveyed all the states found that all states collected minimum housing status data on their Medicaid and TANF applications, such as home address and if the applicant resides in public or subsidized housing, a long-term care facility, or a medical or rehabilitation facility. Twenty eight states collected indicators of homelessness—such as whether an individual resides in a shelter, stays in a domestic violence shelter, or has a permanent home—on their applications. Thirteen states collected information on risk factors often associated with homelessness—such as whether an individual lives with friends or relatives, or has an eviction notice—on their applications. However, these states did not collect this information using consistent definitions and used the data in limited ways. According to the HHS report, most states responding to HHS’s survey said that they did not know whether they had procedures in place to improve the quality of the items collected and thus how complete their homelessness data were. Additionally, while data on homelessness indicators and risk factors resided in statewide databases in many states, the data were not routinely confirmed or verified, making it unclear how reliable the data might be for analysis of homelessness. Further, as previously discussed, homelessness status changes over time, and data collected at one point in time may not accurately capture these changes. Nonetheless, in Michigan, New York City, and Philadelphia, researchers and state officials have been able to use identifying data in mainstream databases to match data in HMIS, and have thus been able to identify patterns in mainstream service usage for homeless populations. Several other mainstream programs provide services for persons experiencing homelessness, but do not provide aggregate or individual- level data on homeless clients served. The Community Services Block Grant, Social Services Block Grant, Maternal and Child Health Block Grant, and the Children’s Health Insurance Program all provide HHS with regular program reports. However, these reports do not include data on the number of clients experiencing homelessness or other housing status data. Although child welfare agencies often collect data on housing status and stability in the process of reviewing family reunification cases, this information is not reported to HHS. Community Development Block Grants often fund services that may benefit those experiencing homelessness, but grantees do not track the number of homeless served by the program. Additionally, local PHAs can give preferences to individuals and families experiencing homelessness; however, PHAs do not have to submit data on these preferences to HUD. HUD sampled Public Housing and Housing Choice Voucher Program to determine how many of them have a preference for those experiencing homelessness. The analysis showed that in 2009, approximately 27 percent of all PHAs had a homeless preference. Finally, agencies have not always consistently collected or analyzed data on housing stability or homelessness because these are not the primary purposes of their programs. In addition, data collection may be expensive, and agencies must weigh the costs and benefits of getting more detailed information. Collecting data on homelessness or housing status for programs such as TANF and Medicaid could be further complicated by the need to work with 50 different state offices to implement a new data collection effort. However, HHS recently reported that of the 28 states that do collect homelessness data, almost all of them indicated that it is not burdensome or costly to collect such data, and about half of the states that collect data said they would comply with requests to make some homelessness data available to HHS for research purposes. Yet even among the willing states, there were some concerns about resource constraints for responding to such requests and concerns about the reliability of the data. However, not having complete and accurate data limits the understanding of the nature of homelessness—a better understanding of which could be used to inform programs and policies designed to improve housing stability and thus reduce homelessness. The 45 research studies analyzing factors associated with homelessness that we reviewed used different definitions or measurements of homelessness, although many of the studies used definitions or measures that were more closely affiliated with the McKinney-Vento Individual definition than with the broader McKinney-Vento Children and Youth definition (see appendix II for a list of the 45 studies). As a result, study findings are difficult to compile or compare. In the absence of a consistent definition and measurement, “homelessness” can mean or designate many conditions. For example, homelessness can refer to long-term homelessness, short stays in shelters, living in nontraditional housing, or living with relatives, friends, or acquaintances. These definitional differences especially limited research on some specific populations, such as “runaway or homeless” youths. The research we reviewed also varied in how it defined and measured the factors that may be associated with the likelihood of experiencing homelessness. For instance, studies that examined families and youths used different definitions or, in some cases, failed to clearly define what they meant by families and youth. Several studies measured variables such as marital status, social or family support, or domestic violence differently. For example, in assessing relationships between family structure and homelessness, one study examined whether a father of a child was cohabitating with a woman, while another study looked at whether the individual was presently married, although it is possible the two categories overlapped. Studies also used various age categories to define youths, including under 17, from 14 to 23, or from 12 to 22. In addition, some studies did not consider factors that figured prominently in other studies, such as the economic conditions of the surrounding area or how childhood experiences influenced later episodes of homelessness. To contribute to a broad-based and reliable understanding of what factors are associated with the likelihood of experiencing homelessness, studies we reviewed and experts with whom we spoke noted research would need to use data that accurately reflect the population studied, track the same individuals or families over time, and consider a broad population over diverse locations. Further, such studies would need to consider a range of both structural factors, such as area poverty level, and individual factors, such as a person’s age. However, the majority of the studies we reviewed did not meet these criteria. As a result, the body of literature we reviewed cannot be used to predict with accuracy who among those at risk of homelessness would likely experience it. Studies we reviewed used samples from several types of data, such as providers’ administrative databases or surveys, but were not always able to ensure that data accurately reflected the population they studied. Approximately half of the studies used information from administrative records or other service-oriented data, such as standardized self- assessments. The remaining studies used information collected in interviews, surveys, or questionnaires. Studies using administrative data may be especially vulnerable to biased sampling or undercounting of street homeless populations because of the myriad issues described previously, such as collecting data only on those receiving services. Some researchers noted that data from secondary sources such as administrative data may be less accurate than data collected by research staff and targeted for research purposes. However, survey data collected for research purposes also are subject to undercounting and biased sampling, because populations experiencing homelessness are difficult to reach. Because people move in and out of homelessness and experience it for different periods, studies we reviewed and experts with whom we spoke noted that data would need to be collected on the same individuals or families over time to more clearly identify which factors could lead to an episode of homelessness or help determine homelessness experiences over longer periods. Like HUD’s point-in-time homeless counts, these studies more likely captured those individuals or families who had been homeless for long periods as opposed to those who experienced it episodically or for short periods, and thus do not give a clear understanding of factors associated with homelessness. These studies also could not determine whether factors associated with being homeless at a point in time caused homelessness. For example, one study found an association between poor physical health and homelessness, but could not say whether poor physical health contributed to experiencing homelessness or whether homelessness contributed to or worsened physical health. Nineteen studies in our review used data that did follow individuals or families over time. However, several of these used administrative data that suffered from the shortcomings described previously, followed individuals or families for relatively short periods, or considered populations in narrow geographic locations. A few studies also used national databases such as the Fragile Families and Child Wellbeing Study and one used the 1997 National Longitudinal Survey of Youth that annually tracks a sample of youth and their parents over time. In addition, most of the studies we reviewed defined their target populations—or the group of people to whom findings can be generalized—narrowly, making it difficult to generalize results to broader populations or to compare or compile them. Much of the research we reviewed focused on small subsets of the population experiencing homelessness in smaller geographic regions, such as those with mental illness or substance abuse problems in a single shelter or city. For example, one study published in a journal on Community Mental Health focused on African Americans admitted to a state psychiatric hospital in New York, and another study published in a journal on youth and adolescence looked at youths aged 14 to 21 years who needed the services of a homeless drop-in center. In part, the target groups studied reflected the wide variety of disciplines—psychology, public policy, public health, and economics—of those conducting the studies. Although researchers have argued that it is necessary to consider structural or macro-level factors (such as employment rate, surrounding poverty level, and availability of affordable housing) as well as individual- level factors to arrive at a full understanding of which factors are associated with the likelihood of experiencing homelessness, only about one-third of the studies we reviewed considered these factors. Structural factors help to explain the prevalence of homelessness across a wider setting, while individual-level factors may explain the immediate circumstances surrounding an episode of homelessness. In addition, over three quarters of the service providers, researchers, advocates, and government agency officials we interviewed identified a structural factor—the lack of affordable housing—as a major barrier to serving those experiencing homelessness. However, most of the studies did not look at structural factors and focused on individual-level factors such as demographic characteristics, individual income, the presence of a mental illness, or substance abuse. Because the majority of the studies that we reviewed examined populations in one or a few cities, it was not possible for them to examine the role played by structural factors, such as unemployment rates and surrounding poverty levels, in a wider context. Although limitations in the studies we reviewed posed challenges for drawing comparisons and often focused on narrow populations in smaller areas, we identified two that tracked homeless families over time and considered structural and individual-level factors across wide geographical areas. One study that defined homelessness as living in a shelter, on the street, or in an abandoned building or automobile, but also considered the population that was doubled up, examined factors associated with individual and family homelessness using nationwide data from the Fragile Families and Child Wellbeing database, which was collected over several years. The study analyzed data on mothers when their children were one and three years old. One hundred and twenty-eight mothers reported experiencing homelessness at the one-year birthday, while 97 reported being homeless when their child turned three. A larger number of mothers reported being doubled up—343 at their child’s one-year birthday and 223 when their child turned three. The study found that the availability of affordable housing—a structural factor—reduced the odds of families experiencing homelessness and doubling up. A number of individual-level factors were associated with experiencing homelessness or doubling up. Specifically, access to small loans and childcare, having a strong family and friend support network, and living longer in a given neighborhood were associated with lowered odds of experiencing homelessness. Additionally, receiving public assistance reduced the likelihood that someone would live doubled up. Another study considered families homeless if they were living on the street, in temporary housing, or in a group home, or had spent at least one night in a shelter or other place not meant for regular housing in the past 12 months. This study, which used the Fragile Families and Child Wellbeing database found that families with higher incomes who received housing assistance had a reduced likelihood of experiencing homelessness. Physical and mental health problems, reports of domestic violence, and substance abuse issues appeared to place them at greater risk for homelessness. Receipt of TANF and poorer surrounding economic conditions—a structural factor—also were positively related to the likelihood of experiencing homelessness but, according to the authors, likely were proxies for individual need and lack of income rather than directly associated with homelessness. Two other studies looked at the association of structural factors and rates of homelessness across geographical areas over time, but did not track specific individuals or families: One nationwide study that tracked homelessness rates over time primarily examined how structural factors affected rates of homelessness. The study found that relatively small changes in housing market conditions could have substantial effects upon rates of homelessness or the numbers of persons in shelters. Their results imply that relatively small increases in housing vacancy rates, combined with small decreases in market rents, could substantially reduce homelessness. Another study that focused on the impact of structural factors on homelessness in 52 metropolitan areas found that poverty levels strongly related to the number of persons experiencing homelessness in an area. No other structural factors—such as unemployment rates, the number of government benefit recipients, or availability of affordable housing in the area—were found to be statistically significant predictors of homelessness. Together, the four studies underlined the importance of structural factors and identified some individual factors associated with homelessness; however, they did not address some issues of importance. None addressed the extent to which childhood experiences were associated with adult homelessness, and only one examined those living in doubled up situations. We reviewed 11 other studies that examined how childhood experiences were associated with experiencing homelessness in adulthood; however, these studies generally relied on people’s recollections. While the studies used varying methodologies and definitions of homelessness and other factors, most highlighted the influence of early childhood experiences on the likelihood of later experiencing homelessness. Results varied by study, but several studies found that factors such as running away from home, being in foster care, having a dysfunctional family, or being sexually molested as a child increased the odds an adult would experience homelessness. Similarly in 1996, the National Survey of Homeless Assistance Providers and Clients found that homeless adults reported many significant adverse childhood experiences. That survey did not compare those experiencing homelessness with those that were not. However, the findings from the studies we reviewed that did compare the two groups generally were consistent with the survey’s findings. Conversely, another study found that a range of childhood experiences (including residential stability: adequacy of income; dependence on public assistance; family violence; and parental criminality, mental illness, or substance abuse) were not significantly associated with adult homelessness. Recognizing that the relationships between living doubled up or in shelters or on the street are important to understanding homelessness, we identified a few studies that analyzed whether doubling up could predict future time spent in a shelter or on the street, or that measured differences at a point in time between those living doubled up and those living in shelters or on the street. However, the results of the studies were inconclusive. Of the two that examined how doubling up affects later homelessness in a shelter or on the street, one found that it was significant and the other found it was not significant. Of the four studies that compared persons on the street or in a shelter with those doubled up, two found few differences in demographic characteristics or backgrounds. A third found some differences between the two groups. For example, receiving public assistance lowered the chance of doubling up but was not significantly associated with homelessness. The fourth study found significant differences between doubled up and homeless mothers. Doubled up mothers were more likely to be younger and working and to have high school degrees, fewer children, and more relatives who could help with finances, housing, and child care. Among the majority of the advocates, government officials, service providers, and researchers we interviewed that identified differences in definitions of homelessness as an important barrier to providing services, several noted that families and youths living in some precarious situations were not eligible for federal assistance under a narrow definition of homelessness. Some said that families and youths who were doubled up or living in hotels because of economic hardship often had similar or greater needs for services than those who met narrower definitions, but were being excluded from receiving government-funded services. For example, those working in educational programs that have broader federal definitions of homelessness noted that those who do not meet the narrow definition have difficulty accessing housing services. One of the school liaisons we visited described visiting a house with a caved-in floor and no front door. This family met the criteria of substandard housing under the McKinney-Vento Children and Youth definition of homelessness, but it is unclear whether the house would have been considered abandoned or condemned, and if the family would have qualified as homeless under the narrower individual definition prior to the HEARTH Act. According to a research study presented at the HUD-HHS homelessness research symposium in 2007, a formal condemnation process for substandard properties does not typically exist in rural areas, and, as a result, properties that would meet the HUD definition of abandoned because they have been condemned in urban areas may not meet that definition in rural areas. HHS provides grants for Head Start programs to collaborate with others in the community to provide services for children and their families; however, officials noted that in the 2009 program year, less than half of the families in Head Start who experienced homelessness acquired housing. HHS has attributed this to a lack of affordable housing and long waiting lists for housing assistance. However, officials for at least one service provider said that the waiting list for housing assistance in their city was much longer for those that do not meet the narrow definition of homelessness. Many of those involved in homeless programs with whom we spoke were particularly concerned about the exclusion of families and youths from programs that addressed the needs of chronically homeless individuals— those unaccompanied individuals who have disabilities and have been continuously homeless for a year or homeless four times in the last 3 years. Before the passage of the HEARTH Act, families that otherwise met the criteria for chronic homelessness programs were not able to participate because chronic homelessness was defined to include only unaccompanied individuals. People in all of the categories we interviewed noted that the emphasis on funding programs for chronic homelessness has meant that families have been underserved. A youth service provider further noted that youths effectively were excluded from programs for those experiencing chronic homelessness because youths generally did not live in shelters or keep records of where they had been living or for how long. Those that cited differences in definitions as a barrier said that families and youths with severe shelter needs had to be on the street or in shelters to access some federally-funded homeless assistance, but shelters were not always available or appropriate for them. Researchers we interviewed noted that families have to obey a number of rules to stay in a shelter and families with the greatest challenges might be less able to follow those rules. Additionally, some facilities do not provide shelter for males above a certain age, so that couples or families with male teenage children may not be able to find shelter together. Similarly for youths, a researcher and a service provider suggested that adult shelters were not appropriate for unaccompanied youths or young adults, and shelters specifically for them were very limited. Some of the people we interviewed also noted that some narrow definitions of homelessness limited services that could be provided to individuals experiencing homelessness. For example, getting one service sometimes precluded individuals from getting another service for which they would otherwise have qualified. Officials at DOL told us that if veterans obtain housing vouchers through HUD-VASH, they no longer meet the narrow statutory definition of homelessness under which they would be eligible for job training funded by the Homeless Veterans Reintegration Program (HVRP). However, if veterans first apply for HVRP and then for vouchers, they can qualify for both programs. Similarly, those in transitional housing programs cannot be considered eligible for programs serving those experiencing chronic homelessness even if they meet the other requirements, such as being homeless for a year and having a disability. In addition, although HUD has recognized in its documents that helping people make successful transitions to the community as they are released from foster care, jails, prisons, and health care, mental health, or substance abuse treatment facilities requires systems to work together to ensure continuity of care and linkages to appropriate housing and community treatment and supports, the definitions of homelessness may hinder these transitions. In August 2009, one advocate noted that HUD’s definition of homelessness includes those that spend 30 days or less in prison if they had been homeless prior to entering prison, but those spending more than 30 days cannot be considered homeless until the week before their release. The advocate said that this limits the incentive for prison staff to work with homeless service providers to allow for a smooth transition from prison to housing and that if an individual leaving prison spends time on the street or in an emergency shelter, the likelihood of recidivism increases. Some of those arguing for a broader definition also have said that the definition of homelessness should not depend on available funding. Officials at one large service provider said that broadening the definition would not necessarily spread a fixed amount of resources across a larger group. Instead, targeting resources to specialized populations more effectively and concentrating on earlier intervention and prevention could lower the cost of serving individual clients. However, they also noted that this might require a better understanding of the needs of particular subgroups experiencing homelessness. Some local officials, homeless service providers, and researchers noted that choosing between a narrow or a broad definition of homelessness was less important than agreeing on a single definition, because multiple definitions made it more difficult or costly to provide services and created confusion that sometimes led to services not being provided to those legally eligible for them. Many researchers, government officials, and advocates with whom we spoke noted the importance of combining services and housing to meet the needs of those experiencing homelessness, and some of these noted that this was more difficult and costly when programs defined homelessness differently. They also noted that obtaining funding for services from sources other than HUD has become more necessary because the proportion of HUD funding for services has declined. Officials at HUD noted that this was a result of HUD having provided incentives to communities to increase the ratio of housing activities to supportive service activities in their funding applications to encourage the development of more housing resources for individuals and families experiencing homelessness. Not only do some targeted programs that provide services use different definitions of homeless, but some state and local grantees receiving federal funds under mainstream programs that can be used to provide certain services for those experiencing homelessness (such as TANF) develop their own local definitions of homelessness. Officials at a lead Continuum agency said that having these different definitions makes putting together funding for permanent supportive housing—the best solution for ending chronic homelessness—especially difficult. Officials at two entities that provide service to and advocate for those experiencing homelessness noted that, given the multiple definitions, scarce resources that could have been used to provide services instead went to eligibility verification. Furthermore, many of those involved in activities related to homelessness said that having multiple definitions created confusion, and government officials overseeing programs that use a broader definition and a service provider in one of these programs noted that this confusion could lead to services not being provided to those that are eligible for them. A school liaison and a youth service provider said that school administrative personnel often apply a narrower definition of homelessness than McKinney-Vento Children and Youth and thus may deny students access to services to which they are entitled. Additionally, Education has cited a state education agency for the failure of local education agencies’ to identify, report, and serve eligible homeless children and youths including youths in doubled-up situations that meet the broader definition of homelessness. Similarly, officials at HHS acknowledged that Head Start programs across the country sometimes were not using the appropriate definition of homelessness to identify children who qualified for those services. As a result, some homeless families would not be receiving Head Start services. However, some government officials, researchers, advocates, and service providers thought that having multiple or narrow definitions of homelessness had certain benefits. Some HHS officials in programs that address homelessness and others noted that having multiple definitions of homelessness allowed programs to tailor services and prioritize them for specific populations. HUD officials and some researchers and advocates said that having a narrow definition for homeless programs that provide shelter for specific populations and broader definitions for programs such as those designed to serve the educational needs of children and youths allowed programs to meet their goals best. HUD officials noted that having a broader definition for certain education programs is appropriate because those that meet the definition are entitled to the service, and the program does not provide housing. Alternatively, it is appropriate for programs such as HUD’s to have a narrower definition because its services are not entitlements and must target those most in need, such as those that are chronically homeless. HUD, HHS, VA, and DOL began redirecting resources to this narrowly defined group in 2003, and according to HUD point-in-time data, chronic homelessness fell by approximately 27 percent from the January 2005 count to the January 2008 count. HUD, HHS, and VA focused on this group, in part, because a research study had shown that they used an inordinate amount of shelter resources. One researcher noted that having a precise definition was essential to ensure that the same kinds of people are being counted as homeless in different locations, which would be important for measuring program outcomes. Supporters of a narrow definition also said that if the definition were broadened, limited resources might go to those who were easier to serve or had fewer needs, specifically to those families with young children who were doubled up rather than to those identified as chronically homeless. Finally, some advocates for those experiencing homelessness and government officials overseeing programs targeted at those experiencing homelessness noted that if the definition of homelessness were broadened for some programs without an increase in resources, many of those that would become eligible for services would not get them. In the HEARTH Act, Congress provided a broader definition of homelessness for those programs that had been serving individuals and families and using the McKinney-Vento Individual definition; however, it is still not as broad as the McKinney-Vento Children and Youth definition, so different definitions will still exist when the HEARTH Act is implemented. In addition, the HEARTH Act mandated that the Interagency Council convene experts for a one-time meeting to discuss the need for a single federal definition of homelessness within 6 months of the issuance of this report. However, having one definition of homelessness would not necessarily mean that everyone who met that definition would be eligible for all homeless assistance programs or that those not defined as homeless would be ineligible. Some of the people we interviewed suggested alternatives—one based on a narrow definition of homelessness and others based on a broader definition. For example, one local official suggested defining homelessness using the narrow McKinney-Vento Individual definition and defining another category called “temporarily housed” that would include those who are doubled up or in hotels. While some programs might only be open to those experiencing homelessness, others such as the Education of Homeless Children and Youth program could be open to both groups. Alternatively, one researcher directed us to a classification scheme developed by the European Federation of National Associations Working with the Homeless. Under that classification scheme, homelessness was defined broadly as not having a suitable home or one to which a person was legally entitled, but then a typology was created that defined subcategories of living situations under headings such as “roofless” or “inadequate” that could be addressed by various policies. Officials at a large service provider we interviewed made similar distinctions saying that it is best to think of people as experiencing functional homelessness—that is, living in situations that could not be equated to having a home—rather than to think of them as literally homeless or doubled up. However, these officials said that subcategories of need would have to be developed based on a better understanding of homelessness, because all persons experiencing homelessness should not be eligible for the same services. In 2007, HHS convened a symposium to begin discussing the development of a typology of homeless families, and in May 2010, they convened about 75 federal and nonfederal participants to discuss issues related to children experiencing homelessness. The lack of affordable housing (whether housing was not available or people’s incomes were not high enough to pay for existing housing) was the only barrier to serving those experiencing homelessness cited more frequently by researchers, advocates, service providers, and government officials we interviewed than definitional differences. Some researchers have shown that more housing vouchers could help eradicate homelessness, but a research study also has shown that generally federal housing subsidies are not targeted to those likely to experience homelessness. Those with certain criminal records or substance abuse histories may not be eligible for federal housing assistance, and these factors sometimes are associated with homelessness. Although certain federal programs target vouchers to those who are most difficult to house, local service providers may still refuse to serve those who have been incarcerated or have substance abuse problems. For example, while the HUD-VASH program is to be available to many of these subpopulations, HUD officials and others told us that local service providers still refuse to serve them. In addition, while HUD estimates that 27 percent of PHAs have preferences for those experiencing homelessness, many of them restrict these programs to those who may be easier to serve. Service providers, advocates, researchers, and government officials that we interviewed also cited eligibility criteria for mainstream programs as a main barrier to serving those experiencing homelessness. In 2000, we reported on barriers those experiencing homelessness faced in accessing mainstream programs, and this is a continuing issue. To obtain benefits, applicants need identification and other documents, which those experiencing homelessness often do not have. Without documentation, they sometimes cannot enter federal and state buildings where they would need to go to get documentation or obtain benefits. Those that cited access as a barrier particularly noted difficulties with SSI/SSDI programs. Service providers and government officials noted that those experiencing homelessness may not receive notices about hearing dates or other program requirements because they lack a fixed address. At least one researcher told us that an initiative, SSI/SSDI Outreach, Access and Recovery (SOAR), has improved performance. The initiative’s Web site says that those experiencing homelessness normally have a 10–15 percent chance of receiving benefits from an initial application, but that SOAR has increased success to 70 percent in areas it serves. However, one local agency in an area served by SOAR told us in January 2010 that most applicants were rejected initially. Some of those we interviewed also noted that Medicaid applicants have some similar problems. For example, one advocate noted that it is difficult for those experiencing homelessness to get through the application process and, when necessary, prove disability; however, because Medicaid is a state- run program, these problems are worse in some states than in others. Another provider noted that Medicaid requires that information be periodically updated, and those experiencing homelessness may not receive notices of this. As a result, they may lose their benefits and be required to travel a long distance to get them reinstated. Finally, service providers said that PHAs often restrict federal housing assistance to those without substance abuse issues or certain criminal records and that programs generally have long waiting lists. Because homelessness is a multifaceted issue and a variety of programs across a number of departments and agencies have been designed to address it, collaborative activities are essential to reducing homelessness in a cost-effective manner. In prior work, we have determined that certain key activities, such as setting common goals, communicating frequently, and developing compatible standards, policies, procedures, and data systems, characterize effective interagency collaboration. In addition, we found that trust is an important factor for achieving effective collaboration. Efforts to address homelessness often have stressed the need for local, communitywide collaboration. For instance, entities applying to HUD for Homeless Assistance Grants have to come together as a Continuum to file applications. Other agencies or individuals, such as the school systems’ homeless liaisons, also are required to coordinate activities in the community. In addition, from 2002 to 2009, Interagency Council staff encouraged government officials, private industry, and service providers to develop 10-year plans to end homelessness or chronic homelessness and provided tools to communities to assist with the development of these plans. Many communities have developed these plans, but whether plans have been implemented or have been achieving their goals is unclear. The Interagency Council reports that 332 of these plans have been drafted. All of the locations we visited had drafted plans at the state or local level, however, in two of the four sites—California and South Carolina—plans that had been drafted had not been adopted by appropriate local or state government entities and thus had not been implemented. Some of the people with whom we spoke said that differences in definitions of homelessness limited their ability to collaborate effectively or strategically across communities. Local officials or researchers in three of the four locations we visited noted that certain elements of collaboration were difficult to achieve with different definitions of homelessness. In one location we visited, local agency officials who had extensive experience with a broad range of homelessness programs and issues noted that multiple definitions impeded those involved in homelessness activities from defining or measuring a common problem and were a major obstacle to developing measures to assess progress in solving the problem. Further, they noted that the trust of the local community in officials’ ability to understand the problem of homelessness was eroded when recent point-in-time counts showed that numbers of families experiencing homelessness under one definition declined while the number of families receiving homeless services in other programs that defined homelessness more broadly increased. In two other locations, local government officials and a researcher involved in evaluating local programs said that having multiple definitions of homelessness impeded their ability to plan systematically or strategically for housing needs or efforts to end homelessness at the community level. Congress also recognized the importance of federal interagency collaboration when it authorized the Interagency Council in the original McKinney-Vento Act and reauthorized it in the HEARTH Act. Some of the people we interviewed further noted that collaboration among federal programs was essential because addressing homelessness required that those in need receive a holistic package of services that might encompass the expertise and programs of a number of agencies. They also said that collaboration was necessary to prevent people from falling through gaps created by certain events, such as entering or leaving hospitals or prisons, aging out of foster care or youth programs, or otherwise experiencing changes in family composition. Further, they noted that, with HUD’s emphasizing housing rather than services in its funding priorities, the need for effective collaboration was greater now than in the past. Finally, officials at HUD, HHS, and Education noted that at a time of budget austerity collaboration among agencies was an effective way to leverage scarce resources. While we noted in 1999 and again in 2002 that homeless programs could benefit from greater interagency coordination, many of the government officials, researchers, advocates, and service providers we interviewed who were knowledgeable about multiple federal agencies said that collaboration among federal programs and agencies had been limited or did not exist at all. Generally, those we interviewed in our current work said that, from 2002-2009, the Interagency Council had focused on that part of its mission that required it to foster local collaboration rather than on that part that required it to foster collaboration among federal agencies. In addition, some of those we interviewed said that federal program staff had focused largely on their own requirements and funding streams rather than on collaborative approaches to addressing homelessness. In 1994, the Interagency Council issued an interagency plan to address homelessness that called for federal agencies to streamline and consolidate programs, when appropriate, and introduced the concept of a Continuum of Care, but did not include any longer-term mechanism to promote interagency collaboration, such as joint funding of programs. Following issuance of this plan, the Interagency Council did not again receive funding until 2001, although it did undertake some joint activities including coordinating and funding a survey of service providers and persons experiencing homelessness. In 2002, an executive director was appointed and, according to some of those involved with the Interagency Council, the council turned its attention largely to helping communities draw up 10-year plans to end chronic homelessness. In the HEARTH Act, Congress called on the Interagency Council to develop a strategic plan to end homelessness that would be updated annually, and in November 2009, a new executive director took office. In preparation for the strategic plan and in response to new staffing and funding at the Interagency Council and elsewhere, agencies and the Council appear more focused on interagency coordination. The Interagency Council issued its strategic plan on June 22, 2010. The plan says that it is designed to neither embrace nor negate any definition of homelessness being used by a program. Federal agencies have also not collaborated effectively outside the Interagency Council. Those we interviewed noted that agencies have focused on their own funding streams and have not coordinated dates for applying for grants that could be combined to provide housing and services for those experiencing homelessness. Service providers must apply for grants at different times, and grants run for different periods and have different probabilities of being continued. A provider might receive funding to build permanent housing but might not receive funding needed for certain support services, or vice versa. One group knowledgeable about an array of housing programs said that recently an HHS grant tried to link its funding to HUD’s, but a lack of full collaboration between the agencies created confusion and discouraged some service providers from applying for the HHS grant. The HHS grant required that applicants have an executed grant from HUD when they applied for the HHS grant. However, HHS applications were due before HUD had executed any of its grants. HHS officials then relaxed their grant criteria, saying that they would evaluate the lack of an executed grant contract with HUD on a case- by-case basis. HUD officials said that the grant criteria were relaxed to include recognition of HUD’s conditional grant award letters. Two groups with whom we spoke also noted that funding from multiple agencies often focused on demonstration projects and that grant processes for these also were not well coordinated and funding ended abruptly. Officials at HUD noted that lack of coordination on grants across agencies is likely the result of the statutes that authorize programs and agency regulations that implement them. Some of the service providers, advocates, and government officials we interviewed cited specific examples of successful programmatic collaboration, such as the HUD-VASH program, and federal agency officials directed us to a number of initiatives that illustrate a greater emphasis on interagency collaboration. HUD officials noted that they have been partnering with HHS and VA to improve and align their data collection and reporting requirements for federally-funded programs addressing homelessness. For example, HUD and HHS announced in December 2009 plans to move toward requiring that HHS’s PATH program use HMIS for data collection and reporting for street outreach programs. They noted that the agencies had agreed to align reporting requirements by establishing common outputs and performance outcomes. The plan called for HHS to begin providing technical assistance and training activities for PATH programs on individual-level data collection and reporting and alignment with HMIS in 2010, and to seek approval for a revised annual report to include HMIS data in 2011. In February 2010, officials from HUD, HHS, and Education—key agencies for addressing homelessness for nonveterans—outlined proposals on homelessness included in the proposed FY 2011 budget. These included a demonstration program that combines 4,000 HUD housing vouchers with HHS supportive services and another program that calls for HUD, HHS, and Education to be more fully engaged in stabilizing families. The latter proposal calls for HUD to provide 6,000 housing vouchers on a competitive basis. We also found that federal agency staff did not effectively collaborate within their agencies. For example, in January 2010, staff at one of HUD’s field offices told us that while collaboration between those involved in the Homeless programs and those involved in Public Housing programs would be beneficial, any coordination between these two HUD programs was “haphazard.” In February 2010, the Assistant Secretaries for the Offices of Public and Indian Housing and Community Planning and Development, which includes homeless programs, reported that they are meeting weekly and looking for ways to better coordinate programs. In another example, staff at HHS who developed the National Youth in Transition Database, which includes looking at experiences with homelessness, had not consulted with staff in the Family and Youth Services Bureau, who administer the Runaway and Homeless Youth Programs and generally were recognized as having some expertise on youths experiencing homelessness. Finally, we observed that while coordination has been limited, it was more likely to occur between those parts of agencies that were using a common vocabulary. For example, state McKinney-Vento education coordinators and local education liaisons are required to coordinate with housing officials and providers in a number of ways; however, the McKinney-Vento Homeless Education Program coordinator in one of the states we visited said that while she has coordinated locally with staff from Head Start, an HHS program that also uses the McKinney-Vento Children and Youth definition of homelessness, she has found it very hard to coordinate with local HUD staff that use a different definition of homelessness, because they did not see how the education activities relate to their programs. In addition, those agencies that have agreed on a definition of chronic homelessness—HUD, HHS, DOL, and VA—have engaged in some coordinated efforts to address the needs of those that met the definition. For many years, the federal government has attempted to determine the extent and nature of homelessness. As part of this effort, Education, HHS, and HUD have systems in place that require service providers involved in the homelessness programs they administer to collect data on those experiencing homelessness and report these data in various ways to the agencies. However, while the data currently being collected and reported can provide some useful information on those experiencing homelessness, because of difficulties in counting this transient population and changes in methodologies over time, they are not adequate for fully understanding the extent and nature of homelessness. In addition, the data do not track family composition well or contribute to an understanding of how family formation and dissolution relate to homelessness. Further, because of serious shortcomings and methodologies that change over time, the biennial point-in-time counts have not adequately tracked changes in homelessness over time. While these data systems have improved, it still is difficult for agencies to use them to understand the full extent and nature of homelessness, and addressing their shortcomings could be costly. For example, one shortcoming of HUD’s point-in-time count is that it relies on volunteer enumerators who may lack experience with the population, but training and utilizing professionals would be very costly. In part because of data limitations, researchers have collected data on narrowly defined samples that may not be useful for understanding homelessness more generally or do not often consider structural factors, such as area poverty rates, which may be important in explaining the prevalence and causes of homelessness. In addition, because complete and accurate data that track individuals and families over time do not exist, researchers generally have not been able to explain why certain people experience homelessness and others do not, and why some are homeless for a single, short period and others have multiple episodes of homelessness or remain homeless for a long time. However, those who have experienced or might experience homelessness frequently come in contact with mainstream programs that are collecting data about the recipients of their services. While homelessness is not the primary focus of these programs, if they routinely collected more detailed and accurate data on housing status, agencies and service providers could better assess the needs of program recipients and could use these data to help improve the government’s understanding of the extent and nature of homelessness. Researchers also could potentially use these data to better define the factors associated with becoming homeless or to better understand the path of homelessness over time. Collecting these data in existing or new systems might not be easy, and agencies would incur costs in developing questions and providing incentives for accurate data to be collected. Collecting such data may be easier for those programs that already collect some housing data on individuals, families, and youths who use the programs and report those data on an individual or aggregate basis to a federal agency, such as HHS’s Substance Abuse Treatment and Prevention Block Grant program or Head Start. For those mainstream programs that do not currently report such data, collecting it may be a state or local responsibility, and the willingness of states to collect the data may vary across locations. For example, HHS has reported that about half of the states that do collect homelessness data do not consider it burdensome to do so through their TANF and Medicaid applications, and would be willing to provide data extracts to HHS for research purposes. States or localities and researchers could find these data useful even if they are not collected on a federal or national level. However, concerns exist about resource constraints and data reliability. Therefore, the benefits of collecting data on housing status for various programs would need to be weighed against the costs. Federal efforts to determine the extent and nature of homelessness and develop effective programs to address homelessness have been hindered by the lack of a common vocabulary. For programs to collect additional data on housing status or homelessness or make the best use of that data to better understand the nature of homelessness, agencies would need to agree on a common vocabulary and terminology for these data. Not only would this common vocabulary allow agencies to collect consistent data that agencies or researchers could compile to better understand the nature of homelessness, it also would allow agencies to communicate and collaborate more effectively. As identified in 2011 budget proposals, Education, HHS, and HUD are the key agencies that would need to collaborate to address homelessness, but other agencies that also belong to the Interagency Council—a venue for federal collaborative efforts— such as DOL and DOJ might need to be involved as well. However, agency staff may find it difficult to communicate at a federal or local level when they have been using the same terms to mean different things. For example, agencies might want to avoid using the term homelessness itself because of its multiple meanings or the stigma attached to it. Instead, they might want to list a set of housing situations explicitly. The agencies could begin to consider this as part of the proceedings Congress has mandated that the Interagency Council convene after this report is issued. Once agencies have developed a common vocabulary, they might be able to develop a common understanding of how to target services to those who are most in need and for whom services will be most effective. In addition, with a common vocabulary, local communities could more easily develop cohesive plans to address the housing needs of their communities. To improve their understanding of homelessness and to help mitigate the barriers posed by having differences in definitions of homelessness and related terminology, we recommend that the Secretaries of Education, HHS, and HUD—working through the U. S. Interagency Council on Homelessness—take the following two actions: 1. Develop joint federal guidance that establishes a common vocabulary for discussing homelessness and related terms. Such guidance may allow these and other agencies on the Interagency Council on Homelessness to collaborate more effectively to provide coordinated services to those experiencing homelessness. 2. Determine whether the benefits of using this common vocabulary to develop and implement guidance for collecting consistent federal data on housing status for targeted homelessness programs, as well as mainstream programs that address the needs of low-income populations, would exceed the costs. We provided a draft of this report to the Departments of Education, Health and Human Services, Housing and Urban Development, Labor, and Justice and the Executive Director of the Interagency Council for their review and comment. We received comments from the Assistant Secretary of the Office of Elementary and Secondary Education at the Department of Education; the Assistant Secretary for Legislation at the Department of Health and Human Services; the Assistant Secretary of Community Planning and Development at the Department of Housing and Urban Development; and the Executive Director of the Interagency Council. These comments are reprinted in Appendixes III through VI of this report respectively. The Departments of Labor and Justice did not provide formal comments. Education, HUD, and the Executive Director of the Interagency Council explicitly agreed with our first recommendation that Education, HHS, and HUD--working through the Interagency Council--develop federal guidance that establishes a common vocabulary for discussing homelessness and related terms. HHS did not explicitly agree or disagree with this recommendation. Instead, HHS commented extensively on the advantages of having multiple definitions of homelessness. While we discuss the challenges posed by, and the advantages of, having multiple definitions of homelessness in this report, our report recommends a common vocabulary rather than either a single or multiple definitions. In their interagency strategic plan to prevent and end homelessness issued on June 22, 2010, the agencies acknowledge the need for a common vocabulary or language when they say that a common language is necessary for the interagency plan to be understandable and consistent and that this language does not negate or embrace the definitions used by different agencies. Education explicitly addressed our second recommendation that agencies consider the costs and benefits of using a common vocabulary to develop and implement guidance for collecting consistent federal data on housing status for targeted homelessness and mainstream programs in their written response. Education wrote that a discussion of such costs and benefits of using more of a common vocabulary, as it relates to data collection, should be an agenda item for the Interagency Council. The Executive Director of the Interagency Council also supported further exploration of how to accurately and consistently report housing status in mainstream programs. Although we recommend that the agencies work through the council to address this recommendation, decisions about individual program data collection will necessarily be made by the agency overseeing the program. Although HHS did not comment explicitly on our second recommendation, they did provide comments on data collection. They commented that GAO appears to assume that programs identify people who are homeless only to have a total count of the homeless population. We do not make that assumption. We recognize that programs collect data specifically for the program’s use; however, data collected for programs also can contribute to a broader understanding of the extent and nature of homelessness. For example, while HMIS has certain shortcomings described in the report, service providers collect HMIS data in some cases to better manage their programs, and HUD also uses those data to attempt to understand the extent and nature of homelessness. HHS also noted that homelessness data systems are costly and complicated to develop and linking them presents challenges. We acknowledge that while collecting more consistent data on housing status for targeted and mainstream programs would have benefits, there would be implementation costs as well. Additionally, HHS, HUD, and the Executive Director of the Interagency Council raised other concerns about this report that did not relate directly to the two recommendations. HHS commented on the history of the National Youth in Transition Database, developed in response to the Chafee Foster Care Independence Act of 1999. HUD commented that the report did not present a complete view of HUD’s data collection and reporting efforts and did not recognize the strides that have been made in this area, the value of the data currently being collected and reported, or that their Annual Homeless Assessment Report is the only national report to use longitudinal data. The Executive Director of the Interagency Council also wrote that the report did not adequately recognize what is possible today that was not possible 5 years ago. The objective of this report was to determine the availability and completeness of data that currently are collected on those experiencing homelessness, not on the extent to which these data have improved over time. In addition, HUD’s data are not longitudinal in that they do not follow specific individuals over time; rather HUD collects aggregated data that track numbers of homeless over time. Nonetheless, in the report we discuss actions that HUD has taken to improve its homelessness data over time and note the inherent difficulties of collecting these data. The report also notes that HUD’s point-in-time count represents the only effort by a federal agency to count all of those who are experiencing homelessness, rather than just those utilizing federally-funded programs. HUD made a number of other comments related to their data and the definition of homelessness. HUD commented that the report did not recognize that data collection is driven by statutory definitions or that HUD’s point-in-time and HMIS systems are in some sense complementary. We have addressed this comment in the final report by making it clearer that data collected necessarily reflect the definitions included in the statutes that mandate data collection. We also added a footnote to show that while point-in-time counts focus on those who are homeless for long periods of time, HMIS may capture those who are homeless for shorter periods of time or move in and out of homelessness. HUD also commented that the report did not adequately describe the statutory history of homelessness definitions. We do not agree; the report describes the statutory history to the extent needed to address our objectives. Additionally, HUD commented that the report did not provide proper context about HMIS development and implementation at the local level, adding that a community’s success in using HMIS to meet local needs depends on a variety of factors, such as staff experience and the quality of software selected. We revised the report to acknowledge that a community’s success in using HMIS depends on these other factors. Further, the report acknowledges that in setting HMIS data standards, HUD allowed communities to adapt locally developed data systems or to choose from many other HMIS systems that meet HUD’s standards. Finally, HUD wrote that we attribute the lack of collaboration among federal agencies solely to differences in definitions. Similarly, the Executive Director of the Interagency Council wrote that many greater obstacles to effective collaboration exist than the definitional issue—such as “siloed” departmental and agency structures, uncoordinated incentives and measures of effectiveness, difficulties communicating across very large bureaucracies, and different program rules for releasing and administering funds. The report does not attribute the lack of collaboration solely to the differences in definitions. Instead we note that agencies have not collaborated and that having a common vocabulary could improve collaboration. The report focuses on definitional differences, in part, because it was a key objective of our work and an issue frequently raised in discussions of barriers to effectively providing services to those experiencing homelessness. Education, HHS, and HUD also provided technical comments which we addressed as appropriate. We are sending copies of this report to the Secretaries of Education, Health and Human Services, Housing and Urban Development, Labor, and Justice; the Executive Director of the U.S. Interagency Council on Homelessness; and relevant congressional committees. This report will also 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) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VII. The objectives of our report were to (1) assess the availability, completeness, and usefulness of data on homelessness collected by federal programs; (2) assess the extent to which research identifies factors associated with homelessness; and (3) analyze how differences in the definitions of homelessness and other factors, such as the level of agency collaboration, may impact the effectiveness of programs serving those experiencing homelessness. To address all of our objectives, we reviewed relevant laws such as the McKinney-Vento Homeless Assistance Act, as amended, and the HEARTH Act, as well as a range of prior GAO reports that addressed homelessness or related issues such as reviews of the Social Security Administration’s Supplemental Security Income (SSI) and Supplemental Security Disability Income (SSDI) programs. We also reviewed regulations and government reports across a number of programs specifically targeted to address issues related to homelessness as well as mainstream programs, such as Temporary Assistance for Needy Families (TANF), Head Start, and Public Housing, that often provide services to people experiencing homelessness. Finally, we reviewed research on homelessness retrieved during a wide- ranging search of the literature. During our review, we conducted interviews with at least 60 entities, including officials of six federal government agencies, representatives of at least 15 state and local government entities, staff and officials at 27 service providers, 11 researchers, and officials at 10 groups that advocated for positions related to homelessness. These sum to more than the 60 interviews because some entities fall into more than one category. Specifically, we interviewed officials at the Departments of Education (Education), Health and Human Services (HHS), Housing and Urban Development (HUD), Justice (DOJ), and Labor (DOL), and the U.S. Interagency Council on Homelessness (Interagency Council). We also conducted in-depth interviews with advocates and researchers, as well as service providers, state and local government officials, and HUD field staff that had extensive experience with homeless programs. Many of our interviews were conducted as part of four site visits to large and medium- sized urban areas that were geographically distributed across the United States. We visited these locations to determine the extent to which views on homelessness were specific to particular locations or regions because of local laws, population concentration, or weather. We chose locations to represent each of the major regions of the United States—the Midwest, Northeast, South, and West—and to reflect differences in population concentration and weather. We chose specific urban areas in part because they had reported recent large changes in homelessness among families— two had seen a marked increase, while a third had noted a decrease. In the fourth location, homelessness had been relatively stable. Using these factors, we chose cities in California, Illinois, Massachusetts, and South Carolina. Generally, we did not consider issues specific to rural areas because Congress had mandated a separate study of them. We chose the specific organizations we interviewed to include a range of activities and views, but did not seek to interview a given number of agencies or individuals in each area or to develop a sample from which we could generalize our findings. We also undertook a number of activities specific to each objective: To address the first objective on the availability, completeness, and usefulness of data on homelessness collected by federal programs, we reviewed statutes, regulations, guidance, technical standards, and reports on federal data from targeted homelessness programs. We focused our review of federal data on the Housing and Urban Development Department’s (HUD) Homeless Management Information System (HMIS) and point-in-time counts, Health and Human Services’ (HHS) Runaway and Homeless Youth Management Information System (RHYMIS), and data submitted to the Department of Education through Consolidated State Performance Reports. We interviewed selected service providers to learn about the data systems they use to collect and store information on the homeless populations they serve, the procedures they use to ensure data reliability, and the usefulness of existing data systems for program management and administrative purposes. In addition, we interviewed selected federal, state, and local officials to identify the data used in their oversight of programs for families and individuals that are experiencing homelessness, the procedures they use to verify data reliability, and the extent to which existing data provide sufficient information for program management. Further, we spoke with researchers, individuals with special expertise with federal data systems, and government contractors, to determine the reliability and usefulness of existing data sources on the homeless, as well as to identify potential areas for improvement in data on the homeless. We also analyzed estimates of the extent of homelessness that were derived from federal data systems. In determining the reliability of the data for this report, we identified several limitations with the data– namely, that persons experiencing homelessness are hard to identify and count; that other than the point-in-time count, the three federal data sources for targeted homelessness programs primarily capture data on program participants; and that duplication can exist because the population is mobile and dynamic–which are noted in the report. Nevertheless, because these are the only available data and the relevant departments use them to understand the extent and nature of homelessness, we present the data with their limitations. We also reviewed two HHS reports on homelessness and housing status data collected from federal mainstream programs, to determine the availability of such data. We reviewed research that estimated the size of the population that is doubled up with family and friends. We used data from the 2008 American Community Survey to develop our own estimate of the number of people who were experiencing severe to moderate economic hardship and living with an extended family or nonfamily member in 2008. The survey is conducted annually by the U.S. Census Bureau, and it asks respondents to provide information for housing information and employment income for households. We made several assumptions about what comprises severe or moderate economic hardship. Severe economic hardship was assumed to mean that households had housing costs of at least 50 percent of household income and that household income was below 50 percent of the federal poverty line and moderate economic hardship was assumed to mean that the households had housing costs that were at least 30 percent of household income and household income was below the federal poverty line. We also made assumptions about what comprises extended family; we assumed that extended family households were those where some people in the household were not part of the head of household’s immediate family, and we included spouse, live-in partners, children, grandparents, and grandchildren in our definition of immediate family members. We cannot determine from the available data whether the individuals that are living with extended family or nonfamily members and experiencing severe or moderate economic hardship would meet the McKinney-Vento Children and Youth definition of homelessness, which requires that individuals be doubled up because of economic hardship. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95-percent confidence interval. This is the interval that would contain the actual population values for 95 percent of the samples we could have drawn. As a result, we cannot determine whether the people in our estimate would be eligible for the benefits if the McKinney-Vento Individual definition of homelessness were expanded to include those doubled up because of economic hardship. To address the second objective, we conducted a literature review to identify research studies that considered factors associated with the likelihood that families, youths, and individuals would experience homelessness. We also used various Internet search databases (including EconLit, ERIC, Medline, and Proquest) to identify studies published or issued after 1998. We chose 1998 as a starting point because welfare reform—which impacted some homeless families—had been implemented by that date and may have affected research findings. We sought to identify additional studies with persons we interviewed (that is, government officials, researchers, and advocacy groups) and from studies’ bibliographies. In this initially broad search, we identified more than 600 studies, although we cannot be certain that we captured all relevant research that met our screening criteria. We screened the papers we identified using a multilevel process to gauge their relevance and evaluate their methodology. We excluded papers that did not specifically focus on our objective, were published or issued before 1998, lacked quantitative analysis, had a target population sample size of less than 25, did not conduct some form of statistical testing, did not use a comparison or control group or some other means to compare the target population (or group of persons to whom the research hopes to generalize findings) such as regression analyses, focused on homeless populations outside of the United States, or were dissertations. We retained 45 studies after screening and reviewed their methodologies, findings, and limitations. Nine GAO staff (four analysts and five methodologists) were involved in the systematic review of each of the 45 studies selected, which were determined to be sufficiently relevant and methodologically rigorous. More specifically, two staff members—one analyst and one methodologist—reviewed each study and reached agreement on the information entered in the database. As noted in this report, many of these studies are subject to certain methodological limitations, which may limit the extent to which the results can be generalized to larger populations. In some cases, studies did not discuss correlation among the factors and are thus limited in their ability to explain which factors might lead to homelessness. In addition, at least four studies used data that were more than 10 years old from the date of publication. Findings based on such data may be limited in explaining the characteristics and dynamics of current homeless populations. Further, collecting comparable information from individuals who have not been homeless (a comparison group) is important in determining which variables distinguish those experiencing homelessness from those that do not, and is essential in determining whether certain at-risk individuals and families experience homelessness and others do not. Although we generally excluded studies that did not use a comparison or control group to test their hypotheses, several studies in our literature review used a comparison group that was another homeless population rather than a nonhomeless control group. In addition to the literature review, we gathered opinions from researchers, advocates, service providers, and government officials on the factors associated with the likelihood of experiencing homelessness. To address the third objective, we took several steps to develop a list of potential barriers to providing services for those experiencing homelessness. First, we reviewed our prior work on barriers facing those experiencing homelessness. Second, we held initial interviews with researchers, service providers, and government officials in our Massachusetts location where potential barriers were raised. Third, in conjunction with a methodologist, we developed a list of potential barriers. The list, which included affordable housing, differences in definitions of homelessness used by various federal agencies, eligibility criteria other than income for accessing mainstream programs, the complexities of applying for grants, and lack of collaboration among federal agencies as well as a number of other potential barriers, was included in a structured data collection instrument to be used in the remaining interviews. We asked those we interviewed to select the three most important barriers from that list but did not ask them to rank order their selections. Interviewees were also able to choose barriers not on the list. To ensure that interviewees were interpreting the items on the list in the same way that we were interpreting them, we had interviewees describe the reasons for their choice. We determined the relative importance of the barriers chosen by summing the number of times an item was selected as one of the three most important barriers. When those we interviewed did not choose differences in definitions of homelessness as one of the three main barriers, we asked them for their views on definitional issues and asked all those we interviewed about the advantages of having multiple definitions of homelessness. Similarly, for collaboration among federal agencies, we asked those we interviewed about the agencies they worked with and, if they worked with multiple agencies, about their experiences. We also asked for examples of successful interaction among federal agencies. collaboration. As previously noted, lack of interagency collaboration was also on the list of barriers. In addition, we interviewed the acting and newly appointed executive directors of the Interagency Council on Homelessness and reviewed certain documents related to their activities; interviewed agency officials at Education, HUD, HHS, DOL, and DOJ; and reviewed agency planning and performance documents to identify coordination with other agencies. We conducted this performance audit from May 2009 to June 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We conducted a review of 45 research studies that analyzed factors associated with homelessness. Most of the studies we reviewed examined factors associated with the likelihood of entering an episode of homelessness or the rates of homelessness in a given area, while a few examined factors associated with the duration of homelessness. Twenty- nine studies examined adult individuals, 14 studies examined families, and 7 studies examined only youths. To assess factors associated with homelessness, studies used a range of analytical techniques—including measures of association or correlation between single factors and methods that accounted for some of the interrelationships among factors. The 45 studies are listed below: Allgood, Sam, and Ronald S. Warren, Jr. “The Duration of Homelessness: Evidence from a National Survey.” Journal of Housing Economics 12 (2003): 273-290. Anderson, Debra Gay, and M. K. Rayens. “Factors Influencing Homelessness in Women.” Public Health Nursing 21, no. 1 (2004): 12-23. Bassuk, Ellen L., Jennifer N. Perloff, and Ree Dawson. “Multiply Homeless Families: The Insidious Impact of Violence.” Housing Policy Debate 12 (2001): 299-320. Bendheim-Thoman Center for Research on Child Wellbeing and Columbia Population Research Center. “Predictors of Homelessness and Doubling- up Among At-risk Families.” Fragile Families Research Brief, no. 43 (August 2008). Caton, Carol L. M., Boanerges Dominguez, Bella Schanzer, et al. “Risk Factors for Long-Term Homelessness: Findings from a Longitudinal Study of First-Time Homeless Single Adults.” American Journal of Public Health 95 (2005): 1753-1759. Caton, Carol L. M., Deborah Hasin, Patrick E. Shrout, et al. “Risk Factors for Homelessness among Indigent Urban Adults with No History of Psychotic Illness: A Case-Control Study.” American Journal of Public Health 90 (2000): 258-263. Collins, Cyleste C., Claudia J. Coulton, and Seok-Joo Kim. Family Homelessness in Cuyahoga County. White paper published for the Sisters of Charity Foundation, Center on Urban Poverty and Community Development, Cleveland, Ohio: Case Western Reserve University, 2009. Cousineau, Michael R. “Comparing Adults in Los Angeles County Who Have and Have Not Been Homeless.” Journal of Community Psychology 296, no. 6 (2001): 693-701. Culhane, Dennis P., and Stephen Metraux. “One-Year Rates of Public Shelter Utilization by Race/Ethnicity, Age, Sex and Poverty Status for New York City (1990 and 1995) and Philadelphia (1995).” Population Research and Policy Review (1999): 219-236. Culhane, Dennis P., Stephen Metraux, Stephen R. Poulin, and Lorlene M. Hoyt. “The Impact of Welfare Reform on Public Shelter Utilization in Philadelphia: A Time-Series Analysis.” Cityscape: A Journal of Policy Development and Research, U.S. Department of Housing and Urban Development, Office of Policy Development and Research 6, no. 2 (2003): 173-185. Early, Dirk W. “An Empirical Investigation of the Determinants of Street Homelessness.” Journal of Housing Economics 14 (2005): 27-47. Early, Dirk W. “The Determinants of Homelessness and the Targeting of Housing Assistance.” Journal of Urban Economics 55 (2004): 195-214. Early, Dirk W. “The Role of Subsidized Housing in Reducing Homelessness: An Empirical Investigation Using Micro-Data.” Journal of Policy Analysis and Management 17, no. 4 (1998): 687-696. Eyrich-Garg, Karin M., John S. Cacciola, Deni Carise, et al. “Individual Characteristics of the Literally Homeless, Marginally Housed, and Impoverished in a U.S. Substance Abuse Treatment-Seeking Sample.” Social Psychiatry and Psychiatric Epidemiology 43 (2008): 831-842. Eyrich-Garg, Karin M., Catina Callahan O’Leary, and Linda B. Cottler. “Subjective Versus Objective Definitions of Homelessness: Are There Differences in Risk Factors among Heavy-Drinking Women?” Gender Issues 25 (2008): 173-192. Fertig, Angela R., and David A. Reingold. “Homelessness among at-Risk Families with Children in Twenty American Cities.” Social Service Review 82, no. 3 (2008): 485-510. Fitzgerald, Scott T., Mack C. Shelley II, and Paula W. Dail. “Research and Homelessness: Sources and Implications of Uncertainty.” American Behavioral Scientist 45, no. 1 (2001): 121-148. Folsom, David P., William Hawthorne, Laurie Lindamer, et al. “Prevalence and Risk Factors for Homelessness and Utilization of Mental Health Services Among 10,340 Patients with Serious Mental Illness in a Large Public Mental Health System.” American Journal of Psychiatry 162, no. 2 (2005): 370-376. Greenberg, Greg A., and Robert A. Rosenheck. “Homelessness in the State and Federal Prison Population.” Criminal Behaviour and Mental Health 18, no. 2 (2008): 88-103. Gubits, Daniel, Jill Khadduri, and Jennifer Turnham. Housing Patterns of Low Income Families with Children: Further Analysis of Data from the Study of the Effects of Housing Vouchers on Welfare Families. Joint Center for Housing Studies of Harvard University, 2009. Ji, Eun-Gu. “A Study of the Structural Risk Factors of Homelessness in 52 Metropolitan Areas in the United States.” International Social Work 49, no. 1 (2006): 107-117. Johnson, Timothy P., and Michael Fendrich. “Homelessness and Drug Use - Evidence from a Community Sample.” American Journal of Preventive Medicine 32 (2007): S211-S218. Kingree, J. B., Torrance Stephens, Ronald Braithwaite, and James Griffin. “Predictors of Homelessness among Participants in a Substance Abuse Treatment Program.” American Journal of Orthopsychiatry 69, no. 2 (1999): 261-266. Kuhn, Randall, and Dennis P. Culhane. “Applying Cluster Analysis to Test a Typology of Homelessness by Pattern of Shelter Utilization: Results from the Analysis of Administrative Data.” American Journal of Community Psychology 26 (1998): 207-232. Leal, Daniel, Marc Galanter, Helen Dermatis, and Laurence Westreich. “Correlates of Protracted Homelessness in a Sample of Dually Diagnosed Psychiatric Inpatients.” Journal of Substance Abuse Treatment 16, no. 2 (1999): 143-147. Lee, Barrett A., Townsand Price-Spratlen, and James W. Kanan. “Determinants of Homelessness in Metropolitan Areas.” Journal of Urban Affairs 25 (2003): 335-355. Lehmann, Erika R., Philip H. Kass, Christiana M. Drake, and Sara B. Nichols. “Risk Factors for First-Time Homelessness in Low-Income Women.” American Journal of Orthopsychiatry 77, no. 1 (2007): 20-28. Metraux, Stephen, and Dennis P. Culhane. “Family Dynamics, Housing, and Recurring Homelessness among Women in New York City Homeless Shelters.” Journal of Family Issues 20, no. 3 (1999): 371-396. Molino, Alma C. “Characteristics of Help-Seeking Street Youth and Non- Street Youth.” 2007 National Symposium on Homelessness Research, 2007. O’Flaherty, Brendan, and Ting Wu. “Fewer Subsidized Exits and a Recession: How New York City’s Family Homeless Shelter Population Became Immense.” Journal of Housing Economics (2006): 99-125. Olsen, Edgar O., and Dirk W. Early. “Subsidized Housing, Emergency Shelters, and Homelessness: An Empirical Investigation Using Data from the 1990 Census.” Advances in Economic Analysis & Policy 2, no. 1 (2002). Orwin, Robert G., Chris K. Scott, and Carlos Arieira. “Transitions through Homelessness and Factors That Predict Them: Three-Year Treatment Outcomes.” Journal of Substance Abuse Treatment 28 (2005): S23-S39. Park, Jung Min, Stephen Metraux, and Dennis P. Culhane. “Childhood Out- of-Home Placement and Dynamics of Public Shelter Utilization among Young Homeless Adults.” Children and Youth Services Review 27, no. 5 (2005): 533-546. Quigley, John M., Steven Raphael, and Eugene Smolensky. “Homeless in America, Homeless in California.” The Review of Economics and Statistics 83, no. 1 (2001): 37-51. Rog, Debra J. C., Scott Holupka, and Lisa C. Patton. Characteristics and Dynamics of Homeless Families with Children. Final report to the Office of the Assistant Secretary for Planning and Evaluation, Office of Human Services Policy, U.S. Department of Health and Human Services (Rockville, Md.: Fall 2007). Shelton, Katherine H., Pamela J. Taylor, Adrian Bonner, and Marianne van den Bree. “Risk Factors for Homelessness: Evidence from a Population- Based Study.” Psychiatric Services 60, no. 4 (2009): 465-472. Shinn, Marybeth, Beth C. Weitzman, Daniela Stojanovic, and James R. Knickman. “Predictors of Homelessness among Families in New York City: From Shelter Request to Housing Stability.” American Journal of Public Health 88, no. 11 (1998): 1651-1657. Slesnick, Natasha, Suzanne Bartle-Haring, Pushpanjali Dashora, et al. “Predictors of Homelessness among Street Living Youth.” Journal of Youth Adolescence 37 (2008): 465-474. Stein, Judith A., Michelle Burden Leslie, and Adeline Nyamathi. “Relative Contributions of Parent Substance Use and Childhood Maltreatment to Chronic Homelessness, Depression, and Substance Abuse Problems among Homeless Women: Mediating Roles of Self-Esteem and Abuse in Adulthood.” Child Abuse & Neglect 26, no. 10 (2002): 1011-1027. Sullivan, G., A. Burnam, and P. Koegel. “Pathways to Homelessness among the Mentally Ill.” Social Psychiatry and Psychiatric Epidemiology 35 (2000): 444-450. Tyler, Kimberly A., and Bianca E. Bersani. “A Longitudinal Study of Early Adolescent Precursors to Running Away.” Journal of Early Adolescence 28, no. 2 (2008): 230-251. The Urban Institute, Martha R. Burt, Laudan Y. Aron, et al. Homelessness: Programs and the People They Serve: Findings of the National Survey of Homeless Assistance Providers and Clients. 1999. Vera Institute of Justice, Nancy Smith, Zaire Dinzey Flores, et al. Understanding Family Homelessness in New York City: An In-Depth Study of Families’ Experiences Before and After Shelter 2005. Whaley, Arthur L. “Demographic and Clinical Correlates of Homelessness among African Americans with Severe Mental Illness.” Community Mental Health Journal 38, no. 4 (2002): 327-338. Yoder, Kevin A., Les B. Whitbeck, and Dan R. Hoyt. “Event History Analysis of Antecedents to Running Away from Home and Being on the Street.” American Behavioral Scientist 45, no. 1 (2001): 51-65. In addition to the individual named above, Paul Schmidt, Assistant Director; Nancy S. Barry; Katie Boggs; Russell Burnett; William Chatlos; Kimberly Cutright; Marc Molino; Barbara Roesmann; Paul Thompson; Monique Williams; and Bryan Woliner made major contributions to this report.

Multiple federal programs provide homelessness assistance through programs targeted to those experiencing homelessness or through mainstream programs that broadly assist low-income populations. Programs' definitions of homelessness range from including primarily people in homeless shelters or on the street to also including those living with others because of economic hardship. GAO was asked to address (1) the availability, completeness, and usefulness of federal data on homelessness, (2) the extent to which research identifies factors associated with experiencing homelessness, and (3) how differences in definitions and other factors impact the effectiveness of programs serving those experiencing homelessness. GAO reviewed laws, agency regulations, performance and planning documents, and data as well as literature on homelessness, and spoke with stakeholders, such as government officials and service providers, about potential barriers. Federal agencies, including the Departments of Education (Education), Health and Human Services (HHS), and Housing and Urban Development (HUD), collect data on homelessness. However, these data are incomplete, do not track certain demographic information well over time, and are not always timely. HUD collects data and estimates the number of people who are homeless on a given night during the year and the number who use shelters over the course of the year; these estimates include the people who meet the definition of homelessness for HUD's programs, but do not include all of those who meet broader definitions of homelessness used by some other agencies' programs. For example, HUD's counts would not include families living with others as a result of economic hardship, who are considered homeless by Education. Data from federally-funded mainstream programs such as HHS's Temporary Assistance for Needy Families could improve agencies' understanding of homelessness, but these programs have not consistently collected or analyzed information on housing status because this is not their primary purpose. Because research studies GAO reviewed often used different definitions of homelessness, relied on data collected at a point-in-time, and focused narrowly on unique populations over limited geographical areas, the studies cannot be compared or compiled to further an understanding of which factors are associated with experiencing homelessness. Furthermore, although researchers GAO interviewed and most studies noted the importance of structural factors such as area poverty rates, and those that analyzed these factors found them to be important, few studies considered them. Most of the studies analyzed only the association of individual-level factors such as demographic characteristics, but these studies often did not consider the same individual-level factors or agree on their importance. Many of the government officials, service providers, advocates, and researchers GAO interviewed stated that narrow or multiple definitions of homelessness have posed challenges to providing services for those experiencing homelessness, and some said that having different definitions made collaborating more difficult. For example, some said that persons in need of services might not be eligible for programs under narrower definitions of homelessness or might not receive services for which they were eligible because of confusion created by multiple definitions. Different definitions of homelessness and different terminology to address homelessness have made it difficult for communities to plan strategically for housing needs and for federal agencies such as Education, HHS, and HUD to collaborate effectively to provide comprehensive services. As long as agencies use differing terms to address issues related to homelessness, their efforts to collaborate will be impeded, and this in turn will limit the development of more efficient and effective programs. Commenting on a draft of this report, HHS and HUD raised concerns about its treatment of homelessness data. We characterize and respond to those comments within the report. GAO recommends that Education, HHS, and HUD (1) develop a common vocabulary for homelessness; and (2) determine if the benefits of collecting data on housing status in targeted and mainstream programs would exceed the costs. To the extent that the agencies explicitly addressed the recommendations in their comments, they agreed with them.

You are an expert at summarizing long articles. Proceed to summarize the following text: Our review found that VHA’s internal controls were not designed to provide reasonable assurance that improper purchase card and convenience check purchases would not occur or would be detected in the normal course of business. We found that (1) VHA lacked adequate segregation of duties between those purchasing and receiving goods; (2) payments for purchase card and convenience check transactions often did not have key supporting documents; (3) timeliness standards for recording, reconciling, and reviewing transactions were not met; and (4) cardholders did not consistently take advantage of vendor-offered purchase discounts. Generally, we found that internal controls were not operating as intended because cardholders and approving officials were not following operating guidance governing the program, and in the case of documentation and vendor-offered discounts, they lacked guidance. We also noted that monitoring activities could be strengthened, for example, as in instances where (1) accounts remained active long after the cardholder had left service at VA, (2) credit limits on accounts were significantly higher than actual usage, and (3) human capital resources were insufficient to enable adequate monitoring of the purchase card program. Our Standards for Internal Control in the Federal Government requires that (1) key duties and responsibilities be divided or segregated among different people to reduce the risk of error or fraud; (2) all transactions and other significant events be clearly documented and readily available for examination, and other significant events be authorized and executed only by persons acting within the scope of their authority; (3) transactions be promptly recorded to maintain their relevance and value to management in controlling operations and decisions; and (4) internal control monitoring be performed to assess the quality of performance over time and ensure that audit findings are promptly resolved. Similarly, internal control activities help ensure that management’s directives are carried out. They should be effective and efficient in accomplishing the agency’s objectives and should occur at all levels and functions of the entity. We found that VHA lacked adequate segregation of duties regarding independent receiving of goods and separation of responsibilities within the purchasing process. Independent receiving, which means someone other than the cardholder receives the goods or services, provides additional assurance that items are not acquired for personal use and that they come into the possession of the government. This reduces the risk of error or fraud. From our purchase card internal control testing, we estimate that $75 million in transactions did not have evidence that independent receiving of goods had occurred. In addition, our data mining of the purchase card and convenience check activity identified 15 agency or organization program coordinators (A/OPC) who were also cardholders and collectively made 9,411 purchases totaling $5.5 million during fiscal year 2002. Because A/OPCs are responsible for monitoring cardholders’ and approving officials’ activities for indications of fraud, waste, and abuse, these A/OPCs were essentially monitoring their own activities. We also found instances where purchase card and convenience check transactions lacked key supporting documentation. This would include internal written authorization for convenience check disbursements and vendor invoices that support the description, quantity, and price of what was purchased. VHA’s purchase card guidance does not address the types of documentation that cardholders should maintain to support their purchases. It only addresses documentation requirements in its audit guide, which is an appendix to the purchase card guidance that provides instructions to internal reviewers for performing their monitoring functions. Furthermore, we noted that VA’s operating guidance for convenience checks has no requirement that vendor documentation be provided before checks are issued. The guidance only provides that sufficient documentation, such as a VA-created purchase order, must be evident before checks are issued. The invoice is a key document in purchase card internal control activities. Without an invoice, independent evidence of the description and quantity of what was purchased and the price charged is not available. In addition, the invoice is the basic document that should be forwarded to the approving official or supervisor so that he or she can perform an adequate review of the cardholder’s purchases. Of the 283 purchase card sample transactions we tested, 74 transactions totaling $2.1 million lacked an invoice, credit card slip, or other adequate vendor documentation to support the purchase. Based on these results, we estimate that $312.8 million of the fiscal year 2002 purchase card transactions lacked key supporting documentation. For the convenience check sample, we found 35 of 255 transactions totaling $43,669 lacked the same key documentation. Based on these results, we estimate that $3.8 million of the fiscal year 2002 convenience check transactions lacked key supporting documentation. We also noted that VA’s operating guidance over convenience checks does not provide detailed procedures regarding appropriate written documentation or authorization that must be forwarded to the authorizing employee before funds are disbursed to a third party. VA’s operating guidance only provides that the required documentation be the same as that for paying with cash, such as a purchase order. The guidance makes no mention of independent vendor documentation and that this type of documentation be required prior to issuing checks to vendors. In addition, VA’s guidance only requires that the authorizing employees issuing convenience checks retain copies for 1 year. This documentation requirement is inconsistent with the Federal Acquisition Regulation (FAR) and VHA’s Records, Control Schedule 10-1, dated February 14, 2002, which requires that such records be retained for 6 years and 3 months after final payment for procurements exceeding the simplified acquisition threshold and for 3 years after final payment for procurements below the simplified acquisition threshold. We found that of 255 convenience check transactions, 17, totaling $8,890, lacked written authorization needed for issuance. Based on these results, we estimate that $1.7 million of the fiscal year 2002 convenience check transactions lacked written authorization. In addition, we noted that 19 of the 255 convenience check transactions lacked a copy of the check or carbon copy. Based on these results, we estimate that $2.3 million of the fiscal year 2002 convenience check transactions lacked this supporting documentation. Although VA only requires copies of convenience checks to be retained for 1 year, retaining the copies and the supporting documentation for the longer retention period mandated by the FAR and incorporated in VHA’s Records, Control Schedule 10-1, would facilitate subsequent internal and external reviews in assessing whether a transaction was proper and in compliance with acquisition policies and procedures. At the time of our work, VHA had also established several timeliness standards for cardholders and approving officials to ensure prompt recording, reconciliation, and review of purchases. Specifically, within 1 workday of making a purchase, cardholders are required to input or record the purchase information in VA’s purchase card order system. Within 10 calendar days of electronically receiving the transaction charge information from Citibank, the cardholder must reconcile 75 percent of these Citibank charges to the purchase information in the system. Within 17 calendar days, 95 percent of the Citibank charges must be reconciled. As evidence of reconciliation, the purchase card order system assigns the date the cardholder reconciled the purchase in the system. For testing the timeliness of cardholder reconciliations, we used the 17 calendar day criteria. In addition, VHA requires that within 14 calendar days of electronically receiving the cardholder’s reconciled purchases, the approving official, through an electronic signature, certify in the purchase card order system that all procurements are legal and proper and have been received. Our review found untimely recording, reconciliation, and approving official review. Table 1 summarizes the statistical results of VHA’s timeliness standards that cardholders and approving officials must meet to ensure prompt recording, reconciliation, and review of purchases. Our work shows that the internal controls were not operating as intended to ensure prompt recording of transactions and events. The following examples illustrate the extent of untimely recording, reconciliation, and review of the purchase card transactions. For instance, one cardholder made a purchase on July 9, 2002, of $994, but did not record the information in VA’s purchase card order system until August 29, 2002— 51 days later and 50 days after VHA policy required that the information be entered. Another cardholder made a purchase of $100 on August 24, 2002. Citibank sent charge information for this purchase to VHA on October 8, 2002. According to VHA policy, the cardholder should have reconciled this charge within 17 days. Instead, we found that the account was not reconciled until September 8, 2003, or 335 days after receiving the charge information. In another instance, a cardholder reconciled a purchase card transaction totaling more than $3,000, which should have been reviewed and certified by an approving official within 14 calendar days. We found no evidence that the approving official reviewed this cardholder’s reconciliation until 227 days later. It is critical that cardholders and approving officials promptly record, reconcile, and review purchase card transactions so that erroneous charges can be quickly disputed with the vendor and any fraudulent, improper, or wasteful purchases can be quickly detected and acted upon. We also found instances where cardholders did not consistently take advantage of vendor-offered purchase discounts. Our review identified 69 invoices containing vendor-offered discounts totaling $15,785 that were not taken at the time of purchase or subsequently credited for the discount amount. When purchases are made, vendors may offer purchase discounts if buyers make early payments of their invoices. Typically, the vendor specifies a period during which the discount is offered, but expects the full invoice amount for payments made after that period. When cardholders use the purchase card, payment to vendors, via Citibank, generally occurs at the time of purchase. In turn, Citibank bills VA for the purchases through a daily electronic file. Therefore, it is critical that cardholders ask about any vendor-offered discounts at the time of purchase and make efforts to obtain a credit upon receipt and review of the invoice. Our detailed testing indicated that VHA did not always take advantage of vendor-offered discounts and that it lacked purchase card guidance to ensure cardholders ask about vendor payment terms to determine whether discounts were being offered. For example, one vendor offered VHA a discount of 2.9 percent, or $896, for an invoice amount of $30,888 if it was paid within 15 days. Citibank, on behalf of VA, made payment to the vendor within the 15-day time frame, yet the vendor charged the cardholder’s account for the full invoice amount. We found no evidence that the cardholder attempted to obtain a credit for the available discount offered. In another example, we found that a cardholder had taken advantage of the vendor-offered discount. A factor that may contribute to cardholder inconsistencies in taking advantage of vendor discounts is the lack of established policies and procedures that address this issue. We found that VHA’s purchase card guidance did not include procedures to ensure that cardholders take advantage of available vendor discounts before making payments or require that approving officials identify instances when cardholders did not take advantage of vendor discounts in order to determine the frequency of these occurrences. Without such guidance, VHA will not be able to determine the frequency of these occurrences and actual dollars lost by the government. While VHA’s purchase card guidance includes prescribed monitoring procedures to help ensure purchases are legal and proper, we found no monitoring procedures to identify active accounts of cardholders who had separated from VA nor any provisions to assess cardholder credit limits. We also noted insufficient human capital resources at the A/OPC level for executing the prescribed monitoring activities. For instance, we identified 18 instances in which purchase card accounts remained active after the cardholders left VA and all related outstanding purchase orders had been reconciled. Of the 18 purchase card accounts that remained active after the cardholders had left VA, we determined that 14 accounts remained active 6 or more days after the cardholders’ outstanding purchase orders had been reconciled, which we deemed too long. The remaining 4 purchase cards had been promptly canceled after all outstanding purchase orders were reconciled. Of the 14 accounts that were untimely cancelled, 11 accounts remained open between 6 and 150 days and 3 accounts remained open between 151 and 339 days. For example, one cardholder separated from VA on April 3, 2002, with five outstanding purchase card orders made prior to separation. The last purchase transaction was reconciled on May 21, 2002, but the account was not canceled until April 25, 2003, or 339 days after reconciliation. Requiring monitoring procedures to identify active accounts of departed cardholders and to ensure prompt closure once outstanding purchase orders have been reconciled would assist in reducing the risk of fraud, waste, and abuse that could occur when accounts remain open beyond the necessary time frame. In addition to accounts left open, our analysis of purchases VHA cardholders made in 2002 showed that cumulatively they bought $112 million of goods and services per month on average, but they had credit limits of $1.2 billion, or about 11 times their actual spending. According to VHA’s purchase card guidance, the approving official, in conjunction with the A/OPC, billing officer, and head of contracting activity, recommends cardholder single purchase and monthly credit limits. However, we found no guidance on what factors to consider when recommending the dollar amounts to be assigned to each cardholder. Further, we found no monitoring procedures that require the A/OPC or approving official to determine periodically whether cardholder limits should be changed based on existing and expected future use. Periodic monitoring and analysis of cardholders’ actual monthly and average charges, in conjunction with existing credit limits would help VHA management make reasonable determinations of cardholder spending limits. Without adequate monitoring, the financial exposure in VHA’s purchase card program can become excessive when its management does not exercise judgment in determining single purchase and monthly credit limits. During our review, for instance, the difference between the monlthly cumulative credit limits of $1.2 billion and actual spending of $112 million represents a $1.1 billion financial exposure. Limiting credit available to cardholders is a key factor in managing the VHA purchase card program, minimizing the government’s financial exposure, and enhancing operational efficiency. Furthermore, VHA has not provided sufficient human capital resources to enable monitoring of the purchase card program. One key position for monitoring purchases and overseeing the program is the A/OPC. While the A/OPC position is a specifically designated responsibility, we found in many instances that the A/OPC also functioned in another capacity or performed other assigned duties, for example, as a systems analyst, budget analyst, and contract specialist. Of the 90 A/OPCs who responded to a GAO question regarding other duties assigned, 55 A/OPCs, or 61 percent, reported that they spend 50 percent or less of their time performing A/OPC duties. For example, at the extreme low end of the scale, one A/OPC responded that he was also the budget analyst and that he spends 100 percent of his time on budget analyst duties, leaving no time for A/OPC duties on an ongoing basis. Given that VHA makes millions of purchase card and convenience check transactions annually, which in fiscal year 2002 exceeded $1.4 billion, it is essential that VHA management devote adequate attention to monitoring its purchase card program to ensure that it is properly managed to reduce the risk of fraud, waste, and abuse. The lack of adequate internal controls resulted in numerous violations of applicable laws and regulations and VA/VHA purchase card policies. We classified purchases made in violation of applicable laws and regulations or VA/VHA purchase card policies as improper purchases. We found violations that included purchases for personal use such as food or clothing, purchases that were split into two or more transactions to circumvent single purchase limits, purchases over the $2,500 micro- purchase threshold that were either beyond the scope of the cardholder’s authority or lacked evidence of competition, and purchases made from an improper source. We also found violations of VA/VHA policy that included using convenience checks to pay for purchases even though the vendor accepted the government purchase card, convenience check payments that exceeded established limits, and purchases for which procurement procedures were not followed. While the total amount of improper purchases we identified, based on limited scale audit work, is relatively small compared to the more than $1.4 billion in annual purchase card and convenience check transactions, we believe our results demonstrate vulnerabilities from weak controls that could have been exploited to a much greater extent. For instance, from the nonstatistical sample, we identified 17 purchases, totaling $14,054, for clothing, food, and other items that cardholders purchased for personal use. Items that are classified as personal expenses may not be purchased with appropriated funds without specific statutory authority. The FAR emphasizes that the governmentwide commercial purchase card may be used only for purchases that are otherwise authorized by law or regulation. We identified eight purchases totaling $7,510, in the nonstatistical sample that were subject to procurement from a mandatory source of supply but were obtained from other sources. Various federal laws and regulations, such as the Javits-Wagner-O’Day Act (JWOD), require government cardholders to acquire certain products from designated sources. The JWOD program generates jobs and training for Americans who are blind or have severe disabilities by requiring that federal agencies purchase supplies and services furnished by nonprofit agencies, such as the National Industries for the Blind and the National Institute for the Severely Handicapped. We noted that cardholders did not consistently purchase items from JWOD suppliers when they should have. For example, a cardholder purchased day planner starter kits and refills for employees, totaling $1,591, from Franklin Covey, a high-end office supply store. These items provide essentially the same features as the JWOD items, which would have cost $1,126, or $465 less. During our data mining, we noted that VHA made 652 purchases totaling $76,350 from Franklin Covey during 2002. While we did not review all of the individual purchases, based on our detailed testing of similar transactions, it is likely that many of them should have been procured from a mandatory source at a much lower cost. Using data mining techniques, we identified purchases that appeared to have been split into two or more transactions by cardholders to circumvent their single purchase limit. We requested documentation for a statistically determined sample of 280 potential split transactions totaling $4 million. Of these 280 transactions, we determined that 49 were actual splits. Based on these results, we estimate that $17.1 million of the total fiscal year 2002 purchase card transactions were split transactions. For example, a cardholder with a single purchase limit of $2,500 purchased accommodations in 110 hotel rooms totaling $4,950. When performing follow-up, the cardholder stated that VA provides lodging accommodations for veterans receiving medical services such as radiation therapy, chemotherapy, and day surgery who live at least 150 miles from the medical facility. The cardholder created two separate purchase orders and had the vendor create two separate charges, one for $2,500 and the other for $2,450, so that the purchase could be made. On the documentation provided, the cardholder stated the “purchase was split per the direction of the previous purchase card program administrator.” The cardholder also stated that currently, her purchase card at that facility is no longer used to pay hotel lodging for veterans. Hotel payments are now disbursed electronically via VA’s Financial Service Center. The purpose of the single purchase limit is to require that purchases above established limits be subject to additional controls to ensure that they are properly reviewed and approved before the agency obligates funds. By allowing these limits to be circumvented, VA had less control over the obligation and expenditure of its resources. The FAR provides that the purchase card may be used by contracting officers or individuals who have been delegated micro-purchase authority in accordance with agency procedures. Only warranted contracting officers, who must promote competition to the maximum extent practical, may make purchases above the micro-purchase threshold using the purchase card. Contracting officers must consider solicitation of quotations from at least three sources, and they must minimally document the use of competition or provide a written justification for the use of other than competitive procedures. When cardholders circumvent these laws and regulations, VHA has no assurance that purchases comply with certain simplified acquisition procedures and that cardholders are making contractual commitments on behalf of VHA within the limits of their delegated purchasing authority. From the statistical sample of purchases over $2,500, we found that for 19 of the 76 transactions, cardholders lacked warrant authority needed to make these types of purchases. Based on these results, we estimate that cardholders with only micro-purchase authority, made $111.9 million of the total fiscal year 2002 purchases that exceeded $2,500. In addition, we found that 12 of the 76 transactions lacked evidence of competition. Based on these results, we estimate that $60 million of the total fiscal year 2002 purchases totaling more than $2,500 lacked evidence of competition. We identified 23 purchase card transactions totaling $112,924 in the nonstatistical sample related to the rental of conference room facilities used for internal VA meetings, conferences, and training. For these purchases, the cardholders could not provide documentation to show that efforts had been made to secure free conference space. VA’s acquisition regulations state that rental conference space may be paid for only in the event that free space is not available, and require that complete documentation of efforts to secure free conference space be maintained in the purchase order file. For one purchase, VHA paid $31,610 for conference room facilities and related services for 3 days at the Flamingo Hilton Hotel in Las Vegas. The cardholder provided no evidence that attempts to secure free facilities had been made. In addition, of the 23 purchase card transactions cited, 12 purchases totaling $103,662 occurred at one VHA facility. This included one transaction totaling $12,000 for a 3- day training course on Prevention and Management of Disruptive Behavior at the MGM Grand Hotel in Las Vegas. Again, we were not provided evidence that efforts had been made to secure free conference space. We identified improper use of convenience checks related to purchases that exceeded VA’s established limits of $2,500 and $10,000 and payments to vendors who accept the purchase card payments. VA’s convenience check guidance requires that a single draft transaction be limited to $2,500 or in some cases $10,000 unless a waiver has been obtained from the Department of the Treasury, restricting convenience check use to instances when vendors do not accept purchase cards. From the statistical testing of convenience check limits, we found that 91 of 105 convenience check purchases were paid using multiple checks because the total purchase amount exceeded the established convenience check limit. Based on these results, we estimate that $13.8 million of the total fiscal year 2002 convenience check transactions were improperly used to pay for purchases exceeding the established limits. In April 2003, VA issued new purchase card guidance providing that for micro-purchases, convenience checks may be used in lieu of purchase cards only when it is advantageous to the government and it has been documented as the most cost-effective and practical procurement and disbursement method. However, we found no established criteria for determining the most cost-effective and practical procurement and disbursement method. The ineffectiveness of internal controls was also evident in the number of transactions that we classified as (1) wasteful, that is, excessive in cost compared to other available alternatives or for questionable government need, or (2) questionable because there was insufficient documentation to determine what was purchased. Of the 982 nonstatistical sample transactions we reviewed, 250 transactions, totaling $209,496, lacked key purchase documentation. As a result, we could not determine what was actually purchased, how many items were purchased, the cost of each of the items purchased, and whether there was a legitimate government need for such items. Because we tested only a small portion of the transactions that appeared to have a higher risk of fraud, waste, or abuse, there may be other improper, wasteful, and questionable purchases in the remaining untested transactions. We identified 20 purchases totaling $56,655 that we determined to be wasteful because they were excessive in cost relative to available alternatives or were of questionable government need. The limited number of wasteful purchases found in the nonstatistical sample demonstrates that cardholders are generally prudent in determining that prices of goods and services are reasonable before they make credit card purchases. We considered items wasteful if they were excessive in cost when compared to available alternatives, and questionable if they appeared to be items that were a matter of personal preference or convenience, were not reasonably required as part of the usual and necessary equipment for the work the employees were engaged in, or did not appear to be for the principal benefit of the government. We identified 18 purchases, totaling $55,156, for which we questioned the government need and 2 purchases, totaling $1,499, that we considered excessive in cost. A majority of the purchases were related to officewide and organizational awards. Many award purchases were for gift certificates and gift cards. Although VA policy gives managers great latitude in determining the nature and extent of awards, we identified 10 purchases, totaling $51,117, for award gifts for which VHA was unable to provide information on either the recipients of the awards or the purposes for which the recipients were being recognized. Therefore, we categorized these purchases as of questionable government need. For example, we identified two transactions for 3,348 movie gift certificates, totaling over $30,000. For these purchases, the cardholders and A/OPCs could provide neither the award letters nor justification for the awards. Consequently, VHA could provide no evidence that these purchases were actually used for awards. We also identified two purchases that we considered wasteful because of excessive cost. We identified a cardholder who purchased a $999 digital camera when there were other less costly digital cameras widely available. For example, during the same 6-month period from February 2002 through July 2002, two other cardholders purchased digital cameras for $526 and $550. No documentation was available to show why the more expensive model was necessary. In the second example, we identified a purchase for a 20-minute magic show, totaling $500, that was performed during a VA volunteer luncheon. Although VA policies allow for funds for volunteer events, this expenditure, at roughly $25 per minute, seemed excessive. We also found questionable purchases. As I discussed earlier, we identified numerous transactions from the statistical samples that were missing adequate supporting documentation on what was actually purchased, how many items were purchased, and the cost of the items purchased. We requested supporting documentation for a nonstatistical sample of 982 transactions, totaling $1.2 million. Of these, we identified 315 transactions, totaling $246,596, that appeared to be improper or wasteful, for which VHA either provided insufficient or no documentation to support the propriety of the transactions. We classified 250 of these 315 transactions, totaling $209,496, as missing invoices because the cardholders either provided VHA internal documentation but no vendor documentation to support the purchase or provided no documentation at all to support the purchase. VHA internal documentation includes purchase orders, reconciliation documents, and receiving reports. Vendor documentation includes invoices, sales receipts, and packing slips. For 184 of these transactions, totaling $155,429, internal documentation was available but no vendor documentation was available. No documentation at all was available for the remaining 66 transactions, totaling $54,068. These purchases were from vendors that would more likely be selling unauthorized or personal use items. Examples of these types of purchases included a purchase form Radio Shack totaling $3,305, a purchase from Daddy’s Junky Music totaling $1,041, a purchase from Gap Kids totaling $788, and a purchase from Harbor Cruises totaling $357. An example of a transaction with internal documentation but no vendor documentation included a purchase from Circuit City where the cardholder stated that the purchase was for three $650 television sets and three $100 television stands, totaling $2,300 (including $50 shipping), that were needed to replace the existing ones in the VA facility’s waiting area. In another transaction, no vendor documentation was available for a transaction from Black & Gold Beer where the cardholder stated that the purchase of beer was for a patient. The purchase order shows that three cases were purchased at $12.50 each, totaling $37.50. The cardholder stated that the purchase was at the request of the pharmacy for a specific patient; however, no documentation was provided to support this claim. We believe that at least some of the items we identified may have been determined to be potentially fraudulent, improper, or wasteful had the documentation been provided or available. In addition, we noted that of the 66 transactions for which VHA cardholders provided no documentation to support the purchase, 32 transactions (49 percent) represented 2 or more transactions by the same cardholder. For example, one cardholder did not provide documentation for 5 transactions, totaling $5,799, from various types of merchants, including two restaurants, a movie theater, a country club, and an airport café. For 65 transactions, totaling $37,100, that we characterized as questionable but appeared to be either improper or wasteful, the documentation we received either was not correct or was inadequate, and we were unable to determine the propriety of the transactions. For example, one transaction was for $1,350 to Hollywood Entertainment; however, the purchase order and invoice listed Hear, Inc., as the vendor for closed captioning services. The cardholder stated that she believed Hollywood Entertainment is an associate company name for Hear, Inc.; however, the company could not provide any documentation to support this statement. Additionally, from our Internet searches of both Hollywood Entertainment and Hear, Inc. we found no information to indicate that these two companies were associated in any way. We also identified 68 transactions, totaling $31,772, involving the purchase of tickets for sporting events, plays, movies, amusement or theme parks, and other recreation activities for veterans and VA volunteers. The documentation provided for these transactions was inadequate or missing vendor invoices; therefore, we could not determine whether these tickets were used in support of the volunteers or veterans. As a result, we categorized these purchases as questionable. Various programs under VHA, such as Recreation Therapy, Voluntary Services, and Blind Rehabilitation Service, sponsor assorted activities for veterans and VA volunteers. From our review of these types of purchases, we found that VHA does not have procedures in place to ensure that the purchased items were used by the intended recipients and accounted for properly. In most cases, there was inadequate or no documentation to account for how the tickets were distributed and who participated in the events. For example, we found a purchase of 46 tickets, totaling $812, for veterans to attend a Pittsburgh Pirates baseball game. However, we were provided no documentation that identified who received the tickets or who attended the baseball game. Proper accountability over the distribution and receipt of tickets for such events is needed to help ensure that tickets are not improperly used for personal use. In closing, Mr. Chairman, I want to emphasize that without improvements in its internal controls to strengthen segregation of duties; documentation of purchase transactions; timely recording, review, and reconciliation of transactions; and program monitoring, VHA will continue to be at risk for noncompliance with applicable laws and regulations and its own policies and remain vulnerable to improper, wasteful, and questionable purchases. Our report, which is being released at this hearing, makes 36 recommendations to strengthen internal controls and compliance in VHA’s purchase card program to reduce its vulnerability to improper, wasteful, and questionable purchases. This concludes my statement. I would be happy to answer any questions you or other members of the committee may have. For information about this statement, please contact McCoy Williams, Director, Financial Management and Assurance, at (202) 512-6906, or Alana Stanfield, Assistant Director, at (202) 512-3197. You may also reach them by e-mail at [email protected] or [email protected]. Individuals who made key contributions to this testimony include Lisa Crye, Carla Lewis, and Gloria Medina. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Department of Veterans Affairs (VA) Office of Inspector General (OIG) has continued to identify significant vulnerabilities in the department's use of government purchase cards. Over the years, the OIG has identified internal control weaknesses that resulted in instances of fraud and numerous improper and questionable uses of purchase cards. The OIG has made a number of recommendations for corrective action. Given that VA is the second largest user of the governmentwide purchase card program, with reported purchases totaling $1.5 billion for fiscal year 2002, and because of the program weaknesses reported by the OIG, GAO was asked to determine whether existing controls at the Veterans Health Administration (VHA) were designed to provide reasonable assurance that improper purchases would be prevented or detected in the normal course of business, purchase card and convenience check expenditures were made in compliance with applicable laws and regulations, and purchases were made for a reasonable cost and a valid government need. GAO's report on this issue, released concurrently with this testimony, makes 36 recommendations to strengthen internal controls and compliance in VHA's purchase card program to reduce its vulnerability to improper, wasteful, and questionable purchases. Weaknesses in VHA's controls over the use of purchase cards and convenience checks resulted in instances of improper, wasteful, and questionable purchases. These weaknesses included inadequate segregation of duties; lack of key supporting documents; lack of timeliness in recording, reconciling, and reviewing transactions; and insufficient program monitoring activities. Generally, GAO found that internal controls were not operating as intended because cardholders and approving officials were not following VA/VHA operating guidance governing the program and, in the case of documentation and vendor-offered discounts, lacked adequate guidance. The lack of adequate internal controls resulted in numerous violations of applicable laws and regulations and VA/VHA purchase card policies that GAO identified as improper purchases. GAO found violations of applicable laws and regulations that included purchases for personal use such as food or clothing, purchases that were split into two or more transactions to circumvent single purchase limits, purchases over the $2,500 micro-purchase threshold that were either beyond the scope of the cardholder's authority or lacked evidence of competition, and purchases made from an improper source. While the total amount of improper purchases GAO identified is relatively small compared to the more than $1.4 billion in annual purchase card and convenience check transactions, they demonstrate vulnerabilities from weak controls that may have been exploited to a much greater extent. The ineffectiveness of internal controls was also evident in the number of transactions classified as wasteful or questionable. GAO identified over $300,000 in wasteful or questionable purchases, including two purchases for 3,348 movie gift certificates totaling over $30,000 for employee awards for which award letters or justification for the awards could not be provided and a purchase for a digital camera totaling $999 when there were other less costly digital cameras widely available. Also, 250 questionable purchases totaling $209,496 from vendors that would more likely be selling unauthorized or personal use items lacked key purchase documentation. Examples of these types of purchases included a purchase from Radio Shack totaling $3,305, a purchase from Daddy's Junky Music totaling $1,041, a purchase from Gap Kids totaling $788, and a purchase from Harbor Cruises totaling $357. Missing documentation prevented determining the reasonableness and validity of these purchases. Because only a small portion of the transactions that appeared to have a higher risk of fraud, waste, or abuse were tested, there may be other improper, wasteful, and questionable purchases in the remaining untested transactions.

You are an expert at summarizing long articles. Proceed to summarize the following text: The U.S. air transportation structure is dominated by “hub-and-spoke” networks and by agreements between major airlines and their regional affiliates. Since the deregulation of U.S. commercial aviation in 1978, most major airlines have developed hub-and-spoke systems. For example, Northwest Airlines (Northwest) has hubs in Minneapolis, Detroit, and Memphis. United Airlines (United) has hubs in Chicago (at O’Hare International Airport), Denver, Los Angeles, San Francisco, and Washington, D.C. (at Dulles International Airport). Major airlines provide nonstop service to many “spoke” cities from their hubs, ranging from large cities like Portland, Oregon, to smaller communities such as Des Moines, Iowa, and Lincoln, Nebraska. Depending on the size of those markets (i.e., the number of passengers flying nonstop between the hub and the “spoke” community), the major airlines may operate their own large jets on those routes or use regional affiliates to provide service to other communities, usually with regional jet and turboprop aircraft. The airports in small “spoke” communities are the smallest in the nation’s commercial air system. The Federal Aviation Administration (FAA) and federal law categorize the nation’s commercial airports into four main groups based on the number of passenger enplanements—large hubs, medium hubs, small hubs, and nonhubs. Generally, airports in major metropolitan areas—such as Chicago, New York, Tampa, and Los Angeles—are “large hubs.” There are 31 large hubs, and they serve the majority of airline traffic, accounting for nearly 70 percent of U.S. passenger enplanements in 1999. At the opposite end of the spectrum are the nonhub airports—the airports for the communities that are the focus of this study. In all, 404 airports were categorized as nonhubs in 1999. As a group, they enplaned only about 3 percent of passengers in 1999. Of those airports, we analyzed 267, which are generally the largest airports within this group. These included 202 small community airports in the continental United States and 65 in Alaska and Hawaii. Table 1 provides more information about the four airport categories, along with an illustration of each type. The typical community of the 202 small communities in our analysis had nine departing flights per day in October 2000, and most had no jet service. They were typically served by two airlines, though 41 percent had service from only one airline. Individually, however, they varied considerably, from having no more than 1 or 2 daily departures to having more than 60. As a group, their limited level of service is related to their small populations. As individual communities, the varied levels of service reflect differences in other factors such as the level of local economic activity and proximity to nearby airports. In October 2000, the typical small community among the 202 we analyzed had the following levels of service: Service from two different airlines or their regional affiliates, each providing service to a different hub where passengers could make connections to other flights in the airline’s hub-and-spoke system. However, a substantial minority of the communities—41 percent—had service from only one airline. Nine departing flights a day, most if not all of them turboprops rather than jets. In all, only 67 of the 202 communities had any jet service. The level of service varied significantly from community to community. At the higher end were airports serving resort destinations like Key West, Florida, where five different carriers operated 44 average daily departures to six nonstop destinations, and communities such as Fayetteville and Bentonville, Arkansas (the headquarters for Wal-Mart Stores, Inc.), near the Northwest Arkansas Regional Airport, where five air carriers scheduled 42 average daily jet and turboprop departures to seven nonstop destinations. The highest number of daily departures—62—was for Nantucket, Massachusetts, a resort community served by turboprop and even smaller piston aircraft. At the other extreme were communities such as Hattiesburg, Mississippi, and Thief River Falls, Minnesota, with an average of 3 and 1 daily departures, respectively. In total, the 10 small communities with the most air service typically had more than 38 scheduled departures per day, while the 10 small communities with the least air service typically had fewer than 3 scheduled departures per day.Table 2 summarizes the range of air service that was available at the 202 small community airports in October 2000. For purposes of comparison, appendix II provides additional information on key differences in the scope of air service that airlines scheduled at nonhub and small hub communities. Small hub airports tend to serve somewhat larger communities and have significantly more commercial air service than do the 202 nonhub airports in the continental United States. The most obvious reason for the generally limited level of service at these small communities is their small size. As a whole, the 202 airports served a small portion of the U.S. population and geographic territory. In 2000, the median population of the 202 nonhub airport communities in our analysis was about 120,000, and the median number of daily passenger enplanements in 1999 was about 150. However, airports typically serve populations and businesses in a larger surrounding area—typically referred to as a “catchment area.” An airport’s catchment area is the potential geographic area for drawing passengers. The geographic size of a catchment area varies from airport to airport depending on such factors as how close an airport is to other airports and whether the airport is served by a low-fare airline (and, therefore, attractive to passengers from farther away). Catchment area size estimates provided by the airport directors we surveyed showed that these airports potentially serve a total population of about 35 million (about 12 percent of the continental U.S. population).Figure 1 shows the location and catchments areas of the 202 airports in our analysis as estimated by airport directors responding to our survey and our estimates of catchment areas for those who did not respond to the survey. The small size of these markets greatly affects the level of service because airlines’ decisions about offering service are motivated primarily by the need to maintain profitability. An airline’s profitability generally depends on its ability to generate revenues in a given market while managing its costs. The airline industry is capital- and labor-intensive and is largely dependent on passenger traffic for its revenues. The airlines use sophisticated computer models to help them identify whether certain markets can be served profitably. The limited amount of passenger traffic from many of these communities limits the number of flights airlines provide. It is also not surprising that turboprops have typically provided most service to these communities, because turboprop aircraft are generally the least expensive type of aircraft to buy and operate. The role of size in limiting a small community’s service can be seen by stratifying the small communities into population groups. As part of our analysis, we separated the 202 small communities into three groups— those smaller than 100,000, those with populations of 100,000 to 249,999, and those with populations of 250,000 and greater. As figure 2 shows, the “smallest of the small” typically had lower median levels of service as measured by such indicators as number of daily departures (both turboprop and jet) and service from more than one airline. Besides population, a variety of other factors may influence how much service an individual community receives. In our analysis, two such factors stood out. One of these was the level of economic activity. The airline industry is highly sensitive to the business cycle, and its economic performance is strongly correlated with fluctuations in personal disposable income and gross domestic product. When the economy is growing, the demand for air transportation grows, allowing carriers to raise yields (prices) and profitability. When the economy falls into recession, unemployment grows, individuals postpone discretionary travel, and airline yields and profitability decline. In particular, a key element to the profitability of an airline’s operation in a given location is the availability of high-yield passenger traffic—that is, business travelers who are more likely to pay higher airfares than leisure travelers. Communities with greater amounts of local business activity may have more (and different) air service than communities with less economic activity. Of course, the reverse may also be true—that local economic activity cannot improve without enhanced air service. Thus, the presence or absence of air service may also positively or negatively affect local economic activity, rather than local economic activity dictating the amount and type of air service. Our analysis showed a statistically valid relationship between the economic characteristics of small communities and the amount of air service that they received. Economic principles led us to expect that passenger demand for air service would be greater in communities with more jobs and higher incomes. Our results were consistent with these expectations. Larger communities with more income and “regional product” had service from more major carriers and had more weekly departures. For example, for every additional 25,000 jobs in a county, a community received 4.3 more jet departures per week and 4.8 more turboprop departures per week. Similarly, for every additional $5,000 in per capita income, a community received 3.3 more jet departures per week and 12.7 more turboprop departures per week. In other words, if two small communities, A and B, were similar except that Community A had $5,000 more in income per capita than Community B, Community A would have had 16 more departures per week than Community B. A third main factor that stood out as helping to explain the variation in service levels between small communities, in addition to relative size and economic activity, was the community’s relative proximity to larger airports. If a small community is located within relatively close driving distance of another commercial airport, passengers may drive to the other airport, rather than fly to or from the local community airport. This tendency to lose passengers to other airports is referred to as “leakage.” Of the 202 small communities in our study, 94 (47 percent) are within 100 miles of an airport that is served by a low-fare airline or that serves as a hub for a major airline. Figure 3 shows circles with 100-mile radiuses around those hub or low-fare carrier airports, and thus the number of small communities that are within 100 miles of those alternative airports. As figure 3 also shows, the concentration of nonhub airports that are close to larger airports is much greater east of the Mississippi River than west of the river. Over 70 percent of the eastern small communities are within 100 miles of a hub or low-fare airport, compared with 26 percent of the western small communities. Our survey of small community airport officials confirmed the likely effect of being close to alternative airports. When asked whether they believed local residents drove to another airport for airline service (prior to September 11), over half of them said that they believed this occurred to a great or very great extent. Eighty-one percent of them attributed the leakage to the availability of lower fares from a major airline at the alternative airport. According to the results of our survey of airport directors, more small community airports that are closer to other larger airports experience a greater extent of passenger leakage than small community airports that are farther away from other larger airports. We were not able to obtain and analyze certain key data that might explain in detail why passengers might opt to use different airports rather than their local facility. In particular, we were not able to obtain information on the differences in airfares among competing airports. However, prior GAO reports indicate that fares at small community airports tend to be higher than fares at larger airports. While choosing to drive to other airports in the vicinity that offer service from other airlines may allow passengers to gain the flight options and fares they want or need—a clear benefit to the individual traveler—it likely affects the local community’s ability to attract or retain other competitive air service. In addition, there may be other factors that influence the amount and type of service that air carriers can provide at small communities. As agreed, we intend to examine possible approaches to enhancing air service to these communities in a subsequent report. Between October 2000 and October 2001 (revised), the number of total daily departures in small communities dropped by 19 percent. Airlines planned part of these decreases before September 11 (a 6 percent reduction) but made even steeper reductions (13 percent) afterward. In 36 communities, at least one of the airlines providing service withdrew entirely from the market, with most of these withdrawals coming before September 11. The number of communities with service from only one airline grew by 12, raising the percentage of communities with one-airline service to 47 percent. While many communities lost service, carriers initiated service at 14 communities. Nearly all of these gains occurred prior to September 11. Airlines substantially reduced total scheduled departures at the 202 small communities we reviewed between October 2000 and October 2001. As figure 4 shows, airlines scheduled an average of 2,406 departures daily during the week of October 15–21, 2000. In their original schedules for the week of October 15–21, 2001 (that is, the schedules prepared before September 11), airlines had planned to operate an average of 2,257 departures per day, a reduction of 6 percent from the October 2000 level. Airlines made further—and sharper—service reductions following September 11. According to our analysis of the airlines’ revised schedules for October 2001, the average number of scheduled daily departures from smaller communities dropped to 1,937, or about 320 (13 percent) fewer departures than originally planned. Combined, these schedule changes amounted to a total reduction of about 19 percent from October 2000’s flight schedule. The median community in our group of 202 had nine daily departures in October 2000. After the combined drop that was planned both before and after September 11, the median community had six daily departures in October 2001. October 2001 (original) October 2001 (revised) Other industry data regarding service decreases was consistent with the decreases identified in our 202 small communities. According to one industry analysis, the changes in daily scheduled seats from U.S. airports were generally comparable across airports of all sizes. Small hubs experienced a greater relative decrease in service (-15.5 percent) compared to nonhubs (-13.5 percent). Large hubs had the greatest relative decrease in total available seats (-16.3 percent), and medium hubs had a smaller decrease (-12.4 percent). The 19-percent drop in average daily departures came almost exclusively on turboprop flights. In October 2000, 67 of the 202 communities had some jet service. Airlines tended not to reduce jet flights in those locations where they already were in place. Overall, there were slightly more jet departures in October 2001 than in October 2000. As table 3 shows, median daily turboprop departures dropped from 8 to 6 before September 11 and from 6 to 5 afterward. On other service measures—number of airlines providing service and number of nonstop departures—the median for these communities remained the same. While the typical small community had the same number of airlines— two—providing service both in October 2000 and October 2001, a number of communities gained or lost a carrier. In the aggregate, the movement was downward, with 36 communities experiencing a net decline in the number of airlines providing service and 14 communities experiencing a net increase. For the 36 communities that lost airlines, most lost them as a result of airline decisions made prior to September 11. Likewise, communities that experienced net gains in the number of carriers did so primarily as a result of airline decisions made before September 11. Among communities that lost airlines, two (Cumberland, Maryland, and Rockford, Illinois) lost service altogether. The overall effect of these gains and losses was a decrease in the number of communities served by four, three, and two airlines and an increase in the number of communities served by only one airline (see fig. 5). In all, the number of communities served by only one airline increased from 83 (41 percent) to 95 (47 percent) of the 202 communities in our review. At a minimum, communities that lost an airline were at risk of losing connecting service to some destinations. Of the 36 communities that lost service from an airline, 5 lost the services of a carrier but did not lose access to other destinations, but 31 lost connecting service to other destinations. For example, when Abilene, Texas, lost its service from one of the two airlines that had been providing service, it lost one-stop connections to 14 destinations. Excluding the 2 communities that lost all service, the other 34 communities lost an average of 12 one-stop connections when one of the carriers discontinued flight operations there. Service changes at Lake Charles, Louisiana, illustrate what happens when an airline withdraws from a market. In October 2000, Continental Express and American Eagle both served Lake Charles Regional Airport. Continental Express was the dominant carrier, providing 40 weekly flights (57 percent of the total capacity, as measured by the number of available seats on departing flights). After September 11, American Eagle discontinued its 27 weekly flights from Lake Charles to Dallas-Fort Worth. Continental Express continued to fly, offering 38 weekly flights (2 fewer) to Houston. The loss of American Eagle’s service also meant that Lake Charles’s passengers could no longer reach 13 other destinations via one- stop connections at Dallas—destinations that Continental did not serve. It is difficult to assess the effect of losing a carrier on competition at a particular community. For one thing, the number of carriers providing service to a small community is an imperfect measure of competition. In the airline industry, competition is normally defined in terms of the number of different carriers serving the same city-pair market—that is, the route between the same two cities. Most small communities that received service from two or more carriers had nonstop flights to two or more airlines’ hubs. In the nonstop markets between the small community and those hubs, there was probably little direct competition initially; passengers, therefore, experienced little if any loss of competition on those routes if one of the carriers discontinued service. However, if the passenger’s final destination was not an airline hub city, then different airlines may compete directly in offering connecting service to the same destination city but through their different respective hubs. In such cases, the loss of an airline’s service at a small community means the loss of a competitive choice. Where competition is lost, the risk that consumers may be subject to higher airfares increases. Two primary external events that occurred since October 2000—the economic decline that began in early 2001 and the collapse of airline passenger traffic after September 11—significantly affected carriers’ financial conditions and thus influenced decisions about service throughout their networks, including service to small communities. As the nation’s economic performance declined, fewer passengers opted to fly. Consequently, airline revenues dropped, and airlines sought ways to control costs. They did so, in part, by reducing scheduled operations. In many small communities, they reduced the number of flights they were providing, and in some communities where they had a small portion of the market, they pulled out altogether. After September 11, passenger traffic and revenue plummeted, exacerbating the situation. Beyond their reactions to the economic slowdown and the events of September 11, airlines also made some changes on the basis of long-range decisions about the composition and deployment of their fleets—decisions, generally, to reduce turboprop operations and increase regional jet service. Some communities lost service as carriers retired certain types of small aircraft. Nationally, the U.S. economy slowed down during 2001 and moved into its first recession (as defined by the National Bureau of Economic Research) since 1991. This change in the national economy is reflected in airline passenger and revenue data. In the latter parts of 2000, monthly airline passenger traffic and revenue were still growing compared with the same periods in 1999. But beginning in February 2001, passenger traffic generally declined. Additionally, reflecting a drop in high-yield business traffic, total passenger revenues decreased at a steeper rate than passenger traffic, as shown in figure 6. For the U.S. airline industry as a whole, data from the Bureau of Transportation Statistics (BTS) indicate that airlines’ net income turned negative in the second quarter of 2001. Simultaneously across the industry, airline costs were rising. Carriers began efforts to control costs, in part by reducing service. As the economy slowed down, industry analysts projected that U.S. commercial airlines would lose over $2 billion in 2001. The events of September 11 accelerated and aggravated negative financial trends already evident in the airline industry. In response to significant losses experienced by the carriers stemming from the temporary shutdown of the nation’s airspace and the drop in passenger traffic, the president signed the Air Transportation Safety and Stabilization Act, which provided up to $4.5 billion in emergency assistance to compensate the nation’s passenger air carriers for these losses. The change in the airlines’ financial condition may be attributable to both the continued deterioration of passenger revenues and the inability of airlines to cut their expenses proportionately. Figure 7 shows the significant drop in passenger traffic after September 11. Data from BTS indicate that passenger enplanements between September 2000 and September 2001 on large air carriers dropped by over 34 percent nationally. As passenger traffic and revenues plummeted, carriers’ efforts to control costs included significant reductions in total capacity—in other words, service reductions. These reductions were dramatic. According to data from BTS, carriers flew 20 percent fewer departures in September 2001 than in September 2000. Different airlines approached such cost-cutting in different ways. For example, US Airways retired 111 older aircraft from its fleet, eliminating its Boeing 737-200s, MD-80s, and Fokker F-100s. Some carriers also replaced service from their large mainline jets with smaller aircraft operated by regional affiliates to better match capacity with passenger demand, as United did in some markets. In addition, United reduced the total number of departures in its system from about 2,400 before September 11 to 1,654 by October 31, in part by reducing early morning and late evening flights. Service to smaller communities was affected as part of the overall decrease in operations. These two factors—the economic downturn and aftermath of September 11—played out in small communities as well as in larger markets. As with the nation as a whole, small communities saw dramatic decreases in passenger traffic. According to our survey of airport officials, passenger traffic at small communities fell by 32 percent between September 2000 and September 2001—about the same percentage that, according to BTS data, passenger traffic decreased throughout the country. Over 80 percent of the airport managers we surveyed reported that passenger fear (that is, general apprehension related to the events of September 11, 2001) was a key factor in decreased enplanements at their airport since September 11. Airport directors also reported that passenger enplanements dropped because of air carrier service changes (e.g., fewer departures, smaller aircraft, or fewer carriers). In addition, managers indicated that basic economic conditions and post-September 11 airport security requirements reduced enplanements. Thus, the general reductions in service that occurred at small communities can be seen as reflecting airlines’ overall response to these factors. Another way that these factors can be seen at work in small communities is in the decisions airlines made to withdraw from a community. In most cases, when an airline withdrew entirely from a community, it was a community in which the airline was competing with other airlines and had only a limited market share. More specifically, of the 36 small communities that lost a carrier between October 2000 and October 2001, there were only six instances in which the carrier that discontinued operations was the largest service provider at the community. The effect of these decisions to withdraw from multiple-carrier markets can be seen in one characteristic we observed in the airline schedule data we analyzed: Among the 202 communities we analyzed, service reductions tended to be greater in those communities with populations above 100,000 than in communities with populations below 100,000. This was true across several types of service indicators, such as number of carriers, total number of daily departures, and number of nonstop flights to more than one destination. Across all these indicators, communities with populations below 100,000 typically had lower levels of service than their larger counterparts both in October 2000 and October 2001, but compared with these larger communities, they lost less of that service during the 1-year period we measured. One reason may be that over half of small communities with populations less than 100,000 were served by only one airline, both in October 2000 and in October 2001. Thus, airlines’ decisions to withdraw from multiple-carrier markets had little effect on them. While the economic downturn and the events of September 11 were potent factors in shaping airline service to small communities, some of the changes that were occurring reflected airline efforts on other fronts. The number of departures or available seating capacity at some small community airports changed when some major airlines directed their regional affiliates to shift some of their aircraft fleets to operate at different hubs in their systems. Similarly, changes in the number of departures or available seating capacity at some small community airports reflected strategic decisions that carriers had made about the composition and deployment of their fleets—decisions to replace their turboprop aircraft with regional jet aircraft. These decisions were made with the concurrence of the regional carriers’ mainline partners. Three examples illustrate how such restructurings often affected service to some small communities. According to a Northwest official, the carrier began restructuring parts of its Northwest Airlink regional fleet in 2002. Northwest began retiring turboprops at its wholly-owned affiliate, Express Airlines I, while increasing the number of regional jets in that carrier’s fleet and deploying them at all three of its hubs—Detroit, Minneapolis/St. Paul, and Memphis. Northwest decided that its other regional carrier, Mesaba Airlines, would become the sole operator of turboprops at its hubs beginning in February 2002. Mesaba also operates 69-seat regional jets. According to our analysis, between October 2000 and October 2001, Express Airlines I and Mesaba altered service at 60 small communities. Overall, more small communities lost service than gained service from these carriers during this period. A total of 49 small communities lost some capacity (e.g., through a reduction in flight frequency or use of smaller aircraft) from these carriers, with four of them losing service from Express Airlines I and Mesaba entirely because, according to a Northwest official, they were no longer profitable. On the other hand, 11 communities gained service—9 of them gaining additional flights or extra capacity through larger aircraft, and 2 gaining start-up service from the two airlines. Appendix VI provides more information about the small community service changes made by Express Airlines I and Mesaba between 2000 and 2001. Service changed at some communities when United renegotiated the contract with one of its regional carriers—Great Lakes Aviation. In 2000, both Great Lakes and Air Wisconsin served as United Express carriers operating between United’s Chicago and Denver hubs. However, beginning in May 2001 under a revised contract, Great Lakes no longer operated as a United Express carrier and instead continued in a “codesharing”relationship with United. Under this new arrangement, Great Lakes could decide which markets it served, but United was free to decide whether or not to codeshare on those routes. Furthermore, United expanded the amount of service Air Wisconsin (as a United Express carrier) provided to many of these communities. Of the 202 communities in our study, 16 were served by Great Lakes, 15 by Air Wisconsin, and 9 by both. Between October 2000 and October 2001, United’s changes altered air service between 39 of the 40 communities served by one of these carriers. Of the 39 communities with service changes, Great Lakes pulled out completely from 4. Either Great Lakes or Air Wisconsin decreased capacity at another 30 communities. Five communities gained new service or additional capacity. Appendix VII provides more information about the communities and how they were affected. According to industry sources, some of the decline in turboprop flights and gain in jet flights can be attributed to strategies that some carriers adopted in recent years to phase out turboprop aircraft and replace them with regional jets. For example, Atlantic Coast Airlines, Inc., which operates as a United Express and as a Delta Connection carrier, is planning to become an “all-jet” carrier by the end of 2003. In October 2000, Atlantic Coast operated 87 aircraft, including 34 regional jets and 53 turboprops, to 51 destinations from Washington Dulles and Chicago O’Hare. Of those 51 markets, 21 were served exclusively with turboprops. In October 2001, Atlantic Coast operated 117 aircraft, including 81 regional jets and 36 turboprops, to 60 destinations. Of those 60 markets, 15 were served exclusively with turboprops. By December 2001, Atlantic Coast had retired all of its 19-seat turboprop aircraft and ended service to two small communities—Lynchburg and Shenandoah Valley, Virginia—when it did so. Other regional carriers, such as American Eagle and Continental Express, have also decided to become “all-jet” carriers. It is not surprising that most small communities have fewer carrier options and less competition than larger communities. The economics of airline operations—that is, the need to cover the cost of operating turboprop or jet service with sufficient passenger revenue—mean that small communities that generate relatively little passenger traffic make profitable operations difficult. Because small communities generate relatively little passenger traffic (especially high-fare business traffic), they tend to have more limited air service than larger communities. As a result, passengers who use these communities’ airports often have less service: fewer nonstop flights to fewer destinations. The declines in air service at small communities in 2001 generally paralleled declines at larger airports. However, because small community airports had much more limited service initially, such decreases may subject passengers to or from those communities to significant effects. For example, when small communities lose a competitive air carrier choice, they may lose access to many destinations through one-stop connecting service. Similarly, although we were unable to analyze how airfares changed when the number of carriers serving a community changed, travelers to or from those communities that lost service from one or more carriers may be more vulnerable to noncompetitive pricing and service patterns. The number of communities subject to this vulnerability increased during 2001. Because of the relationship between economic activity and air service, airlines may restore some air service at small communities when local economic conditions improve. However, trends in the industry— such as the replacement of some turboprop aircraft with regional jets— may make it increasingly difficult for air carriers to operate competitive and profitable air service to some small communities. We provided a copy of the draft report to DOT for review and formal comment. We also provided sections of our draft report for technical comment to Northwest Airlines, United Airlines, Great Lakes Aviation, and Air Wisconsin. Officials with DOT and the airlines offered only technical comments, which we incorporated into the report, as appropriate. We are sending copies of this report to the Honorable Norman Y. Mineta, secretary of transportation; United Airlines; Northwest Airlines; the Regional Airline Association; and other interested parties. We will also send copies to others upon request. If you or your staffs have any questions about this report, please contact me, [email protected], or Steve Martin at (202) 512-2834, [email protected]. Other key contributors to this report are listed in appendix VIII. This report examines the changing air service conditions in small communities. Our work focused on three objectives: (1) describing the overall level of air service at the nation’s small communities in 2000 and the main factors that contributed to that service level; (2) examining how the nature and extent of air service changed among the nation’s small communities in 2001, including a specific accounting for how service changed after the September 11 terrorist attacks; and (3) identifying key factors that have influenced these air service changes. To analyze the overall level of service in 2000 and how the nature and extent of air service at small communities changed in 2001, we first defined the universe of small communities. We began by including all nonhub and small hub airports, which various statutes define as small communities. We then narrowed that definition by including only those nonhub and small hub airports included on the Air Carrier Activity Information System (ACAIS) that supports the Federal Aviation Administration’s (FAA) Airport Improvement Program (AIP) entitlement activities. The ACAIS database contains data on cargo volume and passenger enplanements submitted by air carriers to the Department of Transportation (DOT). The ACAIS database categorizes airports by the number of annual enplanements. According to a DOT official, there are three categories: Primary: Public airports with scheduled, commercial air service with at least 10,000 annual enplanements. These airports are eligible for a minimum entitlement AIP funding of between $650,000 and $1 million. Nonprimary: Public airports with scheduled, commercial air service with annual enplanements between 2,500 and 9,999. These airports are not eligible for AIP entitlement funds, but are eligible for “commercial service funds,” which are discretionary AIP funds. Other: Airports that have scheduled service, but not necessarily commercial service and have less than 2,500 enplanements. To limit the scope of our research, we included only those airports that had more than 2,500 annual enplanements (approximately 7 passengers enplaning per day) in 1999. From this list, we eliminated airports that were located in territories, those at which commercial service was subsidized through DOT’s Essential Air Service (EAS) program as of July, 2001,those for which our data indicated that carriers had scheduled no service at any time between June 2001 and July 2002, and those nonhub airports that were located in metropolitan areas with populations of one million or greater (e.g., Meigs Field in Chicago). We eliminated the latter group of airports because travelers in those metropolitan areas are not limited to air service from the small airport; rather, they have a choice of other larger airports in the immediate area. We then compared various aspects of air service at the nonhub and small hub airports to see if there was a significant difference between the two. Based on that analysis and agreement with the requesters’ staffs, we defined small communities as those served by nonhub airports that met the above-mentioned conditions. Table 4 summarizes the number of nonhub airports affected by each of these filters. As part of our analysis, we also grouped the nonhub airports based on the size of the surrounding areas’ populations. Because many of these airports are within metropolitan statistical areas (MSAs), we used those population totals. If an airport was not located within an MSA, we used the county population. To determine what overall level of service airlines provided at the nation’s small communities in 2000, we examined air service schedules published by the airlines for the week of October 15–21, 2000. As with our previous reports on changes in air fares and service, the types of service we focused our analysis on were: the number of carriers serving the airport, if the airport was dominated by a single carrier, the number of nonstop destinations served out of the airport, the number of hubs served out of the airport, the number of turboprop and jet departures per week out of the airport, and the types of aircraft serving the airport. We determined these air service dimensions using airline flight schedule information submitted by all U.S. airlines that we purchased from the Kiehl Hendrickson Group, an aviation consulting firm. We did not independently assess the reliability of the Kiehl Hendrickson Group’s data, which it purchases from another vendor, Innovata, LLC. According to the Kiehl Hendrickson Group, Innovata employs numerous proprietary quality assurance edit checks to ensure data integrity. To determine factors associated with those service levels, we reviewed available literature on air service and local economic development, and we interviewed industry officials, consultants, academic experts, and airport officials. Based on that information, we identified a number of factors that relate air service levels with various aspects of small communities. Among the elements identified were the population of those small communities and the proximity of small community airports to other larger airports, many of which served either as a hub for a major airline or which was served by a low-fare carrier. We obtained community population data from the U.S. Bureau of the Census. In addition, we asked the airport directors at the small community airports to estimate the size of their airport’s “catchment area.” An airport’s catchment area is the geographic area from which it draws passengers. For those who did not respond to the survey, we estimated the size of their catchment areas based on the average size of the catchment area for other small community airports in the same geographic region. We then calculated the total population living within the catchment areas using 2000 census tract population data. For each small community airport, we also identified the nearest major airline hub facility and nearest airport served by a low-fare carrier and determined the distance between those airports to the small community airport. We statistically analyzed the extent to which some of the identified factors contributed to overall service levels. That analysis is described in greater detail in appendix V. To determine how air service has changed at small communities over time, we analyzed changes in scheduled air service for different time periods. We used our analysis of air service for the week of October 15–21, 2000 as a baseline for comparison. To minimize the possible effects of seasonality in air service, we then examined air service schedules for the week of October 15–21, 2001. To identify the service changes at small community airports that might be separately attributable to the 2001 economic downturn and the September 11 terrorist attacks, we examined two different sets of airline schedule data for October 15–21, 2001: those that airlines had published prior to September 11, 2001, and those published by the airlines following September 11, 2001. The first October 2001 schedule dataset reflected the schedule as of August 30, 2001, and is, therefore, not reflective of the airline industry’s reaction to the events of September 11. The second schedule dataset for October 15–21 reflected the schedule as of October 12, 2001. Finally, to determine if airlines continued to make substantial changes to their scheduled service, we also analyzed their schedules for the week of November 1-7, 2001. We recognize that airlines make frequent changes to their service schedules, and that service at these communities may have changed since then. We analyzed the same service elements as for the week of October 15–21, 2000. To determine factors associated with the changes in service at small community airports, we surveyed airport directors at nonhub and small hub airports. We also interviewed officials from major and commuter airlines, FAA and DOT, and industry experts. The survey responses helped us to identify the individual airport perspectives on how their service has changed and the impact of those changes, as well as the major factors affecting the service changes. We interviewed airline officials to understand how and why the major airlines were reducing and/or transferring small community airport routes to commuter carriers and how the different types of contractual relationships affect the route changes. In addition, airline officials described why many airlines are moving away from turboprop to regional jets. FAA and DOT officials, and industry experts provided further information on the state of the airline industry, particularly the vulnerability of small community airports. To collect information on the operational activities of small and nonhub airports, and the opinions of their managers on a variety of issues, we conducted a Web questionnaire survey of 280 U.S. airports from December 10, 2001, through January 29, 2002. Using data from the FAA, Kiehl Hendrickson Group, American Association of Airport Executives (AAAE), and the State of Alaska, we developed a sample of 280 small and nonhub airports. We did not survey the airport directors of all nonhub and small hub airports. Because of the special circumstances (e.g., unique remoteness) of smaller Alaska airports, we included another criterion for incorporating them into our database: We only included Alaska small and nonhubs that, in addition to meeting the prior criteria, were Part 139 certified. This additional criterion resulted in a total of 20 Alaska airports being included in our survey. We developed our survey instrument in consultation with AAAE officials, who reviewed our draft questionnaire and made suggestions about content and format. We also pretested the draft questionnaire at four airports in our study population. These airports were Bellingham International and Spokane International (Washington) and Hagerstown, Maryland, and Richmond, Virginia. We chose these airports because they represented—in terms of annual enplanements, location, and airport type—the kinds of airports that would be asked to complete our final questionnaire. We incorporated changes into our survey instrument as a result of these pretests. The final questionnaire was posted on the World Wide Web for respondents to complete. A complete reproduction of the Web survey can be viewed in Adobe Acrobat pdf format at www.gao.gov/special.pubs/d02432sv.pdf. We sent e-mail messages or otherwise contacted airports in our survey database in late November 2001 to notify them of our survey. We then sent each airport representative a unique username and password and invited them to fill out an automated questionnaire posted on the World Wide Web in early December of 2001. About 12 percent of the airport representatives completed a paper version of the questionnaire in lieu of completing the survey on-line. During the survey fieldwork period, we made at least three follow-up contacts with each airport that had not yet responded to ask them to participate. We used all completed responses received by January 29, 2002, in the analysis for this report. We received responses from 207 airports in which the respondent had indicated that they had completed their questionnaire and that GAO could use the data (a 74 percent response rate). Response rates did not vary appreciably across small hub and nonhub airports and results of the follow-up efforts showed no evidence that our survey results were not representative of the actual study population. Some questions in our survey instrument were not answered by all of the airports completing a useable questionnaire, but this rate of item nonresponse was generally low. In addition to any systematic bias or random error in our survey results that may have been caused by our inability to obtain answers from all of the airports in the population on all of our questions (nonresponse error), estimates from questionnaire surveys may be subject to other sources of error. We took steps to limit these errors. We checked our sample list of airports against other sources to help ensure its completeness, we pretested our questionnaire and had experts review it, and we checked our analysis for programming errors. We did not, however, verify the answers reported by airport directors. Other important issues may be relevant to an analysis of the service changes at small community airports. However, a lack of detailed information on these factors limited the scope of this review. For example, we were not able to obtain information on the differences in airfares at small communities and at competing airports. Airfare data for the quarter including October 2001 would not be available from the Bureau of Transportation Statistics until late February or early March 2002. Additionally, there is a lack of complete and representative fare data for small communities, especially for local passengers who do not connect to large carrier services. This is because public data on airfares is developed from a 10 percent sample of tickets collected from large air carriers, which comprises DOT’s “Passenger Origin-Destination Survey” (O&D Survey). Small certificated air carriers and commuter carriers do not participate in the O&D Survey. Thus, there are inherent statistical sampling limitations in the O&D Survey data. In addition, airlines’ decisions about profitability of operations in certain markets are proprietary confidential. We conducted our work from April 2001 through March 2002 in accordance with generally accepted government auditing standards. Small hub airports, the closest point of comparison to nonhubs, tend to serve somewhat larger communities and have significantly more commercial air service than do the 202 nonhub airports in the continental United States included in our analysis. The median population for small hub communities included in our analysis was about 417,000. As table 5 shows, only about 2 percent of small hub communities had service from two or fewer major carriers; the other 98 percent had service from more carriers. Additionally, only about 2 percent of small hub communities had service to three or fewer nonstop destinations; the other 98 percent had nonstop service to more locations. In addition, almost two-thirds of their nonstop destinations were into major airline hubs, and the majority of their flights were on jet aircraft (as opposed to turboprop or piston aircraft). Compared to small communities with nonhub airports, the communities with small hub airports had much greater daily air service. As table 6 shows, on average, small hubs had significantly more carriers, more jet and turboprop flights, and more nonstop destination options. For example, the median small hub airport community was served by six airlines, compared with two airlines for the small communities in our analysis, and the median number of daily departures was 45, compared with 9 for small communities. Table 6 provides additional information regarding small hubs and compares key differences in the scope of air service that airlines scheduled at these two airport categories. Compared to the experience of small communities, small hub airports saw relatively little change in their airline schedules during the period we analyzed. For example, there was little change in the number of small hubs that had service from three or more carriers (see figs. 8 and 9). In addition, the number of small hubs with service to more than two nonstop destinations did not change, and the number of small hubs dominated by a single carrier declined slightly. According to other data on changes in daily scheduled seats from U.S. airports, airports of all sizes experienced generally comparable decreases in total service. Small hubs experienced a greater relative decrease in service (-15.5 percent) compared to nonhubs (-13.5 percent). Large hubs had the greatest relative decrease in total available seats (-16.3 percent), and medium hubs had a smaller decrease (-12.4 percent). Unique conditions affecting air service in Alaska and Hawaii required us to look at these two states separately from the rest of the United States. Both states have distinctive geographies: they are both located outside the continental United States and both have unique topographies that require air service to be used as a major source of intrastate travel. We examined air service at 63 nonhub airports in Alaska and 2 in Hawaii. All of the Alaska airports were located in communities with less than 100,000 population; the median population was 7,208. The median passenger enplanements in 1999 was 5,176 (about 14 per day). The two Hawaii airports were located in larger communities; the average population was 128,094. Their median enplanements in 1999 were 108,258 (about 297 per day). There was little change in air service at the small community airports in Alaska and Hawaii between October 2000 and October 2001 (revised), as the median level of service represented by the indicators below show (see table 9). None of these airports had nonstop service to a major airline network’s hub. (The major U.S. airlines do not operate hubs in either state.) From October 2000 to October 2001 (revised), the number of these airports that were dominated by a single airline increased slightly, from 65 percent to 69 percent. There are two communities that are categorized as small hubs in Alaska— Juneau and Fairbanks—and three in Hawaii—Hilo, Kailua/Kona, and Lihue. The Alaska airports were all located in communities with populations less than 100,000 and had no service to an airline hub. Hawaii’s small hubs were in communities with populations of less than 250,000. Two of those communities had service to two airline hubs (San Francisco International and Los Angeles International). Small hub airports in Alaska and Hawaii have notably more passenger traffic and air service than the states’ nonhubs. The median passenger enplanements in the two Alaska airports in 1999 were 385,470 (about 1,056 per day), and the median passenger enplanements in Hawaii were 1,271,744 (about 3,484 per day). Typically, Alaska and Hawaii small hubs received service from four major or independent carriers with service to seven nonstop destinations. In addition, small hubs typically had 213 jet departures per week (30 jet departures per day) in October 2000. Generally, the overall amount of service for these small hub airports declined between October 2000 and October 2001. Specifically, airlines scheduled 50 fewer weekly jet departures (eight per day), and added 8 additional weekly turboprop departures (one per day). See table 10. To examine the factors associated with air service in small communities in October 2000, we statistically analyzed certain economic characteristics of these communities. Our process and the outcomes of our analysis are outlined below. For this study, we used regression analysis to explore which factors, called independent variables, explain differences in the level of service, called the dependent variable, in small communities in October 2000. A regression model is a statistical tool that enables researchers to investigate relationships between the dependent variable and the independent variables. To examine the factors associated with the level of air service provided to small communities in October 2000, we used an ordinary least squares regression model. We developed several models, looking at the contribution of each independent variable to the predictive ability of the models, and the overall explanatory power of the models as measured by the coefficient of determination, or r-squared. R-squared is a measure of the proportion of the total variation in the dependent variable that can be explained by the independent variables in that particular model. Economic principles indicate that as income, market population, and the price of substitute service increase, demand for a service will increase. Under these conditions, within a competitive marketplace, as passenger demand increases, the supply of air service will increase to meet that demand. We, therefore, expect that communities with greater levels of income and gross regional product and larger populations and employment levels will experience more substantial air service. Likewise, we expect that communities that are farther from an airport with a low- fare carrier will realize better service. We obtained the economic data used in the regression analysis from the Regional Economic Information System database produced by the Bureau of Economic Analysis. The data were collected for October 1999 at the county level. We then created a dataset containing variables for each county, including population, total employment, manufacturing earnings, and per capita income. We merged this dataset with the data on air service and the distance between airports to create a final working dataset for this analysis. Table 11 summarizes the descriptive statistics of the economic variables and other factors for the 202 small communities in our analysis. We used employment and population to represent the size of a community and per capita income as a measure of income. We expect that a community with a larger manufacturing sector will have a greater demand for business travel. However, data on business travel and regional exports were unavailable for this study. In addition, it is difficult to obtain data on gross regional product (a measure similar to gross domestic product that is applied at the regional level). Therefore, for the purposes of our analysis, we used manufacturing earnings to represent the level of export activity from a region and, hence, as an indicator of the possible demand for business travel. Using the regression to explain variation in air service, we focused primarily on modeling the number of weekly departures (jet and turboprop) from a small community. Multiple univariate and multivariate models of jet and turboprop departures were specified as a function of the independent variables to examine the consistency and robustness of the findings. The results of a final model are discussed below, in which jet and turboprop departures are specified as a function of employment (or population), manufacturing earnings, minimum distance to a low-fare carrier, and per capita income. The results of our regression models indicate that, as expected, employment (or population), manufacturing earnings, minimum distance from a low-fare carrier, and per capita income had a positive effect on the level of air service received by a small community. Below are quantitative statistics from specific models. After controlling for distance to a low-fare carrier, manufacturing earnings, and population, we found that for every additional $5,000 in per capita income, a community received 3.3 and 12.7 more jet and turbopropdepartures per week, respectively. In other words, if two small communities, A and B, were identical in every way except that Community A had $5,000 more in per capita income than Community B, then Community A had roughly 16 more total departures per week than Community B. This difference in the number of total departures was attributable to the difference in per capita income. After controlling for distance to a low-fare carrier, manufacturing earnings, and per capita income, we found that a community received 4.3 and 4.8 more jet and turboprop departures per week respectively for every additional 25,000 jobs in the community. After controlling for distance to a low-fare carrier, population, and per capita income, we found that a community with $250,000 more in manufacturing earnings received 4.8 more jet departures per week than an otherwise similar community. After controlling for manufacturing earnings, per capita income, and employment, we found that a community received 4.7 more jet departures per week for every additional 50 miles separating the airport from a low- fare carrier. According to our analysis, between October 2000 and October 2001, Express Airlines I and Mesaba altered service at 60 small communities. Overall, more small communities lost service than gained service from these carriers during this period. A total of 49 small communities lost service, 4 of which (Bismarck, North Dakota; Columbus, Georgia; Dothan, Alabama; and Rockford, Illinois) lost all nonstop service from Express Airlines I and Mesaba. On the other hand, 11 communities gained service. Nine gained additional flights or extra capacity (i.e., number of seats available for purchase) through larger aircraft, and two (Charlottesville, Virginia, and Springfield, Illinois) gained start-up service from the two airlines. Express Airlines I made service changes at 27 small communities between 2000 and 2001. Of these 27 communities, Express Airlines I reduced service at 13, increased service at 13, and took mixed actions at 1 other (reducing the number of daily departures but adding more available seating capacity by using larger aircraft). Mesaba altered its weekly service at 44 small communities between 2000 and 2001. Mesaba ended all service to 2 communities. At 37 other communities, Mesaba’s service reductions averaged two departures per day per community. On the other hand, Mesaba increased service at 3 small communities and launched new service at another. At Sioux City, Iowa, Mesaba decreased average daily departures but increased total seating capacity by substituting larger aircraft. Eleven communities were served by both—Mesaba and Express Airlines I. Service reductions that Mesaba made at 8 of the 11 were offset by service additions from Express Airlines I, often with new regional jet service. Table 12 summarizes the small community service changes made by Express Airlines I and Mesaba between October 2000 and October 2001. Of the 202 small communities in our study, Great Lakes Aviation served 16, Air Wisconsin served 15, and both airlines served 9. Both airlines served United’s Chicago (O’Hare) and Denver hubs. Between October 2000 and October 2001, Great Lakes and Air Wisconsin altered air service in 39 communities. Of the 39 communities with service changes, 4 lost all of their air service (all of which was provided by Great Lakes). A total of 30 communities saw reductions in their service (i.e., capacity, either through a reduction in departures or by using smaller aircraft) by Great Lakes or Air Wisconsin. Five of the communities in our analysis gained either new service or capacity (i.e., number of seats available for purchase). Great Lakes altered its weekly capacity at 16 small communities between 2000 and 2001. Of these communities, 4 of them (Dubuque, Iowa; Lafayette, Indiana; Rhinelander, Wisconsin; and Salina, Kansas) lost all of their service. Furthermore, Great Lakes reduced service at 11 communities. Only one community—Telluride, Colorado—gained capacity from Great Lakes. Air Wisconsin reduced service at 11 communities and added either new service or additional capacity in 3 communities. Great Lakes and Air Wisconsin both served 9 communities in our analysis. Between October 2000 and October 2001, in 3 of those communities (Traverse City, Michigan; Springfield, Illinois; and Eagle, Colorado), Air Wisconsin replaced Great Lakes service, and in one community (Cody, Wyoming) Great Lakes replaced Air Wisconsin service. Both Great Lakes and Air Wisconsin provided service to Grand Junction and Durango, Colorado. Great Lakes discontinued service by October 2001. Casper, Wyoming; Hayden and Gunnison, Colorado all were receiving service from both Great Lakes and Air Wisconsin in 2000. By October 2001, Air Wisconsin had discontinued all of its service. Table 13 summarizes the changes in service at small communities served by Great Lakes and Air Wisconsin between October 2000 and October 2001. In addition to those individuals named above, Triana Bash, Curtis Groves, Dawn Hoff, David Hooper, Sara Ann Moessbauer, John Mingus, Ryan Petitte, Carl Ramirez, Sharon Silas, Stan Stenersen, and Pamela Vines made key contributions to this report. Financial Management: Assessment of the Airline Industry’s Estimated Losses Arising From the Events of September 11. GAO-02-133R. Washington, D.C.: October 5, 2001. Commercial Aviation: A Framework for Considering Federal Financial Assistance. GAO-01-1163T. Washington, D.C.: September 20, 2001. Aviation Competition: Restricting Airline Ticketing Rules Unlikely to Help Consumers. GAO-01-831. Washington, D.C.: July 31, 2001. Aviation Competition: Regional Jet Service Yet to Reach Many Small Communities. GAO-01-344. Washington, D.C.: February 14, 2001. Essential Air Service: Changes in Subsidy Levels, Air Carrier Costs, and Passenger Traffic. GAO/RCED-00-34. Washington, D.C.: April 14, 2000. Airline Deregulation: Changes in Airfares, Service Quality, and Barriers to Entry. GAO/RCED-99-92. Washington, D.C.: March 4, 1999. Aviation Competition: Effects on Consumers From Domestic Airline Alliances Vary. GAO/RCED-99-37. Washington, D.C.: January 15, 1999.

Most major U.S. airlines began realizing net operating losses early in the 2001, and all of the major U.S. passenger carriers except Southwest Airlines reported losses for the year. Travelers throughout the nation shared in the difficulties. In October 2000, the typical or median small community that GAO analyzed had service from two airlines, with a total of nine daily departing flights. Forty-one percent of the communities were served by only one airline with size being the most obvious factor for service limitations. However, the level of service also varied by the level of local economic activity. The total number of daily departures from these small communities declined by 19 percent between October 2000 and October 2001. Although carriers had reduced total departure levels at small communities before September 11th, airlines made even more reductions after that date. Because profitability is so critical to airline decisions about what markets to serve and how to serve them, the changes in service levels in small communities can be traced to economic factors. Two such factors--the economic decline that began in early 2001 and the collapse of airline passenger traffic after September 11--are widely acknowledged as the main contributors to declining profitability in the industry.

You are an expert at summarizing long articles. Proceed to summarize the following text: Since our May 2002 report on nuclear smuggling, the International Atomic Energy Agency (IAEA) has reported 481 additional confirmed cases of the smuggling of nuclear and/or radiological materials. One of these cases involved nuclear material suitable for use in a nuclear weapon. The majority of new cases IAEA reported involved radiological sources, which could be combined with conventional explosives to create a “dirty bomb.” According to IAEA, the majority of all reported incidents with radiological sources involved criminal activity, most frequently theft. Radiological sources and devices in which they are used can be attractive for thieves because of their perceived high resale value or the value of their ability to shield or encapsulate illegally shipped materials within legal shipments of radioactive materials. Some of the reported cases indicate a perceived demand for radioactive materials on the black market, according to IAEA. From 2003 to 2004, the number of incidents reported by IAEA substantially increased. IAEA indicated that improved reporting may, in part, account for this increase. As of December 2004, 82 of IAEA’s Member States were participating in contributing to the database. Detecting actual cases of illicit trafficking in nuclear material is complicated because one of the materials of greatest concern—highly enriched uranium—is among the most difficult materials to detect because of its relatively low level of radioactivity. Uranium emits only gamma radiation so detection equipment, which generally contains both gamma and neutron detection capabilities, only detects uranium from the gamma detector. However, gamma radiation emissions can be shielded by encasing nuclear material within another high density material, such as lead. Another nuclear material of great concern is plutonium, which emits both gamma and neutron radiation. However, shielding nuclear material generally does not prevent the detection of neutron radiation and, as a result, plutonium can be detected by neutron detectors regardless of the amount of shielding from high density material. According to DOE officials, neutron radiation alarms are only caused by man-made materials, such as plutonium, while gamma radiation alarms are caused by a variety of naturally occurring sources including commercial goods such as bananas, ceramic tiles, and fertilizer, in addition to dangerous nuclear materials, such as uranium and plutonium. The most common types of radiation detection equipment are radiation portal monitors; handheld equipment, including both survey meters and radioactive isotope identification devices; and radiation pagers. The radiation detection equipment that U.S. programs provide to foreign countries is commercially available, off-the-shelf technology. Radiation portal monitors are stationary pieces of equipment designed to detect radioactive materials being carried by vehicles, pedestrians, or railcars. Radiation portal monitors currently being provided by U.S. agencies have the ability to detect both gamma and neutron radiation, which is important for detecting highly enriched uranium and plutonium, respectively. According to DOE, radiation portal monitors with both gamma and neutron detectors cost between about $28,000 and $55,000, plus the additional costs associated with installing the equipment and communication systems necessary to operate it. Figure 1 shows a picture of radiation portal monitors with both gamma and neutron detectors. In 2002, we reported that some U.S. agencies, primarily State, provided radiation portal monitors that did not have the ability to detect neutron radiation to foreign governments. Because this equipment is capable of detecting only gamma radiation, it is less effective in detecting certain nuclear material, such as plutonium that has been shielded with high density material. Replacement cost for similar equipment (capable of detecting only gamma radiation), is about $5,000, not including installation costs, according to DOE officials. Figure 2 shows an example of such a radiation portal monitor. Handheld radiation detection equipment, such as survey meters and radioactive isotope identification devices, are used by customs officials and border guards to conduct secondary inspections, the aim of which is to localize the source of an alarm and determine the nature of the material present. Survey meters can be used to detect the level of radiation by providing a count of the radiation level in the area. Radioactive isotope identification devices, commonly known as RIIDs, identify the specific isotope of the radioactive source detected. In addition, U.S. programs often provide radiation pagers, which are small radiation detection devices worn on belts by border security personnel to continuously monitor levels of radiation in the area. Pagers are considered personal safety devices and, therefore, should not be relied upon to implement secondary inspections. Since fiscal year 1994, DOE, DOD, and State have spent about $178 million to provide radiation detection equipment to 36 countries as part of the overall U.S. effort to combat nuclear smuggling. However, because some U.S. agencies provide radiation detection equipment to foreign countries on an as needed basis, future U.S. government spending requirements for such assistance are uncertain. DOE has spent about $131 million to provide radiation detection equipment and training to 12 countries and to maintain certain types of equipment previously installed by other U.S. agencies in 23 countries. DOD has also spent almost $22 million to provide radiation portal monitors, handheld radiation detection devices, and radiation detection training to 8 countries in the former Soviet Union and Eastern Europe. Similarly, State has spent about $25 million to provide various types of radiation detection equipment and related training to 31 countries. (See table 1.) Since fiscal year 1998, DOE has spent about $130 million through its SLD- Core program to provide radiation detection equipment and training at 83 border sites in Russia, Greece, and Lithuania and to maintain certain types of equipment previously installed by State and other U.S. agencies in 23 countries. DOE recently signed implementing agreements with the governments of Azerbaijan, Georgia, Slovenia, and Ukraine and will begin work in those countries in fiscal year 2006. Through its SLD-Core program, DOE currently plans to install radiation detection equipment at a total of about 350 sites in 31 countries by 2012 at an estimated total cost of $570 million. In addition, DOE spent about $1 million to provide radiation detection equipment to nine countries through its Cooperative Radiological Instrument Transfer project (CRITr), which began in 2004. Through CRITr, DOE refurbishes previously decommissioned handheld radiation detection equipment located at various DOE sites and provides this equipment to foreign law enforcement officers. DOE plans to provide handheld equipment to six additional countries through the CRITr project in fiscal year 2006. Through the end of fiscal year 2005, DOD had spent about $22 million through two programs to provide handheld radiation detection devices to eight countries in the former Soviet Union and Eastern Europe and to install fixed radiation portal monitors in Uzbekistan. Specifically, through its Weapons of Mass Destruction Proliferation Prevention Initiative (WMD- PPI), DOD spent about $0.2 million to provide various types of handheld radiation detection equipment to three countries and about $6.4 million to install radiation portal monitors at 11 sites in Uzbekistan. DOD plans to complete installation at 6 more sites in Uzbekistan by the end of fiscal year 2006 and to finish all associated radiation detection work in Uzbekistan by fiscal year 2009 at a total cost of about $54 million. In fiscal year 2006, DOD plans to transfer responsibility for maintenance of the equipment it has provided to Uzbekistan to DOE’s SLD-Core program. Through its International Counterproliferation Program (ICP), DOD has spent about $15 million to provide handheld radiation detection equipment and training on weapons of mass destruction proliferation prevention to 6 countries in the former Soviet Union and Eastern Europe. In addition, DOD has provided a variety of training on weapons of mass destruction proliferation to 17 additional countries. Through ICP, DOD plans to continue to provide limited amounts of handheld radiation detection equipment to other countries in the future. The Department of State, through three programs—the Export Control and Related Border Security program (EXBS), the Nonproliferation and Disarmament Fund (NDF), and the Georgia Border Security and Law Enforcement program (GBSLE)—has spent about $25 million since fiscal year 1994 to provide radiation detection equipment and related training to 31 foreign countries. State’s EXBS program has spent approximately $15.4 million to provide radiation portal monitors, various types of handheld radiation detection devices, X-ray vans equipped with radiation detectors, and training on how to use this equipment to 30 countries mainly in the former Soviet Union and Eastern Europe. Similarly, through NDF, State spent about $9.1 million from fiscal year 1994 through 2001 to, among other things, install portal monitors in countries other than Russia, provide handheld radiation detectors, and provide vans equipped with X-ray machines to countries, including Estonia, Latvia, Lithuania, and Poland. Lastly, through its GBSLE program, State spent $0.2 million in 1999 to provide border guards and customs officials in the Republic of Georgia with 137 radiation pagers. State has not provided any additional radiation detection equipment assistance through NDF since 2001 or through its GBSLE program since 1999. Because some U.S. programs provide radiation detection equipment to foreign countries on an as needed basis and DOE has yet to gain agreements with all of the countries where it would like to install equipment, future U.S. government spending requirements for radiation detection assistance remain uncertain. For example, although DOE is the primary U.S. agency responsible for installing radiation portal monitors in foreign countries, State selectively funds projects to provide radiation portal monitors to foreign countries through its EXBS program. State officials told us that State coordinates its work in this area with DOE to avoid duplication, and it conducts these projects on an as needed basis to provide a quick response to emerging nuclear smuggling threats. For example, in December 2005, State installed portal monitors and provided handheld radiation detection equipment to one site in Armenia at a cost of about $0.5 million, in part because it believed that the threat of nuclear smuggling warranted immediate installation of this equipment. State officials we spoke with told us that they coordinated with DOE to ensure State’s work in Armenia is consistent with overall U.S. goals and that the specific equipment installed met minimum detection standards. Furthermore, State officials also told us that the newly installed radiation portal monitors at this site in Armenia provide a redundant layer of security with DOE’s planned work to install equipment on the opposite side of the border in the Republic of Georgia. Because State selectively funds portal monitor projects through its EXBS program to provide a quick U.S. government response to emerging security threats of nuclear smuggling, it is uncertain how many other projects State will fund in this area, in what countries these projects will be conducted, or how much they will cost. Additionally, State officials also told us that they have yet to determine whether or not they will fund any future projects to provide radiation detection equipment assistance to foreign countries through the Nonproliferation and Disarmament Fund or the Georgia Border Security and Law Enforcement program. As a result, it is uncertain how many other projects State will fund through either of these two programs or how much they will cost. DOE currently plans to install equipment at a total of about 350 sites in 31 countries by 2012 at an estimated cost of $570 million based on a strategy that analyzes and prioritizes countries for receiving installations. However, it cannot be certain which countries will be included in the SLD-Core program until it signs the necessary agreements with these countries’ governments. For example, DOE planned to complete installations in Georgia, Kazakhstan, Slovenia, and Ukraine in fiscal year 2005. However, installations in Georgia, Slovenia, and Ukraine will not be completed until at least fiscal year 2006 because of delays in signing implementing agreements with these countries. Additionally, DOE is still in the process of trying to reach agreement with Kazakhstan. In fiscal year 2004, DOE reallocated a portion of its funding to directly fund its planned work at certain border sites in Kazakhstan. However, difficulty in reaching agreement with Kazakhstan continues to delay this work. If DOE continues to experience delays in signing agreements with foreign countries, or cannot reach agreements with all of the countries where it currently plans to install equipment, it may need to alter its planned scope of work and overall cost estimates for the program. Furthermore, once DOE reaches agreement with a certain country, it still needs to conduct individual site assessments to determine at which sites providing radiation detection equipment will be cost-effective, as well as the amount of equipment each site will require. Therefore, DOE is limited in its ability to determine the total cost of the SLD-Core program until it signs implementing agreements with the governments of countries where it plans to work and conducts assessments to determine which specific sites within those countries require radiation detection equipment and in what amounts. U.S. programs that provide radiation detection equipment to foreign governments face a number of challenges that affect the installation and effective operation of radiation detection equipment, including: the threat of corruption of border security officials in some foreign countries, technical limitations of radiation detection equipment previously deployed by State and other agencies, inadequate maintenance of some handheld equipment, and the lack of infrastructure necessary to operate radiation detection equipment and harsh environmental conditions at some border sites. DOE, DOD, and State have taken some steps to address these challenges, such as providing multitiered communications systems to mitigate corruption so that alarm data can be simultaneously viewed at several levels of authority and supplying protective casings for radiation portal monitors to prevent damage from vandals or extreme heat. According to U.S. and foreign government officials, corruption is a pervasive problem within the ranks of border security organizations. Specifically, because foreign border guards are often poorly paid and geographically isolated, there are concerns that foreign officials could be bribed and turn off the radiation detection equipment and allow nuclear smuggling to occur. For example, an official might turn off the equipment to allow a nuclear smuggler to pass through a border crossing. According to a Russian press report, in October 2004, a Russian customs agent at a site in western Russia was fired because he was aiding a smuggling ring. Additionally, in July 2005, after the newly elected President of Ukraine took office, he reorganized many agencies within the government, including the Customs Service, because of concerns about corruption. DOE, DOD, and State officials told us they are concerned that corrupt foreign border security personnel could compromise the effectiveness of U.S.-funded radiation detection equipment by either turning off equipment or ignoring alarms. As a result, U.S. programs that provide fixed radiation portal monitors are taking some steps to evaluate the degree to which corruption is present in the countries and regions where they are working or plan to work. For example, DOE’s SLD-Core program commissioned three studies to better understand corruption and the challenges that it could bring to the program. Additionally, DOE includes countrywide corruption assessments as part of its efforts to help program officials prioritize countries to include in the SLD-Core program. In addition, DOD and State also include anticorruption courses as part of the radiation detection training they provide to foreign border security personnel. Some U.S. programs also have taken or plan to take other specific steps to mitigate the threat of corruption, such as (1) providing multitiered communications systems so that alarm data can be simultaneously viewed at several levels of authority, (2) implementing programs to combat some of the underlying issues that can lead to corruption through periodic screening of border security personnel, and (3) installing radiation portal monitors on both sides of a particular border if there are concerns about corruption of personnel in these countries. For example, DOE and DOD are deploying communication systems that link the activities at individual border sites with regional and national command centers. By doing so, alarm data can be simultaneously evaluated by officials both at the site and up the chain of command, thus establishing redundant layers of accountability for responding to alarms. As a result, if a local official turns off the radiation detection equipment at a site, higher level officials can quickly be made aware of the incident and investigate the reasons for the alarm. Additionally, DOD plans to implement an Employee Dependability Program in Uzbekistan that includes background checks, personal interviews of applicants, monitoring of performance and behavior, and annual refresher training to combat some of the underlying issues that can lead to corruption among border security personnel. DOE officials told us that they are considering implementing such a screening program in some countries where the SLD-Core program works. Lastly, U.S. programs are installing radiation portal monitors on both sides of some borders to create redundant coverage to increase the likelihood of detection and interdiction. In fiscal year 2006, DOE plans to install radiation portal monitors at a number of sites in Georgia. At one site in Armenia, across the border from a planned DOE installation, State installed radiation portal monitors in December 2005, in part, because of concerns about corruption on both sides of the border at this location. DOE is also considering employing this type of redundant coverage at other locations throughout Eastern Europe and the former Soviet Union. While DOE has taken steps to determine the level of corruption in some countries and regions where it works and includes countrywide corruption assessments as part of its prioritization model, DOE is still in the process of determining in what countries it will provide specific anticorruption measures and how much it will cost to do so based on its analysis of the corruption threat. For example, DOE estimates that it will spend about $1 million to provide radiation detection equipment and related communications systems at a typical foreign border crossing. DOE officials noted that the standard communication systems the SLD-Core program provides with radiation portal monitors have some anticorruption value because radiation alarms require more than one official to review and close out before the system can be reset. However, DOE has not included the costs associated with other specific anticorruption measures in the long- term cost estimates for its SLD-Core program. In 2002, DOE assumed responsibility for maintaining some radiation detection equipment previously installed by State and other U.S. agencies in 23 countries in the former Soviet Union and Eastern Europe. However, DOE has not upgraded any of this less sophisticated equipment, with the exception of one site in Azerbaijan. Through an interagency agreement, DOE assumed responsibility for ensuring the long-term sustainability and continued operation of radiation portal monitors and X-ray vans equipped with radiation detectors that State and other U.S. agencies provided to these countries. Through this agreement, DOE provides spare parts, preventative maintenance, and repairs for the equipment through regularly scheduled maintenance visits. Through the end of fiscal year 2005, DOE had conducted maintenance and sustainability activities for equipment in 21 of the 23 countries where equipment had been provided. DOE officials told us that, although Belarus received a significant amount of radiation detection equipment from DOD, DOE is currently prohibited from maintaining this equipment by restrictions placed on U.S. assistance to Belarus. As a result, the maintenance status of the 38 portal monitors and almost 200 pieces of handheld radiation detection equipment DOD provided to Belarus is unknown. Additionally, at the request of the Turkish government, DOE no longer maintains 41 portal monitors and over 150 pieces of handheld radiation detection equipment State previously provided to Turkey. As we originally reported in 2002, at some sites in foreign countries, State and other U.S. agencies installed portal monitors that contained only gamma radiation detectors, which are less effective in detecting certain nuclear material, such as plutonium, than detectors with both gamma and neutron detection capability. Although State’s current policy is to install radiation detection equipment with both gamma and neutron detection capability, according to DOE officials, because of their configuration and sensitivity, these older portal monitors are less likely to detect small quantities of highly enriched uranium or nuclear material that is shielded, for example, by a lead container or certain parts of a vehicle. When it assumed responsibility for maintaining this equipment, DOE conducted an initial assessment of these portal monitors to determine whether they were functional and what maintenance was required. During the course of this analysis, DOE found that much of the equipment was damaged and required total replacement or major repairs. In such cases, DOE installed similar equipment with gamma radiation detectors but chose not to upgrade the equipment with newer portal monitors that would be capable of detecting both gamma and neutron radiation. DOE’s policy was to replace this equipment in-kind and wait to upgrade the equipment as part of a countrywide deployment through the SLD-Core program. However, according to SLD-Core program officials, DOE did not have funds earmarked for upgrading the equipment in the absence of a countrywide deployment through the SLD-Core program. Additionally, SLD-Core program officials stated that DOE would need to sign new agreements with the appropriate ministries or agencies within the governments of the countries where State and other agencies had previously installed equipment before DOE could invest “substantial resources” to upgrade the equipment. DOE officials noted that replacing the less sophisticated portal monitors with similar equipment usually costs less than $5,000, plus installation costs, while deploying a comprehensive system comprised of portal monitors that can detect both gamma and neutron radiation, associated communication systems, and related training can cost up to $1 million per site. The agreements are important because they exempt DOE from payment of host government taxes, customs duties, or other charges per congressional guidance. In addition, these agreements require the host government to provide DOE with data on detections of illicit trafficking in nuclear materials gathered as a result of assistance DOE provided through the SLD-Core program. Though the SLD-Core program has signed agreements with some countries where the less sophisticated equipment was installed, such as Ukraine, DOE has yet to upgrade any of the equipment in these countries, with the exception of one site in Azerbaijan, primarily because the details of the countrywide installations are still being determined. According to DOE officials, as countries with older equipment sign agreements with DOE to implement the full SLD-Core program, sites in these countries with less sophisticated equipment will be upgraded. In November 2005, DOE completed an assessment of the maintenance activities it performs on equipment provided by other U.S. agencies. DOE found that equipment failures at many of these sites go unattended, often for months. DOE determined that its maintenance of X-ray vans previously provided by State was not critical to the mission of the SLD-Core program. As a result, DOE is planning to phase out its maintenance of X-ray vans after fiscal year 2007. According to DOE officials, the budget of the SLD- Core program cannot sustain what DOE considers “non-mission critical work.” In fiscal year 2005, DOE bore the full financial responsibility for all maintenance activities because State provided no funding to DOE for this work. In addition to the X-ray vans, DOE evaluated the sites where portal monitors were previously installed by State and other agencies and identified those monitors that should no longer be supported by the SLD- Core program. DOE assessed each location where less sophisticated portal monitors are maintained and prioritized which sites should receive upgraded equipment. DOE plans to work with State to upgrade selected sites and decommission some sites that have equipment that is not being used or is beyond repair. DOE and State signed an interagency agreement in 2002 giving responsibility for maintaining most radiation detection equipment previously installed by State and other U.S. agencies to DOE. However, this agreement did not make DOE responsible for maintaining handheld radiation detection equipment previously deployed by these agencies. State has also not assumed responsibility for maintaining about 1,000 handheld radiation detectors provided by its programs that are vital to border officials for conducting secondary inspections of vehicles and pedestrians, and, as a result, much of this equipment is in disrepair. For example, at one site in Georgia, we observed border guards performing secondary inspections with a handheld radiation detector, previously provided by State, which had not been calibrated since 1997 (see fig. 3). According to the detector’s manufacturer, yearly recalibration is necessary to ensure that the detector functions properly. Furthermore, DOE officials we spoke with told us that—similar to radiation portal monitors—handheld radiation detection devices require periodic maintenance checks and recalibration to ensure that they remain operable and continue to meet minimum detection standards. Batteries used in some handheld radiation detection equipment typically need to be replaced every 2 years and some types of handhelds are fragile and can be easily broken, requiring that replacement devices or spare parts be readily available. At the request of State, DOE is currently evaluating the costs associated with maintaining this handheld equipment. Specifically, DOE has asked its contractor currently responsible for maintaining the portal monitors and X-ray vans in these countries to develop a proposal for assuming responsibility for maintenance of the handheld equipment as well. According to DOE officials, maintenance of handheld equipment could be conducted during regularly scheduled visits for maintenance of portal monitors and X-ray vans. As a result, DOE officials believe that no additional travel funds would be required for this activity. However, DOE officials also told us that if they were to assume full responsibility for maintaining the handheld equipment at sites where they are maintaining radiation portal monitors installed by State and other agencies they would need additional funding for labor and to provide replacement equipment and spare parts. Limited infrastructure and harsh environmental conditions at some foreign border sites create challenges to the installation and operation of radiation detection equipment. For example, many border sites are located in remote areas, which often do not have access to reliable supplies of electricity, fiber optic lines, and other infrastructure needed to operate radiation portal monitors and associated communication systems. Prior to providing radiation portal monitors, U.S. programs typically perform site assessments to determine the details surrounding how radiation detection equipment will be installed at a given site. The assessment includes the operational needs of the equipment depending on the infrastructure available at the site. To address the needs identified, DOE, DOD, and State provide generators at some sites to supply electricity to the radiation detection equipment because the electric power supply shuts down periodically or may be very low at these remote sites. Additionally, the communication systems that are provided to report activities from the radiation detectors require fiber optic cabling for their operation. If no cabling exists, underground cabling or radio wave operated communication systems must be installed to perform this function. Finally, at some border sites, the radiation portal monitors are located significant distances from the control and communication system center. U.S. program officials we spoke with expressed concern that theft could occur because of the remote location of this equipment. To prevent such interference with the equipment, antitampering measures such as protective cages are used to protect the integrity of the portal monitors (see fig. 4). Additionally, environmental conditions at some sites, such as extreme heat, can compromise the effectiveness of radiation detection equipment. Extreme heat can accelerate the degradation of components within radiation detection equipment and, as a result, can affect the performance and long-term sustainability of the equipment. DOD placed a protective casing around the radiation portal monitors it installed in Uzbekistan as a heat shield to ensure the effective long-term operation of the equipment (see fig. 5). State coordinates U.S. radiation detection equipment assistance overseas through an interagency working group and in-country advisors. However, its ability to carry out its role as lead interagency coordinator is limited by deficiencies in the strategic plan for interagency coordination and by its lack of a comprehensive list of all U.S. radiation detection assistance. Specifically, the interagency strategic plan lacks key components, such as overall program cost estimates, projected time frames for program completion, and specific performance measures. Additionally, State has not maintained accurate information on the operational status and location of all radiation detection equipment provided by U.S. programs. As the lead coordinator of U.S. radiation detection equipment assistance overseas, State has taken some steps to coordinate the efforts of U.S. programs that provide this type of assistance to foreign countries. State’s coordination takes place primarily through two methods: an interagency working group and State’s in-country advisors. The main coordination mechanism for U.S. radiation detection assistance programs is the interagency working group, chaired by State, which consists of program representatives from DOE, DOD, State, and DHS. According to State, this working group holds meetings about once every 2 months to coordinate the activities of U.S. programs that provide radiation detection equipment and export control assistance overseas. These interagency meetings attempt to identify and prevent overlap among the various U.S. programs through discussion of such issues as funding, upcoming program activities, and recent trips to countries receiving U.S. assistance. Meetings are attended by program managers responsible for overseeing and implementing radiation detection equipment assistance programs in foreign countries. While DOD and DOE officials we spoke with told us that these interagency meetings are somewhat beneficial, they stated that meetings primarily facilitate coordination at a high level and typically lack the specific detail necessary to identify and prevent program overlap within countries and regions where multiple U.S. programs provide radiation detection equipment assistance. Through this working group, State also maintains an interagency schedule that provides information on planned activities, training, and site visits of U.S. programs. State also coordinates U.S. programs through in-country advisors, stationed in more than 20 foreign countries. While State funds these advisors, State officials told us that they work on behalf of all U.S. programs that provide nuclear detection assistance in their respective countries. According to State officials, these advisors serve as the on-the- ground coordinators of U.S. export control and border security assistance and are the primary sources of information concerning past and present provision of U.S. radiation detection equipment assistance in their respective countries. State officials also noted that frequent informal coordination takes place between program managers at State and their counterparts in Washington, D.C., at other federal agencies. In addition to State’s coordination efforts, DHS recently created the Domestic Nuclear Detection Office (DNDO) with responsibilities including coordinating nuclear detection research and developing a global nuclear detection architecture. According to DHS, though DNDO is principally focused on domestic detection, its coordinating work will enhance U.S. efforts overseas through the design of a global nuclear detection architecture implemented under current agency responsibilities. Equally, while detection technologies developed by DNDO will be directed primarily by operational requirements for domestic applications, many technologies developed could have application in overseas radiation detection equipment assistance programs. However, DOE, DOD, and State officials we spoke with were unclear on what specific future role DNDO would play in coordinating activities of U.S. programs that provide radiation detection equipment assistance to foreign countries. These agencies are working with DNDO to clarify the future role that the office will play. In 2002, we reported that U.S. efforts to help other countries combat nuclear smuggling needed strengthened coordination and planning to link U.S. programs through common goals and objectives, strategies and time frames for providing assistance, and performance measures for evaluating the effectiveness of U.S. assistance. State, as the lead coordinator of U.S. nuclear detection assistance overseas, led the development of a governmentwide interagency strategic plan to guide the efforts of U.S. programs that provide this assistance. The plan broadly defines a set of interagency goals and objectives, establishes minimum technological standards for radiation detection equipment that U.S. programs provide, and outlines the roles and responsibilities of each agency. However, the plan does not include several elements necessary to effectively link U.S. programs together, prevent duplication, and guide their efforts toward completion. While the plan provides U.S. agencies with a broad framework for coordinating this type of assistance by defining a set of interagency goals and outlining the roles and responsibilities of each agency, it does not include specific performance measures, overall program cost estimates, or projected time frames for program completion. Without incorporating these key elements into its plan, State will be limited in its ability, as lead coordinator, to effectively link U.S. programs and guide their efforts toward achieving interagency goals. For example, a primary goal in its plan is that recipient countries possess a comprehensive capability to detect and interdict illicitly trafficked nuclear and radiological material. However, without incorporating specific performance measures into its plan, State has no transparent way to effectively measure the performance of U.S. programs in this regard or to determine the degree to which they are reaching this or other interagency goals discussed in its plan. Finally, without incorporating overall program cost estimates and time frames for program completion into its plan, State cannot effectively determine the amount of U.S. government resources that will be required to achieve interagency goals and objectives or under what time frames these resources will be required. If State does not take steps to include these key elements in its plan, it will continue to be limited in its ability to effectively track the progress of U.S. programs, measure their performance toward achieving interagency goals and objectives, and determine the amount of funding required to achieve these goals and under what time frames these resources will be needed. State, in its role as lead interagency coordinator, has not maintained accurate information on the operational status and location of all the handheld radiation detection equipment previously provided by U.S. programs. While DOE has taken responsibility for maintaining information on previously deployed U.S.-funded radiation portal monitors, State primarily works through its in-country advisors and its interagency working group to gather and maintain information on handheld radiation detection equipment provided by U.S. programs. State, through its EXBS program, assumed direct management of the in-country advisors from DHS in February 2005. As part of their duties, State’s in-country advisors are required to maintain a record of the transfer of all U.S.-provided export/border control equipment, including radiation detection equipment, within their respective countries and to follow up to ensure it is at the locations specified by the recipient government and is properly maintained. However, four of the nine advisors we spoke with, who are stationed in countries that have received a combined total of about 1,000 pieces of handheld radiation detection equipment from U.S. programs, acknowledged that they did not have up-to-date information regarding the present operational status or location of this equipment. Additionally, five of nine advisors we spoke with were unaware that, as part of their duties, they are required to maintain a record of all U.S.-provided equipment within their country. However, some advisors we spoke with stated that they attempt to determine this information but are sometimes limited in their ability to do so because other U.S. programs have not always coordinated with them before providing equipment in their country. As a result, it is necessary for some advisors to follow up with the host government to determine the status and location of U.S.-provided radiation detection equipment. According to some advisors, however, host governments may not always provide accurate information on what equipment has been provided in the past, where it is currently located, and its current operational status. According to State officials, there is no comprehensive interagency list of radiation detection equipment that has been previously provided to foreign governments by U.S. programs. In 2002, we recommended that State, as the lead interagency coordinator, work with DOE and DOD to develop such a list. Officials we spoke with at DOE and DOD stated that having access to accurate information on past provisions of all radiation detection equipment provided by U.S. programs is essential to interagency coordination, preventing overlap among programs, as well as appropriately assessing a specific country’s equipment needs. During the course of our review, program officials at DOE, DOD, and State provided us with lists of radiation detection equipment their programs had provided to other countries. According to information we received from program managers at DOE, DOD, and State, more than 7,000 pieces of handheld radiation detection equipment, including radiation pagers and radioactive isotope identification devices, had been provided to 36 foreign countries through the end of fiscal year 2005. Because much of this equipment was provided to the same countries by multiple agencies and programs, it is difficult to determine the degree to which duplication of effort has occurred. For example, since fiscal year 1994, a total of 17 different countries have received handheld radiation detection equipment from more than one U.S. agency. However, although DOE, DOD, and State programs each maintain their own lists of radiation detection equipment provided to foreign countries, officials at these agencies told us that they do not regularly share such information with each other. Without the development of a comprehensive interagency list of U.S.-funded radiation detection equipment, program managers at DOE, DOD, and State cannot accurately assess the equipment needs of countries where they plan to provide assistance, may unknowingly provide duplicative sets of equipment, and cannot determine if the equipment is being used for its intended purpose or is in need of maintenance and repair. Since the mid-1990s, DOE, DOD, and State have spent about $178 million to provide a variety of radiation detection equipment to countries around the world, and it is important that this equipment be properly maintained so that it can be effectively used to combat nuclear smuggling overseas. Since taking over responsibility for maintaining portal monitors deployed by other agencies in 2002, DOE has worked to ensure that this equipment is functioning and being used as intended. However, because DOE’s interagency maintenance agreement with State did not include maintaining handheld radiation detection equipment previously provided by State and other agencies, much of this equipment may not be properly functioning. Handheld radiation detection equipment is vital for border officials to conduct secondary inspections of vehicles or pedestrians. Without taking steps to ensure that all previously provided radiation detection equipment, specifically handheld equipment, is adequately maintained and remains operational, State cannot ensure the continued effectiveness or long-term sustainability of this equipment. Because corrupt officials could undermine the effectiveness of U.S. radiation detection assistance programs overseas by turning off radiation detection equipment or not properly responding to alarms, it is important for U.S. programs to employ anticorruption efforts, such as multitiered communication systems for radiation alarms, training, employee dependability programs, and redundant installations of equipment when providing such assistance. While we are encouraged that DOE, DOD, and State employ some corruption mitigation measures in their programs, DOE is still in the process of determining in which countries it will provide these specific anticorruption measures and how much such assistance would cost to implement. In addition, though DOE has maintained less sophisticated radiation portal monitors previously deployed by other agencies since 2002, it has not upgraded the equipment at any of these sites. As a result, border sites with less sophisticated radiation portal monitors are more vulnerable to nuclear smuggling than sites with equipment that can detect both gamma and neutron radiation. We originally reported on this problem in our May 2002 report. In its official comments on that report, DOE stated that these less sophisticated monitors “are not as reliable [as monitors with both gamma and neutron radiation detection capabilities], and have limited or no ability to detect shielded plutonium.” Although it is encouraging that DOE has recently undertaken an assessment of the equipment it maintains that was installed by other U.S. agencies, DOE has not yet improved the neutron detection capabilities of any of these less sophisticated monitors, with the exception of one site in Azerbaijan. As a result, these sites remain just as vulnerable to certain types of nuclear smuggling as they were when we first reported this deficiency in May 2002. Finally, we believe that, unless key components such as overall program cost estimates, projected time frames for completion, and specific performance measures are incorporated into the interagency strategic plan, State will be limited in its ability to determine the amount of resources and time needed to achieve the broader interagency goals discussed in its plan or to effectively measure U.S. programs’ progress toward achieving these goals. Furthermore, without accurate information on the current status and location of radiation detection equipment previously provided by U.S. programs, State cannot effectively fulfill its role as interagency coordinator of U.S. assistance. Because there are at least seven U.S. programs at three federal agencies that provide radiation detection equipment to foreign countries, program managers at DOE, DOD, and State need access to a “master list” that shows the status and location of all U.S. radiation detection equipment assistance to more accurately determine the needs of specific countries and to avoid duplication of effort among U.S. programs. Without such a list, the potential exists for programs to provide duplicative sets of radiation detection equipment to the same country. To strengthen program management and effectiveness, we recommend that the Secretary of Energy, working with the Administrator of the National Nuclear Security Administration, take the following two actions: Integrate projected spending on specific anticorruption measures into the long-term cost estimates for the SLD-Core program. Upgrade less sophisticated portal monitors previously installed by other U.S. agencies where DOE has determined this to be appropriate as soon as possible and include funding to accomplish this in DOE’s planning and budgeting process. To strengthen accountability of U.S. radiation detection equipment assistance programs, we recommend that the Secretary of State, working with the Secretaries of Defense and Energy and the Administrator of the National Nuclear Security Administration, take the following three actions: Ensure continued maintenance of all radiation detection equipment provided to foreign governments, including all handheld equipment previously provided by State and other agencies. Strengthen the Strategic Plan for Interagency Coordination of U.S. Government Nuclear Detection Assistance Overseas by including in the plan (1) specific performance measures to more effectively track and measure the progress U.S. programs are making toward achievement of interagency goals and objectives and (2) overall cost estimates and projected time frames for completion of U.S. radiation detection equipment assistance efforts to determine the amount of U.S. government resources required to achieve interagency goals and objectives and under what time frames these resources will be required. To the extent possible, account for all U.S.-funded radiation detection equipment provided to foreign governments, especially handheld equipment, by creating, maintaining, and sharing among all agencies a comprehensive list of such assistance. DOE and State agreed in general with our conclusions and recommendations. DOD had no written comments on our report. DOE, DOD, and State provided technical comments, which we incorporated as appropriate. In its comments, DOE wrote that it does not believe that our report adequately reflects the department’s efforts to maintain handheld radiation detection equipment provided by State and other agencies because DOE has a process in place to identify and replace handheld equipment used at sites where DOE maintains radiation portal monitors installed by State and other agencies. However, we believe that the extent of DOE’s program is fairly presented because this effort does not cover all handheld equipment previously provided by State and other agencies—only equipment at the selected sites visited by DOE’s maintenance teams is maintained. Further, the current operational status of the vast majority of handheld radiation detection equipment previously deployed by State and other agencies cannot be determined, in large part, because State has not maintained a comprehensive list of such equipment. In its comments, State disagreed with our lack of emphasis on the “informal coordination role played by the department’s front-line country program officers.” State considers informal consultations between these officials and their interagency counterparts to be the “primary means of coordination of its efforts concerning radiation detection equipment provisions.” State believes that such informal coordination is “much more important than coordination through the interagency working group or with State’s in-country advisors.” We have added language to our report noting the role of informal coordination in these programs. However, State’s emphasis on them as its primary means of coordinating radiation detection assistance programs conflicts with its own planning documents. In its Strategic Plan for Interagency Coordination of U.S. Government Nuclear Detection Assistance Overseas, State claims that “a standing sub- working group, the International Nuclear Detection Interagency Working Group, will routinely coordinate nuclear detection, interdiction, and investigation assistance provided by U.S. government agencies.” State’s plan emphasizes the role of the interagency working group and states that such coordination is “vital to the overall success of U.S. nuclear detection assistance efforts.” State’s plan does not, however, emphasize or even mention informal coordination mechanisms as a method for State’s coordination of U.S. radiation detection assistance programs. State also believes that its in-country advisors are unfairly criticized for not maintaining comprehensive lists of radiation detection equipment in countries where they are responsible. State cited competing claims on the advisors’ time, their many responsibilities within the EXBS program, and the limited resources at their disposal. However, State’s own guidance to its in-country advisors states that the advisors’ “general duties include…maintaining a record of the transfer of all U.S. government- provided nonproliferation export/border control equipment, and following- up to ensure that it is operational, being used for intended purposes at the locations previously specified by the recipient government, and in accordance with U.S. laws and policies.” 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. We will then send copies of this report to the Secretary of Energy; the Secretary of Defense; the Secretary of State; the Secretary of Homeland Security; the Administrator, National Nuclear Security Administration; the Director, Office of Management and Budget; and interested congressional committees. We also will make copies available to others upon request. In addition, the report will be made available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this report. Key contributors to this report include R. Stockton Butler, Julie Chamberlain, Nancy Crothers, Chris Ferencik, Gregory Marchand, and Jim Shafer. We performed our review of U.S. programs that provide radiation detection equipment assistance to foreign countries at the Departments of Energy (DOE), Defense (DOD), Homeland Security (DHS), and State (State) in Washington, D.C.; Los Alamos National Laboratory in Los Alamos, New Mexico; and Sandia National Laboratories in Albuquerque, New Mexico. Additionally, we also visited a “nonprobability” sample of six countries (Georgia, Greece, Macedonia, Russia, Ukraine, and Uzbekistan) where U.S. agencies have provided radiation detection equipment. We visited these six countries to observe U.S.-funded radiation detection equipment in operation and to discuss the implementation of U.S. programs with foreign officials. We determined which specific countries to visit based on several criteria, such as historic U.S. government spending to provide radiation detection equipment within that country; countries receiving radiation detection equipment from multiple U.S. agencies and programs; countries receiving significant amounts of handheld equipment; countries with an in- country advisor stationed at a U.S. Embassy; countries where DOE maintains radiation detection equipment previously installed by State and other U.S. agencies; the current political environment within the country; and our ability to travel from country to county within a reasonable amount of time. To address the progress U.S. programs have made in providing radiation detection equipment assistance to foreign countries, we reviewed documents and had discussions with officials from DOE’s Second Line of Defense “Core” (SLD-Core) program, Cooperative Radiological Instrument Transfer project, and International Nuclear Export Control program; DOE’s Office of General Counsel; and DOE’s private sector contractors—SI International, Tetra Tech/Foster Wheeler, Bechtel-Nevada, TSA Systems, and Miratek. We also reviewed documents and interviewed relevant officials from DHS’s Customs and Border Protection; State’s Export Control and Related Border Security (EXBS) program, Nonproliferation and Disarmament Fund, and Georgia Border Security and Law Enforcement program; DOD’s Weapons of Mass Destruction Proliferation Prevention Initiative (WMD-PPI), International Counterproliferation Program (ICP), and Defense Threat Reduction Agency; DOD’s private sector contractor—Washington Group International; Los Alamos National Laboratory; Sandia National Laboratories; and Oak Ridge National Laboratory. In addition, in October 2004, we visited Greece and Macedonia to interview Greek and Macedonian officials and to see U.S. radiation detection assistance provided in each country. In August 2005, we visited Georgia, Russia, Ukraine, and Uzbekistan to see where U.S. agencies have provided radiation detection equipment, to observe U.S.-funded radiation detection equipment in operation, and to discuss the implementation of U.S. programs with foreign officials. We also visited Belgium to meet with officials from the European Union to discuss radiation detection equipment assistance provided to foreign countries by that organization. During our visit to Greece, we spoke with Greek officials from the Greek Atomic Energy Commission; the Greek Ministry of Economy and Finance; and Customs Directorate General (Greek Customs Service). While in Greece, we toured two border crossings where DOE had installed radiation detection equipment through the SLD-Core program, SLD-Core installations at Athens International Airport, and a small research reactor in Athens that received physical security upgrades from DOE prior to the 2004 Olympic Games. While in Macedonia, we interviewed Macedonian officials and toured one border site where radiation detection equipment had previously been provided by the International Atomic Energy Agency and the Department of State. While in Russia, we spoke with officials from the Federal Customs Service of Russia, ASPECT (a Russian company that develops radiation detection equipment), and DOE officials responsible for implementing the SLD-Core program in Russia. During our visit to Russia, we toured DOE installations at three airports and one seaport, the Federal Customs Service Central Command Center where Russian Customs officials gather and respond to portal monitor alarm data, and the Federal Customs Service Training Academy in Saint Petersburg. While in Uzbekistan, we spoke with officials from DOD’s WMD-PPI program, Washington Group International, State and DOD officials at the U.S. Embassy in Tashkent, Uzbekistan’s Institute of Nuclear Physics, and the Uzbek State Customs Committee. While in Uzbekistan, we toured the Tashkent Airport and a land border crossing where DOD had provided radiation detection equipment assistance through the WMD-PPI program. We also toured a small research reactor in Uzbekistan that previously received physical security upgrades from DOE, such as barbed-wire fences and video surveillance cameras. During our visit to Georgia, we spoke with officials from State’s Georgia Border Security and Law Enforcement program, Department of Georgian State Border Defense, Georgia Border Security Coordinating Group, and Georgia’s Andronikashvili Institute of Nuclear Physics. We toured a land border crossing where State had previously provided radiation detection equipment and visited the Georgian Border Guard Training Academy. While in Ukraine, we spoke with DOE, DOD, and State officials at the U.S. Embassy in Kiev, Ukraine’s Border Security Coordinating Group, Ukraine’s Border Guard Service, and toured a land border crossing where State had previously provided radiation detection equipment that DOE currently maintains. We discussed coordination issues with U.S. in-country advisors stationed in countries receiving U.S. assistance, including Armenia, Azerbaijan, Georgia, Kazakhstan, Malta, Moldova, Poland, Romania, and Ukraine. We developed a structured interview guide with a standard set of questions, which we asked all of our interviewees. We designed our interview guide with the assistance of a GAO methodologist. The practical difficulties of asking questions may introduce other types of errors. For example, differences in how a particular question is interpreted or the sources of information available to respondents can introduce unwanted variability into the responses, so we included steps to minimize such errors. We pretested the content and format of the interview guide with two individuals and made minor changes as appropriate. We chose which specific in-country advisors to interview based on several criteria that include advisors who are stationed in the countries we would be visiting, advisors who are stationed in countries receiving significant amounts of radiation detection equipment from multiple U.S. agencies and programs, and advisors who are stationed in countries where DOE maintains radiation detection equipment previously installed by State and other U.S. agencies. Once we determined which specific advisors to interview, we created a list, which we then randomly ordered to provide an unbiased approach to conducting our interviews. Our goal was to talk with all the advisors on the list, but we knew that circumstances might prevent that so we used a randomized list to provide the order of contacting the advisors. We initiated contact with each advisor from this list, but if we could not establish contact with that advisor, we attempted to establish contact with the next advisor on our list. In some instances, we slightly modified our list due to unforeseen developments. For example, during our visit to the Republic of Georgia, we became aware of a Department of State project to install radiation detection equipment in Armenia opposite the Georgian border. Since this met our criteria for including a country in our pool of interviewees, we agreed it was appropriate, for the purposes of this review, to add Armenia. We then contacted the in-country advisor stationed in Armenia to learn more about this project. In addition, we removed the responses from the advisor in Russia from our total list of advisors because he failed to respond to more than half of our questions and stated that his role in coordinating this type of assistance in Russia is nonexistent because DOE, through its SLD-Core program, conducts and coordinates radiation detection assistance provided to Russia. Lastly, we interviewed the advisor responsible for overseeing implementation of U.S. assistance to the Republic of Georgia because Georgia has received radiation detection equipment in the past from multiple U.S. programs. To obtain responses to our structured interview questions, we generally used e-mail and phone interviews. However, during our visits to Georgia and Ukraine, we were able to meet with the in-country advisors to obtain responses to our questions. To assess the current and expected future costs of U.S. programs that provide radiation detection equipment assistance to foreign countries, we reviewed documents from DOE, DOD, State, and DHS detailing program expenditures, projected costs, and schedule estimates. We reviewed contract data for expenditures through the end of fiscal year 2005 and met numerous times with officials from DOE, DOD, State, and DHS to discuss the data. We obtained responses from key database officials to a number of questions focused on data reliability covering issues such as data entry access, internal control procedures, and the accuracy and completeness of the data. Follow-up questions were added whenever necessary. Caveats and limitations to the data were noted in the documentation where necessary. For example, in our discussions with the DOD official who manages its financial database, she stated that program support costs were prorated between WMD-PPI’s projects based on usage. Therefore, the expenditure amount added for the program support cost for Uzbekistan is a reasonable approximation but may not be exact. We determined that the data we received were sufficiently reliable for the purposes of this report based on work we performed. To identify challenges U.S. programs face in deploying and operating radiation detection equipment in foreign countries, we examined documents and spoke with officials from DOE, DOD, State, DHS, Los Alamos National Laboratory, Sandia National Laboratories, Washington Group International, and several nongovernmental entities, including the Transnational Crime and Corruption Center at American University. Additionally, during our visits to Georgia, Greece, Macedonia, Russia, Ukraine, and Uzbekistan we spoke with various foreign officials to better understand the challenges they face in operating radiation detection equipment provided by U.S. programs. We also attended a National Academies of Science conference on nonintrusive technologies for improving the security of containerized maritime cargo and the National Cargo Security Council conference on radiation detection and screening. To understand the steps U.S. programs take to coordinate radiation detection equipment assistance provided by multiple U.S. programs, we met with program officials from each of the agencies providing assistance and reviewed pertinent documents, including individual agency’s assistance plans and State’s Strategic Plan for Interagency Coordination of U.S. Government Nuclear Detection Assistance Overseas. We also assessed coordination through the interagency group headed by State and met with the lead official of that effort—the Director of Export Control and Cooperation—and members of his staff. We discussed coordination issues with U.S. advisors stationed in countries receiving U.S. assistance including Armenia, Azerbaijan, Georgia, Kazakhstan, Malta, Moldova, Poland, Romania, and Ukraine. Several of these advisors were responsible for tracking assistance efforts in more than one country. For example, the advisor stationed in Poland is also responsible for Estonia, Latvia, and Lithuania. Finally, we relied on our previous reviews of the U.S. nonproliferation programs within DOE, DOD, and State. At State, we interviewed the Coordinator of U.S. Assistance to Europe and Eurasia and met with officials from the Bureau of International Security and Nonproliferation. We also relied on related prior GAO reports. We performed our review from April 2005 to February 2006 in accordance with generally accepted government auditing standards. The Department of Energy’s (DOE) Second Line of Defense “Core” program provides comprehensive radiation detection equipment packages to foreign countries to combat nuclear smuggling. Its associated maintenance program focuses on maintaining equipment previously provided by the Department of State and other U.S. agencies. In addition, DOE implements another program within its Office of Global Threat Reduction that provides handheld radiation detection equipment to foreign countries. In 1998, DOE established the Second Line of Defense “Core” (SLD-Core) program, which has primarily worked to help Russia detect illicit nuclear materials trafficking by providing radiation detection equipment to the Federal Customs Service of Russia. DOE recently expanded its efforts in the SLD-Core program to include countries other than Russia. SLD-Core activities focus on providing radiation detection equipment, software and hardware communications equipment and support, and training/processes to foreign countries’ border sites. The radiation detection equipment DOE provides is U.S.-made, except in Russia where Russian-made equipment is installed. The communication systems DOE installs provide important information on the radiation detector alarms, such as the radiation profile of the substance detected. In addition to training at sites where equipment is installed, DOE provides other training courses at the Hazardous Materials Management and Emergency Response training center at Pacific Northwest National Laboratory. Through the end of fiscal year 2005, DOE’s SLD-Core program had completed installation of radiation portal monitors at 83 sites in Greece, Lithuania, and Russia at a cost of about $130 million. In fiscal year 2005, DOE planned to complete 29 sites in seven countries: Azerbaijan, Georgia, Kazakhstan, Russia, Slovenia, and Ukraine. However, due to delays in signing implementing agreements with the governments of some of these countries, many of these sites were not completed. As of December 2005, DOE had signed implementing agreements with Azerbaijan, Georgia, Slovenia, and Ukraine, and plans to commence work in these countries in fiscal year 2006 (see fig. 6). Additionally, the SLD-Core program will be installing radiation detection equipment at some foreign ports, referred to as “feeder” ports, to assist the work done by DOE’s Megaports Initiative. DOE has been cooperating with the Federal Customs Service of Russia since 1998, and, coupled with the large number of sites where Russia has installed equipment on its own, the nature of DOE’s work through the SLD- Core program in Russia is evolving. DOE is transitioning its activities in Russia from installation of new equipment to sustainability of equipment it has previously installed. DOE and the Federal Customs Service of Russia signed an agreement in April 2005 that details plans for the long-term sustainability of radiation detection equipment DOE has provided to Russia. DOE is also now supporting other activities in Russia, such as regional radiation alarm response exercises and rechecks of previously installed equipment. Through the end of fiscal year 2005, DOE spent about $66 million installing radiation portal monitors at 78 border sites in Russia, 4 sites in Greece, 1 site in Lithuania, and to conduct preliminary site assessments in other countries. DOE spent about $50 million on various program integration activities, which are costs not directly associated with installing equipment at a particular site within a specific country. Of this amount, about $15 million was spent on advanced equipment procurement activities, which include the purchase and storage of portal monitors and associated spare parts for use at future installations. DOE also spent almost $16 million on program oversight activities, such as program cost and schedule estimating, technical assistance provided by participating national laboratories, and translation services. In addition, DOE spent over $5 million to develop and maintain its prioritization model for the SLD-Core program, maintained by Los Alamos National Laboratory, which is used to rank foreign countries, as well as specific sites within a country, in terms of their attractiveness to a potential nuclear material smuggler. DOE also spent about $4 million on equipment testing and evaluation to test the effectiveness and performance of the radiation detection equipment that it provides through the program. DOE spent over $8 million on the development of materials and curricula for training foreign customs agents on the use of radiation detection equipment. Finally, DOE spent almost $2 million on other program integration activities. See figure 7 for more information on program integration expenditures. Other countries ($5.4) Program oversight ($16.1) Maintenance ($8.4) Other ($1.8) Equipment testing and evaluation ($3.9) Prioritization model ($5.1) Program integration costs ($50.2) Training ($8.4) Russia, Greece, and Lithuania ($65.5) Advanced equipment procurement ($15.0) In 2002, DOE assumed the responsibility for maintaining certain radiation detection equipment, such as radiation portal monitors and X-ray vans with gamma radiation detection capability, previously installed in 23 countries by State and other U.S. agencies (see fig. 8). Through the end of fiscal year 2005, DOE has successfully conducted maintenance and sustainability activities for this equipment in 21 of 23 countries. DOE contractors service these radiation portal monitors annually and X-ray vans biannually. Since 2002, DOE has spent about $8 million to provide spare parts, preventative maintenance, and repairs for this equipment. DOE anticipates that the future scope of the maintenance program will be reduced as the SLD-Core program expands into countries where equipment was previously installed by other U.S. agencies. If DOE is notified that there are problems with the radiation portal monitors in a certain country, they will add this repair onto a scheduled maintenance trip of a nearby country. According to the DOE maintenance contractor, this occurs 5-6 times a year. However, DOE officials often are not made aware of specific problems with equipment prior to arriving at the site to conduct regular servicing. As a result, DOE’s maintenance teams must be equipped with a wide variety of components in the event that major repairs are required. At times, maintenance teams have had to improvise temporary repairs for equipment due to a lack of necessary replacement parts. For example, during our visit to a border site in Ukraine, DOE’s maintenance team discovered that a truck had struck and damaged a pole holding the wiring for the radiation detection equipment’s communication systems. The truck’s impact caused the wiring to snap in numerous places. Because the maintenance team was unaware of this damage prior to our arrival at the site, it had to repair the cable using connectors rather than replacing the entire wire as they would have preferred to do. DOE officials told us that, during the next scheduled maintenance visit to this site, the wiring will be replaced. In 2004, DOE established the Cooperative Radiological Instrument Transfer project (CRITr) within its Global Threat Reduction Initiative. In this project, DOE partners with Interpol, which provides knowledge of foreign law enforcement to determine the countries to select for assistance and coordinates all CRITr training logistics within its member countries. Through the CRITr project, DOE collects and refurbishes handheld radiation detection devices deemed surplus by DOE national laboratories and provides this equipment to first responders in foreign countries. The handheld radiation detection equipment DOE provides through CRITr consists mostly of survey meters and does not include radiation pagers. In addition to providing radiation detection equipment through the CRITr project, DOE provides training for foreign officials on how to use the equipment. DOE originally provided assistance through the CRITr project in Greece by providing over 100 handheld radiation detection devices prior to the Olympic Games in 2004. According to DOE officials, in fiscal year 2004, with Interpol’s assistance, DOE selected seven additional countries to receive assistance through the project: Croatia, Kazakhstan, Kyrgyzstan, Poland, Romania, Turkey, and Uzbekistan (see fig. 9). DOE also provided radiation detection equipment to Tanzania in fiscal year 2005. Through the CRITr project, DOE spent almost $0.5 million in fiscal year 2004 and almost $0.6 million in fiscal year 2005, according to DOE officials. DOE has budgeted almost $0.4 million for fiscal year 2006 to supply instruments and training to law enforcement officials in Albania, Bosnia and Herzegovina, Bulgaria, Macedonia, Serbia and Montenegro, and Uganda and to provide additional equipment to Tanzania. The Department of Defense (DOD) implements two programs that assist other countries in combating nuclear smuggling: the Weapons of Mass Destruction Proliferation Prevention Initiative (WMD-PPI) and the International Counterproliferation Program (ICP). As figure 10 shows, DOD spent about $22 million on these programs between fiscal years 1994 and 2005. WMD-PPI was created as a project within the Cooperative Threat Reduction Program and is implemented by DOD’s Defense Threat Reduction Agency with oversight and policy guidance from the Office of the Undersecretary of Defense for Policy. In the 2003 National Defense Authorization Act, the Congress created WMD-PPI with a $40 million budget to prevent the proliferation of weapons of mass destruction (WMD) and related materials and technologies from the former Soviet Union. WMD-PPI seeks to accomplish this mission through three projects: the Uzbekistan Land Border project, the Caspian Sea Maritime Proliferation Prevention project in Azerbaijan and Kazakhstan, and the Ukraine Land and Maritime Border projects. In Uzbekistan, DOD is installing radiation portal monitors at 17 sites; 11 of which were completed by the end of fiscal year 2005. To date, WMD- PPI has spent over $6 million to install radiation portal monitors in Uzbekistan. However, this spending total is misleading because DOD has obligated over $19 million to three contracts for program costs associated with installing radiation detection equipment, such as communication systems and training. Because DOD only executes spending on these contracts after all work has been completed, these contracts were not paid in fiscal year 2005. DOD projects that the Uzbekistan Portal Monitoring project will cost about $54 million and be completed in fiscal year 2009. Once these portal monitors are installed in fiscal year 2006, DOE will maintain the equipment within its Second Line of Defense “Core” program. The Caspian Sea project focuses on improving command and control, surveillance, detection and interception of WMD, operation, and sustainability along the Caspian Sea border by providing training and associated equipment, including handheld radiation detection devices. In Azerbaijan, the project’s cost is estimated at $63.4 million and, in Kazakhstan, it is estimated at $60.6 million. In Ukraine, WMD-PPI is implementing a similar project along the Black Sea border. The Maritime Border Security Project in Ukraine is expected to cost over $39 million and will be finished in fiscal year 2009. The Ukrainian Land Border Forces Proliferation Prevention project focuses on securing the points of entry and the green border—border that is not a formal crossing point between countries—between Moldova and Ukraine. It seeks to improve Ukraine’s capabilities to detect and interdict WMD and related materials by providing equipment and training. Radiation detection equipment, such as pagers, is included in this equipment assistance. DOD expects this project will cost over $51 million and be completed in fiscal year 2008. The 1995 National Defense Authorization Act directed DOD and the Federal Bureau of Investigation to establish a program to improve efforts to deter the possible proliferation and acquisition of WMD and related materials across the borders and through the former Soviet Union, the Baltic region, and Eastern Europe. Similarly, the 1997 National Defense Authorization Act directed DOD to work with U.S. Customs to carry out programs to assist customs officials and border guards in those regions in preventing unauthorized transfer and transportation of WMD and related materials. DOD established ICP in response to these requirements. The program is implemented by the Defense Threat Reduction Agency. According to DOD officials, ICP policy guidance comes from DOD’s Eurasia Department because of its strong ties and contacts within the regional scope of the program. Through ICP, DOD provides a range of law enforcement and border security training and equipment, including handheld radiation detection equipment, to foreign law enforcement officials in participating countries. According to an ICP official, the program does not currently provide much radiation detection equipment because, in many countries, other U.S. programs have already provided such equipment. ICP coordinates with the Federal Bureau of Investigation to conduct training of foreign government personnel. In some participating countries, ICP provides both equipment and training, and in others it provides only training, depending upon the needs of the country. Through the end of fiscal year 2005, DOD had spent over $14 million to provide radiation detection equipment and radiation detection training to foreign countries through ICP. Of this amount, DOD spent over $0.5 million to provide handheld radiation detection equipment to six countries (see fig. 12). The remaining funds were spent on a variety of training related to radiation detection, WMD interdiction, and crime scene investigation. Figure 13 shows the flowchart of training DOD provides to participating countries through ICP. According to ICP officials, the program has worked in 23 countries, including Bosnia and Herzegovina, Bulgaria, Croatia, Serbia and Montenegro, Ukraine, and Uzbekistan. In the National Defense Authorization Act of Fiscal Year 2005, DOD was given permission by the Congress to expand ICP’s scope outside of the original region. According to a DOD official, ICP plans to initiate programs in Malaysia, Singapore, and Pakistan. Since fiscal year 1994, the Department of State (State) has provided various types of radiation detection equipment assistance to 31 foreign countries. State has provided this assistance, primarily through three programs (1) the Export Control and Related Border Security program (EXBS), (2) the Nonproliferation and Disarmament Fund (NDF), and (3) the Georgia Border Security and Law Enforcement program (GBSLE). As figure 14 shows, State spent about $25 million from fiscal year 1994 through fiscal year 2005 on radiation detection equipment assistance to foreign countries. State’s Export Control and Related Border Security program, which began in 1998, is a comprehensive U.S. government effort to help foreign countries improve their export controls and border security capabilities. The program provides a broad array of assistance to foreign countries, such as workshops to assist foreign countries draft and implement new export control laws and regulations, as well as various types of equipment and training for foreign border control agencies. Assistance provided through the program focuses on five core areas: (1) laws and regulations, (2) licensing, (3) enforcement, (4) government and industry cooperation, and (5) interagency cooperation and coordination. While the original focus of the program was to provide assistance to potential “source countries” in the former Soviet Union or to countries that produce munitions or dual-use items, State later expanded the program’s focus to include states on potential smuggling routes in Eastern and Central Europe, East Asia, Central Asia, the Caucasus, Latin America, and Africa, as well as potential “source countries” in South Asia and countries with major transshipment hubs in the Mediterranean, Middle East, and Southeast Asia. Through the end of fiscal year 2005, State has spent $15.4 million to provide a variety of radiation detection equipment assistance to 30 countries (see fig. 15). In addition, State also provided funding to the Department of Homeland Security’s (DHS) Customs and Border Protection (formerly known as U.S. Customs) to implement certain types of radiation detection equipment assistance on behalf of its Export Control and Related Border Security program. Specifically, from fiscal year 1999 through 2005, DHS and its predecessor organizations spent about $10.5 million to provide radiation detection equipment and training to 30 countries. This equipment included, among other things, radiation pagers that border officials wear on their belts and radioactive isotope identification devices. Training provided by DHS included assistance in operating the X-ray vans equipped with radiation detectors, hands-on instruction in using radiation detection equipment to detect nuclear smuggling, teaching techniques for investigating smuggling operations, and tracking the movements of smugglers between ports of entry. In addition, DHS also stationed 22 in- country advisors covering 25 countries, on behalf of the program, to assist in implementing and coordinating U.S. government assistance in these countries. In February 2005, State, through its EXBS program, assumed direct responsibility of the in-country advisors from DHS. According to State officials, this management change was done to better address coordination and responsiveness issues in the advisor program. In addition to providing radiation detection equipment assistance to foreign countries, State has also provided other types of assistance designed to better ensure the effectiveness of radiation detection equipment previously provided to foreign countries through U.S. programs. Specifically, in fiscal year 2005, State, through its EXBS program, spent about $1.5 million to fund construction of a national command center for the Federal Customs Service of Russia. Through this project, portal monitors located at various Russian border sites can be directly linked to a national command center, located at Federal Customs Service headquarters in Moscow. By doing so, alarm data can be simultaneously evaluated by Russian officials both at the site and up the chain of command, thus establishing redundant layers of accountability for responding to alarms. For example, when a portal monitor alarms at a specific land border site, airport, or seaport, information will immediately be sent from the site directly to the command center enabling Russian officials to identify which specific site an alarm occurred at, quickly analyze it, and respond appropriately. Prior to the initiation of this project, the Federal Customs Service did not have an effective way to coordinate and integrate all of the information at its borders. While the total scope of work to be done at the command center has not been clearly defined yet, State officials told us that the primary activity will be to maintain and respond to alarm data from the various border sites. State officials we spoke with stated that linking alarm data from the local alarm station at individual border sites to a centrally located command center will enhance Russia’s ability to (1) ensure that U.S. provided equipment is being properly operated, (2) mitigate the possibility of corruption or other nefarious acts being committed by its border guards, and (3) effectively respond to any alarms and/or seizures of illicitly trafficked nuclear or radiological materials. State’s Nonproliferation and Disarmament Fund spent approximately $9.1 million, from fiscal year 1994 through 2001, to provide various types of radiation detection equipment assistance to 21 countries (see fig. 16). This assistance included vehicle portal monitors, mobile vans equipped with X- ray machines and radiation detection equipment, handheld radiation detectors, dosimeters, and radiation pagers. For example, in fiscal year 2001, State approved a $1.3 million NDF project to install vehicle portal monitors at 16 sites in one country, and a $0.5 million project to assist another country’s upgrading its domestically produced portal monitors in order to better detect nuclear material. State also provided $0.8 million to DHS to provide radiation detection equipment and training to seven countries under a project called “Project Amber.” Of this amount, DHS spent $0.6 million to implement the project in these countries. In fiscal year 2001, State began to consolidate its assistance provided to foreign countries for the purposes of combating nuclear smuggling under its EXBS program. However, State officials told us that they have not yet determined whether or not they will fund any future projects to provide radiation detection equipment to foreign countries through NDF. As a result, it is uncertain how many other projects State will fund through NDF, in what countries these projects will be conducted, or how much they will cost. State’s Georgia Border Security and Law Enforcement program focuses on developing the Republic of Georgia’s border infrastructure by assisting the Georgian Customs Administration and Georgian Border Guards in gaining control of the country’s borders and seacoast and strengthening its border security against any type of crime. The program primarily focuses on establishing a transparent land border regime with Azerbaijan, Armenia, and Turkey and strengthening border security against nuclear smuggling. As such, the program has provided assistance to enhance the Georgian Border Guards’ capabilities to prevent, deter, and detect potential weapons of mass destruction smuggling. Through the program, State has provided a limited amount of radiation detection equipment assistance. Specifically, in fiscal year 1999, State spent $0.2 million to provide 137 radiation detection pagers to Georgia. According to State officials, no radiation detection equipment has been provided through the program since fiscal year 1999. However, State officials also told us that they have not yet determined if they will provide any additional radiation detection equipment assistance through the program to the Republic of Georgia in the future. As a result, it is uncertain what additional equipment State might provide or how much it will cost. Combating Nuclear Smuggling: DHS Has Made Progress Deploying Radiation Detection Equipment at U.S. Ports of Entry, but Concerns Remain. GAO-06-389. Washington, D.C.: March 14, 2006. Combating Nuclear Smuggling: Efforts to Deploy Radiation Detection Equipment in the United States and in Other Countries. GAO-05-840T. Washington, D.C.: June 21, 2005. Olympic Security: U.S. Support to Athens Games Provides Lessons for Future Olympics. GAO-05-547. Washington, D.C.: May 31, 2005. Preventing Nuclear Smuggling: DOE Has Made Limited Progress in Installing Radiation Detection Equipment at Highest Priority Foreign Seaports. GAO-05-375. Washington, D.C.: March 31, 2005. Weapons of Mass Destruction: Nonproliferation Programs Need Better Integration. GAO-05-157. Washington, D.C.: January 28, 2005. Customs Service: Acquisition and Deployment of Radiation Detection Equipment. GAO-03-235T. Washington, D.C.: October 17, 2002. Nuclear Nonproliferation: U.S. Efforts to Combat Nuclear Smuggling. GAO-02-989T. Washington, D.C.: July 30, 2002. Nuclear Nonproliferation: U.S. Efforts to Help Other Countries Combat Nuclear Smuggling Need Strengthened Coordination and Planning. GAO- 02-426. Washington, D.C.: May 16, 2002.

According to the International Atomic Energy Agency, between 1993 and 2004, there were 662 confirmed cases of illicit trafficking in nuclear and radiological materials. Three U.S. agencies, the Departments of Energy (DOE), Defense (DOD), and State (State), have programs that provide radiation detection equipment and training to border security personnel in other countries. GAO examined the (1) progress U.S. programs have made in providing radiation detection equipment to foreign governments, including the current and expected costs of these programs; (2) challenges U.S. programs face in this effort; and (3) steps being taken to coordinate U.S. efforts to combat nuclear smuggling in other countries. Since fiscal year 1994, DOE, DOD, and State have provided radiation detection equipment to 36 countries as part of the overall U.S. effort to combat nuclear smuggling. Through the end of fiscal year 2005, these agencies had spent about $178 million on this assistance through seven different programs. Primary among these programs is DOE's Second Line of Defense "Core" program, which has installed equipment mostly in Russia since 1998. U.S. efforts to install and effectively operate radiation detection equipment in other countries face a number of challenges including: corruption of some foreign border security officials, technical limitations of some radiation detection equipment, inadequate maintenance of some equipment, and the lack of supporting infrastructure at some border sites. DOE, DOD, and State officials told us they are concerned that corrupt foreign border security personnel could compromise the effectiveness of U.S.-funded radiation detection equipment by either turning off equipment or ignoring alarms. In addition, State and other agencies have installed equipment at some sites that is less effective than equipment installed by DOE. Since 2002, DOE has maintained the equipment but has only upgraded one site. As a result, these border sites are more vulnerable to nuclear smuggling than sites with more sophisticated equipment. Further, while DOE assumed responsibility for maintaining most U.S.-funded equipment, some handheld equipment provided by State and DOD has not been maintained. Lastly, many border sites are located in remote areas that often lack infrastructure essential to operate radiation detection equipment. As the lead interagency coordinator of all U.S. radiation detection equipment assistance overseas, State has taken some steps to coordinate U.S. efforts. However, its ability to carry out its role as lead coordinator is limited by shortcomings in the strategic plan for interagency coordination. Additionally, State has not maintained an interagency master list of all U.S.-funded radiation detection equipment overseas. Without such a list, program managers at DOE, DOD, and State cannot accurately assess if equipment is operational and being used as intended; determine the equipment needs of countries where they plan to provide assistance; or detect if an agency has unknowingly supplied duplicative equipment.

You are an expert at summarizing long articles. Proceed to summarize the following text: Patients receive infusion therapy for a variety of conditions, and physicians may determine that the home is an appropriate venue for treatment based on a particular patient’s condition and circumstances. Medicare covers and pays for a range of health care services, equipment, and drugs, and uses various payment systems. Over the last three decades, Congress has taken steps to address coverage of home infusion therapy. Patients may receive home infusion therapy for acute conditions, such as infections unresponsive to oral antibiotics or pain management (cancer- related or postsurgical), or for chronic conditions such as multiple sclerosis or rheumatoid arthritis. Prior to initiating infusion therapy in the home, physicians and home infusion providers first assess the appropriateness of home treatment for the needed drug therapy and for the patient’s condition. They then determine whether the patient is able to understand and carry out therapy procedures, and if the patient has family or other caregivers available to provide assistance. For certain therapies, such as antibiotic therapy, the patient or a family member may be taught to administer the drug. In these cases, a nurse would generally visit once or twice at the beginning of treatment, and then once per week throughout the course of treatment. Other therapies may require more frequent nursing care. The home setting is not appropriate for all patients receiving infusion therapy, for all conditions, or for all drugs. Many patients receive home infusion therapy following a hospital stay. The home infusion provider may provide any necessary skilled nursing services directly or may contract with a home health agency to do so. Some patients receive home infusion therapy for chronic conditions that may not require hospitalization; in these cases, a patient’s physician may order the therapy to be delivered by a home infusion provider after diagnosis. Outside of the home, patients may also receive infusion therapy in an independent infusion center, a physician’s office, or a hospital-based infusion clinic. Since it was established in 1965, the structure of Medicare and the benefits covered by the program have evolved. Currently, Medicare consists of four parts, A through D: Medicare Part A: Covers inpatient hospital stays, as well as skilled nursing facility care, hospice care, and home health care. To be eligible for covered home health services—which include skilled nursing care, physical therapy, and occupational therapy—a beneficiary must be homebound and have a home health plan of care approved by his or her physician. In 2008, approximately 3.2 million, or about 7 percent of all Medicare beneficiaries, received home health services. Medicare pays home health agencies that provide these services using a prospective payment system under which they receive a predetermined rate for each 60-day episode of home health care. The payment amounts are generally based on patient condition and service use. Medicare Part B: Provides optional coverage for hospital outpatient, physician, and other services, such as laboratory services. It also covers durable medical equipment (DME) and supplies, including infusion pumps and other equipment needed for infusion therapy. Medicare pays for many Part B services and supplies using fee schedules, and beneficiaries enrolled in Part B are generally responsible for paying monthly premiums as well as coinsurance for services they receive. Certain specified outpatient prescription drugs also are covered under Part B, including drugs needed for the effective use of DME. Part B drugs are generally paid based on a fee schedule; infusion drugs covered under the DME benefit are paid based on a different fee schedule than other Part B drugs. Medicare Part C: Since the 1970s, most Medicare beneficiaries have had the option to receive their Medicare benefits through private health insurance plans—now known as MA plans—under Medicare Part C. In 2008, nearly one out of every four Medicare beneficiaries was enrolled in an MA plan. MA organizations enter into contracts with CMS that require plans to cover Medicare Part A and B services. These organizations have flexibility in designing their plan benefit packages and may offer additional benefits. Medicare pays MA plans a fixed amount per beneficiary per month—based in part on the projected expenditures for providing Medicare-covered services—and adjusts payments to account for beneficiary health status. Medicare Part D: First offered in 2006, Medicare Part D provides optional coverage of outpatient drugs, including infusion drugs, to beneficiaries who enroll in prescription drug plans offered by private entities. Medicare beneficiaries may receive Part D drug coverage through stand- alone prescription drug plans or through MA plans that include drug coverage. Each Part D plan maintains a list of drugs it will cover—a formulary—that must meet certain criteria, and may organize those drugs into pricing groups or tiers. Part D plans contract with pharmacies to create a network of participating providers. Medicare makes subsidy payments to Part D plans, and most beneficiaries pay applicable premiums and cost sharing. Plans negotiate drug prices with drug manufacturers and pharmacies. As such, payment for a drug covered under Part D could be different than payment for the same drug were it covered under Part B. In general, Part D does not cover drugs for which payment is available under Parts A or B. Both home-based services and outpatient infusion therapy have been areas of concern for Medicare program integrity. Recently, the Department of Health and Human Services (HHS) and the Department of Justice have renewed attempts to reduce inappropriate utilization and fraudulent activities in these areas. According to an HHS official, CMS has completed demonstrations that involve strengthening the initial provider and supplier enrollment processes to prevent unscrupulous DME and home health care providers from entering the program. The demonstrations also incorporated criminal background checks of providers, owners, and managing employees into the provider enrollment process. In addition, CMS has found instances of infusion clinics and office-based practitioners billing Medicare for infusion services that were not medically necessary or were not actually provided. Despite the lack of a distinct benefit for home infusion therapy, Medicare policies have played a significant role in the development of the home infusion industry. Specifically, Medicare’s coverage of certain therapies— enteral and total parenteral nutrition (TPN)—in the home beginning in the late 1970s, and the subsequent implementation of prospective payment for Medicare inpatient hospital services in 1983, contributed to the rapid growth of the home infusion industry during the 1980s. Over the last three decades, Congress has taken steps to address expanding Medicare coverage of home infusion therapy. The Medicare Catastrophic Coverage Act of 1988 created a home infusion therapy benefit for all Medicare beneficiaries. The benefit would have provided comprehensive coverage of all the components of home infusion therapy, including intravenous drugs, equipment and supplies, and skilled nursing services when needed. The act called for a per diem fee schedule to pay for the supplies and services used in home infusion therapy and set forth qualifications for infusion providers. Before the provision became effective, however, it was repealed. At the request of the Senate Committee on Finance, the Office of Technology Assessment (OTA) conducted an extensive study of home infusion therapy, released in 1992. The study examined trends in the industry, the safety and efficacy of the technology, and the implications for Medicare coverage, including various coverage and payment options available at the time. OTA found that additional Medicare coverage of home infusion therapy might lead to lower payments to hospitals in some cases because of shorter stays and lower costs. Yet, OTA concluded that Medicare coverage of home infusion therapy could increase overall Medicare spending. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 expanded coverage of home infusion therapy significantly, in that home infusion therapy drugs were covered for beneficiaries enrolled in Part D plans beginning in 2006. Subsequently, CMS released guidance for Part D plan sponsors on their responsibilities in covering home infusion therapy drugs, which may be more complicated to dispense than oral medications. One element of the guidance stated that Part D plan sponsors should ensure that home infusion drugs are dispensed by network pharmacies in a usable form that can be readily administered in beneficiaries’ homes. In January 2009, members of the House and Senate introduced bills that would create a home infusion therapy benefit that provides comprehensive coverage for all Medicare beneficiaries. The proposed legislation called for coverage of infusion-related services, supplies, and equipment under Medicare Part B. The legislation also called for supplies and equipment to be paid through a set fee per day of service, while nursing services would be paid separately based on a fee schedule. Coverage of the drugs used in home infusions would be consolidated under Medicare Part D. Supporters of the legislation have asserted that providing comprehensive coverage of infusion therapy in the home would generate cost savings for the Medicare program, and that beneficiaries who would prefer having treatments at home could not afford it without Medicare coverage. However, concerns have been raised that additional coverage could add to the Medicare program’s growth in spending. Medicare FFS covers components of home infusion therapy in some circumstances. The extent of coverage depends on whether the beneficiary is homebound, as well as factors related to the beneficiary’s condition and treatment needs. For some homebound beneficiaries, Medicare FFS covers all the components of home infusion therapy, while other homebound beneficiaries have limited coverage. Non-homebound beneficiaries who have certain conditions and who require certain drugs and equipment are covered by Medicare FFS for some components of home infusion therapy. Other non-homebound beneficiaries have little or no coverage for home infusion therapy under Medicare FFS. Some Medicare FFS beneficiaries who are homebound—that is, generally confined to their homes and in need of nursing care on an intermittent basis—have coverage for all components of home infusion therapy. (See fig. 1.) Because these beneficiaries qualify for Medicare’s home health benefit, the skilled nursing services—such as training, medication administration, and assessment of the patient’s condition—as well as certain equipment and supplies used at home are covered. These services, equipment, and supplies are provided by or arranged for by a home health agency according to a physician’s plan of care. Any care coordination or clinical monitoring services needed with home infusion therapy would be provided by the home health nurse assisting the beneficiary at home or by the physician who ordered the therapy. The equipment and supplies covered for homebound beneficiaries include certain infusion pumps covered as DME and supplies such as intravenous and catheter supplies. Homebound beneficiaries who require other equipment, such as disposable infusion pumps, would not have coverage for those items, and therefore have limited coverage. Although coverage of drugs is specifically excluded under the home health benefit, coverage for infusion drugs may be obtained through other parts of the Medicare FFS program. For beneficiaries with certain conditions, certain drugs are considered supplies for needed equipment and are therefore covered under the DME benefit. In addition, infusion drugs may be covered for beneficiaries who are enrolled in Part D plans or have other prescription drug coverage. In 2008, approximately 90 percent of all Medicare beneficiaries had prescription drug coverage through Part D plans, retiree plans, or other sources. CMS requires Part D plans to ensure appropriate beneficiary access to commonly infused drugs or drug classes by including them in their formularies and making sure that multiple strengths and dosage forms are available for each covered drug. For non-homebound beneficiaries with certain conditions, Medicare Part B provides limited coverage of home infusion therapy. Specifically, the DME benefit covers certain equipment and associated drugs for beneficiaries with specified conditions, but does not cover other equipment and drugs or any skilled nursing services. (See fig. 2.) In 2008, about 50,000 Medicare FFS beneficiaries received home infusion therapy under this benefit, according to CMS analysis of claims data for covered infusion pumps. In addition, Medicare Part B expressly provides coverage for other home infusion drugs, such as intravenous immune globulin. Under the DME benefit, Medicare covers certain infusion pumps, as well as the infusion drugs that are considered supplies needed for the effective use of the infusion pump, for treatment of particular conditions as specified in national and local coverage policies. Medicare’s national coverage policy related to home infusion details several conditions for which pumps and certain drugs would be covered. The local coverage policies for home infusion outline additional circumstances in which pumps and drugs may be covered, and are required by CMS to be identical. One policy we reviewed listed about 30 specific drugs covered for certain conditions when treated using an external infusion pump. Examples of the limited circumstances in which infusion pumps and related drugs would be covered under the DME benefit include morphine administered by external infusion pump for beneficiaries with intractable pain caused by cancer, deferoxamine administered by external infusion pump for the treatment of acute iron poisoning and iron overload, and TPN administered by infusion pump for patients with a permanent, severe disease or disorder of the gastrointestinal tract. At the same time, national and local coverage policies explicitly exclude certain types of infusion pumps or drugs for certain conditions. For example, Medicare does not cover an implantable infusion pump for the treatment of diabetes because, according to CMS, data do not demonstrate that the pump would provide effective administration of insulin. Medicare coverage also excludes external infusion pumps used to administer vancomycin, a commonly infused antibiotic. According to CMS, this method of treatment is specifically excluded from coverage because of insufficient evidence that an external infusion pump—rather than a disposable pump or the gravity drip method—is needed to safely administer vancomycin. In addition, drugs administered through other methods, such as intravenous gravity drip, are not covered under the DME benefit. Non-homebound beneficiaries needing therapies not covered under Medicare Part B may have coverage of infusion drugs under Part D, but they lack coverage for the other components of home infusion therapy— skilled nursing services, equipment, and supplies. (See fig. 2.) Therefore, these non-homebound beneficiaries would need to seek treatment in another setting—such as a hospital, nursing home, or physician’s office— to have all of the components of infusion therapy covered. Under Part D, drug plans must ensure that certain requirements are met before drugs, including infusion drugs for administration at home, may be dispensed. Specifically, Part D plans must require that their contracted network pharmacies ensure that the other components of therapy are in place before dispensing home infusion drugs. Pharmacies may, in turn, seek assurances that another entity, such as a home health agency, can arrange for other needed services. The health insurers in our study told us that they provide comprehensive coverage of home infusion therapy under all of their commercial health plans and some MA plans. Most of these insurers use a combination of payment mechanisms that include a fee schedule for infusion drugs, a fee schedule for nursing services, and a bundled payment per day for therapy for all other services and supplies provided. The health insurers in our study told us that they provide comprehensive coverage of home infusion therapy under all of their commercial health plans and some MA plans. Most of them reported that they have covered infusion therapy at home for more than 10 years—one for more than 25 years—and that few or no members experienced problems with access to home infusion services. Spokespeople for these insurers generally anticipated more opportunities for home infusion therapy in the future, as more infusion drugs are developed and technology evolves to infuse them safely in the home. All of the health insurers told us that home infusion therapy coverage was comprehensive and available to all members under their commercial health plans. (See fig. 3 for a hypothetical example of how home infusion therapy might be covered under a commercial health plan.) They also told us that their commercial coverage policies have few or no limitations or exclusions on home infusion therapy, although coverage may be denied when the drug’s label specifies another setting as the appropriate venue, such as a hospital or physician’s office. Some insurers mentioned that chemotherapy infusions are rarely administered in the home. One insurer stated that infusion drugs for home use must have a low likelihood of adverse reaction, and that few chemotherapy drugs meet that criterion. Even when the home is a safe setting for such therapy, there may be other reasons to infuse chemotherapy drugs in another setting. For example, another insurer pointed out that cancer treatments might require blood tests prior to the infusion, and fewer supplies would be used if the patient had both the blood testing and the infusion in a physician’s office. Of the five health insurers that had MA plans, two said they provide comprehensive coverage of home infusion therapy for MA beneficiaries in the same manner as for their commercial plan members. The remaining three insurers told us that their MA plans’ policies generally follow Medicare FFS coverage. However, two of these insurers noted that their MA plans may extend coverage to non-homebound beneficiaries on a case- by-case basis. They said that while such MA beneficiaries may be able to leave their homes with little difficulty, it may not be practical for them to go to an outpatient department or infusion clinic three times a day to receive infusion therapy. In those cases, the MA plan might cover infusion therapy administered at beneficiaries’ homes. Nationwide, nearly one out of every five MA beneficiaries has comprehensive coverage of home infusion therapy through a bundle that includes drugs and associated supplies and services. CMS allows MA plans to cover infusion drugs as a Part C mandatory supplemental benefit—a benefit not covered by Medicare FFS, but available to every beneficiary in the plan—to better coordinate benefits for home infusion therapy under Parts C and D. According to CMS, allowing MA plans to cover infusion drugs in this way would also facilitate access to home infusion therapy— including drugs as well as the other needed components—and obviate the need for more costly hospital stays and outpatient services. CMS data show that programwide, roughly 5 percent of MA plans chose to cover infusion drugs as a supplemental benefit: 258 plans representing almost 20 percent of MA beneficiaries in 2009 and 224 plans representing more than 18 percent of MA beneficiaries in 2010. Of the insurers we interviewed, one offers comprehensive coverage in this manner. Health insurer officials we talked to asserted that infusion therapy at home generally costs less than treatment in other settings. Hospital inpatient care was recognized as the most costly setting. One insurer estimated that infusion therapy in a hospital could cost up to three times as much as the same therapy provided in the home. Another insurer reported that its infusion therapy benefit is structured to encourage beneficiaries to receive services at home rather than in a hospital inpatient or outpatient setting whenever possible. For example, members of that insurer’s health plans have no out-of-pocket costs for home infusion therapy. However, the relative costs of infusion therapy in physicians’ offices and infusion clinics compared to the home were less clear. For example, some health insurers stated that the cost of infusion therapy provided in an infusion center may be similar to the cost of treatment at home because nurses at infusion centers can monitor more than one patient at a time. At the same time, other insurers stated that infusion centers incur facility costs, such as rent and building maintenance, which could account for higher costs compared with home infusion. The home may not be the most cost-effective setting for infusion therapy in all cases, given the variability of patient conditions and treatment needs. An insurer noted, for example, that if a patient needs a onetime infusion rather than a longer term treatment, a physician’s office may be the least costly setting. Similarly, another insurer stated that it may not be cost- effective or practical for a patient to be treated at home if that patient requires more than two nursing visits a day—in such a case, treatment in an inpatient setting or nursing home might be more appropriate. Most of the health insurers we spoke with use a combination of methods to pay providers for the different components of home infusion. (See fig. 4 for an example of how a commercial health plan might pay for a typical home infusion case, as introduced in fig. 3.) For infusion drugs, they commonly use a fee schedule, which they update periodically—as frequently as quarterly. Depending on the particular plan and negotiations with individual infusion providers, insurers told us they develop payment amounts for drugs based on one or more of the following: Average wholesale prices (AWP) are list prices developed by manufacturers and reported to organizations that publish them in drug price compendia. There are no requirements or conventions that AWP reflect the price of an actual sale of drugs by a manufacturer. Average sales prices (ASP) are averages, calculated quarterly from price and volume data reported by drug manufacturers, of sales to all U.S. purchasers, net of rebates and other price concessions. Certain prices are excluded, including prices paid to federal purchasers and prices for drugs furnished under Part D. Under Medicare FFS, infusion drugs administered using a covered DME item are generally paid at 95 percent of the October 1, 2003 AWP. Wholesale acquisition costs (WAC) are manufacturer list prices to wholesalers or direct purchasers, not including discounts or rebates. The health insurers in our study reported using these pricing data in different ways. For one insurer, plans in some states base payments on ASP while plans in other states base payments on AWP. Another insurer reported that its MA plans pay for Part D drugs using AWP or WAC, and pay for Part B drugs using either AWP for in-network providers or ASP plus 6 percent for out-of-network providers. Most of the health insurers we spoke with also use a fee schedule to pay for nursing services. The nursing fee schedule generally contains one rate for the first 2 hours of care and another rate for each subsequent hour. According to industry officials, insurers may also provide extra payment for nurses traveling to remote areas or areas considered dangerous enough to require an escort. Nursing services generally are not required for every dose of an infused drug, and the need for such services may depend on the condition of the patient. To explore this, we asked our selected health insurers to estimate nursing costs for different hypothetical cases. For a typical 4-week antibiotic infusion therapy course, insurers estimated the cost of nursing services would range from $270 to $384. For TPN administered over 12 hours, once a day over 4 weeks, insurers’ estimates of the cost of nursing services ranged from $180 to $384. Most of the health insurers in our study pay for the other components associated with home infusion therapy using a bundled payment per day of therapy—known as a “per diem.” This daily rate may cover services, such as pharmacy services, equipment and supplies, and care coordination. The per diem payment amount is based on the type of therapy provided and varies depending on the complexity and frequency of the treatment. For example, the per diem payment for a simple infusion administered once a day might be $75, whereas the per diem for a daily complex infusion with multiple drugs might be $225. Two of the health insurers we spoke with noted that the industry is trending toward greater use of bundled payments, with more services and supplies incorporated into a single rate. For one common home infusion therapy—TPN—the per diem also includes the standard drug costs. Asked about the costs of a typical monthlong course of TPN, insurers estimated total costs ranging from about $3,400 to $5,500, and noted that the per diem payments accounted for more than 90 percent of these costs. Some health insurers we interviewed stated that the infusion drug is generally the most expensive component of home infusion therapy, while others reported most home infusion drugs were among the least expensive, such as generics. Some insurers reported that many of the infusion drugs they cover are specialty drugs that cost more than $600 a month. Other drugs would cost less. For example, for a typical case of a month of antibiotic infusion therapy, a health plan could pay a home infusion provider $300 for the drugs, $350 for nursing services, and $2,000 for the per diem. One insurer told us that the pace of development in specialty infusion drugs is accelerating, which could add to home infusion therapy costs. Most of the health insurers in our study—both commercial and MA plans—use standard industry practices to manage utilization of home infusion and ensure quality of services for their members. None of the insurers reported significant problems with improper payments for home infusion therapy services. While none of the insurers identified significant quality of care problems related to home infusion therapy, they all employ certain practices to help ensure care delivered meets quality standards. Most health insurers we interviewed use two standard industry practices—prior authorization, postpayment claims review, or both—to manage utilization of home infusion therapy for their members. To obtain prior authorization, providers must request and receive approval from the health plan before the therapy is covered. The plan typically requires providers to submit patient information in advance to support a request for coverage and receive payment authorization. With postpayment review, once a claim has been processed, the plan determines if it was billed and paid appropriately, and if not, the plan may seek a refund or adjust future payments. Generally, a health plan auditor would review a sample of claims to see if the patients had medical conditions for which the proposed treatment was required. None of the insurers reported significant problems with improper payments for home infusion therapy. Most of the insurers we interviewed use prior authorization to curb inappropriate use of home infusion therapy. Some insurers stated that prior authorization is particularly effective in managing the use of more costly infusion drugs. Some insurers stated that their plans limit their prior authorization requirement to certain home infusion therapies and drugs. For example, certain hemophilia drugs may require prior authorization because they are expensive and patient needs vary substantially. Additionally, insurers may require prior authorization for immune globulin, checking that patients’ medical conditions indicate use of the drug. In contrast, one home infusion expert told us that prior authorization has little utility for this type of therapy because home infusion providers would incur too much liability risk if they treated patients who were not appropriate for that setting. The denial rates for prior authorization requests are reportedly low. A common reason given for denial of a prior authorization request was that the therapy did not meet medical necessity requirements. Specifically, the requested coverage may be for a treatment of longer than the recommended duration or for a type of narcotic that may not be safe for administration in the home. Another common reason cited for prior authorization denials was insufficient documentation from the prescribing physician. Insurers also cited denials for drugs prescribed for off-label use—that is, for conditions or patient populations for which the drug has not been approved, or for use in a manner that is inconsistent with information in the drug labeling approved by the Food and Drug Administration. An insurance official stated that some conditions that are difficult to treat or diagnose do not have a universally accepted treatment approach. For example, two insurers cited denials for requests to treat Lyme disease with long antibiotic courses that were not supported by medical evidence. Most health insurers we interviewed use postpayment claims review, some in addition to prior authorization, to manage the use of home infusion therapy. One insurer considered postpayment review the practice most effective in deterring inappropriate use of home infusion therapy. Such reviews may have a sentinel effect, meaning that providers who have erroneous claims returned may be less likely to submit such claims in the future. That insurer and an industry expert also noted the importance of developing very specific reimbursement guidelines for providers. An industry expert recommended guidelines at the dosage and package level, noting that a single infusion drug may be used for many different diagnoses, with a different dosage regimen for each diagnosis, and different package sizes from different manufacturers. For example, to reduce wasteful spending, reimbursement guidelines could include the specific package sizes that are covered for products that cannot be reused after they are opened. While none of the health insurers we spoke with identified significant quality problems related to home infusion therapy, they all employ certain practices to help ensure that their members receive quality care. These include developing a limited provider network of infusion pharmacies and home health agencies, requiring provider accreditation, coordinating care among providers, and monitoring patient complaints. Most health insurers we interviewed create a network by contracting with a set of home infusion providers and suppliers that meet certain participation criteria, such as adherence to specified industry standards and licensure. One insurer’s participation criteria contain a set of standards, including staffing requirements, guidelines for patient selection, and the ability to initiate therapy within 3 hours of a referral call. The infusion providers that insurers include in their networks range in size and may include large national chain providers and stand-alone local home infusion providers. Health insurers told us they rely on credentialing, accreditation, or both to help ensure that plan members receive quality home infusion services from their network providers. Home infusion accrediting organizations conduct on-site surveys to evaluate all components of the service, including medical equipment, nursing, and pharmacy. The three accreditation organizations in our study reported that their standards include CMS Conditions of Participation for home health services, other government regulations, and industry best practices. All of their accreditation standards evaluate a range of provider competencies, such as having a complete plan for patient care, response to adverse events, and implementation of a quality improvement plan. According to accreditation organizations we interviewed, an increasing number of providers are seeking home infusion-specific accreditation. One insurer told us that home infusion has minimal quality issues due to strong oversight of pharmacies through state and federal regulation and by accrediting institutions. Accrediting organizations identified unique safety and quality factors that must be considered when providing infusion therapy in the home setting. First, home infusion providers must carefully evaluate the willingness and ability of the patient, caregiver, or both to begin and continue home therapy. Because infusion drugs are administered directly into a vein, the effect of a medication error is greater and faster in infusion therapy than with oral treatments. Providers must therefore also take steps to ensure that patients can recognize the signs and symptoms of an emergency. Second, providers must ensure that patients have the appropriate infrastructure in the home to store equipment, drugs, and supplies, and to provide the therapy. Needed infrastructure often includes a refrigerator to store infusion drugs and sometimes safeguards to protect patients’ drugs and supplies, particularly in the case of controlled substances such as narcotics. Home infusion providers must have emergency support services available 24 hours a day, 7 days a week in case of an adverse drug reaction or to troubleshoot any problems with equipment, such as infusion pumps. Officials from one accrediting organization told us that they also expect infusion providers to have plans in place to deal with other types of emergencies, such as a natural disaster. While officials from accrediting organizations did not report any pervasive quality issues, they described several common problems among home infusion providers that demonstrate the complexity of the treatment. Home infusion providers may not have staff with the appropriate training and competencies, which may be a challenge for small organizations. Also, they may inadequately coordinate care for patients who receive multiple medications and have multiple physicians. Furthermore, home infusion providers may not always meet documentation and planning requirements for accreditation. For example, officials from one accrediting organization stated that the top two deficiencies for infusion companies are incomplete plans of care and a lack of a comprehensive quality improvement program. In addition, home infusion providers may find it challenging to meet some technical standards, including pharmaceutical requirements. An accrediting official observed that some infusion pharmacies are still learning to comply with recent industry standards for combining ingredients or other processes to create a drug in a sterile environment. Poor procedures to track recalled items is another common technical deficiency for home infusion providers. Providers generally have recall processes for medications, but sometimes not for every item used in the provision of care, as required by that accreditation organization. Communication and coordination of care between multiple entities is particularly important for this type of treatment. Several of the insurers we interviewed have processes to coordinate care for home infusion therapy and told us that they take responsibility for that function. Others rely on the patient’s physician, home infusion provider, discharging facility, or a combination of these to coordinate care. Two of the health insurers use the prior authorization process to coordinate care, as case managers initiate contact with the member and home infusion provider and follow up throughout the duration of the therapy. In addition to policies and procedures related to quality, all of the health insurers and accreditation organizations we interviewed have a process for addressing patient complaints. None of the health insurers told us that they have received significant complaints related to home infusion. One insurer cited a case in which a specialty pharmacy had diluted drug doses, and suggested that such problems concerning the quality and integrity of drugs could be overcome with information technology, such as bar coding of drugs. Due to the limited coverage of home infusion therapy under Medicare FFS and some MA plans, non-homebound beneficiaries would need to obtain treatment in alternate and potentially more costly settings—such as a hospital, outpatient department, or physician’s office—to have all of the components of infusion therapy covered. All of the health insurers in our study provide comprehensive coverage of home infusion therapy for all members in their commercial health plans, and some do so in their MA plans as well. Health insurers contend that the benefit has been cost- effective, that is, providing infusion therapy at home generally costs less than treatment in other settings. They also contend that the benefit is largely free from inappropriate utilization and problems in quality of care. Given the long and positive experience health insurers reported having with home infusion therapy coverage, further study of potential costs, savings, and vulnerabilities for the Medicare program is warranted. The Secretary of HHS should conduct a study of home infusion therapy to inform Congress regarding potential program costs and savings, payment options, quality issues, and program integrity associated with a comprehensive benefit under Medicare. We obtained comments on a draft of this report from HHS and from the National Home Infusion Association, a trade group representing organizations that provide infusion and specialized pharmacy services to home-based patients. HHS provided written comments, which are reprinted in appendix I. Officials from the trade association provided us with oral comments. HHS stated that Medicare covers infusion therapy in the home for beneficiaries who are receiving the home health benefit; other beneficiaries have access to infusion therapy in alternate settings, such as hospitals, outpatient departments, and physician offices. HHS noted that adding home infusion therapy as a distinct Medicare benefit would require a statutory change, and suggested we modify our recommendation to recognize statutory authority would be required. To make this more clear, we have rephrased our recommendation for executive action. National Home Infusion Association officials stated that few beneficiaries, even among those who are homebound, receive infusion therapy outside their homes due to the gaps in Medicare FFS coverage. They told us that Medicare FFS does not cover care coordination and clinical monitoring services when performed by infusion pharmacists—the providers most familiar with infusion drugs and treatment regimens. The officials said that homebound beneficiaries, therefore, would not receive infusion therapy in their homes without having supplemental coverage or paying out-of- pocket for services provided by an infusion pharmacist. However, CMS officials reported that infusion therapy in the home is largely provided through home health agencies, which are responsible for meeting a range of beneficiaries’ care needs. These agencies may perform care coordination and clinical monitoring functions themselves or arrange for these services from an independent infusion provider, according to CMS and a home health provider organization. In either case, these services are covered and paid for under the Medicare home health benefit. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Health and Human Services, the CMS Administrator, and interested congressional committees. The report also will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 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 members who made major contributions to this report are listed in appendix II. In addition to the contact named above, Rosamond Katz, Assistant Director; Jennie F. Apter; Jessica T. Lee; Drew Long; Kevin Milne; and Julie T. Stewart made key contributions to this report.

Infusion therapy--drug treatment generally administered intravenously--was once provided strictly in hospitals. However, clinical developments and emphasis on cost containment have prompted a shift to other settings, including the home. Home infusion requires coordination among providers of drugs, equipment, and skilled nursing care, as needed. GAO was asked to review home infusion coverage policies and practices to help inform Medicare policy. In this report, GAO describes (1) coverage of home infusion therapy components under Medicare fee-for-service (FFS), (2) coverage and payment for home infusion therapy by other health insurers--both commercial plans and Medicare Advantage (MA) plans, which provide a private alternative to Medicare FFS, and (3) the utilization and quality management practices that health insurers use with home infusion therapy benefits. To do this work, GAO reviewed Medicare program statutes, regulations, policies, and benefits data. GAO also interviewed officials of five large private health insurers that offered commercial and MA plans. The extent of Medicare FFS coverage of home infusion therapy depends on whether the beneficiary is homebound, as well as other factors related to the beneficiary's condition and treatment needs. Some Medicare FFS beneficiaries who are homebound have comprehensive coverage of home infusion therapy, which includes drugs, equipment and supplies, and skilled nursing services when needed. For non-homebound beneficiaries with particular conditions needing certain drugs and equipment, Medicare FFS coverage of home infusion is limited to the necessary drugs, equipment, and supplies, and excludes nursing services. For other non-homebound beneficiaries, Medicare FFS coverage is further limited; infusion drugs may be covered for those enrolled in a prescription drug plan, but neither equipment and supplies nor nursing services are covered. These non-homebound beneficiaries would need to obtain infusion therapy in a hospital, nursing home, or physician's office to have all therapy components covered. The health insurers in GAO's study provide comprehensive coverage of home infusion therapy under all of their commercial plans. Some insurers also provide comprehensive coverage under their network-based MA plans, which may provide benefits beyond those required under Medicare FFS. Nationwide, nearly one out of every five MA beneficiaries has comprehensive coverage through an MA plan that has chosen to cover home infusion therapy as a supplemental benefit. To pay providers of home infusion therapy, most of the insurers in GAO's study use a combination of payment mechanisms. These include a fee schedule for infusion drugs, a fee schedule for nursing services, and a bundled payment per day of therapy for all other services and supplies. Most of the health insurers in GAO's study use standard industry practices to manage utilization of home infusion therapy and ensure quality of care. Specifically, most health insurers require that infusion providers submit patient information in advance to support a request for coverage and receive payment authorization. Also, health insurers may review samples of claims postpayment to determine if claims were billed and paid appropriately. None of the insurers in GAO's study stated that they have had significant problems with improper payments or quality for home infusion therapy services. In addition, health insurers reported taking various steps to ensure the quality of services delivered in the home. These included developing a limited provider network of infusion pharmacies and home health agencies, requiring provider accreditation, coordinating care among providers, and monitoring patient complaints. In commenting on a draft of this report, the Department of Health and Human Services stated Medicare covers infusion therapy at home for beneficiaries receiving the home health benefit, while other beneficiaries have access to infusion therapy in alternate settings. The Department suggested GAO reword its recommendation to clarify that a change to Medicare benefits would require statutory authority, and GAO has done so.

You are an expert at summarizing long articles. Proceed to summarize the following text: The Workforce Investment Act created a new, comprehensive workforce investment system designed to change the way employment and training services are delivered. When WIA was enacted in 1998, it replaced the Job Training Partnership Act (JTPA) with three new programs—Adult, Dislocated Worker, and Youth—that allow for a broader range of services to the general public, no longer using income to determine eligibility for all program services. These new programs no longer focused exclusively on training, but provided for three tiers, or levels, of service for adults and dislocated workers: core, intensive, and training. Core services include basic services such as job searches and labor market information. These activities may be self-service or require some staff assistance. Intensive services include such activities as comprehensive assessment and case management, as well as classes in literacy, conflict resolution, work skills, and those leading to general equivalency diploma (GED)—activities that require greater staff involvement. Training services include such activities as occupational skills or on-the-job training. These tiers of WIA-funded services are provided sequentially. That is, in order to receive intensive services, job seekers must first demonstrate that core services alone will not lead to getting a job that will provide self-sufficiency. Similarly, to receive training services, a job seeker must show that core and intensive services will not lead to such a job. Unlike prior systems, WIA requires that individuals eligible for training under the Adult and Dislocated Worker Programs receive vouchers—called Individual Training Accounts—which they can use for the training provider and course offering of their choice, within certain limitations. In addition to establishing the three new programs, WIA requires that services for these programs, along with those of a number of other employment and training programs, be provided through a single service delivery system—the one-stop system. States were required to implement these changes by July 1, 2000. Sixteen categories of programs from four separate federal agencies must provide services through the system. (See table 1.) Each local area must have at least one comprehensive one-stop center where core services for all mandatory programs are accessible. WIA allows flexibility in the way these mandatory partners provide services through the one-stop system, allowing colocation, electronic linkages, or referrals to off-site partner programs. While WIA requires these mandatory partners to participate, it does not provide additional funds to operate one- stop systems and support one-stop partnerships. As a result, mandatory partners are expected to share the costs of developing and operating one- stop centers. In addition to mandatory partners, one-stop centers have the flexibility to include other partners in the one-stop system to better meet specific state and local workforce development needs. Services may also be provided at affiliated sites, defined as designated locations that provide access to at least one employment and training program. About $3.3 billion was appropriated in fiscal year 2006 for the three WIA programs—Adult, Dislocated Worker, and Youth. The formulas for distributing these funds to the states were left largely unchanged from those used to distribute funds under the predecessor program, JTPA, and are based on such factors as unemployment rates and the relative number of low-income adults and youth in the population. In order to receive their full funding allocations, states must report on the performance of their three WIA programs. WIA requires that performance measures gauge program results in the areas of job placement, retention, earnings, skill attainment and customer satisfaction, largely through the use of Unemployment Insurance (UI) wage records. Labor’s guidance requires that job seekers be tracked for outcomes when they begin receiving core services that require significant staff assistance. States are held accountable by Labor for their performance and may receive incentive funds or suffer financial sanctions based on whether they meet performance levels. WIA requires states to negotiate with Labor to establish expected performance levels for each measure. While WIA established performance measures for the three WIA-funded programs, it did not establish any comprehensive measures to assess the overall performance of the one-stop system. Seven years after the implementation of the workforce investment system under WIA, the system’s infrastructure continues to evolve. Nationwide, the number of comprehensive one-stop centers has decreased somewhat, but not uniformly across states. States generally reported increased availability of services for some of the mandatory programs at comprehensive one-stop centers. But despite WIA’s requirement that all mandatory partners provide services through the one-stop system, some states have maintained a completely separate system for delivering services for Wagner-Peyser-funded Employment Services (ES). Adults and dislocated workers receive a wide range of services through the one-stop system, but states and local areas have generally focused their youth services on in-school youth, finding it difficult to recruit and retain out-of- school youth. Most medium and large employers are aware of and use the system and are quite satisfied with its services, but they generally use one- stop centers to fill their needs for low-skilled workers. WIA’s service delivery infrastructure has continued to evolve since we last reviewed it in 2001. Over the 6-year period, nationwide, the number of one- stop centers—both comprehensive and satellite—has declined, a fact that states most often attributed to a decrease in funding. The number of comprehensive centers declined from a high of 1,756 in 2001 to 1,637 in 2007. However, this trend is not uniform across states. Ten states reported an increase in comprehensive centers over the last 4 years. For example, Montana reported a 600 percent increase in centers as part of a statewide restructuring of its one-stop delivery system that involved converting former satellite and affiliated sites into comprehensive one-stop centers. States that reported an increase in the number of comprehensive one-stop centers often cited a rise in demand for services as the reason for the increase. Services for mandatory programs are increasingly available through the one-stop system in 2007, though not always on-site. States continue to have services for two key programs—WIA Adult and Dislocated Workers—available on-site at the majority of the one-stop centers. In addition, 30 states reported that TANF services were generally available on-site at a typical comprehensive one-stop center, and 3 more states reported they were typically on-site at satellites. The on-site availability of some other programs—such as, Job Corps, Migrant and Seasonal Farmworkers, Senior Community Service and Employment Program, and Adult Education and Literacy—declined slightly between 2001 and 2007. However, the overall availability of these programs’ services increased, largely because of substantial increases in access through electronic linkages and referrals. Despite the increased availability of some programs at one-stop centers, some states have not fully integrated all of their Wagner-Peyser-funded Employment Service into the system. Six states reported in our 2007 survey that they operate stand-alone Employment Service offices, all completely outside the one-stop system. Another four states reported having at least some stand-alone offices outside the system (see fig. 1). At the same time, states that operate stand-alone offices also report providing services on-site at the majority of their one-stops. Labor has expressed concern that stand-alone Employment Service offices cause confusion for individuals and employers and promote duplication of effort and inefficient use of resources. Given the concern over resources, we asked states to provide estimates of their state’s total Employment Service allotment that was used to support the infrastructure of the stand-alone offices. Only 6 states could provide them, and the overall average was about 5 percent. However, the state with the most stand-alone ES offices reported that it had not used any of its ES allotment to support the infrastructure of these offices. Instead, this state financed the infrastructure costs of its 30 stand-alone offices with state general funds. Despite their concerns, Labor officials say that they lack the authority to prohibit stand-alone ES offices. While most states used multiple program funds to finance the operation of their one-stops, WIA and ES continue to be the two programs most often cited as funding sources used to cover one-stop infrastructure—or nonpersonnel—costs. In program year 2005, the most recent year for which data are available, 23 states reported that WIA was the top funding source used to support infrastructure, while 19 states identified the Employment Service. Of the eight states remaining, three cited TANF as the top funding source, two cited Unemployment Insurance, one cited WIA state funds, and two states could not provide this information. States reported less reliance on other programs to fund the one-stop infrastructure in 2005 than in the past (see table 2). For example, the number of states that reported using TANF funds at all to cover infrastructure costs declined from 36 to 27. WIA provides the flexibility to states and local areas to develop approaches for serving job seekers and employers that best meet local needs. In our work we have found some broad trends in services, but there continues to be wide variation across the country in the mix of services and how they are provided. Local areas use a substantial portion of their WIA funds to provide training to adults and dislocated workers, but use even more to provide the services that go beyond training, including case management, assessment, and supportive services. However, serving youth, particularly out-of-school youth, has proven challenging. WIA increased the focus on the employer as customer, and we found that most medium and large employers are aware of and use the one-stop. However, employers look to the one-stop system mostly to help fill their needs for low-skilled workers, in part because they assume that most workers available through the system are low-skilled. Services to adults and dislocated workers involve more than training. Despite early concerns about the extent of training, we found that substantial WIA funds were being used to fund training. Local boards used about 40 percent of the approximately $2.4 billion in WIA funds they had available in program year 2003 to provide training services to an estimated 416,000 WIA participants, primarily in occupational skills. However, the vast majority of job seekers receive self-assisted core services, not training. Not everyone needs or wants additional training. And even when they do, they need help deciding what type of training would best match their skill level while at the same time meet local labor market needs— help that includes information on job openings, comprehensive assessments, individual counseling, and supportive services, such as transportation and child care. Of the funds available in program year 2003, 60 percent was used to pay for these other program costs, as well as to cover the cost of administering the program. Providing services to youth has been challenging for local areas. Local areas often focus their WIA youth resources on serving in-school youth, often using a range of approaches to prevent academic failure and school dropouts. Out-of-school youth are viewed as difficult to serve, in part because they are difficult to locate in the community and they face particularly difficult barriers to employment and education, including low levels of academic attainment, limited work experience, and a scarcity of jobs in the community. The 5-year Youth Opportunity Grants program, authorized under WIA was designed, in part, to enhance the local infrastructure of youth services, particularly in high-poverty areas. Grantees offered participants a range of youth services—education, occupational skills training, leadership development, and support services. They set up centers that varied widely. To reach the hard-to-serve target population, grantees used a variety of recruiting techniques, ranging from the conventional to the innovative. For example, some grantees conducted community walking campaigns using staff to saturate shopping malls and other areas where youth congregate. Conditions in the communities such as violence and lack of jobs presented a challenge to most grantees, but they took advantage of the local discretion built into the program to develop strategies to address them. Grantees and others reported that the participants and their communities made progress toward the education and employment goals of the program. However, a formal assessment of the program’s impact, while under way, has not yet been released by Labor. Although Labor originally planned to continue to add grantees, funding for the program was eliminated in the budget for fiscal year 2004. Employers mostly use one-stop centers to fill their needs for low-skilled workers. Most medium and large employers are aware of and use the system and are satisfied with its services (see fig 2). Regardless of size, just over 70 percent of employers responding to our 2006 survey reported that they hired a small percentage of their employees—about 9 percent— through one-stops. Two-thirds of those they hired were low-skilled workers, in part because they thought the labor available from the one- stops was mostly low-skilled. Employers told us they would hire more job seekers from the one-stop labor pools if the job seekers had the skills for which they were looking. Most employers used the centers’ job posting service, fewer made use of the one-stops’ physical space or job applicant screening services. Still, when employers did take advantage of services, they generally reported that they were satisfied with the services and found them useful because they produced positive results and saved them time and money. When employers did not use a particular one-stop service, in most cases they said that they either were not aware that the one-stop provided the service, or said they obtained it elsewhere, or said that they carried through on their own. Despite the successes state and local officials have had since WIA’s implementation, some aspects of the law and other factors have hampered their efforts. First, funding issues continue to stymie the system. For example, the formulas in WIA that are used to allocate funds to states do not reflect current program design and have caused wide fluctuations in funding levels from year to year. In addition, Labor’s focus on expenditures without including obligations overestimates the amount of funds available to provide services at the local level. Second, the performance measurement system is flawed and little is known about what WIA has achieved. Labor has taken some steps to improve guidance and communication, but does not involve key stakeholders in the development of some major initiatives and provides too little time for states and local areas to implement them. As states and localities have implemented WIA, they have been hampered by funding issues, including statutory funding formulas that are flawed. As a result, states’ funding levels may not always be consistent with the actual demand for services. In previous work, we identified several issues associated with the current funding formulas. First, formula factors used to allocate funds are not aligned with the target populations for these programs. Second, allocations may not reflect current labor market conditions because there are time lags between when the data are collected and when the allocations become available to states. Third, the formula for the Dislocated Worker program is especially problematic, because it causes funding levels to suffer from excessive and unwarranted volatility unrelated to a state’s actual layoff activity. Several aspects of the Dislocated Worker formula contribute to funding volatility and to the seeming lack of consistency between dislocation and funding. The excess unemployment factor has a threshold effect—states may or may not qualify for the one-third of funds allocated under this factor in a given year, based on whether or not they meet the threshold condition of having at least 4.5 percent unemployment statewide. In a study we conducted in 2003, we compared dislocation activity and funding levels for several states. In one example, funding decreased in one year while dislocation activity increased by over 40 percent (see fig. 3). This volatility could be mitigated by provisions such as “hold harmless” and “stop gain” constraints that limit changes in funding to within a particular range of each state’s prior year allocation. The Adult formula includes such constraints, setting the hold harmless at 90 percent and the stop gain at 130 percent. In addition to issues related to funding allocation, the process used to determine states’ available funds considers only expenditures and does not take into account the role of obligations in the current program structure. Our analysis of Labor’s data from program year 2003 and beyond indicates that states are spending their WIA funds within the authorized 3-year period. Nationwide, states spent over 66 percent of their program year 2003 WIA funds in the first year—an increase from the 55 percent since our 2002 report. In fact, almost all program funds allocated in program year 2003 were spent by states within 2 years. By contrast, Labor’s estimate of expenditure rates suggests that states are not spending their funds as quickly because the estimate is based on all funds states currently have available—from older funds carried in from prior program years to those only recently distributed. Moreover, many of the remaining funds carried over may have already been obligated—or committed through contracts for goods and services for which a payment has not yet been made. When we examined recent national data on the amount of WIA funds states are carrying in from previous program years, we found that, overall, the amount of carryover funds is decreasing—from $1.4 billion into program year 2003 to $1.1 billion into program year 2005. One explanation for the decline may be that obligations are being converted to expenditures. In our 2002 report, we also noted that Labor’s data lacked consistent information on obligations because states were not all using the same definition for obligations in what they reported to Labor. Labor’s guidance was unclear and did not specify whether obligations made at the local level—the point at which services are delivered—should be included. We recommended that Labor clarify the guidance to standardize the reporting of obligations and use this guidance when estimating states’ available funds. Labor issued revised guidance in 2002, but continues to rely on expenditure data in establishing its estimates. In so doing, it overestimates the funds states have available to spend and ignores the role of obligations in the current workforce investment system. Labor’s Office of the Inspector General (OIG) recently concurred, noting that obligations provide a more useful measure for assessing states’ WIA funding status if obligations accurately reflect legally committed funds and are consistently reported. We have little information at a national level about what the workforce investment system under WIA achieves. Outcome data do not provide a complete picture of WIA services. The data reflect only a small portion of those who receive WIA services and contain no information on services to employers. Furthermore, WIA performance data are not comparable across states and localities, in part because of inconsistent policies in tracking participants for outcomes. In addition, the use of wage records to calculate outcomes is no longer consistent across states. Labor and states have made progress in measuring WIA performance in a number of areas, including Labor’s data validation initiative and the move to common measures. Labor’s proposed integrated data system holds promise in improving data reporting, but it is unclear whether it will be implemented as currently proposed. Furthermore, Labor has not yet conducted an impact evaluation, as required by WIA. WIA performance data do not include information on all customers receiving services. Currently Labor has only limited information on certain job seekers—those who use only self-services—and on employers. WIA excludes job seekers who receive core services that are self-service or informational in nature from being included in the performance information. Thus, only a small proportion of the job seeker population who receive services at one-stops are actually reflected in WIA outcome data, making it difficult to know what the overall program is achieving. Customers who use self-services are estimated to be the largest portion of those served under WIA. In a 2004 study, we reported that some estimates show only about 5.5 percent of the individuals who walked into a one-stop were actually registered for WIA and tracked for outcomes. Furthermore, Labor has limited information about employer involvement in the one-stop system. Although Labor measures employers’ satisfaction, this measure does not provide information on how employers use the system. Labor officials told us that they do not rely on this information for any purpose, and the information is too general for states and local areas to use. WIA performance data are not comparable across states and localities. Because not all job seekers are included in WIA’s outcome measures, states and local areas must decide when to begin tracking participants for outcomes—a decision that has led to outcome data that are not comparable across states and local areas. The guidance available to states at the time WIA was first implemented was open to interpretation in some key areas. For example, the guidance told states to register and track for outcomes all adults and dislocated workers who receive core services that require significant staff assistance, but states could decide what constituted significant staff assistance. As a result, states and local areas have differed on whom they track and for how long—sometimes beginning the process when participants receive core services, and at other times not until they receive more intensive services. We have recommended that Labor determine a standard point of registration and monitor states to ensure they comply. Labor has taken some actions, but registration remains an issue. Furthermore, data are not comparable because the availability of wage records to calculate outcomes is no longer consistent across states. UI wage records—the primary data source for tracking WIA performance— provide a fairly consistent national view of WIA performance. At the same time, UI wage records cannot be readily used to track job seekers who get jobs in other states unless states share data. The Wage Record Interchange System (WRIS) was developed to allow states to share UI wage records and account for job seekers who participate in one state’s employment programs but get jobs in another state. In recent years, all states but one participated in WRIS while it was operated by the nonprofit National Association of State Workforce Agencies. However, in July 2006, Labor assumed responsibility for administering WRIS, and many states have withdrawn, in part because of a perceived conflict of interest between Labor’s role in enforcing federal law and the states’ role in protecting the confidentiality of their data. As of March 2007, only 30 states were participating in the program, and it is unknown if and when the other states will enter the data-sharing agreement. As a result, performance information in almost half the states may not include employment outcomes for job seekers who found jobs outside the states in which they received services. Labor has taken steps to address issues related to the quality of WIA performance data, but further action is needed. Both Labor’s OIG and our early studies of WIA raised issues on the quality of the performance data, and Labor has taken steps aimed at addressing these issues. In October 2004, Labor began requiring states to implement new data validation procedures for WIA performance data. This process requires states to conduct two types of validation: (1) data element validation—reviewing samples of WIA participant files, and (2) report validation—assessing whether states’ software accurately calculated performance outcomes. While it is too soon to fully assess whether Labor’s efforts have improved data quality, officials in most states have reported that Labor’s new requirements have helped increase awareness of data accuracy and reliability at both the state and local levels. In addition, in 2005, in response to an Office of Management and Budget (OMB) initiative, Labor began requiring states to implement a common set of performance measures for its employment and training programs, including WIA. These measures include an entered employment rate, an employment retention rate, and an average earnings measure. Moving to the common measures has increased the comparability of outcome information across programs and made it easier for states and local areas to collect and report performance information across the full range of programs that provide services in the one-stop system. In addition, as part of the implementation of the common measures, states are for the first time required to collect and report a count of all WIA participants who use one-stop centers. This may help provide a more complete picture of the one-stop system. The shift to common measures could also affect services to some groups of job seekers. Historically, certain WIA performance measures—primarily the earnings measure—have driven localities to serve only those customers who will help meet performance levels. For example, program providers have reported that the earnings measure provides a disincentive to enroll older workers in the program because of employment characteristics that may negatively affect program performance. In several local areas we visited for our study of older worker services, officials said they considered performance measures a barrier to enrolling older workers seeking part-time jobs because they would have lower earnings and therefore reduce measured program performance. Labor’s shift from earnings gain to average earnings under the common measures may help reduce the extent to which the measures are a disincentive to serve certain populations. It remains unclear, however, how the new measure will affect the delivery of services to some groups, such as older workers, who are more likely to work part-time and have lower overall wages. Further action may be needed to help reduce the incentive to serve only those who will help meet performance levels. One approach that could help would be to systematically adjust expected performance levels to account for different populations and local economic conditions when negotiating performance. We have made such a recommendation to Labor, but little action has been taken. The Workforce Investment Streamlined Performance Reporting System (WISPR). Since 2004, Labor has been planning to implement an integrated data-reporting system that could greatly enhance the understanding of job seeker services and outcomes. WISPR represents a promising step forward in integrating and expanding program reporting, but it is unclear whether implementation will occur as proposed. If implemented, the system would integrate data reporting by using standardized reporting requirements across the Employment Service, WIA, veterans’ state grant, and Trade Adjustment Assistance programs, and ultimately replace their existing reporting systems with a single reporting structure. Its integrated design would, for the first time, allow Labor and states to track an individual’s progress through the one-stop system. In addition, the system would expand data collection and reporting in two key areas: the services provided to employers and estimates of the number of people who access the one-stop system but ultimately receive limited or no services from one- stop staff. On the basis of our preliminary review, WISPR appears to address many of the issues we’ve raised regarding the system’s current performance data. However, concerns have been raised about challenges in implementing the new system, and at present, the timeline for WISPR’s implementation remains unclear. Given the rapidly approaching July 1, 2007, implementation date, it appears likely that implementation will be delayed. No information exists on what works and for whom. Although Labor has improved its outcome data on job seekers who participate in its programs, these data alone cannot measure whether outcomes are a direct result of program participation, rather than external factors. For example, local labor market conditions may affect an individual’s ability to find a job as much as or more than participation in an employment and training program. To measure the effects of a program, it is necessary to conduct an impact evaluation that would seek to assess whether the program itself led to participant outcomes. Since the full implementation of WIA in 2000—in which the one-stop system became the required means to provide most employment and training services—Labor has not made evaluating the impact of those services a research priority. While WIA required such an evaluation by 2005, Labor has declined to fund one in prior budgets. In 2004, we recommended that Labor comply with the requirements of WIA and conduct an impact evaluation of WIA services to better understand what services are most effective for improving outcomes. In response, Labor cited the need for program stability and proposed delaying an impact evaluation of WIA until after reauthorization. In its 2008 budget proposal, Labor identified an assessment of WIA’s impact on employment, retention, and earnings outcomes for participants as an effort the agency would begin. As of May 2007, according to Labor officials, the agency had not yet begun to design the study. Labor has implemented some initiatives, such as national performance and reporting summits, to better communicate with states on changes in processes and procedures. However, guidance on policy changes has often come too late for states to be able to implement them. For example, in implementing common measures, states had very little time to make the necessary changes before they had to begin data collection and reporting using the new requirements. While Labor publicized its plans to adopt the common measures, states were notified only in late February 2005 that Labor planned to implement changes on July 1, 2005, and final guidance was not issued until April 15, 2005. This gave states 3 months or less to interpret federal guidance, coordinate with partners, modify information technology systems, issue new guidance, and train local area staff. In our 2005 report, we commented that rushed implementation could negatively affect data quality and compromise the potential benefits of the proposed changes. In addition to underestimating the cost, time, and effort required of states to make such changes, Labor has failed to solicit adequate stakeholder input when introducing some major new initiatives. For example, Labor’s efforts to implement an integrated reporting system have been hampered by a lack of stakeholder input. In 2004, Labor first proposed a single, streamlined reporting system, known as the ETA Management Information and Longitudinal Evaluation system (EMILE) that would have replaced reporting systems for several Labor programs. While many states supported streamlined reporting, 36 states indicated that implementing the EMILE system, as proposed, would be very burdensome. Labor developed the system with only limited consultation with key stakeholders, including state officials, and as a result underestimated the magnitude and type of changes EMILE would require and the resources states would need in order to implement it. In response, Labor substantially modified this system’s design. The modified system, now called WISPR, was set to be implemented on July 1, 2007. As with EMILE, however, concerns have been raised about challenges in implementing the new system, particularly the early implementation date. Some comments to OMB expressed the view that Labor had again underestimated the time states would need to revise policy, reprogram systems, and retrain staff. Given the rapidly approaching deadline and states’ readiness to implement this system, it seems that this important initiative will likely be delayed again. In 2005, we recommended that Labor consider alternative approaches that involve ongoing consultation with key stakeholders as the agency seeks to implement its new initiatives. In the 7 years since most states fully implemented WIA, much progress has been made in developing and implementing a universal system. With notable exceptions, services for partner programs are becoming increasingly available through the one-stop system. States and local areas have used the flexibility under WIA to tailor services for where they are and for whom they serve. As the Congress moves toward reauthorizing WIA, consideration should be given to maintaining that state and local flexibility, whereby innovation and system ownership can be fostered. However, some aspects of WIA could be improved through legislative action. Our findings highlight two key areas: Improving the data on people who use the system: Requiring all job seekers who receive WIA funded services to be included in the performance management system would improve understanding of who gets served and eliminate the ambiguity about who should be tracked and for how long. Improving funding stability: If Congress chooses not to make broader funding formula changes, reducing the volatility in the Dislocated Worker allocation by requiring the use of hold harmless and stop gain provisions in the formula would help stabilize funding and better foster sound financial practices. Furthermore, we have made a number of recommendations to Labor to improve aspects of the current program. While Labor has implemented many of them, several key concerns remain unaddressed. Labor has not taken steps to more accurately estimate states’ available fund by considering obligations as well as expenditures, establish suitable performance levels for states to achieve by developing and implementing a systematic approach for adjusting expected performance to account for different populations and local economic conditions, maximize the likelihood that new initiatives will be adopted in an achievable time frame by using a collaborative approach that engages all key stakeholders, and improve policymakers’ understanding of what employment and training programs achieve by conducting important program evaluations, including an impact study on WIA, and releasing those findings in a timely way. In absence of actions by Labor on these issues, the Congress may wish to address them legislatively. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the committee may have at this time. For information regarding this testimony, please contact Sigurd R. Nilsen, Director, Education, Workforce, and Income Security Issues, at (202) 512-7215. Individuals who made key contributions to this testimony include Dianne Blank, Rebecca Woiwode, and Thomas McCabe. Veterans’ Employment and Training Service: Labor Could Improve Information on Reemployment Services, Outcomes, and Program Impact. GAO-07-594. Washington, D.C.: May 24, 2007. Workforce Investment Act: Employers Found One-Stop Centers Useful in Hiring Low-Skilled Workers; Performance Information Could Help Gauge Employer Involvement. GAO-07-167. Washington, D.C.: December 22, 2006. National Emergency Grants: Labor Has Improved Its Grant Award Timeliness and Data Collection, but Further Steps Can Improve Process. GAO-06-870. Washington, D.C.: September 5, 2006. Trade Adjustment Assistance: Most Workers in Five Layoffs Received Services, but Better Outreach Needed on New Benefits. GAO-06-43. Washington, D.C.: January 31, 2006. Youth Opportunity Grants: Lessons Can Be Learned from Program, but Labor Needs to Make Data Available. GAO-06-53. Washington, D.C.: December 9, 2005. Workforce Investment Act: Labor and States Have Taken Actions to Improve Data Quality, but Additional Steps Are Needed. GAO-06-82. Washington, D.C.: November 14, 2005. Workforce Investment Act: Substantial Funds Are Used for Training, but Little Is Known about Training Outcomes. GAO-05-650. Washington, D.C.: June 29, 2005. Unemployment Insurance: Better Data Needed to Assess Reemployment Services to Claimants. GAO-05-413. Washington, D.C.: June 24, 2005. Workforce Investment Act: Labor Should Consider Alternative Approaches to Implement New Performance and Reporting Requirements. GAO-05-539. Washington, D.C.: May 27, 2005. Workforce Investment Act: Employers Are Aware of, Using, and Satisfied with One-Stop Services, but More Data Could Help Labor Better Address Employers’ Needs. GAO-05-259. Washington, D.C.: February 18, 2005. Workforce Investment Act: Labor Has Taken Several Actions to Facilitate Access to One-Stops for Persons with Disabilities, but These Efforts May Not Be Sufficient. GAO-05-54. Washington, D.C.: December 14, 2004. Workforce Investment Act: States and Local Areas Have Developed Strategies to Assess Performance, but Labor Could Do More to Help. GAO-04-657. Washington, D.C.: June 1, 2004. National Emergency Grants: Labor Is Instituting Changes to Improve Award Process, but Further Actions Are Required to Expedite Grant Awards and Improve Data. GAO-04-496. Washington, D.C.: April 16, 2004. Workforce Investment Act: Labor Actions Can Help States Improve Quality of Performance Outcome Data and Delivery of Youth Services. GAO-04-308. Washington, D.C.: February 23, 2004. Workforce Training: Almost Half of States Fund Worker Training and Employment through Employer Taxes and Most Coordinate with Federally Funded Programs. GAO-04-282. Washington, D.C.: February 13, 2004. Workforce Investment Act: Potential Effects of Alternative Formulas on State Allocations. GAO-03-1043. Washington, D.C.: August 28, 2003. Workforce Investment Act: Exemplary One-Stops Devised Strategies to Strengthen Services, but Challenges Remain for Reauthorization. GAO-03-884T. Washington, D.C.: June 18, 2003. Workforce Investment Act: One-Stop Centers Implemented Strategies to Strengthen Services and Partnerships, but More Research and Information Sharing Is Needed. GAO-03-725. Washington, D.C.: June 18, 2003. Workforce Investment Act: Issues Related to Allocation Formulas for Youth, Adults, and Dislocated Workers. GAO-03-636. Washington, D.C.: April 25, 2003. Workforce Training: Employed Worker Programs Focus on Business Needs, but Revised Performance Measures Could Improve Access for Some Workers. GAO-03-353. Washington, D.C.: February 14, 2003. Older Workers: Employment Assistance Focuses on Subsidized Jobs and Job Search, but Revised Performance Measures Could Improve Access to Other Services. GAO-03-350. Washington, D.C.: January 24, 2003. Workforce Investment Act: States’ Spending Is on Track, but Better Guidance Would Improve Financial Reporting. GAO-03-239. Washington, D.C.: November 22, 2002. Workforce Investment Act: States and Localities Increasingly Coordinate Services for TANF Clients, but Better Information Needed on Effective Approaches. GAO-02-696. Washington, D.C.: July 3, 2002. Workforce Investment Act: Youth Provisions Promote New Service Strategies, but Additional Guidance Would Enhance Program Development. GAO-02-413. Washington, D.C.: April 5, 2002. Workforce Investment Act: Better Guidance and Revised Funding Formula Would Enhance Dislocated Worker Program. GAO-02-274. Washington, D.C.: February 11, 2002. Workforce Investment Act: Improvements Needed in Performance Measures to Provide a More Accurate Picture of WIA’s Effectiveness. GAO-02-275. Washington, D.C.: February 1, 2002. Workforce Investment Act: Better Guidance Needed to Address Concerns over New Requirements. GAO-02-72. Washington, D.C.: Oct. 4, 2001. Also testimony GAO-02-94T. Workforce Investment Act: Implementation Status and the Integration of TANF Services. GAO/T-HEHS-00-145. Washington, D.C.: June 29, 2000. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Since the Workforce Investment Act's (WIA) enactment in 1998, GAO has issued numerous reports that included recommendations regarding many aspects of WIA, including performance measures and accountability, funding formulas and spending, one-stop centers, and training, as well as services provided to specific populations, such as dislocated workers, youth, and employers. Collectively, these studies employed an array of data collection techniques, including surveys to state and local workforce officials and private sector employers; site visits; interviews with local, state, and Labor officials; and analysis of Labor data and documents. This testimony draws upon the results of these reports, issued between 2000 and 2007, as well as GAO's ongoing work on one-stop infrastructure, and discusses issues raised and recommendations made. Specifically, the testimony addresses (1) progress made by federal, state, and local officials in implementing key provisions of WIA; and (2) challenges that remain in implementing an integrated employment and training system. Seven years after implementing the workforce investment system under WIA, the system's infrastructure continues to evolve. Nationwide, the number of comprehensive one-stop centers has decreased somewhat, but not uniformly across states. States generally reported increased availability of services for some of the mandatory programs at comprehensive one-stop centers. However, despite WIA's requirement that all mandatory partners provide services through the one-stop system, some states have maintained a completely separate system for delivering services for Wagner-Peyser-funded Employment Services. Adults and dislocated workers receive a wide range of services through the one-stop system. Local areas used about 40 percent of their WIA funds in 2003 to provide training services to an estimated 416,000 participants, but the vast majority of job seekers receive services other than training. States and local areas have generally focused their youth services on in-school youth and have found it difficult to recruit and retain out-of-school youth. Most medium and large employers are aware of and use the system and are quite satisfied with its services, but they generally use one-stop centers to fill their needs for low-skilled workers. Despite the successes state and local officials have had since WIA's implementation, some aspects of the law and other factors have hampered their efforts. Funding issues continue to hamper the system. WIA's formulas that are used to allocate funds to states do not reflect current program design and have caused wide fluctuations in funding levels from year to year that do not reflect actual layoff activity. In addition, Labor's focus on expenditures without including obligations overestimates the amount of funds available to provide services at the local level. Moreover, little is known about what the system is achieving because only a small minority of participants are captured in the performance measures, and Labor has not conducted an impact study to assess the effectiveness of the one-stop system, as required under WIA. Labor has taken some steps to improve guidance and communication, but does not involve key stakeholders in the development of some major initiatives and provides too little time for states and local areas to implement them. We are suggesting that Congress consider taking steps to improve the stability of the funding and enhance the data available on people who use the system. In addition, in our past work, we have recommended that Labor use obligations when estimating states' available funds, that it comply with the requirements of WIA and conduct an impact evaluation, and that it consider alternative approaches in implementing new initiatives that involve ongoing consultation with key stakeholders. Labor has taken little action on these recommendations.

You are an expert at summarizing long articles. Proceed to summarize the following text: Internal control is not one event, but a series of actions and activities that occur throughout an entity’s operations and on an ongoing basis. Internal control should be recognized as an integral part of each system that management uses to regulate and guide its operations rather than as a separate system within an agency. In this sense, internal control is management control that is built into the entity as a part of its infrastructure to help managers run the entity and achieve their goals on an ongoing basis. Section 3512 (c), (d) of Title 31, U.S. Code, commonly known as the Federal Managers’ Financial Integrity Act of 1982 (FMFIA), requires agencies to establish and maintain internal control. The agency head must annually evaluate and report on the control and financial systems that protect the integrity of federal programs. The requirements of FMFIA serve as an umbrella under which other reviews, evaluations, and audits should be coordinated and considered to support management’s assertion about the effectiveness of internal control over operations, financial reporting, and compliance with laws and regulations. Office of Management and Budget (OMB) Circular No. A-123, Management’s Responsibility for Internal Control, provides the implementing guidance for FMFIA, and sets out the specific requirements for assessing and reporting on internal controls consistent with the internal control standards issued by the Comptroller General of the United States. The circular defines management’s responsibilities related to internal control and the process for assessing internal control effectiveness, and provides specific requirements for conducting management’s assessment of the effectiveness of internal control over financial reporting. The circular requires management to annually provide assurances on internal control in its performance and accountability report, and for each of the 24 Chief Financial Officers Act agencies to include a separate assurance on internal control over financial reporting, along with a report on identified material weaknesses and corrective actions. The circular also emphasizes the need for integrated and coordinated internal control assessments that synchronize all internal control-related activities. FMFIA requires GAO to issue standards for internal control in the federal government. The Standards for Internal Control in the Federal Government (i.e., internal control standards) provides the overall framework for establishing and maintaining effective internal control and for identifying and addressing major performance and management challenges and areas at greatest risk of fraud, waste, abuse, and mismanagement. As summarized in the internal control standards, the minimum level of quality acceptable for internal control in the government is defined by the following five standards, which also provide the basis against which internal controls are to be evaluated: Control environment: Management and employees should establish and maintain an environment throughout the organization that sets a positive and supportive attitude toward internal control and conscientious management. Risk assessment: Internal control should provide for an assessment of the risks the agency faces from both external and internal sources. Control activities: Internal control activities help ensure that management’s directives are carried out. The control activities should be effective and efficient in accomplishing the agency’s control objectives. Information and communications: Information should be recorded and communicated to management and others within the entity who need it and in a form and within a time frame that enables them to carry out their internal control and other responsibilities. Monitoring: Internal control monitoring should assess the quality of performance over time and ensure that the findings of audits and other reviews are promptly resolved. The third control standard—control activities—helps ensure that management’s directives are carried out. Control activities are the policies, procedures, techniques, and mechanisms that enforce management’s directives. In other words, they are the activities conducted in the everyday course of business that are intended to accomplish a control objective, such as ensuring IRS employees successfully complete background checks prior to being granted access to taxpayer information and receipts. As such, control activities are an integral part of an entity’s planning, implementing, reviewing, and accountability for stewardship of government resources and achievement of effective results. A key objective in our annual audits of IRS’s financial statements is to obtain reasonable assurance about whether IRS maintained effective internal controls with respect to financial reporting, including safeguarding of assets, and compliance with laws and regulations. While we use all five internal control standards as a basis for evaluating the effectiveness of IRS’s internal controls, we place a heavy emphasis on testing control activities. Our evaluations and tests have resulted in the identification of issues in certain internal controls over the years and recommendations for corrective action. To accomplish our objectives, we evaluated the effectiveness of IRS’s corrective actions implemented in response to open recommendations during fiscal year 2007 as part of our fiscal years 2007 and 2006 financial audits. To determine the current status of the recommendations, we (1) obtained IRS’s reported status of each recommendation and corrective action taken or planned as of April 2008, and (2) compared IRS’s reported status to our fiscal year 2007 audit findings to identify any differences between IRS’s and our conclusions regarding the status of each recommendation. In order to determine how these recommendations fit within IRS’s management and internal control structure, we compared the open recommendations, and the issues that gave rise to them, to the control activities listed in the internal control standards and to the list of major factors and examples outlined in our Internal Control Management and Evaluation Tool. We also considered how the recommendations and the underlying issues were categorized in our prior reports; whether IRS had addressed, in whole or in part, the underlying control issues that gave rise to the recommendations; and other legal requirements and implementing guidance, such as OMB Circular No. A-123; FMFIA; and the Federal Information System Controls Audit Manual (FISCAM). Our work was performed from December 2007 through May 2008 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Commissioner of Internal Revenue or his designee on June 9, 2008. We received comments from the Commissioner on June 24, 2008. IRS continues to make progress addressing its significant financial management challenges. Over the years since we first began auditing IRS’s financial statements in fiscal year 1992, IRS has taken actions enabling us to close over 200 of our financial management-related recommendations. This includes 18 recommendations we are closing based on actions IRS took during the period covered by our fiscal year 2007 financial audit. At the same time, however, our audits continue to identify additional internal control issues, resulting in our making further recommendations for corrective action, including 24 new financial management-related recommendations resulting from our fiscal year 2007 financial audit. These internal control issues, and the resulting recommendations, can be directly traced to the control activities in the internal control standards. As such, it is essential that they be fully addressed and resolved to strengthen IRS’s overall financial management and to assist it in efficiently and effectively achieving its goals and mission. In June 2007, we issued a report on the status of IRS’s efforts to implement corrective actions to address financial management recommendations stemming from our fiscal year 2006 and prior year financial audits and other financial management-related work. In that report, we identified 75 audit recommendations that at that time remained open and thus required corrective action by IRS. A significant number of these recommendations had been open for several years, either because IRS had not taken corrective action or because the actions taken had not yet fully and effectively resolved the issues that gave rise to the recommendations. IRS continued to work to address many of the internal control issues to which these open recommendations relate. In the course of performing our fiscal year 2007 financial audit, we identified numerous actions IRS took to address many of its internal control issues. On the basis of IRS’s actions, which we were able to substantiate through our audit, we are able to close 18 of these prior years’ recommendations. IRS considers another 23 of the prior years’ recommendations to be effectively addressed. However, we still consider them to be open either because we had not yet been able to verify the effectiveness of IRS’s actions—they occurred subsequent to completion of our audit testing and thus have not been verified, which is a prerequisite to our closing a recommendation—or because the actions taken did not fully address the issue that gave rise to the recommendation. However, continued efforts are needed by IRS to address its internal control issues. While we are able to close 18 financial management recommendations made in prior years, 57 recommendations from prior years remain open, a significant number of which have been outstanding for several years. In some cases, IRS may have effectively addressed the issues that gave rise to the recommendations subsequent to our fiscal year 2007 audit testing. However, in many cases, we determined based on the work performed for our fiscal year 2007 audit that IRS’s actions taken to date had not yet fully and effectively addressed the underlying internal control issues. Additionally, during our audit of IRS’s fiscal year 2007 financial statements, we identified additional issues that require corrective action by IRS. In a recent management report to IRS, we discussed these issues, and made 24 new recommendations to IRS to address them. Consequently, a total of 81 financial management-related recommendations were open at the end of fiscal year 2007 and need to be addressed by IRS. While most of our open recommendations can be addressed in the short term, a few recommendations, particularly those concerning IRS’s automated systems, are complex and will require several more years to fully and effectively address. We consider 71 recommendations to be short-term and 10 to be long-term. In addition to the 81 open recommendations from our financial audits and other financial management-related work, we have 76 open recommendations as a result of our assessment of IRS’s information security controls over key financial systems, data, and interconnected networks at IRS’s critical data processing facilities. One of those open recommendations relates to IRS’s need to implement an agencywide information security program, the lack of which was a key reason for the material weakness in IRS’s information systems security controls over its financial and tax processing systems. Unresolved, previously reported recommendations and newly identified ones related to information security increase the risk of unauthorized disclosure, modification, or destruction of financial and sensitive taxpayer data. Recommendations resulting from of the information security portion our annual audits of IRS’s financial statements are reported separately and are not included in this report primarily because of the sensitive nature of some of these issues. Linking the open recommendations from our financial audits and other financial management-related work, and the issues that gave rise to them, to internal control activities that are central to IRS’s tax administration responsibilities provides insight regarding their significance. The internal control standards define 11 control activities. These control activities can be further grouped into three broad categories: Safeguarding of assets and security activities: physical control over vulnerable assets, segregation of duties, controls over information processing, and access restrictions to and accountability for resources and records. Proper recording and documenting of transactions: appropriate documentation of transactions and internal control, accurate and timely reporting of transactions and events, and proper execution of transactions and events. Effective management review and oversight: reviews by management at the functional or activity level, establishment and review of performance measures and indicators, management of human capital, and top-level reviews of actual performance. Each of the open recommendations from our financial audits and financial management-related work, and the underlying issues that gave rise to them, can be traced back to 1 of the 11 control activities (grouped into three broad categories). Table 1 presents a summary of the open recommendations, each of which is categorized by the control activity to which it best relates. As table 1 indicates, 21 recommendations (26 percent) relate to issues associated with IRS’s lack of effective controls over safeguarding of assets and security activities. Another 33 recommendations (41 percent) relate to issues associated with IRS’s inability to properly record and document transactions. The remaining 27 open recommendations (33 percent) relate to issues associated with the lack of effective management review and oversight. On the following pages, we group the 81 open recommendations under the control activity to which the condition that gave rise to them most appropriately fits. We first define each control activity as presented in the internal control standards and briefly identify some of the key IRS operations that fall under that control activity. Although not comprehensive, the descriptions are intended to help explain why actions to strengthen these control activities are important for IRS to efficiently and effectively carry out its overall mission. For each recommendation, we also indicate whether it is a short-term or long-term recommendation. Given IRS’s mission, the sensitivity of the data it maintains, and its processing of trillions of dollars of tax receipts each year, one of the most important control activities at IRS is the safeguarding of assets. Internal control in this important area should be designed to provide reasonable assurance regarding prevention or prompt detection of unauthorized acquisition, use, or disposition of an agency’s assets. We have grouped together the four control activities in the internal control standards that relate to safeguarding of assets (including tax receipts) and security activities (such as limiting access to only authorized personnel): (1) physical control over vulnerable assets, (2) segregation of duties, (3) controls over information processing, and (4) access restrictions to and accountability for resources and records. Internal control standard: an agency must establish physical control to secure and safeguard vulnerable assets. Examples include security for and limited access to assets such as cash, securities, inventories, and equipment which might be vulnerable to risk of loss or unauthorized use. Such assets should be periodically counted and compared to control records. IRS is charged with collecting trillions of dollars in taxes each year, a significant amount of which is collected in the form of checks and cash accompanied by tax returns and related information. IRS collects taxes both at its own facilities as well as at lockbox banks that operate under contract with the Department of the Treasury’s Financial Management Service (FMS) to provide processing services for certain taxpayer receipts for IRS. IRS acts as custodian for (1) the tax payments it receives until they are deposited in the General Fund of the U.S. Treasury and (2) the tax returns and related information it receives until they are either sent to the Federal Records Center or destroyed. IRS is also charged with controlling many other assets, such as computers and other equipment, but IRS’s legal responsibility to safeguard tax returns and the confidential information taxpayers provide on tax returns makes the effectiveness of its internal controls with respect to physical security essential. IRS receives cash and checks mailed to its service centers or lockbox banks with accompanying tax returns and information or payment vouchers and payments made in person at its offices. While effective physical safeguards over receipts should exist throughout the year, it is especially important during the peak tax filing season. Each year during the weeks preceding and shortly after April 15, an IRS service center campus (SCC) or lockbox bank may receive and process daily over 100,000 pieces of mail containing returns, receipts, or both. The dollar value of receipts each service center and lockbox bank processes increases to hundreds of millions of dollars a day during the April 15 time frame. Of our 81 open recommendations, the following 9 open recommendations are designed to improve IRS’s physical controls over vulnerable assets. All are short-term in nature. (See table 2.) Internal control standard: Key duties and responsibilities need to be divided or segregated among different people to reduce the risk of error or fraud. This should include separating the responsibilities for authorizing transactions, processing and recording them, reviewing the transactions, and handling any related assets. No one individual should control all key aspects of a transaction or event. IRS employees are responsible for processing trillions of dollars of tax receipts each year, of which hundreds of billions are received in the form of cash or checks, and for processing hundreds of billions of dollars in refunds to taxpayers. Consequently, it is critical that IRS maintain appropriate separation of duties to allow for adequate oversight of staff and protection of these vulnerable resources so that no single individual would be in a position of causing an error or irregularity, potentially converting the asset to personal use, and then concealing it. For example, when an IRS field office or lockbox bank receives taxpayer receipts and returns, it is responsible for depositing the cash and checks in a depository institution and forwarding the related information received to an SCC for further processing. In order to adequately safeguard receipts from theft, the person responsible for recording the information from the taxpayer receipts on a voucher should be different from the individual who prepares those receipts for transmittal to the SCC for further processing. Also, for procurement of goods and services, the person who places an order for goods and services should be different from the person who receives the goods and services. Such separation of duties will help to prevent the occurrence of fraud, theft of IRS assets, or both. The following three open recommendations would help IRS improve its separation of duties, which will in turn strengthen its controls over tax receipts and refunds and procurement activities. All are short-term in nature. (See table 3.) Internal control standard: A variety of control activities are used in information processing. Examples include edit checks of data entered, accounting for transactions in numerical sequences, and comparing file totals with control totals. There are two broad groupings of information systems control—general control (for hardware such as mainframe, network, end-user environments) and application control (processing of data within the application software). General controls include entitywide security program planning, management, and backup recovery procedures and contingency and disaster planning. Application controls are designed to help ensure completeness, accuracy, authorization, and validity of all transactions during application processing. IRS relies extensively on computerized systems to support its financial and mission-related operations. To efficiently fulfill its tax processing responsibilities, IRS relies extensively on interconnected networks of computer systems to perform various functions, such as collecting and storing taxpayer data, processing tax returns, calculating interest and penalties, generating refunds, and providing customer service. As part of our annual audits of IRS’s financial statements, we assess the effectiveness of IRS’s information security controls over key financial systems, data, and interconnected networks at IRS’s critical data processing facilities that support the processing, storage, and transmission of sensitive financial and taxpayer data. From that effort over the years, we have identified information security control weaknesses that impair IRS’s ability to ensure the confidentiality, integrity, and availability of its sensitive financial and taxpayer data. As of January 2008, there were 76 open recommendations from our information security work designed to improve IRS’s information security controls. As discussed previously, recommendations resulting from our information security work are reported separately and are not included in this report primarily because of the sensitive nature of these issues. However, the following open short-term recommendation is related to systems limitations and IRS’s need to enhance its computer programs. (See table 4.) Internal control standard: Access to resources and records should be limited to authorized individuals, and accountability for their custody and use should be assigned and maintained. Periodic comparison of resources with the recorded accountability should be made to help reduce the risk of errors, fraud, misuse, or unauthorized alteration. Because IRS deals with a large volume of cash and checks, it is imperative that it maintain strong controls to appropriately restrict access to those assets, the records that track those assets, and sensitive taxpayer information. Although IRS has a number of both physical and information system controls in place, some of the issues we have identified in our financial audits over the years pertain to ensuring that those individuals who have direct access to these cash and checks are appropriately vetted before being granted access to taxpayer receipts and information and to ensuring that IRS maintains effective access security control. The following eight open short-term recommendations would help IRS improve its access restrictions to assets and records. (See table 5.) Proper Recording and Documenting of Transactions One of the largest obstacles continuing to face IRS management is the agency’s lack of an integrated financial management system capable of producing the accurate, useful, and timely information IRS managers need to assist in making well-informed day-to-day decisions. While IRS is making progress in modernizing its financial management capabilities, it nonetheless continues to face many pervasive internal control weaknesses related to its long-standing systems deficiencies that we have reported each year since we began auditing its financial statements in fiscal year 1992. These deficiencies can only be addressed as part of a longer-term effort to overhaul and integrate IRS’s financial management system structure. Because of the long-standing, pervasive nature of these deficiencies, their resolution is likely to require more than 2 additional years. Nevertheless, IRS also has a number of internal control issues that relate to recording transactions, documenting events, and tracking the processing of taxpayer receipts or information, which do not depend upon longer-term efforts to overhaul and integrate its information systems. We have grouped three control activities together that relate to proper recording and documenting of transactions: (1) appropriate documentation of transactions and internal controls, (2) accurate and timely recording of transactions and events, and (3) proper execution of transactions and events. Internal control standard: Internal control and all transactions and other significant events need to be clearly documented, and the documentation should be readily available for examination. The documentation should appear in management directives, administrative policies, or operating manuals and may be in paper or electronic form. All documentation and records should be properly managed and maintained. IRS collects and processes trillions of dollars in taxpayer receipts annually both at its own facilities and at lockbox banks under contract to process taxpayer receipts for the federal government. Therefore, it is important that IRS maintain effective controls to ensure that all documents and records are properly and timely recorded, managed, and maintained both at its facilities and at the lockbox banks. IRS must adequately document and disseminate its procedures to ensure that they are available for IRS employees. IRS must also document its management reviews of those controls, such as those regarding refunds and returned checks, credit card purchases, and reviews of TACs. Finally, to ensure future availability of adequate documentation, IRS must ensure that its systems, particularly those now being developed and implemented, have appropriate capability to trace transactions. The following 12 open recommendations would assist IRS in improving its documentation of transactions and internal control procedures. Eleven of these recommendations are short-term, and one is long-term. (See table 6.) Internal control standard: Transactions should be promptly recorded to maintain their relevance and value to management in controlling operations and making decisions. This applies to the entire process or life cycle of a transaction or event from the initiation and authorization through its final classification in summary records. In addition, control activities help to ensure that all transactions are completely and accurately recorded. IRS is responsible for maintaining taxpayer records for tens of millions of taxpayers in addition to maintaining its own financial records. To carry out this responsibility, IRS often has to rely on outdated computer systems or manual work-arounds. Unfortunately, some of IRS’s recordkeeping difficulties we have reported on over the years will not be addressed until it can replace its aging systems, which is a long-term effort and depends on future funding. The following 18 open recommendations would strengthen IRS’s recordkeeping abilities. (See table 7.) Twelve of these recommendations are short-term, and 6 are long-term. They include specific recommendations regarding requirements for new systems for maintaining taxpayer records. Several of the recommendations listed affect financial reporting processes, such as subsidiary records and appropriate allocation of costs. Some of the issues that gave rise to several of our recommendations directly affect taxpayers, such as those involving duplicate assessments, errors in calculating and reporting manual interest, errors in calculating penalties, and recovery of trust fund penalty assessments. About 38 percent of these recommendations are 5 years or older and 1 is over 10 years old, reflecting the complex nature of the underlying system issues that must be resolved to fully address of some of these issues. Internal control standard: Transactions and other significant events should be authorized and executed only by persons acting within the scope of their authority. This is the principal means of ensuring that only valid transactions to exchange, transfer, use, or commit resources and other events are initiated or entered into. Authorizations should be clearly communicated to managers and employees. IRS employs tens of thousands of people in its 10 SCCs, three computing centers, and numerous field offices throughout the United States. In addition, the number of staff increases significantly during the peak of the tax filing season. Because of the significant number of personnel involved, IRS must maintain effective control over which employees are authorized to either view or change sensitive taxpayer data. IRS’s ability to establish access rights and permissions for information systems is a critical control. Each year, IRS pays out hundreds of billions of dollars in tax refunds, some of which are distributed to taxpayers manually. IRS requires that all manual refunds be approved by designated officials. However, weaknesses in the authorization of such approving officials expose the federal government to losses because of the issuance of improper refunds. Likewise, the failure to ensure that employees obtain appropriate authorizations to use purchase cards or initiate travel similarly leave the government open to fraud, waste, or abuse. The following three open short-term recommendations would improve IRS’s controls over its manual refund, purchase card, and travel transactions. (See table 8.) Effective Management Review and Oversight All personnel within IRS have an important role in establishing and maintaining effective internal controls, but IRS’s managers have additional review and oversight responsibilities. Management must set the objectives, put control activities in place, and monitor and evaluate controls to ensure that they are followed. Without effective monitoring by managers, internal control activities may not be carried out consistently and on time. We have grouped three control activities together related to effective management review and oversight: (1) reviews by management at the functional or activity level, (2) establishment and review of performance measures and indicators, and (3) management of human capital. Although we also include the control activity “top-level reviews of actual performance” in this grouping, we do not have any open recommendations to IRS related to this internal control activity. Internal control standard: Managers need to compare actual performance to planned or expected results throughout the organization and analyze significant differences. IRS has over 71,000 full-time employees and hires over 23,000 seasonal personnel to assist during the tax filing season. In addition, as discussed earlier, Treasury’s Financial Management Service contracts with banks to process tens of thousands of individual receipts, totaling hundreds of billions of dollars. At any organization, management oversight of operations is important, but with an organization as vast in scope as IRS, management oversight is imperative. The following 18 short-term and one long-term open recommendations would improve IRS’s management oversight of lockbox banks, courier services, user fees, penalty calculations, issuance of manual refunds, and the timely release of liens. (See table 9.) Many of these recommendations were made to correct instances where an internal control activity either does not exist or where an established control is not being adequately or consistently applied. However, a number of these recommendations are aimed at enhancing IRS’s own assessment of its internal controls over financial reporting in accordance with the requirements of the revised OMB Circular No. A-123. Internal control standard: Activities need to be established to monitor performance measures and indicators. These controls could call for comparisons and assessments relating different sets of data to one another so that analyses of the relationships can be made and appropriate actions taken. Controls should also be aimed at validating the propriety and integrity of both organizational and individual performance measures and indicators. IRS’s operations include a vast array of activities encompassing educating taxpayers, processing of taxpayer receipts and data, disbursing hundreds of billions of dollars in refunds to millions of taxpayers, maintaining extensive information on tens of millions of taxpayers, and seeking collection from individuals and businesses that fail to comply with the nation’s tax laws. Within its compliance function, IRS has numerous activities, including identifying businesses and individuals that underreport income, collecting from taxpayers that do not pay taxes, and collecting from those receiving refunds for which they are not eligible. Although IRS has at its peak over 94,000 employees, it still faces resource constraints in attempting to fulfill its duties. Because of this, it is vitally important for IRS to have sound performance measures to assist it in assessing its performance and targeting its resources to maximize the government’s return on investment. However, in past audits we have reported that IRS did not capture costs at the program or activity level to assist in developing cost-based performance measures for its various programs and activities. As a result, IRS is unable to measure the costs and benefits of its various collection and enforcement efforts to best target its available resources. The following three long-term open recommendations are designed to assist IRS in evaluating its operations, determining which activities are the most beneficial, and establishing a good system for oversight. (See table 10.) These recommendations call for IRS to measure, track, and evaluate the costs, benefits, or outcomes of its operations—particularly with regard to identifying its most effective tax collection activities. Internal control standard: Effective management of an organization’s workforce—its human capital—is essential to achieving results and an important part of internal control. Management should view human capital as an asset rather than a cost. Only when the right personnel for the job are on board and are provided the right training, tools, structure, incentives, and responsibilities is operational success possible. Management should ensure that skill needs are continually assessed and that the organization is able to obtain a workforce that has the required skills that match those necessary to achieve organizational goals. Training should be aimed at developing and retaining employee skill levels to meet changing organizational needs. Qualified and continuous supervision should be provided to ensure that internal control objectives are achieved. Performance evaluation and feedback, supplemented by an effective reward system, should be designed to help employees understand the connection between their performance and the organization’s success. As a part of its human capital planning, management should also consider how best to retain valuable employees, plan for their eventual succession, and ensure continuity of needed skills and abilities. IRS’s operations cover a wide range of technical competencies with specific expertise needed in tax-related matters; financial management; and systems design, development, and maintenance. Because IRS has tens of thousands of employees spread throughout the country, it is imperative that management keeps its guidance up-to-date and its staff properly trained. The following five open short-term recommendations would assist IRS in its management of human capital. (See table 11.) For several years, we have reported material weaknesses, a significant deficiency, noncompliance with laws and regulations, and other control issues in our annual financial statement audits and related management reports. To assist IRS in addressing those control issues, Appendix II provides summary information regarding the primary issue to which each open recommendation is related. To compile this summary, we analyzed the nature of the open recommendations to relate them to the material weaknesses, significant deficiency, compliance issues, and other control issues not associated with a material weakness or significant deficiency identified as part of our financial statement audit. Increased budgetary pressures and an increased public awareness of the importance of internal control require IRS to carry out its mission more efficiently and more effectively while protecting taxpayers’ information. Sound financial management and effective internal controls are essential if IRS is to efficiently and effectively achieve its goals. IRS has made substantial progress in improving its financial management since its first financial audit, as evidenced by consecutive clean audit opinions on its financial statements for the past 8 years, resolution of several material internal control weaknesses, and actions taken resulting in the closure of hundreds of financial management recommendations. This progress has been the result of hard work by many individuals throughout IRS and sustained commitment of IRS leadership. Nonetheless, more needs to be done to fully address the agency’s continuing financial management challenges. Further efforts are needed to address the internal control deficiencies that continue to exist. Effective implementation of the recommendations we have made and continue to make through our financial audits and related work could greatly assist IRS in improving its internal controls and achieving sound financial management. While we recognize that some actions—primarily those related to modernizing automated systems—will take a number of years to resolve, most of our outstanding recommendations can be addressed in the short-term. In commenting on a draft of this report, IRS expressed its appreciation for our acknowledgment of the agency’s progress in addressing its financial management challenges as evidenced by our closure of 18 open financial management recommendations from GAO’s prior year report. IRS also commented that it is commited to implementing appropriate improvements to ensure that the IRS maintains sound financial management practices. We will review the effectiveness of further corrective actions IRS has taken or will take and the status of IRS’s progress in addressing all open recommendations as part of our audit of IRS’s fiscal year 2008 financial statements. We are sending copies of this report to the Chairmen and Ranking Members of the Senate Committee on Appropriations; Senate Committee on Finance; Senate Committee on Homeland Security and Governmental Affairs; and Subcommittee on Taxation, IRS Oversight and Long-Term Growth, Senate Committee on Finance. We are also sending copies to the Chairmen and Ranking Members of the House Committee on Appropriations; House Committee on Ways and Means; the Chairman and Vice Chairman of the Joint Committee on Taxation; the Secretary of the Treasury; the Director of OMB; the Chairman of the IRS Oversight Board; and other interested parties. Copies will be made available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions concerning this report, please contact me at (202) 512-3406 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Open. The Internal Revenue Service’s (IRS) Exam Policy has expanded its action plan to include short-term actions for fiscal year 2008. By June 30, 2008, it plans to issue a memorandum to emphasize the importance of training employees who calculate interest and outline available training modules. By September 30, 2008, it plans to offer assistance reviews as requested to verify adherence to procedures, and to improve the process for employees to elevate issues to the program office for resolution. By January 1, 2009, Exam Policy will coordinate additional interest-related training to target field exam and collection personnel. Open. In testing a statistical sample of 45 manual interest transactions recorded during fiscal year 2006, we found eight errors relating to the calculation and recording of manually calculated interest. Based on this, we estimated that 18 percent of IRS’s manual interest population contains errors and concluded that IRS’s controls over this area remain ineffective. The ineffectiveness of these controls contributes to errors in taxpayer records, which is a major component of the material weakness in IRS’s unpaid assessments. During fiscal year 2007, IRS did not make any significant improvements to controls related to manual interest calculations. We will continue to evaluate IRS’s corrective actions in future audits. Internal Revenue Service: Immediate and Long-Term Actions Needed to Improve Financial Management (GAO/AIMD-99-16, Oct. 30, 1998) Open. IRS’s Small Business/Self- Employed (SB/SE) Division began a Trust Fund Recovery Penalty (TFRP) Database Cleanup Initiative in September 2006 that involved a combined systemic clean-up and systemically-assisted, manual cleanup. SB/SE completed the clean-up initiative in January 2008. According to IRS, one of the accomplishments of the clean-up initiative was to reduce cross- reference errors by 32.4 percent. IRS will continue to identify and submit work requests to address current programming shortfalls, corrections and enhancements to the Automated Trust Fund Recovery (ATFR) program and database. The Work Request Tracking System will improve the Area Office, Control Point Monitoring, and Campus Compliance components of the database. These enhancements and improvements include but are not limited to minimizing accounts requiring manual intervention, providing increased managerial oversight through the creation of various reports and improvements to the current inventory delivery system. Open. IRS has taken several actions to strengthen controls and correct programming or procedural deficiencies in the cross-referencing of payments. To ensure quality, timeliness, and accuracy of the TFRP process, IRS recently completed a quality review process that improved the accuracy rate of cross-references recorded in its master files. Additionally, IRS continues to monitor the accuracy and effectiveness of the TFRP process and all corrective actions already in place. However, IRS’s actions have not been completely successful in addressing this issue. As part of our fiscal year 2007 financial audit, we reviewed a statistical sample of 76 TFRP payments, made on accounts created since August 2001. We found nine instances in which IRS did not properly record the payments to all related taxpayer accounts. We estimate that 11.8 percent of these payments may not be properly recorded. Thus, we conclude that IRS’s controls over this area remain ineffective. The ineffectiveness of these controls contributes to errors in taxpayer records, which is a major component of our reported material weakness in IRS’s unpaid assessments. We will continue to review IRS’s corrective actions to address this issue during our fiscal year 2008 audit. Internal Revenue Service: Immediate and Long-Term Actions Needed to Improve Financial Management (GAO/AIMD-99-16, Oct. 30, 1998) Open. IRS is developing the Custodial Detailed Data Base (CDDB), which it believes will ultimately address many of the outstanding financial management recommendations. IRS implemented the first phase of the CDDB during fiscal year 2006. In fiscal year 2007, IRS enhanced the CDDB to process a larger percentage of accounts associated with unpaid payroll taxes and began journalizing unpaid assessment information from CDDB to the Interim Revenue and Accounting Control System (IRACS) weekly; the first step in establishing CDDB to serve as the subsidiary ledger for unpaid assessments. For fiscal year 2008, IRS is continuing to enhance the CDDB in order to process an even larger percentage of accounts associated with unpaid payroll taxes. Open. IRS’s development and use of CDDB has improved its ability to analyze and classify related taxpayer accounts associated with unpaid payroll taxes. However, CDDB is currently not able to analyze and classify 100 percent of such cases. In fiscal year 2007, IRS implemented CDDB programs to begin journalizing tax debt information from its master files to its general ledger weekly, a first step in establishing CDDB’s capability to serve as a subsidiary ledger for unpaid tax debt. However, IRS is presently unable to use CDDB as its subsidiary ledger for posting tax debt information to its general ledger in a manner that ensures reliable external reporting. Specifically, to report balances for taxes receivables and other unpaid tax assessments in its financial statements and required supplemental information, IRS must continue to apply statistical sampling and estimation techniques to master file data processed through CDDB at year-end. Even though CDDB is capable of analyzing master file data weekly to produce tax debt information classified into the various financial reporting categories (taxes receivables, compliance assessments, and write-offs), this information contains material inaccuracies. For example, over $20 billion in adjustments to the year-end gross taxes receivable balance produced by CDDB were needed to correct for errors. Full operational capability of CDDB is several years away and depends in part on the successful implementation of future system releases through 2009. The lack of a fully functioning subsidiary ledger capable of producing accurate, useful, and timely information with which to manage and report externally is a major component of our reported material weakness in IRS’s unpaid assessments. We will continue to monitor IRS’s development of CDDB during our fiscal year 2008 and future audits. Internal Revenue Service: Physical Security Over Taxpayer Receipts and Data Needs Improvement (GAO/AIMD-99-15, Nov. 30, 1998) Closed. Recommendation is no longer directly applicable to IRS’s current business operations. The Wage and Investment (W&I) Division is no longer organized by districts, and no longer has teller functions. The operations aspect of the recommendation has been addressed with procedures and processes in recommendation 99-22. Managerial aspects of the control logs and reviews are addressed in recommendations 02-16 and 05-33, where IRS addresses its monitoring activities and efforts to improve its current state of compliance. Closed. The original report issued in November 1998 directs the intent of this recommendation to the Customer Service Units at district offices that collected walk-in payments. Since that time IRS reorganized its operations into four operating divisions with particular responsibility for the collection of individual and corporate taxes, examination of returns, and taxpayer assistance. Specifically, the W&I Division’s Taxpayer Assistance Centers (TACs) now handle the collection of walk-in payment receipts. Therefore, we agree that recommendations 99-22, 02-16 and 05-33 address the substance of the weaknesses reported in the November 1998 report. We will continue to monitor those recommendations to assess IRS’s corrective actions. Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/AIMD-99-193, Aug. 4, 1999) Open. IRS implemented the Area Office (AO) ATFR Web application. This implementation included the Web version of the Control Point Monitoring (CPM) portion of the application. The CPM acts as the conduit from the AO to the Campus for assessment. IRS drafted new Internal Revenue Manual (IRM) procedures to complement the CPM AO Web processing, and is currently testing these procedures. IRS plans to assess the results of the test and implement the IRM procedures as appropriate. IRS continues to identify and submit Work Requests and Information Technology Assets Management System tickets to enhance the assessment process and provide for efficiencies in the CPM process. These include but are not limited to the systemic generation of the Form 5942, redefining the current inventory assignment system and creating inventory and management reports. Open. To ensure quality, timeliness, and accuracy of the TFRP process, the IRS initiated a quality review process that focused on two primary areas, the first being consolidation of all TFRP work to one campus. Consolidation of all SB/SE ATFR work to the Ogden Campus was completed in September 2005. All W&I business unit TFRP work was transferred to SB/SE Campuses as of January 2006. The second area IRS undertook was the task of rewriting the ATFR area office user component to provide system flexibility that better replicates the realities of the current trust fund investigation/proposal process. IRS continues to monitor the accuracy and effectiveness of the TFRP process and all corrective actions already in place. According to IRS, it completed consolidation of ATFR work at its Ogden Campus by September 2005. However, during our fiscal year 2007 audit, we continued to find long delays in IRS’s processing and posting of TFRP assessments. In one case, we noted that IRS did not record the assessment against the responsible officer until 4 years after it made the determination that the officer was responsible for the TFRP. In another case, IRS did not record the TFRP assessment against the officer until almost 3 years after it made the determination that the officer was responsible for the TFRP. Such delays in recording taxpayer information contribute to errors in taxpayer records, which is a major component of our reported material weakness in IRS’s unpaid assessments. We will continue to review IRS’s corrective actions related to this issue as part of our fiscal year 2008 audit. Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/AIMD-99-193, Aug. 4, 1999) Closed. All IRS field offices continue to provide training and to perform reviews to strengthen controls over remittances. The Large and Mid- sized Business (LMSB) requires each field executive to certify that each group either had in its possession or was able to obtain the stamp. LMSB obtained certifications from the LMSB Industry Headquarter Offices that field groups are maintaining and using the US Treasury stamps, and that they are covering these procedures periodically in group meetings or through issuance of memorandums. LMSB implemented a training module on July 28, 2006 on the responsibilities and procedures for payment processing and check handling. SB/SE collection group managers have been instructed to periodically review remittance packages transmitted by revenue officers and designated clerical employees using a random selection process. In addition, territory managers review the group manager’s control of those reviews. SB/SE Headquarters will be addressing this in interviews with territory managers as part of their operational reviews. Tax Exempt and Government Entities (TE/GE) continues to perform reviews to ensure adherence to the IRM procedures and to require managers to confirm that each group either had in its possession or was able to obtain the stamp. Open. The objective of this recommendation was to create a mechanism for IRS to monitor the status of pervasive weaknesses in controls over taxpayer receipts and information that we have found at IRS’s field offices over the years. The purpose of this monitoring is to facilitate the timely detection and effective resolution of issues and to verify the effectiveness of new and existing policies and procedures on an ongoing basis. During our fiscal year 2007 audit, we identified one instance at an SB/SE unit where employees did not have access to stamps needed to overstamp improper payee lines. Also, at five SB/SE field offices we found that there was no system in place or evidence maintained to track acknowledged document transmittals. Had IRS periodically reviewed the effectiveness of these controls in field offices as we recommended, these issues might have been detected and corrected. In addition, during our review of IRS’s response to this recommendation, we asked IRS to provide a list and blank copies of the reviews that are performed within the LMSB, SBSE, and TEGE business units that address key controls over (1) physical security, (2) procedural safeguards, and (3) the transfer of taxpayer receipts and information. While IRS provided extensive explanations of the various procedures and reviews that are performed, IRS did not provide copies of the reviews covering all three business units for our evaluation to assess the adequacy and frequency of these reviews. We will continue to assess IRS’s actions during our fiscal year 2008 audit. Internal Revenue Service: Custodial Financial Management Weaknesses (GAO/AIMD-99-193, Aug. 4, 1999) Open. The IRS is continuing to develop CDDB. Each release is providing more detail for unpaid assessments, and new functionality will be added for revenue and refunds in fiscal year 2008 to reduce the reliance on master file extracts and ad hoc procedures. The Chief Financial Officers (CFO) office has hired three additional staff and is cross-training existing staff to perform more of the ad hoc procedures to reduce the work on Modernization & Information Technology Services for financial reporting purposes. IRS continues to have contractor support to ensure that master file extracts and other ad hoc procedures are in place to continually develop reliable balances for financial reporting purposes while it finalizes CDDB and develops the IRACS redesign to be a compliant general ledger. Open. We will continue to assess IRS’s actions during our fiscal year 2008 audit. Internal Revenue Service: Serious Weaknesses Impact Ability to Report on and Manage Operations (GAO/AIMD-99-196, Aug. 9, 1999) Open. IRS now has 3 complete years of fully allocated cost data in the Integrated Financial System (IFS). The Statement of Net Costs is now produced from the cost accounting module of IFS. IRS also initiated a project in fiscal year 2007 to identify the issues associated with developing a methodology for determining the costs of performance measures within IRS. Open. We confirmed that IRS continued to improve its cost accounting capability in fiscal year 2007. However, while the cost accounting module of IFS successfully produced the Statement of Net Costs, it still does not provide IRS with the ability to produce full cost information for its performance measures. IRS states that it initiated a strategy to develop cost data for performance measures. We will continue to review and assess IRS’s initiatives during our fiscal year 2008 audit. Internal Revenue Service: Serious Weaknesses Impact Ability to Report on and Manage Operations (GAO/AIMD-99-196, Aug. 9, 1999) Closed. IRS continues to strengthen internal controls and procedures to enhance its ability to account for P&E in IFS. P&E, including capital leases, are recorded as assets when purchased. During fiscal year 2007, IRS revised the dollar threshold for review of P&E accounting transactions and conducted intensive reviews of the large-dollar transactions, increasing the accuracy of P&E reporting. IRS also improved its capability to capitalize assets or expense other items and to properly account for Business System Modernization costs in internal use software. Open. Our fiscal year 2007 P&E valuation testing revealed problems with the linking of the purchase of assets recorded in the general ledger system to the P&E inventory system, which indicates that IRS’s detailed P&E records do not yet fully reconcile to the financial records. We will continue to monitor IRS’s strategy in addressing these financial management system issues. Internal Revenue Service: Recommendations to Improve Financial and Operational Management (GAO- 01-42, Nov. 17, 2000) Open. IRS has developed a workload delivery model that integrates the work plans of each source of assessment to evaluate the overall impact on downstream collection operations. IRS is continuing to look at case delivery practices from an overall perspective and make recommendations for changes to case routing and assignment priorities. IRS is also monitoring the nonfiler strategy and work plans to improve the identification of and selection of nonfiler cases to balance the working of nonfiler inventory with balance- due inventory. Additionally, IRS is also continuing the project to enhance its decision analytical models used for selecting cases based on their predicted collection potential to apply decision analytics to both delinquent accounts and unfiled returns; apply decision analytics to all categories of taxpayer not just small business, self- employed; expand the use of internal and external data sources to increase the portion of cases predicted by the models; ultimately develop alternative treatment strategies based on the least costly treatment indicated by the models; and update definitions for complex cases to improve routing to field collection. Open. According to IRS, SB/SE has initiated several projects to build additional decision analytical models to increase its ability to route cases to the appropriate resource. These projects utilize more sophisticated computer modeling and risk assessment techniques to improve the targeting of cases to pursue. The Collection Governance Council was established to ensure the inventory is balanced and resources are expended appropriately. IRS has estimated several billion dollars in additional tax collections have been realized through the use of the collection approach developed from the projects. Although these efforts have helped IRS target cases for collection, its ability to assess the relative merits of these efforts continues to be hindered by its inability to reliably measure how much it collects as a result of these efforts, relative to their associated costs. In addition, these efforts are primarily focused on SB/SE, thus they do not represent an integrated agencywide systemic approach to managing the collection of unpaid taxes across the scope of IRS’s activities. IRS has made some improvements in prioritizing its inventory of collection cases; but more needs to be done by IRS to address the full range of cost- benefit considerations. We will continue to review IRS’s initiatives to manage resource allocation levels for its collection efforts. Internal Revenue Service: Recommendations to Improve Financial and Operational Management (GAO- 01-42, Nov. 17, 2000) Open. IRS continues to address and correct issues that cause late lien releases through a Lien Release Action Plan, and conducting reviews as a part of A-123. In April 2007 IRS’s review of lien releases found it had improved the timely release of liens to 88 percent, a 19 percentage point increase from the 69 percent timeliness rate in fiscal year 2006. IRS added new action items and corrective actions to address new and repeat issues. IRS’s goal is to reduce overall lien release error rates to below 5 percent by September 30, 2009. Open. IRS has taken a number of actions over the past several years to address this issue. IRS developed an action plan to incorporate the requirements of the revised OMB Circular No. A-123. The overall action addresses untimely lien releases, including identification of causes and where they occur organizationally. For example, IRS centralized all lien processing at its Cincinnati Service Center Campus in 2005. Additionally, in July 2006, IRS enhanced various lien-processing exception reports to include a cumulative listing of unresolved lien releases, allowing it to more readily track the release status and take corrective action. However, during our fiscal year 2007 audit, we continued to find delays in the release of liens. In its OMB No. A-123 testing of lien releases, IRS found 7 instances out of 59 cases tested in which it did not release the applicable federal tax lien within the statutory period. The time between the satisfaction of the liability and release of the lien ranged from 35 days to 135 days. Based on its sample, IRS estimated that for about 12 percent of unpaid tax assessment cases in which it had filed a tax lien that were resolved in fiscal year 2007, it did not release the lien within 30 days. IRS is 95 percent confident that the percentage of cases in which the lien was not released within 30 days does not exceed 21 percent. IRS’s ineffective controls over this area results in its non-compliance with Internal Revenue Code section 6325 which requires IRS to release its tax liens within 30 days of the date the related tax liability was fully satisfied, had become legally unenforceable, or the Secretary of the Treasury has accepted a bond for the assessed tax. We will continue to assess the affect of IRS’s actions and continue to review IRS’s testing of tax lien releases as part of our fiscal year 2008 audit. Internal Revenue Service: Recommendations to Improve Financial and Operational Management (GAO- 01-42, Nov. 17, 2000) Open. IRS has taken steps to screen and examine Earned Income Tax Credit (EITC) claims and to address the collection of AUR and CAWR as part of the workload delivery model. For EITC IRS is pursuing estimating the full cost of these programs, and in the interim IRS is using information such as annual error rate estimates and high-level return on investment (ROI) computations for EITC base compliance activities and initiatives to make sound decisions about resource investments. IRS employs a ROI estimate for compliance activities that uses labor costs associated with protecting revenue for both pre-refund and post-refund activities. Since labor represents approximately 73 percent of the total IRS budget (2007) and 91 percent of the EITC budget, ROI calculations using labor costs provide valid cost/benefit data which are used, along with other data and program considerations, to make sound program decisions. The IRS released two reports that include ROI discussions and it is in the process of finalizing a summary report on the 3-year test to assess investments in a certification requirement versus other potential compliance investments. SB/SE is monitoring the nonfiler strategy and work plans to improve the identification of and selection of non- filer cases to balance the working of nonfiler inventory with balance-due inventory. SB/SE continues to review this model to ultimately develop alternative treatment strategies based on the least costly treatment indicated by the models. The CFO also initiated a cost pilot during fiscal year 2007 to determine the costs of several performance measures within AUR, and will share this information at the conclusion of the cost pilot. Open. In fiscal year 2008, we will continue to follow up on IRS’s progress on the various initiatives taken as well as IRS’s progress in estimating the full cost of these programs. Internal Revenue Service: Recommendations to Improve Financial and Operational Management (GAO- 01-42, Nov. 17, 2000) Closed. IRS continues to strengthen internal controls and procedures to enhance its ability to account for P&E in IFS. P&E, including capital leases, are recorded as assets when purchased. During fiscal year 2007, IRS revised the dollar threshold for review of P&E accounting transactions and conducted intensive reviews of the large-dollar transactions, increasing the accuracy of P&E reporting. IRS also improved its capability to capitalize assets or expense other items and to properly account for Business System Modernization costs in internal use software. Currently, IRS does not have a subsidiary ledger for leasehold improvements. A subsidiary ledger requires an enhancement to IFS. Funding for enhancements was denied for fiscal years 2007, 2008 and 2009. Depending on the amount of any future funding and prioritization of enhancements, it is not known when or if IRS can accomplish what was originally agreed to. Considering the age of this report and the long-term unknowns, IRS considers this action closed until further follow-up is required. Open. IRS implemented the first release of IFS on November 10, 2004, which allowed recording leasehold improvements as assets when purchased. A subsidiary ledger for leasehold improvements has not been developed. According to IRS, it lacks the funding to make the enhancements to IFS that are needed to develop a subsidiary ledger for leasehold improvements. Until it determines the amount of its future funding and prioritization of IFS enhancements, IRS will remain unsure of any additional actions it will take to accomplish this recommendation. We will continue to evaluate IRS’s efforts to enhance its ability to account for P&E assets, including leasehold improvements. Management Letter: Improvements Needed in IRS’s Accounting Procedures and Internal Controls (GAO-01-880R, July 30, 2001) Closed. The CFO implemented IFS on November 10, 2004 which included a cost module. The cost module currently has 3 years of data which provide managers with basic cost data for decision making in relation to their activities. IRS continues to improve the allocation methodology so that it can determine the detail behind the allocated costs. Open. We confirmed that IRS has procedures for costing reimbursable agreements that provide the basic framework for the accumulation of both direct and indirect costs at the necessary level of detail. IRS has improved its methodology for allocating its costs of operations to its business units. However, further actions are needed for it to accumulate and report actual costs associated with specific reimbursable projects. We will continue to monitor IRS’s efforts to fully implement its cost accounting system and, once it has been fully implemented, evaluate the effectiveness of IRS’s procedures for developing cost information for its reimbursable agreements. Internal Revenue Service: Progress Made, but Further Actions Needed to Improve Financial Management (GAO- 02-35, Oct. 19, 2001) Open. IRS is exploring other system- based ways of capturing both time and costs associated with its projects and activities and does not anticipate implementing the requirement for employees to itemize their time in the near future. Open. IRS states that it is exploring other system-based ways of capturing both time and costs associated with its projects and activities and does not anticipate implementing the requirement for employees to itemize their time in the near future. We will continue to monitor IRS’s efforts to fully implement its cost accounting system. Once it has been fully implemented, we will evaluate the effectiveness of IRS’s procedures for developing cost information to use in resource allocation decisions, which is the underlying basis for our making this recommendation. Internal Revenue Service: Progress Made, but Further Actions Needed to Improve Financial Management (GAO- 02-35, Oct. 19, 2001) Closed. IRS now allocates all costs, both personnel and nonpersonnel, to the major program areas described in the Statement of Net Costs on a monthly basis. Open. We confirmed that IRS has improved its cost accounting capabilities by developing and implementing procedures for allocating its costs of operations to its business units and to the cost categories in its Statement of Net Cost on a monthly basis. However, the cost categories on the Statement of Net Cost are at a higher level than specific programs and activities. Therefore, further actions are still needed to enable IRS to allocate nonpersonnel costs to the detailed level of specific programs and activities. We will continue to monitor IRS’s efforts to fully implement its cost accounting system and, once it has been fully implemented, evaluate the effectiveness of IRS procedures for developing cost information for specific programs and activities to use in resource allocation decisions. Management Report: Improvements Needed in IRS’s Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 2002) Open. During fiscal year 2007, IRS conducted Operational Reviews of its W&I Field Assistance area groups. These reviews included compliance with this recommendation. While groups were generally in compliance, IRS recognized the need for additional training. Field Assistance is conducting Filing Season Readiness training for Managers in fiscal year 2008 that includes remittance and security training. The fiscal year 2008 performance commitments address remittance security and shared responsibility for operational reviews. Operational reviews at all levels will be conducted during fiscal year 2008 to ensure consistency. Open. During our fiscal year 2007 audit, we visited 10 TACs and identified weaknesses over the payment processing and TAC managerial reviews that would address this recommendation at all 10 locations. We will review IRS’s additional planned corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Accounting Procedures and Internal Controls (GAO-02-746R, July 18, 2002) Closed. SETS data are reviewed on a bi-weekly basis to detect and correct errors. Monitoring SETS falls across a broad group of Chief Human Capital and Agency-Wide Shared Services (AWSS) staff. IRS provided guidance in November 2007 to all involved staff reminding them to monitor SETS systemic issues and immediately elevate those issues for NFC correction. Until a SETS replacement is developed, continuous monitoring will occur. Open. During our fiscal year 2007 audit, we continued to identify technical limitations and weaknesses with the SETS database. Specifically, during our analysis of the SETS data, we found multiple instances where (1) employees entered on duty either prior to the Office of Personnel Management completing their fingerprint check, IRS receiving their fingerprint check results, or both and (2) employees entered on duty with expired fingerprint check results (over 180 days old). The guidance provided to staff in November 2007 was subsequent to the completion of our fiscal year 2007 audit. We will evaluate IRS’s additional corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls and Accounting Procedures (GAO-04- 553R, April 26, 2004) Closed. IRS continues to conduct on-site reviews looking at logs for desk and work area, date stamp, cash, candling, shred, and mail. IRS uses the data collection instrument (DCI) entitled “Processing-Internal Controls” and uses the results of these reviews to roll them into a calculation to determine each bank’s score in the new bank performance measurement process. In addition, lockbox personnel are required to perform similar reviews monthly and report results to the lockbox field coordinators. The report must contain the date of review, shifts reviewed, results of the review (even when no items are found) and include a reviewer and site manager’s initials; a signature as required by the Lockbox Processing Guidelines (LPG); or both. Additional reviews are performed on the monthly F9535/Discovered Remittance, candling log, disk checks/audits, and shred reports received from the lockbox site by the lockbox field coordinators. Closed. We verified that IRS established and implemented a Processing Internal Controls and Physical Security DCIs. These DCIs are used to assess the required managerial reviews that are performed at each lockbox bank. Management Report: Improvements Needed in IRS’s Internal Controls and Accounting Procedures (GAO-04- 553R, April 26, 2004) Closed. IRS continues to perform monthly unannounced testing of guard response to alarms, and documentation from these reviews is maintained at each service center campus. Roll-up documentation from Physical Security Area managers is provided to the Program, Planning, and Policy Office (PPPO) for reports to higher-level management. PPPO also conducts random unannounced spot checks when on-site at campuses and computing centers. Open. During our fiscal year 2007 audit, we identified instances at two of five SCCs we visited in which security guards did not respond properly to alarms. We will evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Review of Controls over Safeguarding Taxpayer Receipts and Information at the Brookhaven Service Center Campus (GAO-05-319R, Mar 10, 2005) Closed. Accounts Management is enforcing adherence to existing instructions for securing access to restricted areas through trained security monitors at consolidated sites. These clerks receive training annually, as well as periodic briefings, on the issuance and inventory of badges and the security of taxpayer information and receipts. Candling procedures are reinforced through training and team meetings. Local management ensures that correct procedures are followed when reviewing equipment and candling logs. Open. During our fiscal year 2007 audit, we identified instances at one SCC we visited with reduced submission processing functions where (1) neither the door monitor nor the payment processing supervisor in the receipt and control area inspected visitors’ belongings when they exited the restricted area and (2) the inside envelope of the 3210 transmittal package did not contain a statement indicating that the information inside is for limited official use. We will continue to assess IRS’s actions during our fiscal year 2008 audit. Management Report: Review of Controls over Safeguarding Taxpayer Receipts and Information at the Brookhaven Service Center Campus (GAO-05-319R, Mar 10, 2005) Closed. IRS has developed and implemented a methodology for estimating mail volumes and resource requirements for use in future submission processing consolidations. IRS used the prior campus consolidation experiences from both Brookhaven and Memphis in its projections for the Philadelphia Campus Support Department. Closed. During our fiscal year 2007 audit, IRS W&I staff provided us with a methodology and estimation for anticipated rapid changes in mail volume at future SCCs selected for significant reductions in their submission processing functions. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. PPPO issued notification in February 2007 reminding Physical Security area directors that required documentation from contracting officers’ technical representatives is needed to support the issuance of identification media before granting staff-like access to contractors, and that all forms must remain on file. The Audit Management Checklist is also used to ensure that proper documentation is received and filed. All IRMs have been updated and renumbered. IRM 10.2.5 Identification Card specifies that Form 5519, 13716-A or similar identification request form (13760), and the interim or final background investigation letter must be retained and filed in the identification media file on each contractor for the life of the identification card. Open. During our fiscal year 2007 audit, we identified four contractors at one of five SCCs we visited who were granted staff-like access before background investigations had been completed. Also, we obtained and reviewed SCC contractor background investigation data from all 10 SCCs and found that 3 SCCs permitted five contractors staff-like access before their background investigations had been completed. In addition, IRM series 10.2 mentioned in IRS’s response to this recommendation is currently in draft, under review, and waiting to be finalized. We will evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. PPPO issued notification in February 2007 reminding Physical Security area directors that documentation from the contracting officer’s technical representative is needed to support the issuance of identification media before granting staff-like access to contractors, and that all forms remain on file. The Audit Management Checklist is also used to ensure that proper documentation is received and filed. All IRMs have been updated and renumbered. IRM 10.2.5 Identification Card specifies that Form 5519, 13716-A or similar identification request form (13760), and the interim or final background investigation letter must be retained and filed in the identification media file on each contractor for the life of the identification card. Open. As of the time of our audit, the IRM 10.2 series was in draft, under review, and waiting to be finalized. We will monitor its final implementation and continue to evaluate IRS’s policies and procedures related to background investigations for contractors during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. Submission Processing issued an annual reminder memorandum to the courier contractors on February 27, 2007. Additionally, the lockbox banks security team verified that all lockbox bank sites issued an annual reminder memorandum to courier contractors reminding them to adhere to all courier service procedures in the Lockbox Security Guidelines (LSG). Closed. We verified that reminder memorandums were issued to the SCC and lockbox bank couriers. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. Submission Processing revised the LSG 2.5 during 2007 to provide for periodic verification that couriers adhere to IRS policy while transporting taxpayer receipts and information. In IRS’s campuses, IRS ensures couriers sign, date, and note the time of pickup on Form 10160, Receipt for Transport of IRS Deposit. When the couriers drop off the deposit, IRS ensures Form 10160 is date and time stamped. Each campus reviews the form and notes any time discrepancies. Couriers are questioned if discrepancies are found and the information is noted in the Courier Incident Log. If inconsistencies are noted, the centers use their discretion to determine whether it is necessary to trail the couriers. Closed. We verified that IRS revised its LSG to include provisions for periodic verification that couriers adhere to IRS procedures for transporting taxpayer receipts and information. We also noted that procedures were established at the campuses involving the review of the returned Form 10160. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Open. SB/SE revised IRM 5.1.2, 1.4.50, 4.20.3, and 4.20.4 to address this recommendation. The Director, Examination sent a memorandum to all Examination area directors on October 17, 2006 reminding them of the payment processes outlined in IRM 5.1.2, and requiring periodic reviews of payment processing procedures during their group operational reviews. Although SB/SE believes its current field payment processing procedures sufficiently addresses segregation of duties, it is currently conducting a risk assessment to identify potential weaknesses. Open. The status information provided by IRS did not clearly address segregation of duties within the SB/SE business units. When we issued this recommendation, we noted that (1) individuals responsible for preparing payment posting vouchers were the same individuals who recorded the information from those vouchers on the document transmittal and mailed those forms to the IRS service center and (2) there was no independent review or reconciliation of documents or payments before they were mailed by their preparer. During our recent visits to selected SB/SE units in March 2008, we found that this condition continued to exist. Duties involving the preparation of payment posting vouchers, document transmittal forms, and transmittal packages were not segregated. Employees informed us that there was no related requirement in the IRM. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Open. W&I Field Assistance has taken a number of actions to emphasize the requirement for including a document transmittal form listing the Daily Report of Collection Activity forms in transmittal packages, and ensuring that they are reconciled and reviewed by the secretary, initial assistant representative, or manager in offices where these positions are located. Territory managers review and discuss the monthly Trends and Patterns reports with the group manager. Results of the reviews are forwarded to the area director. Operational reviews at all levels will be conducted annually to ensure that field offices comply with the requirement to prepare Form 3210, which lists all Forms 795 being shipped to the Submission Processing Center. Open. During our visits to several SB/SE business units, we found that a document transmittal form was not being used to transmit multiple Daily Report of Collection Activity forms to the respective service center campus. We will continue to assess IRS’s actions during our fiscal year 2008 audit. Beginning in March 2008 Collection began annual reviews of a sample of groups in each area to ensure the reviews described in IRM 1.4.50 are taking place. The results of the headquarters review will be documented in the area operational review. SB/SE is currently reviewing the language in IRM 1.4.50, Collection Group Manager, Territory Manager and Area Director Operational Aid to determine if clarification is needed. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. The procedures to prevent the generation or disbursement of refunds associated with AUR accounts are in place and included in IRM 3.8.45. Employees are required to conduct Integrated Data Retrieval System (IDRS) research after receiving an unidentified remittance to determine if there is an open account that allows for posting of the remittance. Submission Processing issued a Hot Topic on January 25, 2007, which added procedures to IRM 3.17.10 to check for cases that can be identified as an AUR payment and research IDRS for CP2000 Indicators: TC 922, “F” Freeze Code, and campus under reporter programs. Closed. We confirmed that IRS updated IRM 3.8.45 and IRM 3.17.10 to include the requirement that employees conduct IDRS research after receiving unidentified remittances. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. IRS issued its annual memorandum in August 2007 and received the annual list of authorized signatures by October 31, 2007, per IRM 3.17.79.3.5(4)(d). Submission Processing completed a sample review as part of the Monthly Security Review Checklist per 3.17.79.3.5(3), and completed a 100 percent review of the new annual list in November 2007. Open. During our fiscal year 2007 audit, we continued to find that the documentation requirements on memorandums, which are submitted to the manual refund units listing officials authorized to approve manual refunds, were incomplete. The annual memorandums issued, the annual list of authorized signatures, and the reviews performed noted in IRS’s response to this recommendation were subsequent to our fieldwork. We will follow up on IRS’s efforts to improve the documentation requirements during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. IRS issued guidance on enforcing requirements for monitoring accounts and reviewing monitoring of accounts via Hot Topics on April 30, 2007 and again on July 13, 2007. Department managers provided subordinate managers and the employees refresher training using IRM 21.4.4 and 3.17.79 as reference materials to reinforce the monitoring requirements. Accounts Management completed refresher training at all campuses from January through May 2007. SB/SE Campus Compliance Services (CCS) continues to stress the importance of following all IRM procedures for the manual refunds. To ensure that the campuses continue to comply with all IRM provisions for manual refunds, the CCS directors are covering this topic in both filing & payment compliance and campus reporting compliance operations during their fiscal year 2008 campus reviews. The Taxpayer Advocate Service (TAS) has specific IRM requirements and controls for all employees and managers to monitor the posting of manual refunds to prevent duplicate refunds, and to document in the Taxpayer Advocate Management Information System (TAMIS) that all actions were completed. TAS also updated its manual refund training on March 12, 2007, re-emphasizing the requirement to monitor manual refunds to prevent duplicate refunds. Open. We verified that IRS issued the Hot Topics, which included providing managers and the employees training to reinforce monitoring requirements. However, during our fiscal year 2007 audit, we continued to find instances where the manual refund initiators, leads, or both did not monitor accounts to prevent duplicate refunds. We also found that some of the supervisors did not review the initiators’ or leads’ work to ensure that the monitoring of accounts was performed. We will continue to review IRS’s monitoring and review efforts during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. Submission Processing (SP) issued guidance on enforcing requirements for monitoring accounts and reviewing monitoring of accounts via Hot Topics on April 30, 2007 and again on July 13, 2007. Department managers provided subordinate managers and the employees refresher training using IRM 21.4.4 and 3.17.79 as reference materials to reinforce the monitoring requirements. Accounts Management completed refresher training at all campuses from January through May 2007. IRS continues to use the Manual Refund Check Sheet and monthly security reviews to ensure compliance with IRM requirements, and these reviews are forwarded monthly to SP headquarters for consolidation and review by headquarters analysts and management. The SB/SE Campus Compliance Services continues to stress the importance of following all IRM procedures for the manual refunds. To ensure that the campuses continue to comply with all IRM provisions for manual refunds, the CCS directors are covering this topic in both filing & payment compliance and campus reporting compliance operations during their fiscal year 2008 campus reviews. The TAS has specific IRM requirements and controls for all employees and managers to monitor the posting of manual refunds until posted to prevent duplicate refunds, and to document in TAMIS that all actions were completed. TAS also updated its manual refund training on March 12, 2007, re-emphasizing the requirement to monitor manual refunds to prevent duplicate refunds. Open. We verified that IRS issued the Hot Topics, which included providing managers and employees training to reinforce the monitoring requirements. However, during our fiscal year 2007 audit, we continued to find instances where the requirement for documenting monitoring actions and documenting supervisory review were not enforced. We will continue to review IRS’s monitoring and review efforts during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. IRS issued a Hot Topic on January 10, 2007 and again on March 30, 2007 as a reminder to ensure adherence to the existing process of enforcing the requirement that command code profiles be reviewed at least once annually. The Manual Refund Unit has included a signed and dated copy of the Command Code: RSTRK input (action performed through the use of IDRS in the file with the authorization memorandums to verify compliance with IRM 3.17.79.1.7. The Monthly Security Review Checklist was updated to add this review. Closed. During our fiscal year 2007 audit, we found that the requirements that command code profiles be reviewed at least once annually were enforced. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-05-247R, Apr 27, 2005) Closed. IRS updated IRM 10.8.34 IDRS Security Handbook replacing the IDRS Security Law Enforcement Manual (LEM) 25.10.3. Section 10.8.34.5.3.1 (3) – (6) prohibits managers from being in the same IDRS unit as the employees they review. Section 10.8.34.8.2.2.5 (2) (f) requires managers to review reports monthly to ensure profiles have appropriate restrictions. Section 10.8.34.8.2.2.5 (2) (m) prohibits employees from reviewing their own profile or any other report data pertaining to themselves. IRS also updated the IDRS section of the annual FMFIA Self-Assessment Tool for Managers with item 4.50 requiring the quarterly review of IDRS user profiles in accordance with the IRM, and item 4.52 requiring managers to indicate that they completed a review of IDRS security reports and appropriate action has been taken to correct weaknesses. Closed. During our fiscal year 2007 audit, we found no instances of staff members reviewing their own command codes. We verified that IRS has updated IRM 10.8.34 IDRS Security Handbook, which has replaced IDRS Security LEM 25.10.3. We also verified that section 10.8.34.5.3.1 (3) – (6) prohibits managers from being in the same IDRS unit as the employees they oversee; section 10.8.34.8.2.2.5 (2) (f) requires managers to review reports monthly to ensure that profiles have appropriate restrictions; and section 10.8.34.8.2.2.5 (2) (m) prohibits employees from reviewing their own profile or any other report data pertaining to themselves. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Open. W&I’s Accounts Management will confirm during the site operational reviews that managers are performing a follow-up and documentation acknowledgement of receipt of Form 3210. This item will be monitored during the fiscal year 2008 quarterly reviews. During fiscal year 2007, IRS completed conference calls prior to each directorates filing season readiness (FSR) certification, and will continue to provide directions during the fiscal year 2008 FSR conference calls to enforce management controls to complete, review, approve, and follow up on receipt of Forms 3210 in Accounts Management. Open. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Open. LMSB has issued procedures to the field on the responsibilities for using receipt transmittals. LMSB employees are reminded annually through executive memorandum of Form 3210 procedures and responsibilities. LMSB has also issued memos to the field to remind and reinforce the use of Form 3210 and establishment of a follow-up system for unacknowledged 3210s. A Closing Checklist for LMSB Cases which includes Form 3210 requirement reminders was created to assist LMSB employees when transmitting cases. LMSB Technical training has certified that Form 3210 procedures and responsibilities are included in revenue agent training materials. LMSB Human Capital Office has included the requirement that Industry Territory Managers review Form 3210 utilization and follow-up procedures during operational reviews in a memorandum dated December 13, 2006. Open. During our fiscal year 2007 audit, we identified instances at one SCC and four TACs where there was no system in place or evidence maintained to track acknowledged document transmittals. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. IRMs 21.3.4.7 and 1.4.11.19.1 were revised during 2007 to provide procedures for requiring TACs to follow-up with SP centers when acknowledgements are not received within 10 days. Similarly, W&I Accounts Management revised IRMs 21.5.4.2 and 1.4.16 for this requirement. W&I Field Assistance will conduct operational reviews during and after filing season to monitor compliance, and is currently enhancing the existing TAC Security and Remittance Review Database to provide more comprehensive and quantitative data for analysis. Reviews conducted during 2007 showed that offices transmitting receipts have a system to track acknowledged copies of document transmittals. Planned reviews will enforce existing requirements for both organizations. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. LMSB has issued procedures to the field on the responsibilities for using receipt transmittals. LMSB employees are reminded annually through executive memorandum of Form 3210 procedures and responsibilities. LMSB has also issued memos to the field to remind and reinforce the use of Form 3210 and establishment of a follow-up system for unacknowledged 3210s. A closing checklist for LMSB cases was created to assist LMSB employees when transmitting cases. LMSB technical training has certified that Form 3210 procedures and responsibilities are included in revenue agent training materials. LMSB Human Capital Office has included the requirement that Industry Territory Managers review Form 3210 utilization and follow-up procedures during operational reviews in a memorandum dated December 13, 2006. Closed. During our fiscal year 2007 audit, we verified that the IRM includes procedures for LMSB and TE/GE units to follow up with the destination sites if remittance transmittals are not returned within 10 days or if all remittances were not marked with a distinctive checkmark. Also, we verified that the IRM contains Field Assistance (TAC) procedures for monitoring document transmittal acknowledgements. IRMs 21.3.4.7 and 1.4.11.19.1 were revised to provide procedures for requiring TACs to follow-up with SP centers when acknowledgements are not received within 10 days. IRM 1.4.11.19.1 Maintaining Form 795/795A Centralized Files provides instruction to document follow-up of unacknowledged document transmittals. To help reinforce the importance of the follow-up managers are required to attend classroom training. New and acting managers attended “Managing a TAC” training in 2007, and all managers attend a filing season readiness workshop. W&I Accounts Management revised IRMs 21.5.4.2 and 1.4.16 for this requirement. Planned reviews will enforce existing requirements. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. LMSB has issued procedures to the field on the responsibilities for using receipt transmittals. LMSB employees are reminded annually through executive memorandum of Form 3210 procedures and responsibilities. LMSB has also issued memos to the field to remind and reinforce the use of Form 3210 and establishment of a follow-up system for unacknowledged 3210s. A closing checklist for LMSB cases was created to assist LMSB employees when transmitting cases. LMSB technical training has certified that Form 3210 procedures and responsibilities are included in revenue agent training materials. LMSB Human Capital Office has included the requirement that Industry Territory Managers review Form 3210 utilization and follow-up procedures during operational reviews in a memorandum dated December 13, 2006. Open. During our fiscal year 2007 audit, we identified instances at seven TACs where there was no evidence of managerial review of document transmittals and one instance at one of five SCCs we visited in which one Refund Inquiry Unit manager did not document his review of the document transmittals. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. IRM 1.4.11.19.5 Field Assistance Manager Review outlines instructions for managers to perform a minimum of two reviews per quarter per employee for payment processing and reconciliation procedures that include 3210 and 795 segregation of duties. A certification template has been created and placed in the IRM 1.4.11-10 for managers to confirm the review being conducted. To help reinforce the importance of the follow-up managers are required to attend classroom training. New and acting managers attended “Managing a TAC” training in 2007 and all managers will attend a Filing Season Readiness Workshop. During the training the requirement to conduct reviews and document results will be emphasized. W&I Accounts Management revised IRMs 21.5.4.2 and 1.4.16 for this requirement. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Open. W&I Field Assistance (FA) and AWSS are currently implementing plans to correct security and control access issues in TACs. Field Assistance identified 120 locations and AWSS completed a detailed analysis on each one. Most locations were identified as space and design issues that require implementation of the TAC Model Design. For locations that were not space and design issues, AWSS provided the funding and implemented corrective actions. Most of the security and control access issues affect small TACs. FA and AWSS have developed a strategic TAC Model implementation plan and the new “Mini TAC Model Design” to correct security and control access issues in the remaining offices. Open. During our fiscal year 2007 audit, we identified instances at two TACs where the controlled area was not equipped with physical security controls adequate to deter and prevent unauthorized access to restricted areas or office space occupied by other IRS units. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Open. Effective November 27, 2007, FA managers are no longer required to document visits to outlying TACs by using a checklist. Instead, new processes were implemented that will better gauge managers’ adherence to remittance and physical security internal controls. The new process includes the following: (1) A performance commitment for each level of FA management (director, area director, territory manager (TM), and TAC manager). The commitment requires managers to conduct and document reviews to ensure protection of data and equipment and ensure compliance with remittance and security procedures. (2) Implementation of a tiered operational review approach. This will allow FA to determine if TAC managers are performing required reviews, conducting periodic visits, and focusing on actions that mitigate control weaknesses. Headquarters (HQ) reviews focus on the Area Offices, Area Office operational reviews focus on TMs, and TM reviews focus on each TAC manager. (3) TAC managers and TMs using DCIs to conduct physical security and remittance reviews. (4) TAC managers inputting review results into the TAC Security and Remittance Review Database. Database information will be analyzed at the headquarters level to identify top issues needing attention and to develop corrective actions. Open. IRS no longer requires TAC managers to document their visits to outlying TACs by using a checklist but has implemented new procedures involving FA managers at all levels to ensure that periodic reviews are performed and centrally documented. However, these changes occurred subsequent to our fiscal year 2007 audit. We will assess, during our fiscal year 2008 audit, whether the new procedures will effectively mitigate the risks that the previous recommendation of documenting supervisory visits was originally designed to address. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. In January 2006, the lockbox bank LSG 2.2.3.1.5 (6) was revised to add the requirement that banks maintain a logbook of incident reports and any applicable supporting documentation, and note corrective follow-up actions taken on each incident. IRS reinforced the requirement to maintain a logbook in sequential date order in the 2007 LSG. For SCCs, the requirement for all activations of alarms to be logged in security console logs has been on the Audit Management Checklist since June 2006. Interim IRM 1.16.12A Security Guard Service and Explosive Detection Dogs, issued in November 2006, states the requirement for the guard console blotter/event log to be annotated to record and document the guard force response to each alarm activation exercise. Draft IRM 10.2.14 Methods of Providing Protection (awaiting finalization) states, “A record of all instances involving the activation of any alarm regardless of the circumstances that may have caused the activation, must be documented in a Daily Activity Report/Event Log, or other log book and maintained for two-years.” The IRM 1.16 series is being changed to 10.2. Open. As of the time of our audit, the IRM changes were in draft, under review, and waiting to be finalized. During our fiscal year 2007 audit, we identified three instances at one of four lockbox banks we visited in which the activation of intrusion alarms were not recorded by security guards. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. W&I issued a memorandum on April 5, 2007, to address this issue. Additionally, a letter was issued to the Director, Security and Law Enforcement of Homeland Security, to ensure that security officers are aware of their duties and responsibilities at key post of duty. Closed. We did not identify any instances where key posts of duty were left unattended by security guards during our fiscal year 2007 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. IRS continues to use the Security Review Check List to document the effectiveness of the initial and final candling process, and to talk to employees who perform initial and final candling as part of the monthly campus and national office security reviews. Closed. We verified that IRS revised its Security Review Checklist to document, through observation, the effectiveness of the initial and final candling process. During our fiscal year 2007 audit, we non-statistically selected and reviewed several campus security review reports and found no instances where the reports did not document the number of employees who were questioned about their knowledge of candling procedures and the responses received from the employees. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. As of January 1, 2007, IRS revised LSG section 2.2.3.1(6) k to restrict access of all delivery personnel. The IRS Lockbox Security Review Team observed the lockbox site’s process of delivery personnel while on-site to ensure compliance with the LSG requirement. In addition, section 2.2.2.13.1 (CCTV Cameras) (2)g of the LSG was revised to add that cameras must capture images of all persons entering and exiting perimeter doors and other critical ingress/egress points, including but not limited to the computer room and closets containing main utility feeds. AWSS continues to complete compliance reviews, risk assessments, and quarterly audit management checklist reviews. Since April 2006, the service center campuses have been providing quarterly verification that all guards have been reminded to inspect and scrutinize all badges of personnel accessing IRS facilities. During the past year, IRS has accessed closed- circuit television (CCTV) capabilities and is currently taking corrective actions to allow the unobstructed surveillance of campus fence lines and the facility perimeters. Closed. We verified that IRS refined the scope and nature of its periodic security reviews by (1) performing periodic tests of whether lockbox personnel are only allowing authorized individuals to access the facility and verifying that CCTVs are capturing key areas and (2) conducting quarterly assessments of the integrity of perimeter access controls. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. IRM 1.16.12 was revised and documents the requirements to test, document, report and follow-up on service center campus intrusion detection alarms. Physical Security area directors began implementing the new procedures in January 2007. Test results are rolled-up to PPPO for quarterly reports for upper management. Open. IRS officials informed us that the IRM section is in draft and currently in the review stage. We will follow up on the finalization of this IRM and continue to assess IRS’s actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. This recommendation remains closed, as IRS reported in fiscal year 2006. AWSS reports that the re-engineered process is working as intended. Aging record reports are monitored monthly, and AWSS staff follows up on disposal actions to identify issues or problems. Closed. During fiscal year 2006, IRS re-engineered the P&E asset retirement and disposal process. The new process generates exception reports that enable management to monitor the aging of transactions during the disposal process. Our fiscal year 2007 review of P&E internal controls showed that anomaly reports are now being generated when an asset remains in a disposal code for an extended period of time. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-06-543R, May 12, 2006) Closed. This recommendation remains closed as IRS reported in fiscal year 2006. AWSS reports that the reengineered process is working as intended. Aging record reports are monitored monthly and AWSS staff follows up on disposal actions to identify issues or problems. Open. During fiscal year 2006, IRS re- engineered the P&E asset retirement and disposal process. The new process generates exception reports that enable management to monitor the aging of transactions during the disposal process. While our fiscal year 2007 review of P&E internal controls showed that anomaly reports are now being generated when an asset remains in a disposal code for an extended period of time, our audit testing revealed that disposals are still not being recorded in a timely manner. Our inquiries of IRS management revealed that management is not always reviewing the anomaly reports as required by the reengineered process. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. IRS is currently evaluating this recommendation to determine the best means to safeguard (e.g. encryption) and/or retain taxpayer data. To assist in the evaluation process, IRS plans to complete a cost-benefit analysis to determine the best solution. The tentative date for completion of the cost-benefit analysis and any resulting solution is September 30, 2008. In the interim, to mitigate the risk of losing personally identifiable information (PII), IRS plans to incorporate specific guidelines in the calendar year 2008 LSG to clearly require that all lockbox sites store backup media containing PII in locked containers. The calendar year 2008 LSG was issued on December 19, 2007. Open. During our fiscal year 2007 audit, we identified instances at all four lockbox banks we visited where backup data tapes containing federal taxpayer information were not encrypted. We will evaluate IRS’s planned corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. IRS is currently evaluating this recommendation to determine the best means to safeguard (e.g. encryption) and/or retain taxpayer data. To assist in the evaluation process, IRS plans to complete a cost- benefit analysis to determine the best solution. The tentative date for completion of the cost-benefit analysis and any resulting solution is September 30, 2008. In the interim, to mitigate the risk of losing PII, IRS plans to incorporate specific guidelines in the calendar year 2008 LSG to clearly require that all lockbox sites store backup media containing PII in locked containers. The calendar year 2008 LSG was issued in December 19, 2007. Open. During our fiscal year 2007 audit, we identified instances at all four lockbox banks we visited where backup media containing federal taxpayer information was not stored at an off-site location. We will evaluate IRS’s planned corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. IRS is currently evaluating this recommendation to determine the best means to safeguard (e.g. encryption) and/or retain taxpayer data. To assist in the evaluation process, IRS plans to complete a cost-benefit analysis to determine the best solution. The tentative date for completion of the cost-benefit analysis and any resulting solution is September 30, 2008. In the interim, to mitigate the risk of losing PII, IRS plans to incorporate specific guidelines in the calendar year 2008 LSG to clearly require all lockbox sites store backup media containing PII in locked containers. The calendar year 2008 LSG was issued in December 19, 2007. For the Lockbox Electronic Network (LEN), it electronically transmits all transactional data, including federal taxpayer information, from the lockbox banks to IRS via the Martinsburg Computing Center, which is currently going to the Tennessee Computing Center. The electronic transmission securely transmits the data through the use of Virtual Private Network devices like the devices used at the computing centers which will encrypt the data as it is being transmitted. Effective March 2008, the LEN is being used to transmit the data to the SP centers. Cartridges will only be used in the event of an emergency or contingency situation where the LEN transmission fails. Open. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. All SCCs conducted an assessment of the CCTV systems concerning unobstructed views of fence lines and perimeter, and identified problems that were documented in an action plan developed in May 2007 and completed by February 2008. Open. During our fiscal year 2007 audit, we identified instances at three of five SCCs we visited where security cameras did not provide an unobstructed view of the entire perimeter of the facility. We will evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. Procedures were implemented requiring Physical Security analysts to document issues/problems during quarterly reviews, establish corrective action due dates, and track progress to ensure implementation of all corrective actions. The new procedures and reporting formats were implemented in June 2007. Compliance with the procedures is monitored during Physical Security area director operational reviews and random sampling by PPPO. Closed. We verified that IRS revised its procedures and reporting formats to require its Physical Security analysts to (1) document concerns identified during quarterly physical security reviews, (2) establish corrective action implementation dates, and (3) track those actions to ensure and monitor implementation. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. Employees have been instructed to recognize only IRM 3.17.79 and IRM 21 as the official authoritative guidance for processing manual refunds. Submission Processing (SP) conducted a conference call with designated campus planning and analysis staff, SP Headquarters staff and the IRM owner for 21.4.4, and issued a Hot Topic on April 30, 2007. SP also provided sites with this information and contacted authors of IRM 21.4.4 and IRM 4.4.19. Accounts Management and SB/SE Compliance will review the IRM to ensure that instructions are correct and that related training course modules are correct. Closed. IRS’s action satisfies the intent of this recommendation. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. W&I reinforced IRM 3.17.79.0 and 21.4.4 as the official authoritative guidance for processing manual refunds. SP provided sites with this information and also contacted authors of IRM 21.4.4 and IRM 4.4.19. The Account Management analyst and the SB/SE Compliance analyst will review the IRM to ensure that instructions are correct and that related training course modules are accurate. Closed. IRS’s action satisfies the intent of this recommendation. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. All W&I business functions conducted training by July 2007, except for Compliance, which is planned to be completed by April 2008. SP management reviews history sheets annotated with taxpayer identification numbers, tax period, transaction code, date, and initials of initiator. SP conducted team refresher training by July 30, 2007. This refresher training will also be included in fiscal year 2008 continuing professional education. A manual refunds refresher course was distributed by the Accounts Management Program Management/Process Assurance and training was completed by June 2007. The course emphasized the required monitoring of manual refunds and the documentation of monitoring actions. Accounts Management will conduct additional training by July 15, 2008, for employees who initiate manual refunds. Open. We will review IRS’s records of training during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. IRS submitted a work request on June 26, 2007, to update its computer programs to check for outstanding liabilities associated with both the primary and secondary Social Security numbers on a joint tax return and offsetting to any outstanding TFRP liability before issuance of a refund. The programming change was implemented on January 20, 2008. Open. The programming change was initiated after our fiscal year 2007 audit was complete. We will evaluate the effectiveness of IRS’s corrective action during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. IRS counsel said that it was acceptable for the revenue officer to also freeze the refund of any spouse at the time of approval of recommendation for a TFRP assessment or at the time the TFRP assessment is made, Therefore, IRS’s SB/SE issued interim guidance on July 23, 2007, for input of transaction code 130 to freeze potential individual master file refunds for all individuals determined responsible for the TFRP. Closed. Based on our review of the IRS interim guidance issued on July 23, 2007, we verified that IRS instructed revenue officers making TFRP assessments to research whether responsible officers are filing jointly with their spouses and to place refund freezes on the joint accounts. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. IRS implemented a system change in January 2007 to correct the penalty calculation program. Open. We will evaluate the effectiveness of IRS’s corrective action during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. IRS implemented a system change in January 2007 that corrected debit balance taxpayer accounts affected by the programming error. Open. We will evaluate the effectiveness of IRS’s corrective action during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. The Deputy Commissioner for Services and Enforcement issued a memorandum to all functions titled “Service wide Action to Prevent Late Lien Releases,” in January 2007. The memorandum directed manual lien releases when systemic processes do not release liens. Based on the memorandum, IRS revised several IRM sections. In addition, IRS plans to revise IRM 5.1.2 by May 2008 to include all four elements contained in this recommendation. Open. During our fiscal year 2007 audit, we identified issues that resulted in the untimely release of a tax lien. We will continue to review IRS’s corrective actions to address this issue during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. IRS completed programming changes in January 2007 that allow lien releases regardless of freeze codes. In addition, the Deputy Commissioner for Services and Enforcement issued a memorandum to all functions titled “Service wide Action to Prevent Late Lien Releases,” in January 2007. The memorandum directed manual lien releases when systemic processes do not release liens. Based on the memorandum IRS revised several IRM sections. Finally, IRS plans to revise IRM 5.1.2 by May 2008 to include all of the elements contained in this recommendation. Open. During our fiscal year 2007 audit, we identified issues that resulted in the untimely release of a tax lien. We will continue to review IRS’s corrective actions to address this issue during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. In order to facilitate timely lien releases, IRS put a new “My Eureka” report in place for the Centralized Insolvency Office. IRS generates and resolves issues on this report weekly. IRS revised IRM 5.9.17.11.6 in March 2007 to reference the report and request manual lien releases. Campus Compliance analysts conduct reviews quarterly to ensure appropriate actions are taken. However, IRS’s fiscal year 2007 OMB Circular No. A-123 review of its lien release process identified two lien release errors associated with bankruptcy discharges. Therefore, IRS has added new action items to the Lien Release Action Plan, to establish new controls and oversight by management in CIO and Field Insolvency to ensure that IRM guidelines are followed and new procedures for Field Insolvency. In addition, IRS identified an instance where Field Insolvency failed to release a lien after an Exempt/Abandoned Asset review. Therefore, Collection Policy will review Field Insolvency by June 30, 2008, and consider the addition of new corrective actions to reduce lien errors based on this issue. Open. During our fiscal year 2007 audit, we identified issues that resulted in the untimely release of a tax lien. We will continue to review IRS’s corrective actions to address this issue during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. The IRM for the Centralized Lien Unit (CLU) provides specific direction to date stamp and maintain billing support vouchers (BSVs) as evidence of timely releases of federal tax liens. In November 2006 CLU began a new process of scanning BSVs, and associating BSVs with Specific Lien Identification (SLID) numbers in order to ensure that BSVs are retrievable and show that liens were timely released. IRS trained employees on this process as it was rolled out. In May 2007 IRS completed the 2007 OMB Circular No. A-123 review on the timeliness of lien releases. The review found that BSVs were stamped appropriately in all cases reviewed. Closed. In our review of IRS’s fiscal year 2007 OMB circular No. A-123 lien testing results, we verified that IRS was able obtain the date stamped billing vouchers for all of its sample items. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. The collection activity reports (CAR) capture data each month on installment agreement activity. The number of installment agreements, number of user fees paid and user fee dollar amounts are extracted from the installment agreement reports. These reports are utilized by Headquarters to conduct month-to-month and year- to-year comparisons for trend analysis. Headquarters will monitor collections on the CAR and balance those collections against what is projected and what is in the financial system, and use historical trends to identify issues. Open. IRS’s actions to monitor and analyze installment agreement user fee collections at headquarters were initiated after our fiscal year 2007 audit was completed. We will review and evaluate IRS’s efforts to monitor installment agreement user fee activity during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. A sweep process that collects paid fees and records them in the user fee account has been established. Effective January 2008, the sweep is run weekly to ensure accurate and more timely accounting of fee dollars. Open. The action described in IRS’s response does not fully ensure that recorded installment agreement user fees correctly reflect user fees earned and collected from taxpayers because it is not designed for that purpose. IRS’s sweep (recovery) process is designed to identify and correct for unrecorded user fees collected with the initial installment agreement payment but incorrectly posted against the taxpayer’s debt (tax module). We will continue to review and evaluate IRS’s efforts to address issues related to installment agreement user fees during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. Steps to ensure appropriate assessment and collection of user fees are already in place. The user fee category on the Installment Agreement Accounts Listing (IAAL) compares unpaid and overpaid user fee money and makes adjustments accordingly. The IAAL for W&I is consolidated at one site. For both W&I and SBSE, the IAAL is subjected to Planning and Analysis Support, Managerial, Operations and Headquarters review. Open. IRS was in the process of updating its operating procedures to account for and record new installment agreement user fee amounts when we completed our fiscal year 2007 audit. We will review and evaluate IRS’s use of the IAAL and Managerial, Operations, and Headquarters review processes during our fiscal year 2008 audit. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Open. IRS is identifying locations that need additional secured storage space and will obtain the necessary space as appropriate. Scheduled completion date is October 1, 2009. Processes and procedures are in place for business units to request space, either secured or non- secured. AWSS negotiated processes and procedures with the business units that are now part of AWSS’s Senior Commissioner Representative Handbook. Business units needing secured space must follow established guidance. Also, processes have been set for business units to approve and fund their space requests. Open. IRS has implemented a plan to obtain additional secured storage space as deemed necessary, with a scheduled completion date of October 1, 2009. We will monitor IRS’s corrective actions during our fiscal years 2008 and 2009 audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-07-689R, May 11, 2007) Closed. IRS updated the IRM in September 2007 and sent a reminder to those with acquisition authority about the IRS acquisition procedures developed in December 2002. The update included reference to Policy and Procedures Memorandum No. 46.5, “Receipt, Quality Assurance and Acceptance,” reiterating requirements for separation of duties. Open. Our fiscal year 2007 review of internal controls over property and equipment revealed that at least one IRS employee was permitted to place orders with vendors and perform receipt and acceptance functions when the orders were delivered. We will continue to evaluate IRS’s corrective actions during our fiscal year 2008 audit. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. In the fiscal year 2007 A-123 cycle, IRS expanded its A-123 guidance, improved review procedures, and improved training. As IRS prepares for the fiscal year 2008 A-123 cycle, it plans to continue to further enhance its in- house training and has instituted procedures to address the clarity and completeness of its explanations. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. In fiscal year 2007, IRS made progress on this recommendation by adding a requirement to test plan templates to document audits reviewed. During the fiscal year 2008 planning phase, IRS plans to fully document the existing reviews and audits. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. IRS plans to continue to work with the Department of the Treasury and GAO to fully implement OMB Circular No. A-123 requirements for evaluating controls over information technology relating to financial statement reporting. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. IRS is piloting a limited set of fiscal year 2008 test plans, which include an analysis of the design for each transaction control set tested, with full implementation expected in the fiscal year 2009 A-123 cycle. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. In fiscal year 2007, IRS established an internal crosswalk between A-123 tests and laws and regulations significant to financial reporting. IRS plans to further refine this linkage for the fiscal year 2008 A-123 process. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. Although implementation of such procedures is not necessary until elimination of the outstanding material weaknesses, IRS plans to develop follow-up procedures that provide assurance for the last 3 months of the fiscal year. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: IRS’s First Year Implementation of the Requirements of the Office of Management and Budget’s (OMB) Revised Circular No. A-123 (GAO-07- 692R, May 18, 2007) Open. IRS has enhanced training at the beginning of each A-123 cycle to include an external course designed for financial auditors on preparing workpapers. IRS evaluated results from fiscal year 2007 and has incorporated improvements to the fiscal year 2008 training to ensure its curriculum addresses issues in testing approach, testing methodology, workpaper reviews, and lessons learned. Open. We will follow up during future audits to assess IRS’s progress in implementing its OMB Circular No. A- 123 review procedures. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. Management Report: Improvements Needed in IRS’s Internal Controls (GAO-08-368R, June 2008) Because this is a recent recommendation, GAO did not obtain information on IRS’s status in addressing it. Open: This is a recent recommendation. We will review IRS’s corrective actions during future audits. IRS does not have financial management systems adequate to enable it to accurately generate and report, in a timely manner, the information needed to both prepare financial statements and manage operations on an ongoing basis. To overcome these systemic deficiencies with respect to preparation of its annual financial statements, IRS was compelled to employ extensive compensating procedures. Specifically, IRS (1) did not have an adequate general ledger system for tax-related transactions, and (2) was unable to readily determine the costs of its activities and programs and did not have cost-based performance information to assist in making or justifying resource allocation decisions. As a result, IRS does not have real-time data needed to assist in managing operations on a day-to-day basis and to provide an informed basis for making or justifying resource allocation decisions. IRS has serious internal control issues that affected its management of unpaid tax assessments. Specifically, (1) IRS lacked a subsidiary ledger for unpaid tax assessments that would allow it to produce accurate, useful, and timely information with which to manage and report externally, and (2) IRS experienced errors and delays in recording taxpayer information, payments, and other activities. IRS does not, at present, have agencywide cost-benefit information, related cost-based performance measures, or a systematic process for ensuring it is using its resources to maximize its ability to collect what is owed and minimize the disbursements of improper tax refunds in the context of its overall mission and responsibilities. These deficiencies inhibit IRS’s ability to appropriately assess and routinely monitor the relative merits of its various initiatives and adjust its strategies as needed. This, in turn, can significantly affect both the level of tax revenue collected and the magnitude of improper refunds paid. Significant weaknesses in information security controls continue to threaten the confidentiality, integrity, and availability of IRS’s financial processing systems and information. IRS has weaknesses in controls for protecting access to systems and information, as well as other information security controls that affect key financial systems—particularly IFS and IRACS. For example, sensitive information, including user identification, passwords, and software code for mission-critical applications, was accessible on an internal Web site to anyone who could connect to IRS’s internal network—without having to log in to the network. The information gained through this access could be used to alter data flowing to and from IFS. In addition, configuration flaws in the mainframe allowed users unrestricted access to all programs and data on the mainframe, including IRACS. Because this access was not controlled by the security system, no security violation logs would be created, reducing IRS’s ability to detect unauthorized access. Weaknesses also existed in other areas, such as protecting against unauthorized physical access to sensitive computer resources and patching servers to protect against known vulnerabilities. Material Weakness: Controls over Information Systems Security Although IRS has made some progress in addressing previous weaknesses we identified in its information systems security controls and physical security controls, these and new weaknesses in information systems security continue to impair IRS’s ability to ensure the confidentiality, integrity, and availability of financial and tax-processing systems. As of January 2008, there were 76 open recommendations from our information systems security work designed to help IRS improve its information systems security controls. Our recommendations resulting from our information systems security work are reported separately and are not included in this report primarily because of the sensitive nature of some of those issues. IRS manually processes hundreds of billions of dollars of hard-copy taxpayer receipts and related taxpayer information at its service center campuses, field office taxpayer assistance centers, other field office units, and commercial lockbox banks. However, we have identified weaknesses in IRS’s controls designed to safeguard these taxpayer receipts and information which increase the risk that receipts in the form of checks, cash, and the like could be misappropriated or that the information could be compromised. IRS did not always release the applicable federal tax lien within 30 days of the tax liability being either paid off or abated, as required by the Internal Revenue Code. The Internal Revenue Code grants IRS the power to file a lien against the property of any taxpayer who neglects or refuses to pay all assessed federal taxes. The lien serves to protect the interest of the federal government and as a public notice to current and potential creditors of the government’s interest in the taxpayer’s property. Under section 6325 of the Internal Revenue Code, IRS is required to release federal tax liens within 30 days after the date the tax liability is satisfied or has become legally unenforceable or the Secretary of the Treasury has accepted a bond for the assessed tax. The recommendations listed below do not rise to the level of a significant deficiency or a material weakness. However, these issues do represent weaknesses in various aspects of IRS's control environment that should be addressed. In addition to the contact named above, the following individuals made major contributions to this report: William J. Cordrey, Assistant Director; Gloria Cano; Stephanie Chen; Nina Crocker; John Davis; Charles Ego; Charles Fox; Valerie Freeman; Ted Hu; Delores Lee; John Sawyer; Angel Sharma; Peggy Smith; Cynthia Teddleton; and Gary Wiggins.

In its role as the nation's tax collector, the Internal Revenue Service (IRS) has a demanding responsibility in annually collecting trillions of dollars in taxes, processing hundreds of millions of tax and information returns, and enforcing the nation's tax laws. Since its first audit of IRS's financial statements in fiscal year 1992, GAO has identified a number of weaknesses in IRS's financial management operations. In related reports, GAO has recommended corrective action to address those weaknesses. Each year, as part of the annual audit of IRS's financial statements, GAO not only makes recommendations to address any new weaknesses identified but also follows up on the status of weaknesses GAO identified in previous years' audits. The purpose of this report is to (1) assist IRS management in tracking the status of audit recommendations and actions needed to fully address them and (2) demonstrate how the recommendations relate to control activities central to IRS's mission and goals. IRS has made significant progress in improving its internal controls and financial management since its first financial statement audit in 1992, as evidenced by 8 consecutive years of clean audit opinions on its financial statements, the resolution of several material internal control weaknesses, and actions resulting in the closure of over 200 financial management recommendations. This progress has been the result of hard work throughout the agency and sustained commitment at the top levels of the agency. However, IRS still faces financial management challenges. At the beginning of GAO's audit of IRS's fiscal year 2007 financial statements, 75 financial management-related recommendations from prior audits remained open because IRS had not fully addressed the issues that gave rise to them. During the fiscal year 2007 financial audit, IRS took actions that enabled GAO to close 18 of those recommendations. At the same time, GAO identified additional internal control issues resulting in 24 new recommendations. In total, 81 recommendations remain open at the end of fiscal 2007. To assist IRS in evaluating and improving internal controls, GAO categorized the 81 open recommendations by various internal control activities, which, in turn, were grouped into three broad control categories. The continued existence of internal control weaknesses that gave rise to these recommendations represents a serious obstacle that IRS needs to overcome. Effective implementation of GAO's recommendations can greatly assist IRS in improving its internal controls and achieving sound financial management and can help enable it to more effectively carry out its tax administration responsibilities. Most can be addressed in the short term (the next 2 years). However, a few recommendations, particularly those concerning IRS's automated systems, are complex and will require several more years to fully and effectively address.

You are an expert at summarizing long articles. Proceed to summarize the following text: The Copyright Office was established in 1897, and is currently one of seven service units within the Library of Congress. To carry out its mission, the Copyright Office has several functions set out in law, including (1) administering the nation’s copyright registration and recordation processes, (2) developing regulations related to copyright policies and procedures, (3) advising Congress on copyright issues, and (4) administering statutory licenses for cable and satellite retransmissions and digital audio recording technology. Importantly, the Copyright Office is also a driver in adding materials to the Library’s collections, as about 20 percent of these works are received in accordance with the legal requirement that copies of certain copyrighted works be deposited with the office for the Library. The Copyright Office is charged with administering the nation’s copyright law. As part of that responsibility, it performs a number of key functions, including copyright registration, recordation, and statutory licensing. Registration. The Copyright Office examines applications for registering copyrights, along with any accompanying copies of the work (called the deposit), to determine whether they satisfy statutory requirements. Copyright registration is a legal formality intended to make a public record of the basic facts of a particular copyright, but is not required by law or as a condition of copyright protection. According to the Copyright Office, in fiscal year 2014, the Copyright Office registered about 476,000 creative works for copyright, including about 219,000 literary works and 65,000 sound recordings. Recordation. Authors, heirs, and other parties submit a variety of documents to the Copyright Office for public recordation, including copyright assignments, licenses, security interests, and termination of transfers. Like registration, a copyright owner is not required to record such changes to ownership, but there are certain incentives in the law for those who do. The Copyright Office recorded about 7,600 copyright records in fiscal year 2014. Statutory Licenses. The Copyright Office administers several statutory licenses set forth in the Copyright Act that manage and disperse royalty payments, including those pertaining to copyright owners’ rights related to television programming that is retransmitted by cable operators and satellite carriers. The disposition of these private funds is determined by a board of copyright royalty judges, called the Copyright Royalty Board. The work of the board is reviewable by the Register, but the board reports to the Librarian as head of the agency. According to the Copyright Office, in fiscal year 2014, it collected approximately $315 million in royalties and made disbursements in accordance with the decisions of the Copyright Royalty Board. In addition to registration, recordation, and statutory licensing, the office also performs other functions. For example, the Register is charged with advising Congress on national and international issues relating to copyright and provides assistance to federal departments, the judiciary, and the public on such topics. The office also requests published works on behalf of the Library of Congress to meet the mandatory deposit provisions of the Copyright Act. The Copyright Office, by law, is part of the Library of Congress. The Register of Copyrights, who heads the office, and all other employees of the office are appointed by the Librarian of Congress and act under the Librarian’s general direction and supervision. While the Register is responsible for all administrative functions and duties under the Copyright Act (except as otherwise specified), all regulations established by the Register are subject to the approval of the Librarian, who is also directed by law to make rules and regulations for the government of the Library. The Register relies on about 380 staff across seven program areas to carry out the office’s mission. A simplified view of the office’s organization is provided in figure 1. The seven program areas have various responsibilities related to meeting the Copyright Office’s statutory mission. A description of the key responsibilities of each program area is found in table 1. The Copyright Office also receives support from the Library’s administrative offices. For example: The Library’s Office of Human Resources Services develops policies and procedures for and supports hiring, pay, and benefits. The Library’s Office of the Chief Financial Officer is responsible for providing policy direction, review, and coordination of all budgetary and financial activities of the Library, including the development of the budget and tracking of expenditures. The Library’s Office of Integrated Support Services provides assistance with procurement, physical space utilization, and management of mail. The Library’s Office of Information Technology Services (ITS) has primary responsibility for the planning, analysis, design, development, and maintenance of software systems, hardware, telecommunications, and networks. The Copyright Office is funded both by direct appropriations and fees paid by external customers. Congress generally limits the amount of fees that the office may obligate in a given year. The office’s budget for fiscal year 2014 was about $45 million, with about 62 percent ($27.9 million) coming from fees. The Copyright Office uses its IT systems to meet important mission requirements that have been established in law. For example, the Copyright Act requires the office to receive and examine copyright registration applications. To meet these mission requirements, the office relies on several mission-related systems, as well as servers, networks, and the data center managed by the Library’s central IT office—ITS. However, we and others have identified challenges with this environment. For example, external users have described limitations in the performance and usability of the office’s registration system, and the Copyright Office has expressed concerns about the integrity of the files stored in the Library’s servers. Organizationally, responsibility for managing the office’s IT environment is shared between the Copyright Office’s Office of the CIO and ITS. However, as we recently reported, the Library has serious weaknesses in its IT management, which have also hindered the ability of the Library and the Copyright Office to meet mission requirements. For example, the Library has not had a permanent CIO in over 2 years and instead has had a series of temporary CIOs; according to the Register of Copyrights, this has caused a breakdown in communication between Library management and the Copyright Office related to IT. The Copyright Office’s use of IT is driven by legal requirements that establish its responsibilities and corresponding business needs. The office’s IT environment reflects more than a decade of efforts to increase the use of automated IT to fulfill this legally established mission. For example, by law, the office must be able to receive and examine copyright registration applications, collect and maintain deposited copies of copyrighted works as necessary to support the production of “facsimile reproductions” and retention of works up to 120 years, produce certificates of registration and certified copies of applications, maintain records of the transfer of copyright ownership. In addition, the Copyright Office also administers the mandatory deposit provisions of the Copyright Act, which require copyright owners to deposit certain published works with the Library of Congress for its collections. In this role, the office may facilitate, demand, negotiate, or exempt the provision of these copies. Absent an exemption, the law requires that one or two copies of the best edition of every copyrightable work published in the United States be sent to the office within 3 months of publication, regardless of whether the creator registers the work. This mandatory deposit requirement is designed, in part, to serve the Library. Specifically, according to the Copyright Office, copyright deposit (whether through registration or mandatory deposit) is a means by which the Library obtains about 20 percent of its collections. While the Copyright Office resides within the Library of Congress, it also has responsibilities that distinguish it from the Library. For example, all actions taken by the Register to implement the Copyright Act are subject to the provisions of the Administrative Procedure Act. Among other things, this means that all actions of the office that would constitute a rule generally must be published for public notice and comment and are subject to review. It also means that copyright-related records are governed by the Freedom of Information Act and the Privacy Act, which are included in the Administrative Procedure Act. These legal requirements necessitate actions by the Copyright Office that differ from otherwise-standard Library processes. The Copyright Office relies extensively on IT to carry out its legal responsibilities. Specifically, the office uses multiple systems to, among other things, allow the public to electronically register works with the office, assist it in examining copyright registrations for such submissions, and allow the office to record documentation related to copyright transfers and provide that information to the public. The office manages mission- related systems and, in some cases, procures its own equipment, which is hosted within the Library’s infrastructure (i.e., networks, telecommunications, and data center). Table 2 describes selected systems used by the office to support its registration, recordation, and licensing functions. The office uses these systems to meet its major statutory responsibilities, as described below: Registration. The primary system used in the registration process is eCO. To register a copyright, a creator generally submits a completed application, the relevant fee, and the deposit copies to the Copyright Office. This can be done in one of three ways: (1) by submitting all three of these items in physical form (e.g., paper); (2) by submitting all three items online (through eCO); or (3) by submitting the application and fee online and providing the deposit in physical form. Copyright Office staff process these materials based on the method of submission. For example, for applications received in physical form, Copyright Office staff must scan the application, enter the application information and fee payment (check, cash, or deposit account) into eCO, manually process the related fees, and affix a barcode to the deposit copy. Regardless of how the materials are submitted, a registration specialist uses the eCO system to validate the accuracy of the information entered into eCO and review the application and materials to ensure that they meet the criteria for copyright protection. Printed registration certificates are generated and mailed to the recipient designated on the application, and an image of the certificate is stored in the Copyright Imaging System. If the deposit was provided in physical form and is not selected for the Library’s collections, it is stored in a warehouse and tracked using either eCO or the Box Number Control System. Digital deposits are stored in servers within the Library of Congress’s data center. Information about the copyright registration (for example, author names and titles of work) is also made available online to the public through the Copyright Voyager system. Figure 2 below depicts the copyright registration process. Recordation. Copyright Office staff currently use several systems to record documents related to changes in copyright. The public, however, must submit the documentation to be recorded in physical form since there is currently no online means for doing so. Specifically, to record a document, an individual must submit the related documentation (with an original signature) and the relevant fee. Once received by the Copyright Office, the documents must be scanned and the information must be entered into either eCO or several legacy systems. Copyright Office officials stated that they are incorporating the functionality of most of the registration and recordation systems into eCO. During the transition, however, Copyright Office staff must use one of two parallel business processes to record copyright changes. Specifically, if the Copyright Office received a document during or prior to January 2013, Copyright staff must type the information into the Copyright Office Documents System, and the documentation must be scanned twice—once into eCO and once into the Copyright Imaging System. Then the specialist must manually number the document and assemble the recordation package (including certificate, cover sheet, and numbered document) to be sent back to the submitter. If the office received the document after January 2013, all data entry and scanning is completed in eCO, and the recordation package is electronically bundled, printed, and sent back to the submitter. Similar to the registration process, once the change is processed, the information is available to the public using the Copyright Voyager system, which is available online (see fig. 3). Licensing. Licensing Division staff members examine statements of account and process royalty payments. Since 1992, licensing staff have used the Licensing Division System to examine and process statements of account. In 2010, the Copyright Office began an initiative to reengineer its licensing business processes and develop a new system (called the Electronic Licensing Information System) to replace the Licensing Division System. The office launched a pilot of the new system in October 2014 and plans to use information gathered during that pilot to improve the new system before its deployment. According to Copyright Office staff, the office has recently taken steps to incorporate the functionality from all registration and recordation systems into eCO. Specifically, according to Copyright Office officials, most of the systems supporting the registration and recordation processes were developed in the 1990s, have far exceeded their shelf-life, are running on obsolete technology, and do not meet current security standards required by Library policy. Because of these limitations, as already noted, the Copyright Office plans to incorporate the functionality of these legacy systems into eCO and ultimately retire them, with the changes expected to be completed by January 2016. According to the Director of the Office of Public Records and Repositories at the Copyright Office, moving the recordation functionality to eCO is an interim step to address immediate needs. In addition, the Copyright Office CIO stated that supporting the transition of legacy system functions has required the office to divert resources otherwise intended to make updates to eCO. Our work, Copyright Office employees, and external users have all identified challenges with the Copyright Office’s current IT environment, including eCO and the infrastructure supporting that system that is managed by the Library’s central IT office (ITS), as described below: Both internal and external users have described challenges with eCO related to performance, stability, and usability. For example, internal registration staff said that eCO sometimes freezes multiple times a day, requiring the staff to restart the system or their computers, which ultimately decreases productivity. ITS officials noted that they plan to move eCO onto its own data storage server in an attempt to temporarily address these issues. However, there is disagreement about whether this will fix the problem, since the underlying cause was never identified. ITS officials stated that the suspected underlying cause of the issue is within the eCO system, which is managed by the Copyright Office, and that this is just a temporary solution. However, the Copyright Office CIO disagrees, and believes that eCO having its own server will fix this problem. Other users of eCO internal to the Copyright Office have also experienced issues with the system. For example, according to one of the office’s registration specialists, eCO’s interface requires them to input the same information multiple times on multiple screens. He noted that this type of re-work takes additional time and increases the chance of errors. External users have also described challenges with eCO. For example, in an online survey by the Copyright Office, 35 percent of eCO users were dissatisfied with the ease of use of eCO. One respondent stated that “this is, hands down, the worst site I have ever had to navigate” and noted that it took the individual 4 hours to submit the registration application. In our March 2015 report on the Library of Congress’s IT management, we determined that while the Library had established a security and privacy program that covers service units, including the Copyright Office, it had not fully implemented management controls to ensure the protection of its systems and information, including both the front-end eCO system and the infrastructure that stores copyright deposits. For example, as of February 2015 the Copyright Office did not have necessary security documentation for eCO, including (1) complete security testing, (2) a current authorization to operate, and (3) a privacy impact assessment. More generally, the Library did not always require two-factor authentication for access to sensitive Library resources, establish and implement a process for documenting approvals for permissions to access systems, or ensure that sensitive information transmitted across its network was being adequately encrypted. These limitations increase the risk that Library systems—including those used by the Copyright Office—will not limit access appropriately and that an individual could gain unauthorized access to system data. To address these issues, we made a number of recommendations to better protect the Library’s IT systems and reduce the risk that the information they contain will be compromised. Both the Copyright Office and ITS recently identified data integrity issues when performing analyses of the eCO system. For example, one analysis found that eCO was not properly saving registration certificates, although the root cause was not identified. In addition, the Copyright Office’s General Counsel stated that the Library has used settings and controls that do not provide a sufficient level of integrity for the office’s digital records, and that the Copyright Office does not have means of verifying the integrity of files maintained in those systems. The Copyright Office has a legal responsibility to retain unpublished works (including digital works) for the length of the copyright, which could be as long as 120 years. A report developed by a contractor for ITS noted that no current technology exists that would allow for digital deposits to be stored for the required length of time. According to the report, maintaining access to the deposits in the future requires migration to new storage solutions as technology evolves. Although the Copyright Office has communicated this requirement to ITS, a service-level agreement for this requirement has not been established between ITS and the Copyright Office. These technical challenges and the need for improvements have been acknowledged both by the current Register of Copyrights and by the office’s external stakeholders. For example, in October 2011, the Register released a document identifying a series of priorities and special projects intended to improve the quality and efficiency of the office’s services. The special projects included, among others, the need for technical upgrades to the eCO registration system and reengineering of the recordation process. Further, in March 2013, the Copyright Office solicited public comments on the electronic registration and recordation functions. The comments received, which the Copyright Office made publicly available on its website, ranged from basic frustrations with eCO, such as the need to make the workflow viewable throughout the registration process, to requests for new features, such as instant message, video communication, webinars, and customer support during West Coast hours. In November 2013, the Register reiterated the need for technical improvements. Specifically, she stated that the Copyright Office’s technical capacities, such as its bandwidth, networking equipment, electronic storage capacity, hardware, and software, do not fully accommodate services such as registration that require short-term and long-term solutions. In a September 2014 hearing before the House Judiciary Committee, the Register further discussed the need to modernize the Copyright Office, because of issues with the registration user interface, the quality of public records, security concerns, interoperability, and overall customer service. The Register also discussed backlogs in processing registration and recordation documents, specifically stating that such issues relating to recordation are systemic and cannot be improved until the recordation system is redesigned and brought online. Finally, in December 2014, the Copyright Office developed a report that described the need to reengineer the recordation process, including potentially making changes to the law. This report was informed by, among other things, public comments provided in response to a Federal Register notice and roundtable meetings. This report also discussed shortcomings in the current recordation process described by the public, including the time it takes for the office to process these documents, the difficulties in submitting the documents in physical form, and inaccuracies caused by recordation specialists transcribing the physical documents. As noted previously, responsibilities for managing IT at the Copyright Office are shared between Copyright Office staff and organizations at the broader Library level. For example, the Copyright Office manages many of its systems, while ITS manages and controls the infrastructure (e.g., networks, servers, and data center) on which the systems and applications reside. Within the Copyright Office, the Office of the CIO is responsible for advising the Register on the development and implementation of technology policy, providing strategic direction for the office’s IT initiatives, and serving as a liaison with ITS. The CIO office has 21 staff that manage several of the Copyright Office’s IT systems, most notably eCO, and assume overall responsibility for operating the systems at an acceptable level of risk for the office. Importantly, Copyright Office staff are in charge of ensuring that systems they are responsible for are developed in accordance with, and comply with, the Library’s information security policies. In addition, the Copyright CIO office manages a help desk specifically for the eCO system, which fields technical help requests from both internal Copyright Office staff and public users of the system. The Copyright CIO office also has an internal review board that selects and manages proposed modifications to any Copyright Office systems and an eCO steering committee, which meets monthly to discuss changes to that system. According to the Copyright Office CIO, in fiscal year 2015, the office will establish a Copyright IT steering committee, which will review proposed new technology initiatives for the Copyright Office and oversee them from planning to retirement. The Copyright Office, as a service unit within the Library of Congress, is subject to the organization’s IT policies and procedures. For example: The Library has developed Library-wide policies and procedures for IT management that cover service units, including the Copyright Office. Specifically, the Library’s IT Steering Committee is responsible for overseeing an IT investment management process to provide structure for the selection and management of all major Library IT investments and oversight of their performance. The Library has developed an information security program, assigned responsibility for ensuring that the security program is being implemented to the Librarian, and assigned specific responsibilities to various individuals within the Library. For example, the Library’s CIO is responsible for overseeing the program, and the Library’s Chief Information Security Officer is to act as a single point of contact for all information security activities. In addition, the Copyright Office relies on ITS for IT support. Specifically, ITS has responsibility for maintaining certain systems within the service units. For example, ITS has developed several of the Copyright Office’s mission-related IT systems and is also responsible for maintaining some of them (with the Copyright Office maintaining others). In addition, ITS is responsible for maintaining the hosting environment (including the data center, networks, and telecommunications) that supports the Copyright Office’s systems. For example, although the Copyright Office is responsible for maintaining the eCO system and making necessary changes to the interface, ITS is responsible for the underlying servers that store copyright deposits. Finally, ITS provides other services to support Copyright Office staff, including e-mail and help desk support. In our recent evaluation of the Library’s IT management, we identified challenges with the level of IT governance that adversely affected the Library’s ability to efficiently and effectively manage its IT resources, including its ability to support the IT needs of its service units. These issues have in turn affected the Copyright Office’s ability to carry out its responsibilities. Specifically, our report identified the following challenges: The Library does not have the leadership needed to address IT management weakness. For example, the Library CIO does not have responsibility for all of the Library’s commodity IT or the ability to adequately oversee mission-specific system investments made by the service units. Also, the Library has not had a permanent CIO in over 2 years. Since the departure of the most recent permanent CIO in 2012, four individuals have served as acting CIO, and another was recently appointed to serve in an interim capacity until a permanent CIO is found. According to the Register, the absence of a permanent CIO has resulted in a lack of routine communication between senior Library and Copyright leadership about IT. In addition, the Library has not clearly defined the responsibilities and authorities governing the relationship of the Library CIO and component organizations. Of particular concern is the lack of clearly defined relationships between the Library CIO and the two service unit CIO positions at the Library, one of which is the Copyright CIO. From the Copyright Office’s perspective, the lack of clearly defined roles and responsibilities at the Library has impeded its ability to carry out its mission. According to the Register, because the Copyright Office has unique statutory requirements and business needs, IT issues should not be decided solely by Library staff outside of the Copyright Office or simply according to an internal Library regulation. For example, the Library’s requirement that the Copyright Office provide “best editions” for deposits that are to be added to the Library’s collection has been interpreted to mean that these deposits should be provided in hard copy. However, according to the General Counsel of the Copyright Office, this requirement is a chief cause of delays in processing registration applications and hampers the ability of the office to modernize the copyright registration system and move to a fully electronic process. In addition, according to the Copyright Office’s General Counsel, as a result of its subordinate status within the Library of Congress, the Copyright Office lacks adequate control over mission-critical IT resources and decisions, thus frustrating its basic statutory purpose of creating, maintaining, and making available to the public an authoritative record of copyright ownership and transactions. For example, Copyright Office staff expressed concerns regarding ITS’s control of servers containing its deposit files. Specifically, the Copyright CIO noted that ITS employees recently moved Copyright Office deposits from the existing storage server without the permission of the office, raising concerns about the integrity and security of these files. We also reported that the Library lacks a strategic plan to guide its IT investments. An IT strategic plan has been drafted, but it does not identify strategies for achieving defined goals and interdependencies among projects. According to the Librarian of Congress, the draft IT plan was merely a starting point for the Library’s IT strategic planning efforts, and in January 2015, the Librarian’s Chief of Staff stated that the Library plans to draft a new strategic plan within 90 days. The Register has noted that it has been difficult for the Copyright Office to develop any long-term plans for improving the office’s IT environment because the Library does not have overarching long-term IT plans. In addition, our report found that the Library’s central IT office—ITS—had not ensured that its services support the business needs of the Library, and had not established complete service-level agreements with its customers (i.e., the service units). For example, ITS had one service- level agreement with the Copyright Office for the eCO system; however, that agreement was incomplete. Specifically, the service-level agreement did not include all of the services that ITS provides to the Copyright Office. As a result, services that ITS provides to the Copyright Office may not be meeting the office’s business needs. For example, according to the Copyright CIO, ITS controls when eCO is to be shut down for maintenance and outages had, at times, been scheduled during periods of heavy traffic from the office’s external users. Finally, our report found that inconsistent satisfaction with the services provided by ITS had likely contributed to duplicative or overlapping efforts across the Library. Specifically, service units across the Library performed many of the same functions as ITS; for example, the Copyright Office provides Internet management and desktop support services, which overlap similar services by ITS. In addition, service units within the Library had purchased their own commodity IT in the past 3 years. For example, the Copyright Office had purchased laptops, mobile devices, servers, and workstation software, even though these may be duplicative of those that the Library has procured. Our report also raised questions about recent budget requests made by the Copyright Office, and whether those proposed requests may create additional services that overlap those already provided by ITS. In our report on the Library’s IT management, we made a number of recommendations to address the weaknesses we identified. These included, among others, appointing a senior executive for IT (i.e., a CIO) who has responsibility for commodity IT throughout the Library and clarifying the relationship between that official and IT leadership at the service unit level; fully establishing and implementing a Library-wide approach to service-level agreements; and conducting a review of the Library’s IT portfolio to identify potential areas of duplicative activities and spending. Although the Copyright Office has acknowledged many of the reported organizational and technical challenges we have identified previously, the office has not yet developed plans to improve its IT environment. Specifically, while the office has identified several proposed IT initiatives for improving its IT environment and requested over $7 million to fund these initiatives, it has not yet developed plans and proposals to justify these investments, including identifying the business need they will meet and their expected costs and benefits. The office also did not present the initiatives to the Library’s IT Steering Committee for review as required by Library policy. By identifying mission needs and plans in investment proposals and charters, decision makers at the Library and the Copyright Office would have greater assurance that the selected investments meet these mission needs. In addition, the office has not yet developed an IT strategic plan to help ensure that its IT goals are aligned with the agency’s strategic goals, stating that it is difficult to do so when the Library does not yet have an IT strategic plan. We agree that the Copyright Office’s IT strategic planning should be aligned with the Library’s own efforts in this regard. Developing a strategic plan that is aligned with the Library’s forthcoming efforts will help the Copyright Office ensure that current and future investments aimed at improving its IT will support its mission needs, as well as avoiding duplication with existing activities within the Library. According to Copyright Office officials, the office requested funding for four initiatives to address immediate technical challenges: (1) reengineering the recordation function, (2) developing a secure digital repository for digital deposits, (3) developing a software application development environment, and (4) developing a data management team. In total, the office requested over $7 million in funding for both fiscal years 2015 and 2016 in support of these four IT initiatives. The office developed brief summaries supporting these requests, which described the initiatives as follows: Reengineering the recordation function. This investment involves reengineering the business process from an IT, legal, and administrative perspective, and ultimately developing an online filing system. To inform this effort, the office solicited public comments on the current recordation process through a Federal Register notice and through roundtable discussions in 2014. This information was used to develop a report regarding limitations in the current process and high- level requirements for an electronic recordation system. The office requested $1.5 million to conduct business analysis for recordation reengineering in fiscal year 2015, and received that amount in its appropriations. The Library requested an additional $676,000 for this effort in its fiscal year 2016 budget justification. Developing a secure digital repository for digital deposits. This investment focuses on the secure transfer and storage of digital works that are registered and electronically deposited with the Copyright Office for protection. The office noted that the analysis stage would determine whether the appropriate solution includes using cloud- based providers or investing in additional hardware. The office requested $3.07 million in fiscal year 2015, but did not receive funding for this investment. The office submitted a new request in fiscal year 2016 for $2.64 million, but did not receive approval for including this initiative in the Library’s proposed budget to Congress. Developing a software application development environment. This investment would create a development environment for all future copyright-specific applications (e.g., an online system for the recordation process). According to the office, this requires an investment in hardware, software, and personnel. The office requested $2.43 million in fiscal year 2015, but did not receive funding for this investment. The office submitted a new request in fiscal year 2016 for $2.22 million, but did not receive approval for including this initiative in the Library’s proposed budget to Congress. Developing a data management team. This investment includes the development of a data strategy for the Copyright Office’s public records, a data management plan, a data governance plan, a data model, data standards, and data exchanges. The office estimates that additional IT infrastructure may be required, but has not determined whether the cloud is the appropriate solution. The office requested $2.80 million in fiscal year 2016 for this investment, but did not receive approval for including this initiative in the Library’s proposed budget to Congress. In addition, since being appointed to the position in 2011, the Register of Copyrights has acknowledged the technical challenges facing the office and described the need for improvements in its technology. For example, in October 2011 the Register announced a series of special projects, including performing research on technical upgrades to electronic registration. As part of this technical upgrades research project, in March 2013 the office requested public comments on the current registration process through a Federal Register notice. In February 2015, the office published the results of its research that, according to the CIO, either directly or indirectly address concerns voiced by copyright stakeholders. According to the report developed by the CIO, the research identified four IT areas in greatest need of improvement: (1) challenges with the current user experience, (2) challenges with access to and the usability of copyright records, (3) inefficiencies with current copyright data, and (4) poor performance of outdated IT architecture and infrastructure. The report also identified a number of proposed recommendations to improve in these areas, including, among other things, improving eCO’s user interface; ensuring that the office’s public record databases show accurate, complete, and up-to-date information; establishing effective data standards; and developing a secure repository for digital deposits. Best practices we have identified for IT investment management note that mature organizations analyze and prioritize IT investments before selection. For example, before committing significant funds to any project, organizations should select IT projects based on quantitative and qualitative criteria, such as expected costs, benefits, schedule, risks, and contribution to mission goals. Importantly, we have also reported that high-performing organizations manage investments in a portfolio approach through an investment review board. In this way, selection decisions can be made in the context of all other investments, thus minimizing duplication across investments. Consistent with these best practices, the Library has an established policy and process for service units to propose IT investments for selection through the Library’s IT Steering Committee, which acts as the agency’s investment review board. Specifically, before an investment is selected for funding, service units are to prepare (1) an investment proposal, which includes identifying the business problem, a proposed solution, the expected benefits, how the solution aligns with the Library’s strategic plan, initial 3-year cost estimate, and expected funding sources, and (2) an investment charter, which includes a budget plan and a cost-benefit analysis. The service units are also required to present this information to the Library’s IT Steering Committee, which makes recommendations for investments to be selected for funding. The Library’s central IT office— ITS—has also developed guidance for requirements development and analysis, which is to take place after the project has gone through the initiation and planning phases and the investment owner has already prepared the investment proposal and charter. However, in developing the funding requests for the four initiatives aimed at improving its IT environment, the Copyright Office did not follow the Library’s IT investment management policies for selecting investments. While the funding requests contained background information on the proposals, 1-year expected costs and, in some cases, expected benefits and categories of tasks to be completed within the first year (e.g., program management, analysis, and requirements development), they did not include all the key information required by Library policy for investment proposals and charters. For example, they did not include 3- year cost estimates, the business needs that drive the investments, details on how the investments aligned with the agency’s strategic plan, or the expected funding sources. Further, the office did not present any of these IT investments to the Library’s IT Steering Committee to be approved for funding, as required by Library policy. Both the Register and the Copyright CIO stated that the office is not yet in a position to prepare planning documentation for each of its proposed initiatives and that the Copyright Office planned to use the first year of funding to develop requirements. However, according to best practices and Library policy, the Copyright Office should identify the mission needs, cost estimates, and other information prior to selecting the investments and requesting funding, and should use this planning information as input into its requirements development and analysis. In addition, in the absence of critical information such as specific needs, costs, and benefits, it is unclear whether the office’s request to allocate about $7 million to these IT-related investments constitutes an effective and efficient use of Copyright Office and Library resources. Further, because the investments have not been reviewed by the Library’s IT investment review board and compared to the entire portfolio of IT systems, there is a risk that they may duplicate existing efforts within the agency. In this regard, our March 2015 report on the Library’s IT management noted that, for example, ITS has a software application development environment, and currently works with the Copyright Office to maintain digital deposits—efforts which appear to duplicate two of the Copyright Office’s budget requests. By identifying mission needs and plans in investment proposals and charters, and by presenting the requests to the IT Steering Committee as part of the Library’s investment selection process, decision makers at the Library and the Copyright Office would have greater assurance that the selected investments meet mission needs and do not duplicate existing efforts. Our experience with IT modernization efforts has shown that having sound management for planning, oversight, and reporting progress is essential to achieving successful outcomes. Requirements for executive branch agencies from law and Office of Management and Budget guidance reflect best practices and note that effective planning involves creating an IT strategic plan that includes goals, measures, and timelines in order to help the organization align its information resources with its business strategies and investment decisions. The Copyright Office has not yet developed an IT strategic plan that can be used to guide its IT improvement efforts and monitor progress in meeting its goals. According to the Register, the Copyright Office is currently drafting an overall strategic plan to be completed by the end of September 2015. However, the Register stated that it will not include plans about improving the Copyright Office’s IT environment. The Register further stated that it is difficult for the Copyright Office to develop full IT strategic planning documents because the Library of Congress has not yet developed such strategic plans for the entire organization. Finally, the Register stated that the IT goals of the Copyright Office will depend upon the duties it must carry out in coming years, many of which may change because of recent efforts in Congress to review federal copyright law. The Register added that the office’s general goal is to achieve greater control of its IT infrastructure and environment, helping the office to meet its statutory responsibilities. According to the Register, the Copyright Office needs dramatic improvements in the ways in which it registers works, collects copyright deposits, records licenses and other documents, presents the chain of title, administers statutory licenses, and otherwise administers the law. She stated that these changes will require statutory and regulatory changes as well as new models for IT governance and funding. We agree that the Copyright Office’s IT strategic planning should be aligned with the Library’s own ongoing efforts to develop an IT strategic plan for the entire organization. In our review of the Library’s IT management, we noted that the Library does not have an IT strategic plan and that efforts to develop such a plan have just recently begun. We also recognize that future legislation may have an impact on the office’s responsibilities in administering the law and, therefore, may affect the office’s future technology needs. Nonetheless, developing a strategic plan that is aligned with the Library’s forthcoming efforts will help to ensure that the Copyright Office’s current and future investments aimed at improving its IT will support its mission needs, as well as avoid duplication with existing activities within the Library. The Copyright Office has an important legal mission supporting the creative industries that significantly contribute to the United States economy, and the office relies heavily on IT to carry out this mission. However, its IT environment faces many technical and organizational challenges, which ultimately may affect the office’s ability to meet its legal mission. Copyright’s primary system—eCO—has had significant technical issues, both with the system itself—managed by the Copyright Office— and with its underlying infrastructure, managed by the Library’s central IT office. Even with all of the identified challenges, however, the office is adding significant new functionality onto this already-burdened system, by transferring legacy system functionality onto it. Significant IT management weaknesses of the Library exacerbate the technical issues, making it difficult for the Library and the Copyright Office to address the technical challenges. As we have already recommended, strong IT leadership within the Library and effective coordination with its service units is needed; otherwise, the Copyright Office will continue to face challenges in making the needed changes to its IT environment. Although the Copyright Office’s current IT environment is hampered by these challenges, the office has yet to develop plans to address the problems. The office has taken the first steps toward developing plans, by identifying a list of proposed technical upgrades and performing further research on one of the initiatives (recordation reengineering). However, it has been about 3 years since the Register of Copyrights identified the need for technical upgrades, and little documented planning has been carried out. Importantly, although the office has requested over $7 million for its proposed IT initiatives, it has not yet fully articulated its business needs or expected costs and benefits for these initiatives. Instead, the office has been reacting to current needs—such as retiring legacy systems—rather than developing clear plans for needed IT improvements that take into account such inevitabilities. In addition, because the office has not presented these investments to the Library’s IT investment review board, it is unclear whether these investments will overlap with activities that are already performed by the Library’s central IT office, and are thus a wasteful use of taxpayer funds. In this context, developing an IT strategic plan that is aligned with forthcoming efforts from the Library will better position the office to effectively prioritize, manage, and monitor the progress of its IT improvement efforts. To help ensure that the Copyright Office makes improvements to its current IT environment, we are recommending that the Librarian of Congress direct the Register of Copyrights to take the following two actions: For current and proposed initiatives to improve the IT environment at the Copyright Office, develop plans including investment proposals that identify the business problem, a proposed solution, the expected benefits, how the solution aligns with the Library’s strategic plan, an initial 3-year cost estimate, and expected funding sources, and bring those to the Library’s IT Steering Committee for review, as required by Library policy. Develop an IT strategic plan that includes the office’s prioritized IT goals, measures, and timelines, and is aligned with the Library’s ongoing strategic planning efforts. In response to our request for comments, we received a written response from the Register of Copyrights. According to the Register, the Librarian of Congress deferred to her to comment on our draft report. In her response, the Register did not state whether the office agreed or disagreed with our recommendations, but provided comments on these and other matters. These comments are summarized below, along with our responses. According to the Register, the Copyright Office must evolve from a small department of public record to a digitally savvy administrator of intellectual property rights, remedies, and commercial information, which requires the office to evaluate the needs of the national copyright system objectively and transparently. As described in this report, we agree that the Copyright Office has technical and organizational challenges that hinder its ability to meet its statutory and business needs. We further acknowledged that the office has begun to address these needs in its technical upgrades research. However, making progress in addressing these limitations will require a strategic vision as well as effective planning, and our recommendations are aimed at assisting the office in these areas. The Register further noted that we did not examine the legal relationship between the Copyright Office and the Library and that our recommendations assume that the Copyright Office will continue to route its IT needs through Library processes and managers, similar to other Library units. She added that members of Congress have recently questioned the current governance structure and that it would be prudent for the Library and the Copyright Office to solicit further congressional guidance before implementing GAO’s recommendations. We acknowledge that concerns about the legal relationship between the Copyright Office and the Library have been raised in Congress. In our report we discuss the office’s legal responsibilities, including the relationship between the office and the Library and the Copyright Office’s distinctive mission. Our review of the office’s IT environment was undertaken in light of current law and the existing organizational structure. We recognize that future legislation may change the office’s responsibilities in administering copyright law, which may in turn impact its future technology needs. Whether such changes to the law will alter the office’s placement in the Library is unknown at this time. Regardless of the Copyright Office’s organizational placement, it still needs to support and justify its request for $7 million for IT-related projects in fiscal years 2015 and 2016. In addition, the Register stated that we primarily reviewed management issues and did not examine issues with the Library’s technical infrastructure that, in her view, appear to be insufficient to support a 21st- century Copyright Office. While our report did highlight management challenges, we also noted several technical challenges impeding the office’s ability to carry out its work. Specifically, we noted challenges in the performance and usability of the office’s eCO system; concerns regarding the implementation of security controls; and data integrity, availability, and retention issues. Moreover, our report on IT management Library-wide identified a number of issues, both management-related and technical, and made numerous recommendations aimed at addressing them. Given the current organizational structure, it is important that both the Library and the Copyright Office take actions to address the challenges within their purview and collaborate in ways that best support their respective missions. Finally, the Register stated that our recommendations would require the Copyright Office to absorb more of the burden of preparing investment proposals, cost-benefit analyses, and strategic IT planning, which have not been in the domain of the office. According to the Register, this would require the office to acquire additional IT specialists. However, preparing such planning documentation is required of all service units by Library policy for investments of this nature, and is consistent with best practices for selecting IT investments to pursue for funding. In addition, developing this preliminary planning documentation requires knowledge and expertise of the office’s business processes and mission needs, but not necessarily technical expertise. Once the appropriate investments have been selected, this preliminary information can be used to develop business requirements, which in turn can be used by Copyright Office staff or external vendors with the appropriate expertise to identify technical solutions that will most effectively and efficiently support the Copyright Office’s mission. We are sending copies of this report to the appropriate congressional committees, the Librarian of Congress, 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) 512-6253 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. The Senate Appropriations Committee report accompanying the fiscal year 2015 legislative branch appropriations bill (S. Rep. No. 113-196) required that we review the Copyright Office’s current information technology (IT) environment and its plans for modernizing that infrastructure. Our specific objectives for this review were to (1) describe the legal, technical, and organizational aspects of the Copyright Office’s current IT environment and (2) describe and evaluate the Copyright Office’s plans for modernization. To address our first objective, we reviewed the legal requirements for the Copyright Office found in the Copyright Act and the Administrative Procedure Act, and related legal requirements for the Library of Congress, as well as the Library’s IT management policies and procedures. We also reviewed documentation related to concerns expressed by internal and external users of Copyright’s registration system, including public comments and transcripts of meetings with the public; testimony, hearing transcripts, and speeches by the Register of Copyrights; results from customer satisfaction surveys for the office’s systems; e-mails related to IT challenges sent by Copyright Office staff to the Associate Register for Registration Policy and Practice; and help desk tickets provided to both the Copyright Office help desk and the Library of Congress IT help desk. We reviewed feasibility studies and plans for migrating functionality from legacy systems to Copyright’s registration system. We also relied on the results of our recent review of the Library’s IT management. In addition, to test the integrity of the office’s deposit files, we selected a random probability sample of the deposit files stored in the Library of Congress’s storage servers. Specifically, we selected a simple random sample of 60 of the over 6 million deposit files that were stored from 2005 to 2014. We met with staff in the Library’s Office of Information Technology Services to confirm that the selected files existed in the expected locations. Finally, we interviewed Library of Congress officials, including the Library’s former acting Chief Information Officer (CIO) and head of the Library’s Information Technology Services division, and Copyright Office officials, including the Register of Copyrights, the Copyright CIO, and the heads of Copyright Office’s program areas. To describe and evaluate the office’s plans for modernization, we reviewed best practices on IT investment management identified by GAO and Library policies and procedures. We also reviewed requirements for IT strategic planning found in related provisions of the Clinger-Cohen Act of 1996 and guidance from the Office of Management and Budget. We reviewed the Copyright Office’s IT-related funding requests in fiscal years 2015 and 2016, including the underlying cost estimates, and compared them against the IT investment management criteria. We also reviewed testimony, hearing transcripts, and speeches made by the Register about the office’s needs for technical upgrades. Finally, we interviewed Library of Congress officials, including the Library’s former acting CIO, the Register of Copyrights, and the Copyright Office’s CIO, to discuss the office’s efforts to plan for IT improvement initiatives. We conducted this performance audit from June 2014 to March 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Joel C. Willemssen, (202) 512-6253 or [email protected]. In addition to the contact named above, individuals making contributions to this report included Nick Marinos, Lon Chin, and Chris Warweg (assistant directors), James Ashley, Chris Businsky, Sa’ar Dagani, Neil Doherty, Torrey Hardee, Thomas Johnson, Kaelin Kuhn, Lee McCracken, David Plocher, Meredith Raymond, Kate Sharkey, Andrew Stavisky, Tina Torabi, and Charles Youman.

The mission of the Copyright Office, a service unit within the Library of Congress, is to promote creativity by administering and sustaining a national copyright system. As part of this mission, the Copyright Office registers about 500,000 creative works a year for copyright and records documentation related to copyright transfer and sale. In recent years, the Register of Copyrights has discussed the need for a modernized Copyright Office, to include upgrades to the current IT environment. The Senate Appropriations Committee report accompanying the 2015 legislative branch appropriations bill required GAO to review the Copyright Office's current IT environment and plans for the future. This report (1) describes the legal, technical, and organizational aspects of the Copyright Office's current IT environment, and (2) describes and evaluates the Copyright Office's plans for modernization. To carry out its work, GAO reviewed Library policies and related best practices, comments by stakeholders, IT funding requests, and other relevant documentation, and interviewed key Library and Copyright Office officials. The Copyright Office has a legal mission supporting the creative industries that significantly contribute to the United States economy and relies heavily on information technology (IT) to carry out this mission. For example, by law, the office must be able to receive and examine copyright registration applications, collect and maintain deposited copies of copyrighted works, and maintain records of the transfer of copyright ownership. To meet these mission requirements, the office relies on several IT systems, as well as the infrastructure managed by the Library of Congress's central IT office. However, GAO and others have identified challenges with this environment. For example, comments solicited by the Copyright Office from external users have described limitations in the performance and usability of the office's electronic copyright registration system, and the Copyright Office has expressed concerns about the integrity of the files stored in the Library's servers. Organizationally, responsibility for managing the office's IT environment is shared between the Copyright Office's Office of the Chief Information Officer (CIO) and the Library's central IT office. The Library has serious weaknesses in its IT management, which have hindered the ability of the Library and the Copyright Office to meet mission requirements. For example, the Library has not had a permanent CIO in over 2 years. The Copyright Office requested over $7 million in fiscal years 2015 and 2016 to address four key challenges: (1) reengineer recordation—one of the office's key business processes—to include developing an online filing capability; (2) develop a secure digital repository for its electronic materials (e.g., books and music); (3) develop a software application development environment; and (4) establish a data management team, to include developing data standards. The office has also published a report that summarizes stakeholder comments on the current IT environment and makes several recommendations to improve this environment. However, the office has not adequately justified these proposed investments. Specifically, it has not identified the business needs they are intended to meet, expected costs, or how they align with the agency's strategic plan, as called for by Library IT investment management policy. The office also did not present the investments to the Library's IT investment review board, which was established to select investments for funding that meet defined criteria and ensure that such investments are not duplicative of existing investments or activities performed within the Library. Copyright officials stated that these initiatives were in early stages and the office was not yet in a position to develop this information. However, without identifying key costs and benefits of proposed initiatives and presenting this information to the Library-wide investment review board, decision makers at the Library and the Copyright Office do not have the assurance that the selected investments support the organization's goals and do not duplicate existing activities. In addition, the office does not have an IT strategic plan, and officials described difficulties in developing such a plan given that the Library has not yet developed one. As noted in a recent GAO review of the Library's IT management, the Library has recently committed to developing an updated IT strategic plan, and it will be important for the Copyright Office's own strategic planning to be aligned with this effort. GAO recommends that the Copyright Office (1) develop key information to support proposed initiatives for improving its IT environment and submit them to the Library's IT investment review board for review, and (2) develop an IT strategic plan that is aligned with the Library's strategic planning efforts. The office neither agreed nor disagreed. GAO continues to believe its recommendations are warranted.

You are an expert at summarizing long articles. Proceed to summarize the following text: This section describes (1) Y-12’s role in NNSA’s Nuclear Security Enterprise; (2) NNSA policy for setting program requirements; (3) best practices for program cost and schedule estimating; and (4) best practices for technology readiness. NNSA is responsible for managing national nuclear security missions: ensuring a safe, secure, and reliable nuclear deterrent; supplying nuclear fuel to the Navy; and supporting the nation’s nuclear nonproliferation efforts. NNSA directs these missions but relies on management and operating contractors to carry them out and manage the day-to-day operations at each of eight sites that comprise the agency’s nuclear security enterprise. These sites include laboratories, production plants, and a test site. Of NNSA’s eight sites, the Y-12 National Security Complex in Tennessee is the primary site with enriched uranium processing capabilities. Y-12’s primary mission is processing and storing uranium, processing nuclear fuel for the U.S. Navy, and developing technologies associated with those activities, including technologies for producing uranium-related components for nuclear warheads and bombs. Construction of the 811- acre Y-12 site began in 1943 as part of the World War II-era Manhattan Project. Y-12’s enriched uranium processing and storage capability is primarily housed in the following buildings: Building 9212: This building was constructed in 1945, at the end of World War II, and includes a number of support and storage facilities related to uranium purification and casting. According to a 2016 report from the DOE Office of Inspector General, all of the various support and storage facilities of Building 9212 contain radioactive and chemical materials in sufficient quantities that an unmitigated release would result in significant consequences. These facilities do not meet current safety requirements for such facilities in that they cannot withstand a seismic event, high wind event, or aircraft crash. The shutdown of Building 9212 operations that have the highest nuclear safety risk at Y-12 is a key NNSA uranium program goal. Because of these risks, according to NNSA officials, NNSA has substantially reduced the risks from high-hazard materials, such as enriched uranium in organic and aqueous solutions, with a focus on materials located in Building 9212. As such, according to these officials, the remaining material at risk in Building 9212 has been reduced to a level significantly below the facility’s administrative limit, and NNSA is implementing a four-phase exit strategy to systematically phase out mission dependency on Building 9212. The exit strategy includes actions necessary to remove material hold-up, complete all process relocations, transition personnel to the UPF, and complete post- operations cleanout of the facility, among other things, according to NNSA officials. Building 9215: This building was constructed in the 1950s and consists of three main structures. Specific activities in Building 9215 include fabrication activities, such as metal forming and machining operations for highly enriched uranium, low-enriched uranium, and depleted uranium. NNSA and others, such as the Defense Nuclear Facilities Safety Board, have raised concerns about the future reliability of the building, particularly as the amount of deferred maintenance in Building 9215 has steadily increased over the past several years. According to NNSA officials, NNSA’s contractor has hosted a series of technical evaluations that identified and prioritized needed infrastructure investments over the next 15 years, including within Building 9215, that are intended to ensure facility reliability through the 2040s. NNSA is reviewing these initial proposed investments. Building 9204-2E: This building, constructed in the late 1960s, is a three-story, reinforced concrete frame structure. Operations in this building include the assembly and disassembly of enriched uranium components with other materials. Also, according to NNSA officials, radiography capabilities have been successfully relocated out of Building 9212 and installed in Building 9204-2E. The design used for this facility predates modern nuclear safety codes. Building 9720-82 (also called the Highly Enriched Uranium Materials Facility): This building became operational in January 2010. Built to current safety standards, the facility provides long-term storage of enriched uranium materials and accepts the transfer of some legacy enriched uranium from older facilities. According to NNSA officials, as part of the uranium program NNSA transferred 12.3 metric tons of enriched uranium to this facility in fiscal year 2015, 9.8 metric tons in fiscal year 2016, and anticipates transferring 6 metric tons in fiscal year 2017. According to NNSA documents, Y-12’s enriched uranium operations have key shortcomings including (1) an inefficient workflow, (2) continually rising operations and maintenance costs due to facility age, and (3) hazardous processes that could expose workers to radiological contamination. To address these shortcomings, NNSA developed plans to replace aging infrastructure at Y-12 and relocate key processing equipment without jeopardizing uranium production operations. The first solution, proposed in 2004, envisioned relocating Y-12’s main uranium processing equipment into a new UPF. NNSA planned to construct this single, consolidated facility that would be less than half the size of existing facilities; reduce costs by using modern processing equipment; and incorporate features to increase worker protection and environmental health and safety. In 2007, NNSA estimated the UPF would cost from $1.4 billion to $3.5 billion to design and construct. In June 2012, the Deputy Secretary of Energy approved an updated cost estimate range for the UPF of from $4.2 billion to $6.5 billion. However, by August 2012, the UPF contractor concluded that the uranium processing and other equipment would not fit into the UPF as designed. In 2014, because of the high cost and schedule concerns of a solution focused solely on constructing new buildings, NNSA prepared a high- level strategic plan for its uranium program that is now focused on ceasing operations in building 9212 through a combination of new construction, infrastructure investments in existing facilities, upgrades to and relocation of select processing technologies, and improved inventory management. This strategy includes replacing certain 9212 capabilities, with continued operation of 9215 and 9204-2E, and removing a considerable amount of the scope of work that had been included in the original UPF plan (as the functions performed in Buildings 9215 and 9204-2E are no longer included within the UPF project). Figure 1 below depicts the planned transfer of uranium processing capabilities out of Building 9212 and into a new UPF and existing facilities by 2025 under the new approach. Under the new approach, the UPF is to provide less floor space, compared to the original UPF design, for casting, oxide production, and salvage and accountability of enriched uranium. NNSA has stated that this newly designed UPF is to be built by 2025 for no more than $6.5 billion through a series of seven subprojects. NNSA is required to manage construction of the new UPF in accordance with DOE Order 413.3B, which requires the project to go through five management reviews and approvals, called “critical decisions” (CD), as the project moves forward from planning and design to construction and operation. The CDs are as follows: CD 0: Approve mission need. CD 1: Approve alternative selection and preliminary cost estimate. CD 2: Approve the project’s formal scope of work, cost estimate, and schedule baselines. CD 3: Approve start of construction. CD 4: Approve start of operations or project completion. In March 2014, NNSA updated its Business Operating Procedure, clarifying its policy for developing and maintaining program requirements on construction programs and projects executed by the agency. According to this procedure, this program requirements policy is applicable to most projects constructed for NNSA or managed by NNSA personnel and that have an estimated total project cost of $10 million or greater, or the cost threshold determined appropriate by the Deputy Secretary of Energy. These projects include line item (capital asset) projects. According to NNSA’s Business Operating Procedure policy, program officials should establish the mission- and program-level requirements that apply to the development and execution of the program or project. The policy also states that program officials should translate the “need” in the Mission Need Statement into initial top-level requirements addressing such concerns as performance, supportability, physical and functional integration, security, test and evaluation, implementation, and quality assurance. The policy states that experience has shown that a formal process resulting in an agreed-upon definition of requirements for new systems, new capabilities, and updates or enhancements to systems is a prerequisite to proceeding to system or capability design. Furthermore, according to the policy, failure to do this results in rework and unnecessary costs and delays in schedule. NNSA policy states that Program Requirements Documents shall contain both mission and program requirements and should include the “objective” value—the desired performance, scope of work, cost, or schedule that the completed asset should achieve, as well as the “threshold” value—representing the minimum acceptable performance, scope of work, cost, or schedule that an asset must achieve. NNSA’s requirements policy also states that the development of mission requirements should include summary documentation on how the requirements were identified or derived and that the documentation should contain explanations of the processes, documentation, and direction or guidance that govern the derivation or development of the requirements. The policy also states that the basis for the requirements, where not obvious, should be traceable to decisions or source documentation and that details relating to the traceability of requirements may be included in an attachment to the program requirements document. NNSA’s uranium modernization efforts under the broader program have focused on establishing NNSA program requirements, which NNSA considers in determining its infrastructure plans. In July 2014, NNSA appointed a uranium program manager to integrate all of the uranium program’s elements. According to NNSA uranium program officials and documents, uranium program elements include construction of the new UPF; repairs and upgrades to existing facilities; uranium sustainment activities for achieving specific uranium production capabilities and inventory risk reduction (the strategic placement of high-risk materials in lower-risk conditions); depleted uranium management; and technology development, deployment, and process relocation. In March 2009, we published a cost estimating guide to provide a consistent methodology that is based on best practices and that can be used across the federal government for developing, managing, and evaluating capital program cost estimates. The methodology outlined in the guide is a compilation of best practices that federal cost estimating organizations and industry use to develop and maintain reliable cost estimates throughout the life of a government acquisition program. According to the cost estimating guide, developing accurate life-cycle cost estimates has become a high priority for agencies in properly managing their portfolios of capital assets that have an estimated life of 2 years or more. A life-cycle cost estimate provides an exhaustive and structured accounting of all resources and associated cost elements required to develop, produce, deploy, and sustain a particular program. According to the guide, a life-cycle cost estimate can be thought of as a “cradle to grave” approach to managing a program throughout its useful life. This entails identifying all cost elements that pertain to the program from initial concept all the way through operations, support, and disposal. A life-cycle cost estimate encompasses all past (or sunk), present, and future costs for every aspect of the program, regardless of funding source. According to the guide, a life-cycle cost estimate can enhance decision making, especially in early planning and concept formulation of acquisition, as well as support budget decisions, key decision points, milestone reviews, and investment decisions. The guide also states that a credible cost estimate reflects all costs associated with a system (program)—we interpret this to also mean that it must be based on a complete scope of work—and the estimate should be updated to reflect changes in requirements (which affect the scope of work). Because of the inherent uncertainty of every estimate due to the assumptions that must be made about future projections, once life-cycle costs are developed it is also important to continually keep them updated, according to the guide. We also published a schedule guide in December 2015—as a companion to the cost estimating guide—that identifies best practices for scheduling the necessary work. According to the schedule guide, a well-planned schedule is a fundamental management tool that can help government programs use funds effectively by specifying when work will be performed in the future and measuring program performance against an approved plan. Moreover, an integrated master schedule can show when major events are expected as well as the completion dates for all activities leading up to these events, which can help determine if the program’s parameters are realistic and achievable. An integrated master schedule may be made up of several or several hundred individual schedules that represent portions of effort within a program. These individual schedules are “projects” within the larger program. An integrated master schedule integrates the planned work, the resources necessary to accomplish that work, and the associated budget, and it should be the focal point for program management. Furthermore, according to the schedule guide, an integrated master schedule constitutes a program schedule that includes the entire required scope of work, including the effort necessary from all government, contractor, and other key parties for a program’s successful execution from start to finish. Conformance to this best practice—that the schedule should capture all activities or scope of work—logically leads to another key schedule best practice: the sequencing of all activities. This best practice states that activities must be listed in the order in which they are to be carried out and be joined with logic. Consequently, developing a complete scope of work or knowing all of the activities necessary to accomplish the project’s objectives is critical to adhering to these best practices. In other words, a schedule is not complete and reliable if significant portions of the scope of work are not yet developed or are still uncertain, including over the longer term. In prior reports from February 2014, November 2014, and August 2016, we included recommendations concerning NNSA’s development of life- cycle cost estimates or an integrated master schedule for certain projects and programs, as called for in our cost estimating and schedule best practice guides. Specifically: In February 2014, we recommended that to develop reliable cost estimates for its plutonium disposition program, among other things, the Secretary of Energy should direct the NNSA office responsible for managing the program to, as appropriate, revise and update the program’s life-cycle cost estimate following the 12 key steps described in our Cost Estimating Guide for developing high-quality cost estimates. In our November 2014 report, we recommended that to enhance NNSA’s ability to develop reliable cost estimates for its projects and for its programs that have project-like characteristics, the Secretary of Energy should revise DOE directives that apply to programs to require that DOE and NNSA and its contractors develop cost estimates in accordance with the 12 cost estimating best practices, including developing life-cycle cost estimates for programs. In August 2016, regarding the preparation of integrated master schedules, we recommended that to ensure that NNSA’s future schedule estimates for the revised Chemistry and Metallurgy Research Replacement project—a key element of NNSA’s plutonium program—provide the agency with reasonable assurance regarding meeting the project’s completion dates, the Secretary should direct the Under Secretary for Nuclear Security, in his capacity as the NNSA Administrator, to develop future schedules for the revised project that are consistent with current DOE project management policy and scheduling best practices. Specifically, the Under Secretary should develop and maintain an integrated master schedule that includes all project activities under all subprojects prior to approving the project’s first CD-2 decision. The agency generally agreed with these recommendations and has initiated various actions intended to implement them, including revising certain DOE orders, but it has not completed all actions needed to fully address the recommendations. To ensure that new technologies are sufficiently mature in time to be used successfully, NNSA uses a systematic approach—Technology Readiness Levels (TRL)—for measuring the technologies’ technical maturity. TRLs were pioneered by the National Aeronautics and Space Administration and have been used by the Department of Defense and other agencies in their research and development efforts for several years. As shown in table 1, TRLs start with TRL 1, which is the least mature, and go through TRL 9, the highest maturity level and at which the technology as a total system is fully developed, integrated, and functioning successfully in project operations. In November 2010, when NNSA’s original approach was to consolidate Y- 12’s uranium processing capabilities into a single large facility, we reported that NNSA did not expect to have optimal assurance as defined by TRL best practices that 6 of the 10 new technologies being developed for construction of the new UPF would work as intended before project critical decisions are made. Our November 2010 report also concluded that because all of the technologies being developed for construction of the new UPF would not achieve optimal levels of readiness prior to project critical decisions, NNSA might lack assurance that all technologies would work as intended. The report further stated that this could force the project to revert to existing or alternate technologies, which could result in design changes, higher costs, and schedule delays. In September 2011, DOE issued a technology readiness assessment guide for the agency, which states that new technologies should reach TRL 6 by CD 2, when the scope of work, cost estimate, and schedule baselines are to be approved. The guide also encouraged project managers to reach TRL 7 prior to CD 3, or when the start of construction is approved. In April 2014, we provided additional information on technology development efforts for the UPF and identified five additional technology risks since our November 2010 report. In May 2016, DOE strengthened TRL requirements and updated DOE Order 413.3B, Program and Project Management for the Acquisition of Capital Assets, which states that project managers shall reach TRL 7 prior to CD 2 for major system projects or first-of-a-kind engineering endeavors. In August 2016, we provided an exposure draft to the public to obtain input and feedback on our technology readiness guide, which identifies best practices for evaluating the readiness of technology for use in acquisition programs and projects. NNSA documents we reviewed and program officials we interviewed indicate that NNSA has made progress in developing a revised scope of work, cost estimate, and schedule for the new UPF, potentially stabilizing escalating project costs and technical risks experienced under the previous strategy. According to NNSA’s 2014 high-level strategic plan for the uranium program, NNSA changed its strategy for managing the overall uranium program, including the UPF, that year, which resulted in the need to develop a new scope of work. NNSA has reduced the scope of work for construction of the new UPF—the most expensive uranium program element—as a result of key adjustments NNSA had made to program requirements. For example, NNSA’s October 2014 revision of program requirements for construction of the new UPF resulted in the following changes: NNSA modified the processing capability for casting uranium initially intended for construction of the new UPF, which then allowed the agency to scale back certain capabilities envisioned for the facility, potentially reducing project costs. NNSA significantly simplified processing capabilities and reduced critical technologies needed for construction, due to the reduction in the scope of work for the new UPF from the 10 technologies the agency planned to use prior to 2014 to 3, according to program officials. NNSA officials told us that this change was needed to help control escalating costs and technical risks. NNSA integrated graded security and safety factors into the new UPF design, which resulted in cost savings and schedule improvement for the UPF project, according to agency officials. According to NNSA’s fiscal years 2017 and 2018 budget requests, NNSA expects to approve formal scope of work, cost, and schedule baseline estimates for construction of the new UPF as the designs for the Main Process and Salvage and Accountability Buildings subprojects—the two largest subprojects—reach at least 90 percent completion, which is consistent with DOE’s order on project management for construction of these types of facilities. According to NNSA’s fiscal year 2017 and 2018 budget requests, construction of the new UPF will occur in distinct phases, by key subproject. The seven key subprojects are as follows: Main Process Building Subproject: This subproject includes construction of the main nuclear facility that contains casting and special oxide production. Support structures include a secure connecting portal to the Highly Enriched Uranium Materials Facility. Salvage and Accountability Building Subproject: This subproject includes work intended to construct a facility for handling chemicals and wastes associated with uranium processing, as well as decontamination capabilities, among other things. Mechanical Electrical Building Subproject: This subproject includes work intended to provide a building for mechanical, electrical, heating, ventilating, air conditioning, and utility equipment for the Main Process and Salvage and Accountability buildings. Site Infrastructure and Services Subproject: This subproject includes work intended for demolishment, excavation, and construction of a parking lot, security portal, and support building. Process Support Facilities Subproject: This subproject includes work intended to provide chilled water and chemical and gas supply storage for the UPF. Substation Subproject: This subproject includes work intended to provide power to the new UPF and additional capacity for the remainder of the Y-12 Plant. Site Readiness Subproject: This subproject included work to relocate Bear Creek Road and construct a new bridge and haul road. As of May 2017, NNSA had developed and approved a revised formal scope of work, cost, and schedule baseline estimates for four of the seven subprojects. NNSA expects to approve such baseline estimates for the all of the remaining subprojects—including the two largest subprojects—by the second quarter of fiscal year 2018. NNSA also plans to validate the estimates through an independent cost estimate at that time. Concurrently with its approval and validation of the formal baseline estimates—which constitutes CD 2 in NNSA’s project management process—NNSA intends to approve the start of construction, which constitutes CD 3 in that process. Table 2 shows estimated or approved time frames for CD 2, 3, and 4 milestones, as well as preliminary or (where available) formal cost baseline estimates for each subproject. NNSA has not developed a complete scope of work, life-cycle cost estimate, or integrated master schedule for its overall uranium program, and it has no time frame for doing so. In particular, it has not developed a complete scope of work for repairs and upgrades to existing facilities, nor has it done so for other key uranium program elements. Therefore, NNSA does not have the basis to develop a life-cycle cost estimate or an integrated master schedule for its overall uranium program. NNSA has not developed a complete scope of work to repair and upgrade existing facilities for the overall uranium program, even though these activities could be among the most expensive and complicated non- construction portions of the uranium program. According to a July 2014 memorandum from the NNSA Administrator, the uranium program manager is expected to, among other things, identify the scope of work of new construction and infrastructure repairs and upgrades to existing facilities necessary to support the full uranium mission. NNSA is still evaluating a November 2016 initial implementation plan, proposed by the Y-12 contractor, for the repairs and upgrades that broadly outlines the scope of work. We found that some areas of the scope of work are more fully defined than others. For example, NNSA’s implementation plan identifies the scope of work to conduct electrical power distribution repairs and upgrades in buildings 9215 and 9204-2E—which were constructed in the 1950s and 1960s, respectively—beginning in fiscal year 2017. However, NNSA does not have a complete scope of work to serve as the basis for its $400 million estimate. Officials we interviewed said that the agency intends to develop each year the complete and detailed scope of work to be done in the following year or two, including the work related to infrastructure investment. We also found that one significant area of the scope of work that has not been developed concerns repairs and upgrades to address certain safety issues confirmed by the Defense Nuclear Facilities Safety Board. For example, according to the board’s February 2015 letter to NNSA, earthquakes or structural performance problems in Buildings 9215 and 9204-2E could contribute to an increased risk for structural collapse and release of radiological material. NNSA officials said they have not fully developed the long-term scope of work to address the safety issues that the board confirmed because much of this work depends on the results of upcoming seismic and structural assessments the agency expects to be conducted in or after fiscal year 2018. According to these officials, the need for these assessments was not apparent until after 2014, when NNSA decided to rely, in part, on aging existing facilities to meet uranium program requirements. NNSA then had to adjust plans in alignment with the new circumstances that required repairs and upgrades to these facilities. According to NNSA program officials, the planned infrastructure repairs and upgrades will address many, but not all, of the safety issues identified by the board. For example, NNSA program officials stated that they do not expect building 9215, which it expects to be in operation through the late 2030s, to meet all modern safety standards even with planned upgrades. NNSA officials also stated that planned upgrades have not been finalized and will focus on the upgrades that balance cost and risks. Other aspects of the scope of work for repairs and upgrades have been developed but may not be stable because NNSA continues to review and adjust program requirements that affect the scope of work. For example, during our examination of how NNSA established uranium purification requirements, NNSA program officials told us that they identified a more accurate program requirement for purified uranium that increased the required annual processing throughput capability for purified uranium from 450 to 750 kilograms. As a result, in August 2016, NNSA program officials told us that NNSA will need to add to the capacity of the equipment to be installed in Building 9215 to convert uranium that contains relatively high amounts of impurities, such as carbon, into a more purified form—increasing the scope of work for this upgrade. The uranium program manager told us that, in an effort to make the requirement more accurate, NNSA changed its approach to determining the requirement so that it relied less on historical data and more on data on the purification levels of uranium inventories on hand, among other considerations. This program manager also told us that accurate and stable program requirements establish the basis for the infrastructure and equipment that will be needed to meet program goals, such as processing uranium for nuclear components necessary to meet nuclear weapons stockpile needs. The ongoing review of program requirements, with minor adjustments, is expected and necessary to ensure accuracy, according to NNSA officials. We also found that NNSA has not developed complete scopes of work for other uranium program elements, including uranium sustainment activities, depleted uranium management, and technology development, based on our review of documents and discussion with NNSA officials. NNSA officials we interviewed told us that NNSA is working to develop these scopes of work, but the agency has no time frames for completion. We determined that NNSA has not yet developed the complete scope of work for activities to reduce the risk associated with and sustain its uranium inventory, based on our review of program documents and interviews with NNSA program officials. These activities include efforts to remove higher-risk materials from higher-risk conditions and strategically place them in lower-risk conditions. For example, NNSA expects to reprocess the uranium contained in organic solutions, which is a relatively higher-risk form of uranium storage, for repackaging and eventual removal from deteriorating, higher-risk buildings, such as Building 9212. These reprocessed materials and other materials that are more easily repackaged, such as nuclear components from dismantled nuclear weapons, are expected to be relocated to lower-risk storage areas, such as the Highly Enriched Uranium Materials Facility, which became operational in 2010. NNSA program officials told us that they have developed a detailed scope of work for the removal of higher-risk materials from some Y-12 areas but have not developed the complete scope of work for their removal from other facilities or for transferring these materials to the storage facility or other interim locations. NNSA officials we interviewed told us that the agency recognized in December 2015 that requirements for depleted uranium were incomplete, which could affect the scope of work for meeting these requirements. In December 2015, NNSA completed its initial analysis of depleted uranium needs, by weapon system, to determine potential gaps in material availability in the future. This initial analysis was an important first step in defining requirements for depleted uranium, but the program element is in an early stage of development, according to NNSA program officials. According to NNSA officials, NNSA is developing the scope of work necessary to sustain depleted uranium capabilities and infrastructure at Y-12, and it is evaluating strategies to procure or produce additional feedstock of high-purity depleted uranium to support production needs. NNSA’s broad strategy to replace Building 9212 capabilities by 2025— through plans for the construction of a new UPF under a reduced scope of work—currently involves plans to install new uranium processing capabilities in other existing Y-12 buildings, including Buildings 9215 and 9204-2E, and will rely on developing and installing new technologies. Two of the uranium processing technologies—calciner and electrorefining— are at later stages of development, and the scope of work needed to bring them to full maturity is relatively straightforward, according to NNSA program officials. One technology—chip processing—is less mature, but the remaining activities necessary to potentially develop it to full maturity have been determined, according to NNSA program officials. Also, according to these officials, for one technology that has been deferred, the remaining activities necessary to develop it to full maturity are less clear. Calciner technology enables the processing of certain uranium- bearing solutions into a dry solid so that it can be stored pending further processing in the future. According to a NNSA uranium program official, NNSA had determined as of May 2015 that the calciner technology had reached TRL 6—the level required prior to CD 2 (when scope of work, cost, and schedule baselines are to be approved) under DOE’s technology readiness guide. After finishing calciner equipment installation in Building 9212 and project completion, expected in fiscal year 2022, NNSA plans to conduct a readiness review to demonstrate that the technology meets TRL 8 (meaning that it has been tested and demonstrated), according to a NNSA uranium program official. Electrorefining technology applies a voltage that drives a chemical reaction to remove impurities from uranium. According to NNSA documents, using this technology eliminates various hazards associated with current chemical purification processes, such as using hydrogen fluoride and certain solvents, and allows a 4-to-1 reduction in square footage to operate compared with existing technologies. As of December 2015, NNSA had determined that the electrorefining technology had reached TRL 6, according to a key NNSA program official. After finishing electrorefining equipment installation in Building 9215 and project completion, expected in fiscal year 2022, NNSA plans to conduct a readiness review to demonstrate that the technology meets TRL 8, according to a NNSA uranium program official. Direct electrolytic reduction technology could convert uranium oxide to uranium metal using an electrochemical process similar, but not identical, to electrorefining. It was assessed at TRL 4 as of September 2014. According to NNSA program officials, NNSA may pursue direct electrolytic reduction technology as a follow-on to electrorefining, but NNSA has not determined whether there is a mission need for this technology. Currently, NNSA has deferred funding for it until fiscal year 2019. Chip processing technology converts enriched uranium metal scraps from machining operations into a form that can be re-used. This technology is already in use, but NNSA is investigating improved technology to potentially simplify the process and reduce the number of chip processing steps, according to NNSA program officials. As of July 2016, NNSA had determined that the new technology had reached TRL 5, and the agency plans to reach TRL 6 by June 2017. Because NNSA has not developed a complete scope of work for the overall uranium program, it does not have the basis to develop a life-cycle cost estimate or an integrated master schedule for the program. As noted previously, NNSA has made progress in developing a cost estimate for the new UPF, and this estimate will be an essential component of a life- cycle cost estimate for the overall program. For other program elements, discussed below, NNSA either has rough or no estimates of the total costs. According to our analysis of information from NNSA documents and program officials, these program elements may cost nearly $1 billion over the next 2 decades. Repairs and upgrades to existing facilities: NNSA’s contractor’s implementation plan includes a rough-order-of-magnitude cost estimate of $400 million over the next 20 years—roughly $20 million per year—for repairs and upgrades to existing facilities. Uranium sustainment activities for achieving inventory risk reduction: Activities to reduce the risk associated with and sustain NNSA’s uranium inventory are expected to cost roughly $25 million per year in fiscal years 2017 through 2025 for a total of around $225 million, according to NNSA program officials. Depleted uranium management: NNSA has not estimated costs for meeting depleted uranium needs for weapons systems. Current costs related to managing depleted uranium are broadly shared among various NNSA program areas. NNSA is exploring options and costs of increasing the supply of depleted uranium to meet NNSA needs. Technology development: Estimated costs for development of technology to be installed in existing Y-12 buildings are roughly $30 million per year in fiscal years 2017 through 2025, for a total of around $270 million, according to NNSA program officials. Our cost estimating guide states that a credible cost estimate reflects all costs associated with a system (program)—i.e., it must be based on a complete scope of work—and that the estimate should be updated to reflect changes in requirements (which affect the scope of work). Because NNSA has not developed the complete scope of work for each program element and the overall uranium program, NNSA does not have the basis for preparing a credible life-cycle cost estimate for the program. Having a life-cycle cost estimate can enhance decision making, especially in early planning and concept formulation of acquisition, as well as support budget decisions, key decision points, milestone reviews, and investment decisions, according to our cost estimating guide. For the uranium program, a life-cycle cost estimate could better inform decision making, including by Congress. Uranium program managers indicated that they plan to eventually develop a life-cycle cost estimate for the overall uranium program, but they have no time frame for doing so and said that it may take several years. In addition, NNSA has not developed an integrated master schedule for its uranium program as called for in our schedule guide. An integrated master schedule for the uranium program would need to include individual schedules that represent portions of effort within the program— that is, program elements. As noted earlier, NNSA has made progress in developing a schedule for the UPF project and expects to complete development of schedule baselines for all UPF subprojects in 2018; this schedule information will be an essential component of an integrated master schedule for the overall program. For other program elements, however, NNSA does not have a basis to develop a complete schedule because, as discussed above, NNSA has not developed a complete scope of work. NNSA’s program guidance recommends development of an integrated master schedule and states that having one supports effective management of program scope, risk, and day-to-day activities. Specifically, the guidance states that during the initial phases of a program, an integrated master schedule provides an early understanding of the required scope of work, key events, accomplishment criteria, and the likely program structure by depicting the progression of work through the remaining phases. Furthermore, it communicates the expectations of the program team and provides traceability to the management and execution of the program. However, NNSA’s guidance does not always explicitly require the development of such a schedule—the guidance allows for the tailoring of the agency’s management approach based on the particular program being managed. Uranium program managers indicated that they plan to eventually develop an integrated master schedule for the uranium program but were uncertain when this schedule may be developed. In the meantime, NNSA plans to spend tens of millions of dollars annually on uranium program activities—including $20 million per year for repairs and upgrades to existing buildings—without providing decision makers with an understanding of the complete scope of work, key events, accomplishment criteria, and the likely program structure. Under federal standards for internal control, management should use quality information to achieve the entity’s objectives, and, among other characteristics, quality information is provided on a timely basis. Without NNSA setting a time frame for when it will (1) develop the complete scope of work for the overall uranium program, to the extent practicable, and (2) prepare a life-cycle cost estimate and integrated master schedule, NNSA does not have reasonable assurance that decision makers will have timely access to essential program management information—risking unforeseen cost escalation and delays in NNSA’s efforts to meet the nation’s uranium needs. NNSA is making efforts to modernize uranium processing capabilities that are crucial to our nation’s ability to maintain its nuclear weapons stockpile and fuel its nuclear-powered naval vessels. NNSA’s modernization efforts will likely cost several billions of dollars and take at least 2 decades to execute. As part of these efforts, NNSA is planning to construct a new UPF, using a revised approach intended to help control escalating costs and schedule delays. NNSA has made progress in developing a scope of work, cost estimates, and schedules for the new UPF. However, the success of the new UPF approach, which relies on support capabilities outside of the new UPF project, depends on the successful completion and integration of many other projects and activities that comprise the overall uranium program, including repairs and upgrades to existing Y-12 facilities needed for housing uranium processing capabilities. NNSA has not developed a complete scope of work for its overall uranium program, nor has it set a time frame for doing so. In the interim, NNSA cannot adhere to best practices, such as developing a credible life-cycle cost estimate or an effective long-term, integrated master schedule for the program because of gaps in information about future activities and their associated costs. Without NNSA setting a time frame for when it will (1) develop a complete scope of work for the overall uranium program, to the extent practicable, and (2) prepare a life-cycle cost estimate and an integrated master schedule for the program, NNSA does not have reasonable assurance that decision makers will have timely access to essential program management information for this costly and important long-term program. We recommend that the NNSA Administrator set a time frame for when the agency will (1) develop the complete scope of work for the overall uranium program to the extent practicable and (2) prepare a life-cycle cost estimate and an integrated master schedule for the overall uranium program. We provided a draft of this report to DOE and NNSA for their review and comment. NNSA provided written comments, which are reproduced in full in appendix II, as well as technical comments, which we incorporated in our report as appropriate. In its comments, NNSA generally agreed with our recommendation. NNSA stated that the recommendation reflects the logical next steps in any program’s maturity and is consistent with its existing planning goals. NNSA further stated that while it is too early to have developed full scope and cost estimates for the entire program at this point, it fully intends to implement the recommendation at the appropriate times in the uranium program’s continuing development. In particular, NNSA stated that it is developing a complete scope of work, which is necessary for a fully informed program cost estimate, and anticipates this to be a multiyear effort. Regarding cost estimates, NNSA said that initial cost estimates it develops will continue to reflect strategies and emerging risks over the course of the Future Years Nuclear Security Plan—a 5-year plan typically used as part of the basis for NNSA congressional budget requests for each fiscal year. NNSA stated that once stable implementation plans are developed for its activities, it will consider whether there is value in further extending the time frame for estimates. NNSA further stated that it plans to complete an initial coordinated program schedule by December 31, 2018, and that the schedule would continue to be updated as plans and strategies evolve. NNSA also provided additional examples to illustrate the program’s progress in improving safety, relocating processes, improving infrastructure, and construction of the UPF, among other things. We incorporated several of these examples in the report where appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Energy, the Administrator of the National Nuclear Security Administration, 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) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To describe the status of the National Nuclear Security Administration’s (NNSA) efforts to develop a revised scope of work, cost estimate, and schedule for the new Uranium Processing Facility (UPF) project, we reviewed NNSA program planning documents, and any updates, concerning cost and budget and interviewed agency officials to determine the effect of uranium program strategy revisions on the UPF project’s scope of work, cost, and schedule. To examine the scope of work for the UPF project, which directly impacts the project’s cost and schedule, we reviewed NNSA business operating procedures for developing program requirements and the steps taken to identify and update requirements, which would apply to the construction of the new UPF. We interviewed program officials to understand how they defined and adjusted program requirements and to understand the potential effects of any adjustments on NNSA’s infrastructure plans. For example, NNSA officials stated that they followed key portions of the applicable Business Operating Procedure (BOP) regarding program requirements for construction projects. As such, we reviewed those portions of BOP-06.02 that the officials stated were applicable, including stipulations that requirements include the “threshold” value (the minimum acceptable performance, scope of work, cost, or schedule that construction of the new UPF must achieve), and “objective” value (the desired performance, scope of work, cost, or schedule that the new UPF should achieve). To review project requirements for the construction of the new UPF, we reviewed copies of the most recent requirements revision documents—NNSA’s project and program requirements documents. Specifically, we reviewed the requirements to determine whether requirements for the construction of the new UPF specified both threshold and objective requirements. To examine the extent to which NNSA has developed a complete scope of work, life-cycle cost estimate, and integrated master schedule for the overall uranium program, we reviewed NNSA program-planning documents concerning cost and budget and interviewed NNSA’s program manager and other program and contractor officials. We examined information regarding the broader uranium program, including NNSA’s efforts to repair and upgrade existing Y-12 facilities and other key uranium program elements. Specifically, to examine the scope of work for key elements of the overall uranium program—this scope of work directly impacts the program’s cost and schedule—we reviewed NNSA planning, strategy, and implementation-related documents for the program. We reviewed NNSA business operating procedures for developing program requirements and the steps taken to identify and update requirements for unique processing capabilities to be housed in existing facilities external to the UPF. We interviewed program officials to understand how they defined and adjusted program requirements and to understand the potential effects of any adjustments on NNSA’s infrastructure plans. In particular, we reviewed requirements external to the construction of the new UPF that were determined to be critical in meeting key program goals, according to NNSA officials, such as uranium purification requirements. We interviewed officials to determine the approach/process used for requirement-setting, the data used, and how NNSA analyzed the data. In addition, we reviewed detailed program planning documents, such as the Y-12 Enriched Uranium Facility Extended Life Program Report and Highly Enriched Uranium Mission Strategy Implementation Plan to learn about the infrastructure repairs and upgrades NNSA identified it needs to meet facility safety and other requirements. To obtain the views of independent subject matter experts on the structural, seismic, and safety condition of existing Y-12 facilities, we reviewed the Defense Nuclear Facilities Safety Board 2014 report that addressed the subject and that included conclusions and recommendations. In September 2016, we also spoke with board officials to determine if there were updates, additions, or changes to its letter; the officials said there were none and that the Y-12 facility structural concerns expressed in the 2014 letter remain. To further examine the estimated cost and schedule for the overall uranium program from a broader perspective, we gathered and analyzed information regarding the extent to which NNSA has developed a life- cycle cost estimate and an integrated master schedule as called for in best practices. We reviewed best practices for cost and schedule as described in our Cost Estimating Guide and Schedule Guide. For the cost estimating guide, GAO cost experts established a consistent methodology that is based on best practices that federal cost estimating organizations and industry use to develop and maintain reliable cost estimates. Developing a life-cycle cost estimate and an integrated master schedule for the overall program are critical to successfully managing a program. We identified the benefits of using these best practices and interviewed program officials to obtain information on the status of their adherence to these best practices in managing the overall uranium program. In addition to the individual named above, Jonathan Gill (Assistant Director), Martin Campbell, Antoinette Capaccio, Jennifer Echard, Cynthia Norris, Christopher Pacheco, Sophia Payind, Timothy M. Persons, Karen Richey, Jeanette Soares, and Kiki Theodoropoulos made significant contributions to this report. Program Management: DOE Needs to Develop a Comprehensive Policy and Training Program. GAO-17-51. Washington, D.C.: November 21, 2016. DOE Project Management: NNSA Needs to Clarify Requirements for Its Plutonium Analysis Project at Los Alamos. GAO-16-585. Washington, D.C.: Aug. 9, 2016. Modernizing the Nuclear Security Enterprise: NNSA’s Budget Estimates Increased but May Not Align with All Anticipated Costs. GAO-16-290. Washington, D.C.: March 4, 2016. Modernizing the Nuclear Security Enterprise: NNSA Increased Its Budget Estimates, but Estimates for Key Stockpile and Infrastructure Programs Need Improvement. GAO-15-499. Washington, D.C.: August 6, 2015. DOE and NNSA Project Management: Analysis of Alternatives Could Be Improved by Incorporating Best Practices. GAO-15-37. Washington, D.C.: December 11, 2014. Project and Program Management: DOE Needs to Revise Requirements and Guidance for Cost Estimating and Related Reviews. GAO-15-29. Washington, D.C.: Nov. 25, 2014. Department of Energy: Interagency Review Needed to Update U.S. Position on Enriched Uranium That Can Be Used for Tritium Production. GAO-15-123. Washington, D.C.: October 14, 2014. Nuclear Weapons: Some Actions Have Been Taken to Address Challenges with the Uranium Processing Facility Design. GAO-15-126. Washington, D.C.: October 10, 2014. Nuclear Weapons: Technology Development Efforts for the Uranium Processing Facility. GAO-14-295. Washington, D.C.: April 18, 2014. Plutonium Disposition Program: DOE Needs to Analyze the Root Causes of Cost Increases and Develop Better Cost Estimates. GAO-14-231. Washington, D.C.: Feb. 13, 2014. Nuclear Weapons: Information on Safety Concerns with the Uranium Processing Facility. GAO-14-79R. Washington, D.C.: October 25, 2013. Nuclear Weapons: Factors Leading to Cost Increases with the Uranium Processing Facility. GAO-13-686R. Washington, D.C.: July 12, 2013. Nuclear Weapons: National Nuclear Security Administration’s Plans for Its Uranium Processing Facility Should Better Reflect Funding Estimates and Technology Readiness. GAO-11-103. Washington, D.C.: November 19, 2010.

Uranium is crucial to our nation's ability to maintain its nuclear weapons stockpile. NNSA processes uranium to meet this need. In 2004, NNSA began plans to build a new UPF that would consolidate capabilities currently housed in deteriorating buildings; by 2012, the project had a preliminary cost of $4.2 billion to $6.5 billion. To control rising costs, NNSA changed its approach in 2014 to reduce the scope of the new UPF and move uranium processing capabilities once intended for the UPF into existing buildings. The broader uranium program also includes the needed repairs and upgrades to these existing buildings. The National Defense Authorization Act for Fiscal Year 2013 as amended includes a provision for GAO to periodically assess the UPF. This is the fifth report and (1) describes the status of NNSA's efforts to develop a revised scope of work, cost estimate, and schedule for the UPF project, and (2) examines the extent to which NNSA has developed a complete scope of work, life-cycle cost estimate, and integrated master schedule for the overall uranium program. GAO reviewed program documents on planning, strategy, cost, and implementation and interviewed program officials to examine the program's scope, cost and schedule. The National Nuclear Security Administration (NNSA) has made progress in developing a revised scope of work, cost estimate, and schedule for its project to construct a new Uranium Processing Facility (UPF), according to NNSA documents and program officials. As of May 2017, NNSA had developed and approved a revised formal scope of work, cost, and schedule baseline estimates for four of the seven subprojects into which the project is divided. NNSA expects to approve such baseline estimates for the other three—including the two largest subprojects—by the second quarter of fiscal year 2018. NNSA also plans to validate the estimates by then through an independent cost estimate. NNSA, however, has not developed a complete scope of work, life-cycle cost estimate (i.e., a structured accounting of all cost elements for a program), or integrated master schedule (i.e., encompassing individual project schedules) for the overall uranium program, and it has no time frame for doing so. In particular, it has not developed a complete scope of work for repairs and upgrades to existing buildings in which NNSA intends to house some uranium processing capabilities and has not done so for other key program elements. For example: The scope of work for a portion of the upgrades and repairs will not be determined until after fiscal year 2018, when NNSA expects to conduct seismic and structural assessments to determine what work is needed to address safety issues in existing buildings. NNSA has developed an initial implementation plan that roughly estimates a cost of $400 million over the next 20 years for the repairs and upgrades, but a detailed scope of work to support this estimate is not expected to be fully developed except on an annual basis in the year(s) that immediately precedes the work. Because NNSA has not developed a complete scope of work for the overall uranium program, it does not have the basis to develop a life-cycle cost estimate or an integrated master schedule. Successful program management depends in part on developing a complete scope of work, life-cycle cost estimate, and an integrated master schedule, as GAO has stated in its cost estimating and schedule guides. In previous work reviewing other NNSA programs, GAO has found that when NNSA did not have a life-cycle cost estimate based on a complete scope of work, the agency could not ensure its life-cycle cost estimate captured all relevant costs, which could result in cost overruns. The revised cost estimate that NNSA is developing for the new UPF will be an essential component of a life-cycle cost estimate for the overall program. However, for other program elements, NNSA has either rough or no estimates of the total costs and has not set a time frame for developing these costs. Federal internal control standards call for management to use quality information to achieve an entity's objectives, and among other characteristics, such information is provided on a timely basis. Without setting a time frame to complete the scope of work and prepare a life-cycle cost estimate and integrated master schedule for the program, NNSA does not have reasonable assurance that decision makers will have timely access to essential program management information—risking unforeseen cost escalation and delays. GAO recommends that NNSA set a time frame for completing the scope of work, life-cycle cost estimate, and integrated master schedule for the overall uranium program. NNSA generally agreed with the recommendation and has ongoing efforts to complete these actions.

You are an expert at summarizing long articles. Proceed to summarize the following text: Anatomic pathology services aid in the diagnosis and treatment of diseases such as cancers and gastroenteritis—a condition that causes irritation and inflammation of the stomach and intestines. Medicare pays providers for performing the services and subsequently interpreting the results. Payment for the performance of the services can be made through different payment systems, depending on where the anatomic pathology service is performed. In 2010, Medicare paid about $1.28 billion under the physician fee schedule for anatomic pathology services across all settings, of which about $945 million was for services performed in physician offices and independent laboratories. Anatomic pathology services involve the examination of tissues and other specimens to diagnose diseases, such as cancers and gastroenteritis, and guide patient care. The services may be performed after a biopsy procedure used to obtain tissue samples. For example, after removing tissue samples during a biopsy procedure on a patient’s prostate, a urologist may refer the patient’s tissue sample for examination to determine whether, on the basis of an analysis of the tissue sample or samples, the patient has prostate cancer. After collecting these tissue samples, a non-self-referring provider may send them to an independent diagnostic laboratory, a hospital laboratory, or pathology physician group for further preparation and analysis. In contrast, self-referring providers may prepare specimens or evaluate specimens or both at their practices, rather than involving an external diagnostic laboratory or pathology physician group. For example, the ordering provider’s group practice may have a technician who prepares specimens into slides or include a pathologist who interprets these specimens, or both. Providers have discretion in determining the number and type of tissue samples that become a specimen. For example, a provider referring anatomic pathology services may include more than one tissue sample in a specimen if the samples are from the same areas of abnormal tissue (see fig. 1). Alternatively, a provider may choose to create multiple specimens, each containing a single tissue sample. Providers differ on whether or to what extent tissue samples can be combined in creating a specimen or if each tissue sample must become a specimen. For example, urologists differ on whether it is clinically appropriate to combine tissue samples obtained through a prostate biopsy procedure or whether each tissue sample must became a specimen. The resultant number of specimens has implications for payment as each specimen submitted for analysis can be billed to Medicare separately as an anatomic pathology service. CMS policy states that specimens submitted for individual examination should be medically reasonable and necessary for diagnosis. Finally, a pathologist—a specialty provider trained to interpret specimens—examines the specimen with and without a microscope and prepares written results of this examination for the referring provider. Depending on the level of complexity, biopsy procedures can involve risks for patients. For example, biopsies of the skin to detect cancer are generally considered safe, but complications such as bleeding, bruising, or infection can occur. Additional complications, such as difficulty urinating and infections resulting in hospitalization, can occur from other biopsy procedures. Medicare’s payments for anatomic pathology services are separated into two components—the technical component (TC) and the professional component (PC). The TC payment is intended to cover the cost of preparing a specimen for analysis, including the costs for equipment, supplies, and nonphysician staff. The PC payment is intended to cover the provider’s time examining the specimen and writing a report on the findings. The PC and TC can be billed together, on what is called a global claim, or alternatively the components can be billed separately. For instance, a global claim could be billed if the same provider prepares and examines the specimen, whereas the TC and PC could be billed separately if the performing and interpreting providers are different. Medicare reimburses providers through different payment systems depending on where the anatomic pathology service is performed. When an anatomic pathology service is performed in a provider’s office or independent clinical laboratory, both the PC and TC are reimbursed under the Medicare physician fee schedule. Alternatively when the service is performed in an institutional setting such as a hospital inpatient department, the provider is reimbursed under the Medicare physician fee schedule for the PC, while the TC is reimbursed under a different Medicare payment system. For instance, the TC of an anatomic pathology service performed in a hospital inpatient setting is reimbursed through a facility payment made under Medicare Part A. In response to concerns about potential overutilization of anatomic pathology services due to physician self-referral, CMS established rules limiting the reimbursements allowed under certain self-referral arrangements. Specifically, in 2008 CMS imposed an “anti-markup rule” that prohibits providers from billing Medicare for anatomic pathology services for amounts that exceed what the providers themselves pay to subcontract the services from other providers or pathology laboratories. However, in the 2009 physician fee schedule final rule, CMS identified an exception to the anti-markup rule: a service may be marked up when performed by a physician who shares a practice with the billing provider.Since then, arrangements in which a provider group practice includes a pathologist in the practice’s office space have become a common self- referral arrangement. In the 2009 physician fee schedule, CMS also introduced a payment change for anatomic pathology services related to a specific biopsy procedure due to concern of overpayment. Specifically, CMS began paying for multiple anatomic pathology services from prostate saturation biopsy procedures through a single payment, rather than paying for each specimen individually. This specific biopsy procedure involves taking numerous tissue samples—typically 30 to 60—to increase the likelihood of detecting prostate cancer in a subgroup of high-risk individuals in whom previous conventional prostate biopsies had been negative. As a result, CMS introduced four new HCPCS codes to pay for these specimens, which were previously paid through HCPCS 88305. The four HCPCS codes noted are payment for 1 to 20 specimens (G0416), 21 to 40 specimens (G0417), 41 to 60 specimens (G0418), and more than 60 specimens (G0419). The payment change resulted in a substantial decrease in payment for anatomic pathology services resulting from prostate saturation biopsy procedures. CMS reduced its payment for anatomic pathology services in 2013 as part of its efforts to examine the payment for certain high-volume services. Specifically, CMS reduced its payment of anatomic pathology services in 2013 because it determined that fewer resources—equipment, supplies, and nonphysician staff—were required to prepare anatomic pathology services, which in turn reduced payment for the TC. Effective January 1, 2013, CMS reduced Medicare’s reimbursement for anatomic pathology services under the physician fee schedule by lowering reimbursement for the TC by approximately half. With this change, a payment for a global claim for an anatomic pathology service was reduced by approximately 30 percent. In 2010, there were about 16.2 million anatomic pathology services performed in all settings, including physician offices and hospitals. In 2010, expenditures for anatomic pathology services paid under the physician fee schedule totaled about $1.28 billion across all settings. About $945 million of the $1.28 billion—74 percent—in expenditures for anatomic pathology services in 2010 were for services performed in physician offices and independent laboratories. The number of self-referred anatomic pathology services increased at a faster rate than non-self-referred anatomic pathology services from 2004 through 2010. Similarly, expenditures for self-referred anatomic pathology services increased at a faster rate than expenditures for non-self-referred services. The share of anatomic pathology services that were self- referred increased overall during the period we reviewed. While both the number of self-referred and non-self-referred anatomic pathology services grew overall from 2004 through 2010, self-referred services increased at a faster rate than non-self-referred services. Specifically, the number of self-referred anatomic pathology services more than doubled over the period we reviewed, growing from about 1.06 million services in 2004 to about 2.26 million services in 2010 (see fig. 2). In contrast, the number of non-self-referred anatomic pathology services increased about 38 percent, growing from about 5.64 million services to about 7.77 million services. Because of the faster growth in self-referred anatomic pathology services, the proportion of anatomic pathology services that were self-referred grew from about 15.9 percent in 2004 to about 22.5 percent in 2010. Notably, the number of self- referred anatomic pathology services increased from 2004 through 2010, even after accounting for the decrease in the number of Medicare FFS beneficiaries. Specifically, the number of self-referred anatomic pathology services per 1,000 Medicare FFS beneficiaries grew from about 30 to about 64, an increase of about 113 percent. Although both self-referred and non-self-referred anatomic pathology services increased over the period of our study, the number of self- referred anatomic pathology services decreased slightly from about 1.67 million in 2007 to about 1.65 million in 2008 before increasing about 14 percent to 1.88 million services in 2009. This decrease in 2008 corresponds to the implementation of CMS’s anti-markup rule that limits reimbursement for anatomic pathology services in certain self-referral arrangements. In contrast, the number of non-self-referred anatomic pathology services increased every year during the period we studied, with the largest annual increase (about 13 percent) in 2008. While Medicare expenditures for self-referred and non-self-referred anatomic pathology services grew from 2004 through 2010, expenditures for the self-referred services increased at a faster rate. Specifically, expenditures for self-referred anatomic pathology services grew about 164 percent from 2004 to 2010, increasing from about $75 million in 2004 to $199 million in 2010 (see fig. 3). In contrast, non-self-referred anatomic pathology expenditures increased about 57 percent, from $473 million to about $741 million. Consistent with the overall trend, the proportion of anatomic pathology services that were self-referred increased for the three provider specialties—dermatology, gastroenterology, and urology—that accounted for over 90 percent of self-referred anatomic pathology services in 2010 (see table 1). For example, the proportion of anatomic pathology services self-referred by dermatologists increased from 24 percent in 2004 to about 29 percent in 2010. Self-referring providers in 2010 generally referred more anatomic pathology services on average than those providers who did not self-refer these services, even after accounting for differences in specialty, number of Medicare FFS beneficiaries seen, patient characteristics, or geography. Providers’ referrals for anatomic pathology services substantially increased the year after they began to self-refer. Across the three provider specialties—dermatology, gastroenterology, and urology—that refer the majority of anatomic pathology services, we found that in 2010, self-referring providers referred more anatomic pathology services, on average, than other providers, regardless of number of Medicare FFS beneficiaries seen. Specifically, we found this pattern for dermatologists, gastroenterologists, and urologists treating small, medium, and large numbers of Medicare beneficiaries (see table 2). Notably, for all provider specialties, providers who treated a large number of Medicare FFS beneficiaries—more than 500—had the highest relative rate within each specialty. Self-referring providers generally referred more anatomic pathology services on average than non-self-referring providers due to referring more services—specimens to be examined—per biopsy procedures and, in certain cases, performing a greater number of biopsy procedures. Across the three specialties we reviewed, self-referring providers referred more services per biopsy procedure, on average, than non-self-referring providers, regardless of the number of Medicare FFS beneficiaries seen. Specifically, self-referring providers referred from 7 percent to 52 percent more services per biopsy procedure for the provider specialty and size category combinations we examined. Further, we observed a greater number of biopsy procedures performed by self-referring providers in certain cases. Specifically, self-referring dermatologists treating medium and large numbers of Medicare FFS beneficiaries performed about 8 and 38 percent more biopsy procedures on average, respectively, than non- self-referring dermatologists treating similar numbers of Medicare beneficiaries. In the remaining provider specialty and size category combinations, the rate of biopsy procedures performed by self-referring providers was similar to that for non-self-referring providers. The higher number of referrals for anatomic pathology services among self-referring providers relative to other providers of the same size and specialty cannot, in general, be explained by differences in patient diagnoses, patient health status, other patient characteristics, or geography. Differences in referrals for anatomic pathology services between self- referring and non-self-referring providers of the same specialty treating a similar number of Medicare FFS beneficiaries could not be explained by differences in their patients’ diagnoses. Generally, we found that the types and proportions of patient diagnoses were similar for self-referring and non-self-referring providers of the same specialty. However, we found that self-referring providers referred more anatomic pathology services per biopsy procedure for nearly all—53 of 54—primary diagnoses for which beneficiaries were referred for anatomic pathology services. This pattern is particularly evident for those diagnoses that accounted for a large proportion of anatomic pathology services referred within each specialty (see table 3).For example, self-referring urology providers referred on average about 12.5 anatomic pathology services per biopsy procedure for diagnosis of elevated prostate specific antigen (790.93) while non-self-referring urology providers referred about 8.5 anatomic pathology services per biopsy procedure for this diagnosis. For further information on the average number of anatomic pathology services referred per biopsy procedure by beneficiary primary diagnosis, see appendix III. Differences in the number of referrals for anatomic pathology services between self-referring and non-self-referring providers of the same specialty treating similar numbers of Medicare FFS beneficiaries could generally not be explained by differences in patient health status. Specifically, for all three provider specialties we reviewed, the beneficiaries seen by self-referring providers treating a small, medium, or large number of Medicare FFS beneficiaries were of similar health status as patients seen by non-self-referring providers of the same specialty and size category (see table 4), as indicated by having similar average risk If self-referring providers saw relatively sicker beneficiaries, it scores.could have explained why these providers referred more anatomic pathology services on average than other providers of the same provider specialty and size categories. Differences in the number of anatomic pathology service referrals between self-referring and non-self-referring providers of the same specialty treating similar numbers of Medicare FFS beneficiaries could not be explained by differences in the age and sex of beneficiaries. In particular, the age and sex of Medicare FFS beneficiaries were generally consistent between those beneficiaries seen by self-referring providers and those seen by non-self-referring providers for all provider specialties and size categories we examined. For further information on the average age and sex of beneficiaries seen by self-referring and non-self-referring providers of the provider specialties we examined, see appendix IV. Differences in the number of anatomic pathology service referrals between self-referring and non-self-referring providers could not generally be explained by whether a provider practiced in an urban or rural area. Self-referring providers of the same specialty treating a similar number of Medicare beneficiaries generally referred more anatomic pathology services on average than non-self-referring providers, regardless of whether the provider practiced in an urban or rural area. For example, self-referring dermatologists and urologists treating a similar number of Medicare FFS beneficiaries had higher referral rates on average for anatomic pathology services, regardless of whether they practiced in an urban or rural location. Likewise, self-referring gastroenterologists treating a medium or large number of Medicare FFS beneficiaries referred a higher number of anatomic pathology services on average than non-self- referring gastroenterologists treating a similar number of Medicare beneficiaries, regardless of whether they practiced in an urban or rural location. For further information on referral of anatomic pathology services across provider specialties and size categories in urban and rural areas, see appendix V. Our analysis shows that, across the three provider specialties we reviewed, providers’ referrals for anatomic pathology services substantially increased the year after they began to self-refer. In our analysis we examined the number of anatomic pathology referrals made by “switchers”—those providers that did not self-refer in 2007 or 2008 but began to self-refer in 2009 and continued to do so in 2010—and compared these referrals to the number made by providers that did not begin to self-refer during this period. Providers could self-refer by setting up an in-office laboratory, contracting for laboratory services, or joining a group practice that already self-referred. We found that the switchers saw large increases in the number of anatomic referrals they made from 2008 to 2010 when compared with other providers (see table 5). Specifically, across the three provider specialties we reviewed, the switcher group of providers increased the number of anatomic pathology referrals they made from 2008 to 2010 by at least 14.0 percent and by as much as 58.5 percent. In contrast, providers that self-referred anatomic pathology services during the entire period experienced smaller changes in the number of referrals, ranging from a 1.4 percent increase to an 11.6 percent increase, depending on the provider specialty. Among providers that did not self-refer anatomic pathology services, the number of referrals the providers made for these services ranged from a decrease of 0.2 percent to an increase of 2.8 percent, depending on the provider specialty. Providers in the switcher groups for the three specialties we reviewed had an increase in the number of anatomic pathology referrals they made from 2008 to 2010 due to an increase, on average, in the number of anatomic pathology services referred per biopsy procedure. Across the three specialties we reviewed, the increase in the number of specimens submitted for examination from each biopsy procedure from 2008 to 2010 ranged from 13.3 percent to 48.9 percent. For all three specialties we reviewed, the increase in the number of anatomic pathology services referred per biopsy procedure was greater for providers in the switchers group than for providers who did not self-refer from 2008 through 2010 or those providers who self-referred for all 3 years. The increase in anatomic pathology referrals for providers that began self-referring in 2009 cannot be explained exclusively by factors such as providers joining practices with higher patient volumes, different patient populations, or different practice cultures. Specifically, providers that remained in the same practice from 2007 through 2010, but began self- referring in 2009, also had a bigger increase in the number of anatomic pathology referrals than did providers that did not change their self- referral status. The increase in the number of anatomic pathology services referred by providers in the switcher group that met this criterion from 2008 to 2010 ranged from an increase of 6.8 percent to an increase of 38.6 percent, depending on the provider specialty. We estimate that Medicare spent about $69 million more in 2010 than the program would have spent if self-referring providers performed biopsy procedures at the same rate as and referred the same number of services per biopsy procedure as non-self-referring providers of the same provider size and specialty (see fig. 4). This additional spending can be attributed to the fact that self-referring providers in the 3 provider specialties we examined referred about 918,000 more anatomic pathology services in 2010. In 2013, CMS reduced its payment of anatomic pathology services because it determined that fewer resources—equipment, supplies, and non-physician staff—were required to prepare anatomic pathology services. If the lower 2013 Medicare reimbursement rates for anatomic pathology services were in effect in 2010, Medicare would have spent approximately $48 million more than it would have if self-referring providers performed biopsy procedures at the same rate as and referred the same number of services per biopsy procedure as non-self-referring providers of the same provider size and specialty. This calculation likely underestimates the total amount of additional Medicare spending that can be attributed to self-referring providers because we did not include all Medicare providers in our analysis. Specifically, we limited our analysis to anatomic pathology services referred by dermatologists, gastroenterologists, and urologists. These specialties account for approximately 64 percent of anatomic pathology services referred across all settings and about 90 percent of all self- referred anatomic pathology services in 2010. Anatomic pathology services are vital services that help providers diagnose disease and guide treatment options for patient care. Proponents of self-referral contend that the ability of providers to self-refer anatomic pathology services has the potential benefit of more rapid diagnoses and better coordination of care. Our review indicates that across the major provider specialties that refer beneficiaries for anatomic pathology services, self-referring providers generally referred more anatomic pathology services on average than other providers of the same specialty treating similar numbers of Medicare patients. This increase is due to a greater number of specimens submitted for examination from each biopsy procedure, and in certain cases a greater number of biopsy procedures performed. This increase raises concerns, in part because biopsy procedures, although generally safe, can result in serious complications for Medicare beneficiaries. Further, our analysis shows that across these provider specialties, providers’ referrals for anatomic pathology services substantially increased the year after they began to self-refer. The relatively higher rate of anatomic pathology services among self- referring providers cannot be explained by patient diagnosis, patient health status, or geographic location. Taken together, this suggests that financial incentives for self-referring providers were likely a major factor driving the increase in anatomic pathology referrals. In 2010, providers who self-referred made an estimated 918,000 more referrals for anatomic pathology services than they likely would have if they were not self- referring. Notably, these additional referrals cost CMS about $69 million in 2010 alone. To the extent that these additional services are unnecessary, avoiding them could result in savings to Medicare and to beneficiaries. Despite the potential safety and financial implications of unnecessary anatomic pathology services, CMS does not have policies to address the effect of how self-referral affects the utilization of and expenditures for anatomic pathology services. CMS does not currently have the ability to identify anatomic pathology services that are self-referred so that the agency can track the extent to which anatomic pathology services are self-referred and identify services that may be unnecessary. Specifically, Medicare claims do not include an indicator or “flag” that identifies whether services are self-referred or non-self-referred. Thus, CMS does not currently have a method for easily identifying such services and cannot determine the effect of self-referral on utilization and expenditures for anatomic pathology services. Including a self-referral flag on Medicare Part B claims submitted by providers who bill for anatomic pathology services is likely the easiest and most cost-effective approach. If CMS could readily identify self-referred anatomic pathology services, the agency may be better positioned to identify potentially inappropriate utilization of biopsy procedures. CMS could, for example, consider performing targeted audits of providers who perform a higher average number of biopsy procedures, compared to providers of the same specialty treating a similar number of Medicare beneficiaries. Given our report findings, CMS may want to initially focus its efforts on self-referring dermatologists who treated a larger number of Medicare beneficiaries. While providers have discretion in determining the number of tissue samples that become specimens, CMS’s current payment system provides a financial incentive for providers to refer a higher number of specimens—or anatomic pathology services—per biopsy procedure. Providers can double their payment for anatomic pathology services, for example, by submitting four specimens from four tissue samples instead of combining the four tissue samples into two specimens. However, providers differ on whether or to what extent tissue samples can be combined in creating a specimen or if each tissue sample must become a specimen. CMS has already implemented a payment approach for one specific biopsy procedure—prostate saturation biopsy—that pays providers through a single payment rather than paying for each specimen individually within a given range of anatomic pathology services, such as 1 to 20 specimens. However, this policy does not apply to anatomic pathology services from other biopsy procedures. CMS could expand this payment approach to other biopsy procedures and associated anatomic pathology services. In order to improve CMS’s ability to identify self-referred anatomic pathology services and help CMS avoid unnecessary increases in these services, we recommend that the Administrator of CMS take the following three actions: 1. Insert a self-referral flag on Medicare Part B claim forms and require providers to indicate whether the anatomic pathology services for which the provider bills Medicare are self-referred or not. 2. Determine and implement an approach to ensure the appropriateness of biopsy procedures performed by self-referring providers. 3. Develop and implement a payment approach for anatomic pathology services that would limit the financial incentives associated with referring a higher number of specimens—or anatomic pathology services—per biopsy procedure. We provided a draft of this report to HHS, which oversees CMS, for comment. HHS provided written comments, which are reprinted in appendix VI. We also obtained comments from representatives from four professional associations selected because they represent an array of stakeholders with specific involvement in anatomic pathology services. Three associations provided oral comments: the College of American Pathologists (CAP), which represents pathologists; the American Academy of Dermatology Association (AADA), which represents dermatologists; and the American Gastroenterological Association (AGA), which represents gastroenterologists. The American Urological Association (AUA), which represents urologists, provided written comments. We summarize and respond to comments from HHS and representatives from the four professional associations in the following sections. HHS reviewed a draft of this report and provided written comments, which are reprinted in appendix VI. In its comments, HHS stated that it concurred with, and had addressed, one of our recommendations, but did not concur with our other two recommendations. HHS provided few comments on our findings that self-referring providers referred substantially more anatomic pathology services than non-self-referring providers. HHS stated that it concurred with, and has already addressed, our recommendation that CMS develop and implement a payment approach for anatomic pathology services that would limit the financial incentives associated with referring a higher number of anatomic pathology services per biopsy procedure. According to HHS, the payment revaluation for anatomic pathology services in 2013 decreased payment by approximately 30 percent and significantly reduced the financial incentives associated with self-referral for these services. We are pleased that CMS examines and revalues HCPCS codes to ensure that payment for services matches the resources involved and adjusts payment to the extent needed. However, the payment revaluation that occurred in 2013 does not address the higher referral of anatomic pathology services we found associated with self-referring providers. Although no consensus exists on the number and type of tissue samples that become a specimen—an anatomic pathology service—the current payment system pays more if providers create more specimens from the same number of samples. We continue to believe that CMS should develop a payment approach that addresses the incentive to provide more services. HHS did not concur with our recommendation that CMS insert a self- referral flag on the Medicare Part B claims form and require providers to indicate whether the anatomic pathology services for which a provider bills Medicare are self-referred or not. In its response, HHS did not provide reasons for not concurring with this recommendation, but stated that the President’s fiscal year 2014 budget proposal includes a provision to exclude certain services from the in-office ancillary services exception. HHS added that anatomic pathology services may share some characteristics with the services mentioned in the proposal. To the extent that self-referral for anatomic pathology services continues to be permitted, we believe that including an indicator or flag on the claims would likely be the easiest and most cost-effective approach to improve CMS’s ability to identify self-referred anatomic pathology services. Such a flag would allow CMS to monitor the behavior of self-referring providers and could be helpful to CMS in answering broader policy questions on self-referral. HHS did not concur with our recommendation that CMS determine and implement an approach to ensure the appropriateness of biopsy procedures performed by self-referring providers. In its response, HHS noted that it would be difficult to make recommendations regarding whether services are appropriate without reviewing large numbers of claims, reporting that 918,000 instances of self-referral that we identified would need to be reviewed. Further, the agency stated that it does not believe that this recommendation will address overutilization that occurs as a result of self-referral. We do not suggest or intend that CMS review every anatomic pathology service to determine whether it is appropriate. Self-referral, however, could be a factor CMS considers in its ongoing efforts to identify and address inappropriate use of Medicare services. As noted in the report, CMS could, for example, consider performing targeted audits of providers that perform a higher average number of biopsy procedures, compared to providers of the same specialty treating similar numbers of Medicare beneficiaries. In this regard, a flag that we also recommended to identify self-referred services would facilitate such audits. On the basis of HHS’s written response to our report, we are concerned that HHS does not appear to recognize the need to monitor the self- referral of anatomic pathology services on an ongoing basis and determine those services that may be inappropriate or unnecessary. HHS did not comment on our key finding that providers’ referrals for anatomic pathology services across the three specialties we examined substantially increased the year after they began to self-refer. Nor did HHS comment on our estimate that additional referrals for anatomic pathology services from self-referring providers cost CMS about $69 million in 2010 or $48 million based on the 2013 payment rates. Given these findings, we continue to believe that CMS should take steps to monitor the utilization of anatomic pathology services and ensure that the services for which Medicare pays are appropriate. By not monitoring the appropriateness of these services, CMS is missing an opportunity to save Medicare expenditures. Representatives from CAP expressed concern that our methodology to identify self-referral missed certain self-referral arrangements for anatomic pathology services and that our findings understate effects from self-referral. According to the CAP representatives, because our methodology did not identify providers who self-refer the PC only and did not include financial relationships that do not share TINs, effects from self-referral are greater than our findings suggest. As noted in the report, we excluded claims with a only a PC from our finding on utilization and expenditures trends for anatomic pathology services because we could not reliably determine that they were performed in the physician office or independent laboratory. We identified financial relationships among providers using TINs, which would identify the provider, the provider’s employer, or another entity to which the provider reassigns payment. To the extent that providers self-refer only the PCs of anatomic pathology services or self-refer to entities with which they do not share TINs, differences between self-referring and non-self-referring providers would be greater, and our estimate of the differences would be more conservative. CAP representatives also raised questions about self- referral that our report did not address, such as why the report did not examine cancer detection rates or whether anatomic pathology services should be included in the in-office ancillary services exception. These issues were outside the report’s objectives. While the representatives from CAP agreed with the recommendation to include a self-referral flag on the Medicare Part B claims form, they disagreed with our other recommendations, stating that they would not sufficiently address the report findings. We believe that our recommendations incorporate actions that address the problems we identified. Representatives from the AADA stated that dermatologists should continue to be allowed to prepare and review their own anatomic pathology services because they receive considerable training as part of their education and offered several possible explanations for the additional anatomic pathology services referred and biopsy procedures performed by self-referring providers. For example, they raised the possibility that the increase in anatomic pathology services referred and biopsy procedures performed by providers in the switcher group was due to increases in patient volume, providers joining a larger group practice or hiring a mid-level practitioner allowing the provider to see more patients. They also raised the possibility that providers in the switcher group became further specialized, resulting in a change in the number and type of diagnoses for their patients. Also, the AADA reported that our reliance on TINs to identify self-referral could be problematic because providers working in large, university-based practices would be flagged as self- referring, despite lacking a financial incentive to provide more services. As noted in the report, the increase in anatomic pathology referrals for providers that began self-referring in 2009 cannot be explained exclusively by factors such as providers joining practices with higher patient volumes, different patient populations, or different practice cultures. Specifically, providers that remained in the same practice from 2007 through 2010, but began self-referring in 2009, had a bigger increase in the number of anatomic pathology services referred than providers who did not change their self-referral status. Further, we found that the types and proportions of patient diagnoses were similar for self- referring and non-self-referring providers of the same specialty and that self-referring providers referred more anatomic pathology services per biopsy procedure for nearly all—53 of 54—primary diagnoses for which beneficiaries were referred for anatomic pathology services. To the extent that providers who share a TIN, but do not have a financial incentive to refer more services, are counted as self-referring, our findings would likely underestimate differences between self-referring and non-self- referring providers and would thus provide a conservative estimate of the effects of self-referral. The AADA agreed with our recommendation of determining an approach to ensure the appropriateness of biopsy procedures, but disagreed with our recommendation of a payment approach limiting the financial incentives associated with a higher number of services per biopsy procedure. Specifically, the AADA expressed concern about any disincentives for dermatologists to perform biopsy procedures. As noted in the report, increases in the number of anatomic pathology services per biopsy procedure were primarily responsible for the growth of anatomic pathology services referred by providers in the switcher group from 2008 to 2010 across provider specialties. We continue to believe that CMS should develop and implement a payment approach for anatomic pathology services that would limit the financial incentives associated with referring a higher number of services per biopsy procedure. Representatives from the AGA asked for further information about the providers in our analysis (particularly gastroenterologists in the switcher group) and diagnoses of the beneficiaries referred for anatomic pathology services, and offered several possible explanations for the additional anatomic pathology services referred and biopsy procedures performed by self-referring providers. Specifically, the AGA raised the possibility that providers in the switcher group joined larger groups that perform more anatomic pathology services or changed the types of biopsy procedures they performed. Finally, the AGA also noted that an appropriate number of anatomic pathology services is not known. Specifically, they reported that larger practices, which are also more likely to self-refer, are more likely to have formal peer review, which could result in more anatomic pathology services referred. We have included an appendix with additional information on the number of services per biopsy procedure for the most common diagnoses for which beneficiaries were referred for anatomic pathology services in 2010. As noted, the types and proportions of diagnoses for which beneficiaries were referred for anatomic pathology services were similar for self-referring and non-self-referring providers. We found that self-referring providers referred more services per biopsy procedure on average than non-self-referring providers for nearly all of these diagnoses. We acknowledge that the appropriate number of referrals for these services is not known, but the consistent pattern of self- referring providers’ higher use suggests that additional scrutiny is warranted. The AGA agreed with our recommendations, but did not think the recommendation on a payment approach for anatomic pathology services limiting the financial incentives associated with referring a higher number of specimens per biopsy procedure was as applicable to providers of their specialty. The AUA agreed with our recommendation to identify self-referred services but did not agree with our other recommendations to examine the appropriateness of biopsy procedures performed by self-referring providers or develop a payment approach that would limit the financial incentives for referring a higher number of anatomic pathology services. The AUA said that there were problems with the study’s design and data gathering methodology originating from problems with identifying self- referral which resulted in their questioning the validity of the report findings. AUA did not provide further detail on their methodological concerns. We believe our methodology to identify self-referred services and classify providers as self-referring using one hundred percent of Medicare Part B claims is a reasonable and valid approach. In designing our methodology, we consulted with officials from CMS, specialty societies, and other researchers. Our approach is similar to the one used by MedPAC for its study of the effect of physician self-referral on use of imaging services. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, interested congressional committees, and others. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VII. As part of our work, we also analyzed additional anatomic pathology services—known as special stains—that providers may use in conjunction with anatomic pathology services to enhance their ability in making a diagnosis. We focused our special stains analysis on services with Healthcare Common Procedure Coding System (HCPCS) codes 88312, 88313, and 88342 that were used in conjunction with the anatomic pathology service, HCPCS code 88305. We considered special stains billed on the same date, by the same provider, for the same beneficiary as those used in conjunction with anatomic pathology services. In 2010, expenditures under the physician fee schedule for these three special stain services totaled approximately $387 million. Providers may utilize special stains with a HCPCS code of 88312 on specimens to detect the presence of infectious organisms such as bacteria and fungus, special stains with a HCPCS code of 88313 to detect the presence of iron, and special stains with a HCPCS code of 88342 to identify the origin of a Use of special stains is determined by the provider referring cancer.anatomic pathology services, the pathologist interpreting the anatomic pathology service, or both. We examined (1) trends in the number of and expenditures for self-referred and non-self-referred special stains, and (2) how the provision of special stains differs for providers who self-refer when compared with other providers. Similar to anatomic pathology services, the number of both self-referred and non-self-referred special stains increased from 2004 through 2010, with self-referred special stains increasing at a faster rate than services that were not self-referred. Specifically, the number of special stains that were self-referred increased from about 60,000 in 2004 to about 340,000 in 2010, an increase of more than 400 percent (see fig. 5). Further, we found that self-referred special stains increased more than non-self- referred special stains for each of the three special stains we studied. In contrast, non-self-referred special stains grew from about 710,000 services to about 1.80 million services, an increase of about 150 percent. Similar to expenditures for anatomic pathology services, Medicare’s expenditures for both self-referred and non-self-referred special stains used in conjunction with HCPCs code 88305 also grew rapidly during the period we studied, with the greater rate of increase among expenditures for self-referred services. Specifically, expenditures for self-referred special stains grew more than six-fold, increasing from about $4 million in 2004 to about $30 million in 2010 (see fig. 6). In comparison, expenditures for non-self-referred special stains more than tripled during these years, growing from about $46 million in 2004 to about $162 million in 2010. For two of the three specialties we examined, self-referring providers referred a higher number of special stains on average than non-self- referring providers of the same specialty treating similar numbers of Medicare fee-for-service (FFS) beneficiaries. Specifically, self-referring gastroenterologists and urologists referred more special stains on average than non-self-referring gastroenterologists and urologists treating a similar number of Medicare beneficiaries. We also found this pattern for self-referring dermatologists treating small numbers of Medicare FFS beneficiaries. Provider specialty and size category combinations we studied where self-referring providers referred more special stains on average than non-self-referring providers represented about 86 percent of special stains referred by these specialties. Our analysis shows that, for two of the three specialties we reviewed, providers’ referrals for special stains substantially increased the year after they began to self-refer. Specifically, urologists and gastroenterologists that were “switchers”—those providers that did not self-refer in 2007 or 2008 but began to self-refer in 2009 and continued to do so in 2010—saw larger increases in the number of special stain referrals they made relative to other providers (see table 7). Dermatologists in the switcher group had a 17.6 percent increase in the number of special stains referred from 2008 to 2010, but this was roughly equivalent to the increase for providers in the non-self-referring group and only slightly higher than the increase for providers in the self-referring group. This section describes the scope and methodology used to analyze our three objectives: (1) trends in the number of and expenditures for self- referred and non-self-referred anatomic pathology services from 2004 through 2010, (2) how the provision of anatomic pathology services may differ for providers who self-refer when compared with other providers, and (3) the implications of self-referral for Medicare spending on anatomic pathology services. For all three objectives, we used the Medicare Part B Carrier File, which contains final action Medicare Part B claims for noninstitutional providers, such as physicians. Claims can be for one or more services or for individual service components. Each service or service component is identified on a claim by its Healthcare Common Procedure Coding System (HCPCS) code, which the Centers for Medicare & Medicaid Services (CMS) assigns to products, supplies, and services for billing purposes. For the purposes of this report “anatomic pathology” services refer to HCPCS 88305 services, and “special stains” refer to HCPCS 88312, 88313, and 88342 services that were used in conjunction with these anatomic pathology services. with which he or she has a financial relationship without implicating the Stark law. Because there is no indicator or “flag” on the claim that identifies whether services were self-referred or non-self-referred, we developed a claims- based methodology to identify services as either self-referred or non-self- referred. Specifically, we classified services as self-referred if the provider that referred the beneficiary for an anatomic pathology service and the provider that performed the anatomic pathology service was identical or had a financial relationship. We used taxpayer identification number (TIN), an identification number used by the Internal Revenue Service, to determine providers’ financial relationships. The TIN could be that of the provider, the provider’s employer, or another entity to which the provider reassigns payment. referring and performing providers, we created a crosswalk of the performing provider’s unique physician identification number or national provider identifier (NPI) to the TIN that appeared on the claim and used that to assign TINs to the referring and performing providers. Some providers may be associated with TINs with which they do not have a direct or indirect financial relationship and thus would not have the same incentives as other self- referring providers. We anticipate that relatively few providers in our self-referring group meet this description but to the extent that they do, it may have limited the differences we found in utilization and expenditure rates between self-referring and non-self-referring providers. We considered global services and separately-billed TCs to be self- referred if one or more of the TINs of the referring and performing provider matched. However, we did not consider separately-billed PCs to be self-referred, even if they met the same criterion. We did not count claims with PC only as self-referred because we could not reliably determine whether they corresponded to anatomic pathology services that were performed in a provider’s office or laboratory. Further, we excluded claims where a HCPCS code of 88305 was billed with another anatomic pathology service and a special stain, because we could not determine which service required the use of the special stain. As part of developing this claims-based methodology to identify self-referred services, we interviewed officials from CMS, provider groups, and other researchers. To describe the trends in the number of and expenditures for self-referred anatomic pathology services from 2004 through 2010, we used the Medicare Part B Carrier file to calculate utilization and expenditures for self-referred and non-self-referred anatomic pathology services, both in aggregate and per beneficiary. We limited this portion of our analysis to global claims or claims for a separately-billed TC for anatomic pathology services, which indicates that the performance of the anatomic pathology service was billed under the physician fee schedule. As a result, the universe for this portion of our analysis is those anatomic pathology services performed in a provider’s office or in an independent clinical laboratory that both bill for the performance of an anatomic pathology service under the physician fee schedule. We focused on these settings because the financial incentive for providers to self-refer is most direct when the service is performed in a physician office. Further, we limited our analysis to self-referral of the preparation—as opposed to the interpretation—of these services, because we could determine the site of service as a physician’s office or laboratory. Accordingly, we did not examine self-referral of the interpretation of these services as we could not reliably determine their site of service. Approximately two-thirds of all anatomic pathology services billed under the physician fee schedule were performed in a physician’s office or clinical laboratory. To calculate the number of Medicare beneficiaries from 2004 through 2010 needed for per beneficiary calculations, we used the Denominator File, a database that contains enrollment information for all Medicare beneficiaries enrolled in a given year. We also examined the utilization for self-referred anatomic pathology services by provider specialty for 2004 and 2010. To determine the extent to which the provision of anatomic pathology services differs for providers who self-refer when compared with other providers, we first classified providers based on the type of referrals they made. Specifically, we classified providers as self-referring if they self- referred at least one beneficiary for an anatomic pathology service. We classified providers as non-self-referring if they referred a beneficiary for an anatomic pathology service, but did not self-refer any of the services. We assigned to each provider the anatomic pathology services, including those for the performance of an anatomic pathology service and those for the interpretation of the anatomic pathology service result. If the TC and PC were billed separately for the same beneficiary, we counted these two components as one referred service. As a result, we counted all services that a provider referred, regardless of whether it was performed in a provider office, independent clinical laboratory, or other setting. We classified anatomic pathology services as being from the same biopsy procedure if the services were referred by the same provider for the same beneficiary on the same day. We then performed two separate analyses. First, we compared the provision—that is, the number of referrals made— of anatomic pathology services by self-referring providers and non-self- referring providers in 2010, disaggregated by the number of Medicare beneficiaries seen by the provider, provider specialty, and geography (i.e., urban or rural) and patient characteristics. We used the number of unique Medicare fee-for-service (FFS) beneficiaries for which providers provided services in 2010 as a proxy for practice size, which we identified using 100 percent of providers’ claims from the Medicare Part B Carrier file. We defined urban settings as metropolitan statistical areas, a geographic entity defined by the Office of Management and Budget as a core urban area of 50,000 or more population. We used rural-urban commuting area codes—a Census tract-based classification scheme that utilizes the standard Bureau of Census Urbanized Area and Urban Cluster definitions in combination with work commuting information to characterize all of the nation’s Census tracts regarding their rural and urban status—to identify providers as practicing in metropolitan statistical areas.providers’ specialties on the basis of the specialties listed on the claims. These specialty codes include physician specialties, such as dermatology and urology, and nonphysician provider types, such as nurse practitioners and physician assistants. We also examined the extent to which the characteristics of the patient populations served by self-referring and non- self-referring providers differed. We used CMS’s risk score file to identify average risk score, which serves as a proxy for beneficiary health status. Information on additional patient characteristics, such as age and sex, came from the Medicare Part B Carrier file claims. We considered all other settings to be rural. We identified Second, we determined the extent to which the number of anatomic pathology service referrals made by providers changed after they began to self-refer. Specifically, we identified a group of providers that began to self-refer anatomic pathology services in 2009. We refer to this group of providers as “switchers” because it represents providers that did not self- refer in 2007 or 2008, but did self-refer in 2009 and 2010. We then calculated the change in the number of anatomic pathology referrals made from 2008 (i.e., the year before the switchers began self-referring) to 2010 (i.e., the year after they began self-referring). We compared the change in the number of referrals made by these providers to the change in the number of referrals made over the same time period by providers who did not change whether or not they self-referred anatomic pathology services. Specifically, we compared the change in the number of referrals made by switchers to those made by (1) self-referring providers— providers that self-referred in years 2007 through 2010, and (2) non-self- referring providers—providers that did not self-refer in years 2007 through 2010. For each provider, we also identified the most common TIN to which they referred anatomic pathology services. If the TIN was the same for all 4 years, we assumed that they remained part of the same practice for all 4 years. We calculated the number of referrals in 2008 and 2010 separately for providers that met this criterion. To determine the implications of self-referral for Medicare spending on anatomic pathology services, we summed the number of and expenditures for all anatomic pathology services performed in 2010 across the three provider specialties we reviewed. We then calculated the number of and expenditures for anatomic pathology services if self- referring providers performed biopsy procedures at the same rate as and referred the same number of services per biopsy procedure as non-self- referring providers of the same provider size and specialty. We repeated this analysis incorporating an approximation of the payment reduction for anatomic pathology services that became effective in 2013. We took several steps to ensure that the data used to produce this report were sufficiently reliable. Specifically, we assessed the reliability of the CMS data we used by interviewing officials responsible for overseeing these data sources, including CMS and Medicare contractor officials. We also reviewed relevant documentation, and examined the data for obvious errors, such as missing values and values outside of expected ranges. We determined that the data were sufficiently reliable for the purposes of our study, as they are used by the Medicare program as a record of payments to health care providers. As such, they are subject to routine CMS scrutiny. We conducted this performance audit from January 2012 through June 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix IV: Age and Sex of Medicare Beneficiaries for Select Provider Specialties by Practice Size in 2010 Provider specialty and number of unique Medicare FFS beneficiaries Dermatology The number of unique Medicare FFS beneficiaries refers to the number of unique beneficiaries that received at least one service from a provider. The number of unique Medicare FFS beneficiaries refers to the number of unique beneficiaries that received at least one service from a provider. The number of unique Medicare FFS beneficiaries refers to the number of unique beneficiaries that received at least one service from a provider. In addition to the contact named above, Thomas Walke, Assistant Director; Todd D. Anderson; Manuel Buentello; Krister Friday; Gregory Giusto; Brian O’Donnell; and Daniel Ries made key contributions to this report.

Questions have been raised about self-referral's role in Medicare Part B expenditures' rapid growth. Self-referral occurs when providers refer patients to entities in which they or their family members have a financial interest. Services that can be self-referred under certain circumstances include anatomic pathology--the preparation and examination of tissue samples to diagnose disease. GAO was asked to examine the prevalence of anatomic pathology self-referral and its effect on Medicare spending. This report examines (1) trends in the number of and expenditures for self-referred and non-self-referred anatomic pathology services, (2) how provision of these services may differ on the basis of whether providers self-refer, and (3) implications of self-referral for Medicare spending. GAO analyzed Medicare Part B claims data from 2004 through 2010 and interviewed officials from the Centers for Medicare & Medicaid Services (CMS) and other stakeholders. GAO developed a claims-based approach to identify self-referred services because Medicare claims lack such an indicator. Self-referred anatomic pathology services increased at a faster rate than non-self-referred services from 2004 to 2010. During this period, the number of self-referred anatomic pathology services more than doubled, growing from 1.06 million services to about 2.26 million services, while non-self-referred services grew about 38 percent, from about 5.64 million services to about 7.77 million services. Similarly, the growth rate of expenditures for self-referred anatomic pathology services was higher than for non-self-referred services. Three provider specialties--dermatology, gastroenterology, and urology--accounted for 90 percent of referrals for self-referred anatomic pathology services in 2010. Referrals for anatomic pathology services by dermatologists, gastroenterologists, and urologists substantially increased the year after they began to self-refer. Providers that began self-referring in 2009--referred to as switchers--had increases in anatomic pathology services that ranged on average from 14.0 percent to 58.5 percent in 2010 compared to 2008, the year before they began self-referring, across these provider specialties. In comparison, increases in anatomic pathology referrals for providers who continued to self-refer or never self-referred services during this period were much lower. Thus, the increase in anatomic pathology referrals for switchers was not due to a general increase in use of these services among all providers. GAO's examination of all providers that referred an anatomic pathology service in 2010 showed that self-referring providers of the specialties we examined referred more services on average than non-self referring providers. Differences in referral for these services generally persisted after accounting for geography and patient characteristics such as health status and diagnosis. These analyses suggest that financial incentives for self-referring providers were likely a major factor driving the increase in referrals. GAO estimates that in 2010, self-referring providers likely referred over 918,000 more anatomic pathology services than if they had performed biopsy procedures at the same rate as and referred the same number of services per biopsy procedure as non-self-referring providers. These additional referrals for anatomic pathology services cost Medicare about $69 million. To the extent that these additional referrals were unnecessary, avoiding them could result in savings to Medicare and beneficiaries, as they share in the cost of services. CMS should identify self-referred anatomic pathology services and address their higher use. The Department of Health and Human Services, which oversees CMS, agreed with GAO's recommendation that CMS address higher use of self-referral through a payment approach, but disagreed with GAO's other two recommendations to identify self-referred services and address their higher use. GAO believes the recommended actions could result in Medicare savings.

You are an expert at summarizing long articles. Proceed to summarize the following text: The extent of foodborne illness in the United States and its associated costs are significant. CDC estimates that unsafe foods cause as many as 76 million illnesses, 325,000 hospitalizations, and 5,000 deaths annually. In terms of medical costs and productivity losses, foodborne illnesses associated with seven major pathogens cost the nation between $7 billion and $37 billion annually, according to USDA’s estimates. The National School Lunch Program and the School Breakfast Program share the goals of improving children’s nutrition, increasing lower-income children’s access to nutritious meals, and supporting the agricultural economy. The school lunch program is available in almost all public schools and in many private schools. About 70 percent of those schools also participate in the breakfast program. Schools participating in the school lunch or breakfast programs receive a per-meal federal cash reimbursement for all meals they serve to children, as long as the meals meet federal nutrition standards. In fiscal year 2001, school meal programs provided lunch, breakfast, and snacks to over 27 million school children daily. At the federal level, FNS administers the school meal programs. At the state level, the program is usually administered by state education agencies, which operate them through agreements with local school food authorities. Overall, USDA donates about 17 percent of the dollar value of food that goes on the table in school lunch programs through its Food Distribution Program. USDA purchases and distributes commodities to remove surpluses from the marketplace and to provide nutritious foods to the nation’s children. Schools purchase the remaining 83 percent of the dollar value of food served using USDA’s cash reimbursement and their own funds. In fiscal year 2001, the total cost of the school meal programs—including cash reimbursements to schools, USDA purchases of donated foods, and program administration—was nearly $8 billion. By far the largest component of the school meal programs is the school lunch program. In fiscal year 2001, the school lunch program cost about $5.7 billion. The procurement process for foods served in school lunch program differs depending on whether federal or state/local food authorities procure the foods (see figure 1). USDA’s Agricultural Marketing Service (AMS) and Farm Service Agency (FSA) are responsible for procuring USDA-donated foods. The Agricultural Marketing Service purchases meat, poultry, fish, and fruits and vegetables for donation; the Farm Service Agency purchases grains, oils, peanut products, dairy products, and other foods. USDA contracts for the purchase of these products with manufacturers that are selected through a formally advertised competitive bidding process. FNS, through its Food Distribution Division, provides the donated foods to state agencies for distribution to schools. Schools then purchase the remainder of food for school meals independently using their own procurement practices, either purchasing foods directly from manufacturers or distributors, or contracting with food service management companies that procure the foods for them. USDA provides little guidance to promote safety in school food procurements. FNS’ guidance to schools emphasizes safe food handling because, according to USDA officials, most cases of foodborne illness at schools are due to poor food storage, handling, and serving practices. Therefore, the priority is on guidance to ensure food safety through proper handling and preparation of foods at schools. For example, manuals are provided that address appropriate temperatures for reheating ready-to-eat foods and for hot-holding potentially hazardous foods. Similarly, FNS provides information on employee personal hygiene and how it relates to cross-contamination of foods. CDC’s outbreak data shows an increase in the number of school-related outbreaks since 1990. Between 1990 and 1999 (the most recent year for which complete outbreak data is available from CDC), 292 school-related outbreaks were reported to CDC, averaging 17 outbreaks in the first 4 years of the decade, 28 in the next 4 years, and 57 in the final 2 years (see table 1). In total, approximately 16,000 individuals, mostly children, were affected. For those outbreaks with a known cause, the most commonly identified cause of the illnesses were foods contaminated with salmonella or Norwalk-like viruses. According to CDC officials, some unknown portion of the increase in reported outbreaks extends from CDC’s transition from a completely passive surveillance data collection method to a more active surveillance methodology in early 1998. In effect, CDC went from accepting data from the states to actively soliciting states for more comprehensive information and having the states verify the information that they submit. As a result, states began to report more of all types of foodborne outbreaks, including school outbreaks, to CDC beginning in 1998. Moreover, CDC suggests that increased resources for outbreak investigations and greater awareness among the general public about foodborne disease might also account for the increased number of reported outbreaks. To evaluate the trend in the number of school outbreaks, and in their number relative to non-school outbreaks, we compared the observed numbers to the estimated numbers of school and non-school outbreaks.This analysis shows that there is an upward trend in foodborne illness outbreaks reported in schools between 1990 and 1999 and that not all of this increasing trend is attributable to changes that took place when CDC began a more active data collection effort. Outbreaks in the general population have increased by a comparable amount over the same period; therefore, there is no statistically significant difference between increased outbreaks in schools and increased outbreaks in general. As figure 2 shows, our analysis of CDC’s data indicates that, even after adjusting for CDC’s improved data collection, the number of school-related foodborne outbreaks increased, on average, about 10 percent per year between 1990 and 1999. We also analyzed trends in participation in the school meal programs over this same time period and found that the changes in school outbreaks reported did not simply mirror changes in the number of students participating in the school meal programs. While the number of reported school outbreaks doubled over the decade, and generally increased by an average of about 10 percent from one year to the next, the number of school lunch participants increased by only 12 percent over the entire decade, or by just over 1 percent per year. Thus, the increase in school outbreaks reported is not explained by the increase in children’s participation in the school meal programs. One should exercise caution, however, when analyzing school outbreak data. CDC’s data must be supplemented with more detailed state or local information to determine the extent of foodborne illness outbreaks actually associated with the school meal programs in any given year. We gathered additional state and local health department information for the 20 largest school outbreaks in CDC’s database for 1998 and 1999, each of which resulted in 100 or more illnesses. We determined that 13 of the 20 outbreaks (65 percent) were associated with foods served in the school meal programs. Three of the 13 outbreaks were linked to tainted burritos that were distributed to schools nationwide and are thought to have caused approximately 1,700 illnesses. The other 7 outbreaks were not linked to foods served in the school meal programs, but with foods brought to schools from home or other sources. Therefore, data limitations make it difficult to assert with complete certainty to what extent the foods served in the school meal programs are the cause of the reported outbreaks from 1990 to 1999. USDA has, for the most part, been responsive to the two recommendations we made in our February 2000 report. First, we recommended that USDA develop a database to track the actions it takes to hold or recall donated foods when safety concerns arise regarding foods donated to the school meal programs. Second, we recommended that the agency revise its school food service manual to include guidance regarding food safety procurement contract provisions, which could be used by state and local school authorities. We made our first recommendation because, without comprehensive records of such safety actions, USDA had no reliable basis for identifying problematic foods or suppliers, or for documenting the agency’s responsiveness to concerns over the safety of USDA-donated foods. In response to our February 2000 recommendation, USDA implemented its food safety action database in April 2000. The database identifies and tracks key hold and recall information starting in October 1998. As of April 2002, the database lists 11 food safety actions, including, for example, the recall of 114,000 pounds of chicken that was contaminated with listeria in February 2000. Because of the limited number of actions recorded thus far, USDA has not conducted any analysis of the information contained in the database, but plans to continue maintaining it for future use. We made our second recommendation because, although USDA has established procurement policies and procedures to ensure the safety of foods donated to schools, these policies and procedures do not apply to foods purchased independently by schools. For example, contracts for donated foods may specify pathogen testing for every lot of certain products that are highly susceptible to contamination, or may contain contract provisions that establish specific temperature requirements for chilled and frozen products during processing and storage at the plant, transportation between processing plants, upon shipment from the plant, and upon arrival at final destination. However, there is no requirement that state and local authorities include similar food safety provisions in their procurement contracts. According to USDA’s regulations for schools participating in the school meal programs, the responsible school food authority may use its own procurement procedures, which reflect applicable state and local laws and regulations. Therefore, the extent to which schools address safety in their food procurement contracts may vary depending on state and local laws and procurement guidance that is available to them. To assist state and local authorities, we recommended that USDA provide them guidance on food safety provisions that could be included in their procurement contracts. USDA officials told us that they plan to address our recommendation by revising the school procurement guidance to include an example that addresses safety concerns. We believe, however, that USDA should include more information that would be useful to schools. Specifically, providing a list of the specific food safety provisions found in USDA- donated food contracts would help schools in preparing their own food procurement contracts. While USDA officials contend that local school districts have little negotiating power to require safety provisions because their purchases are mainly low-volume from commercial sources, USDA’s own data indicates that in the 1996-1997 school year, the latest year for which this data was available, 37 percent of school food authorities participated in cooperative arrangements that purchase in larger volume. Therefore, we believe that more detailed information on contract safety provisions could enhance the safety of foods purchased directly by schools. In particular, since local school authorities purchase 83 percent of the dollar value of school meals, it is important that they receive guidance from FNS on how best to achieve a comparable level of safety precautions through their procurement process. Based on limited work conducted in preparation for this testimony, we offer two additional observations that, if validated by further study, may contribute to greater safety for school children at minimal cost. First, USDA’s procurement officials told us that they have routine access to federal inspection and compliance records of potential suppliers and that they consider this information when they review bids before contracting. However, there is currently no established mechanism for state and local authorities in charge of purchasing food for schools to easily and routinely access such information. It may be desirable for USDA to consider whether it should provide state and local school officials with access to information collected through FDA’s and USDA’s inspections of school lunch food suppliers, potentially enabling them to make more informed purchasing decisions. USDA officials stated that this idea would have to be explored further to address potential legal impediments to such information sharing. FDA officials commented that this idea is worth considering. Second, FNS has developed a process for holding foods suspected of contamination that applies exclusively to food commodities that USDA purchases for donation to schools. The hold allows time for additional testing and inspection prior to asking for a recall of donated foods when safety concerns arise. Because FNS is the single common point of contact for all schools participating in the school meal programs, and because it does provide guidance to the schools on food nutrition and quality, an extension of FNS’ hold and recall procedures to include non-donated (school-purchased) foods would seem logical. USDA officials agreed with this concept and indicated that they intend to share the hold and recall procedures with schools in fiscal year 2003. USDA and FDA have not developed any specific security provisions to help protect food served through the school meal programs from potential deliberate contamination. But, according to USDA and FDA officials, actions designed to enhance the security of the federal food safety system as a whole would also enhance the security of meals served at schools. As we testified in October 2001, however, recent events have raised the specter of bioterrorism as an emerging risk factor for our food safety system.. We further stated that under the current structure, there are questions about the system’s ability to detect and quickly respond to any such event. Since our October 2001 testimony, both FDA and USDA have stated that they are better prepared to detect and respond to such an event. Both agencies are in the process of conducting risk assessments to determine where in the farm-to-table food continuum there is a critical need to provide additional resources. In addition, FDA staffing has already increased inspections of imported foods, added more inspections of domestic producers, and more laboratory testing of food products. Further, FDA has issued voluntary security guidelines to the sector of the food industry that it regulates on the need to (1) ensure physical security of processing and storage facilities, (2) ensure that chemical and biological agents that may be kept in their facilities or at in-house laboratories are under appropriate controls, and (3) verify the background of plant employees. Currently, the agency is receiving public comments and expects to revise the guidelines. USDA is also working on a similar set of guidelines that meat, poultry, and egg products processors could voluntarily adopt. Finally, agency officials told us that they have generally asked their field personnel to be on heightened alert for potential security concerns. We are initiating a review to determine how these guidelines are being implemented and how federal agencies plan to monitor their implementation. As we reported in February 2000, while no federal agency monitors the safety of school meals, USDA’s Food Safety and Inspection Service (FSIS) and FDA are responsible for enforcing regulations that ensure the safety of the nation’s food supply. FSIS is responsible for the safety of meat, poultry, and some eggs and egg products, while the FDA is responsible for all other foods, including fish, fruit, vegetables, milk, and grain products. However, as we stated most recently in our October 2001 testimony, the existing food safety system is a patchwork structure that hampers efforts to adequately address existing and emerging food safety risks whether those risks involve inadvertent or deliberate contamination. The food safety system is also affected by other overarching problems, such as the challenge of effectively coordinating the food safety activities of multiple agencies including coordinating multi-state outbreaks. For example, the current organizational and legal structure of our federal food safety system has given responsibility for specific food commodities to different agencies and provided them with significantly different regulatory authorities and responsibilities. As a result, we have inefficient use of resources and inconsistencies in oversight and enforcement. USDA and FDA oversee recalls when the foods they regulate are contaminated or adulterated. If a USDA-regulated company does not voluntarily conduct the recall, USDA can detain the product for up to 20 days. On the other hand, FDA, which currently does not have administrative detention authority for food under the Federal Food, Drug, and Cosmetic Act, must seek a court order to seize the food. Moreover, as we reported in August 2000, neither USDA nor FDA had provided guidance to industry on how to quickly initiate and carry out food recalls that involve potentially serious adverse health risk. We recommended that such guidelines instruct companies on time frames for quickly initiating and carrying out recalls, including procedures that expeditiously notify distribution chains and alert the public. USDA has revised its guidelines, and FDA is in the process of revising its guidance and expects to reissue the guidance in September 2002. Finally, Mr. Chairmen, in working on food safety issues over the past decade, we have reviewed USDA’s and FDA’s inspection systems and identified weaknesses in both. The agencies agreed with most of our recommendations and have either taken steps or are taking steps to improve inspections. We have also focused on specific products, many of which are included in school meals. For example, because of concerns about the risk of salmonella in eggs, we reviewed the adequacy of the federal system for ensuring egg safety. Our work shows that the current regulatory and organizational framework for egg safety makes it difficult to ensure that resources are directed to areas of highest risk. Similarly, we evaluated the seafood and shellfish safety program and determined that theses programs do not sufficiently protect consumers because of weaknesses in FDA’s implementation of the new science-based inspection system. FDA agreed with most of our recommendations. We also reviewed USDA’s oversight of meat and poultry products and concluded that, in order to better ensure safety, USDA needed to ensure that inspectors are properly trained on the new science-based system. USDA agreed with our recommendation and is providing enhanced training. In January 2002, our report on mad cow disease concluded that, although bovine spongiform encephalopathy (BSE) has not been found in the United States, federal actions do not sufficiently ensure that all BSE-infected animals or products are kept out of the country or that if BSE were found, it would be detected promptly and not spread. FDA, USDA, and Customs generally agreed with the report’s recommendations.

The national school lunch and breakfast programs provide inexpensive or free meals to more than 27 million children each day. During the 1990s, nearly 300 outbreaks of foodborne illness at the nation's schools sickened 16,000 students. The rise in the number of school outbreaks mirrors a rise in the number of outbreaks in the overall population, according to the Centers for Disease Control and Prevention (CDC). Because the CDC data include outbreaks attributable to food brought from home or other sources, GAO could not determine the extent to which food served in the school meal programs caused reported outbreaks. Data from 1998 and 1999 do show, however, that most of the outbreaks during those years were caused by foods served through the school meal program. Foods contaminated with salmonella and Norwalk-like viruses were the most common causes of outbreaks. GAO found that the Department of Agriculture has not developed security measures to protect foods served at schools from deliberate contamination. The existing food safety system is a patchwork of protections that fall short in addressing existing and emerging food safety threats.

You are an expert at summarizing long articles. Proceed to summarize the following text: OSHA is responsible for protecting the safety and health of the nation’s workers under the Occupational Safety and Health Act of 1970 (OSH Act). OSHA sets and directly enforces occupational safety and health standards for the private sector in about half the states. Occupational safety and health standards are a type of regulation and are defined as standards that require “conditions, or the adoption or use of one or more practices, means, methods, operations, or processes, reasonably necessary or appropriate to provide safe or healthful employment and places of employment.” OSHA carries out its enforcement activities through its 10 regional offices and 90 area offices. The remaining states set and enforce their own workplace safety and health standards for employers under a state plan approved by OSHA. In these states, the state agency typically responsible for enforcing workplace safety and health standards is the state department of labor. OSHA conducts two types of inspections to enforce the OSH Act and its standards: unprogrammed and programmed inspections. Unprogrammed inspections are unplanned and conducted in response to certain events, such as investigating employee complaints, including claims of imminent danger and serious accidents involving fatalities, amputations, and in- patient hospitalizations. Programmed inspections are planned and target industries or individual workplaces based on predetermined criteria, such as those that have experienced relatively high rates of workplace injuries and illnesses. Among states with OSHA-approved state plans, enforcement practices may vary, but states generally are expected to use a similar approach to performing planned and unplanned inspections. The states with OSHA-approved state plans cover different types of employers in their state. Twenty-one of the states with OSHA-approved state plans are responsible for enforcing workplace safety and health laws and standards at private-sector and state and local government workplaces. Five of the states with OSHA-approved state plans cover state and local government workplaces only, with OSHA providing enforcement for the private sector (see fig. 1). Four of the nine states we reviewed–California, Maryland, Oregon, and Washington–are responsible for enforcement for the private sector and the state and local public sector under an OSHA-approved state plan. In the remaining five states–Connecticut, Illinois, Maine, New Jersey, and New York–OSHA provides enforcement for the private sector, while the state is responsible for the state and local public sector. In addition to workplace safety and health regulation by OSHA and state departments of labor, other federal and state government agencies regulate health care employers in various ways and may have requirements related to workplace violence prevention. For example, states may impose certain licensing requirements on hospitals or other health care facilities. In addition, the Joint Commission on Accreditation of Healthcare Organizations (Joint Commission), a nonprofit corporation that accredits and certifies health care organizations and programs, also has its own requirements for accreditation purposes. OSHA does not require employers to have workplace violence prevention programs; however, the agency issued voluntary guidelines in 1996 to help employers establish them. Although there is no federal occupational safety and health standard for workplace violence prevention, OSHA may issue citations to employers for violating a certain provision of the OSH Act–referred to as the general duty clause–which requires employers to provide a workplace free from recognized hazards likely to cause death or serious physical harm. To cite an employer under the general duty clause, OSHA must have evidence that (1) a condition or activity in the workplace presents a hazard to an employee, (2) the condition or activity is recognized as a hazard by the employer or within the industry, (3) the hazard is causing or is likely to cause death or serious physical harm, and (4) a feasible means exists to eliminate or materially reduce the hazard. When OSHA does not have enough evidence to support a citation, it can issue hazard alert letters that warn employers about the dangers of specific industry hazards and provide information on how to protect workers. OSHA has recordkeeping regulations that require employers to record certain workplace injuries and illnesses. For each work-related injury and illness that results in death, days away from work, restricted work or transfer to another job, loss of consciousness, or medical treatment beyond first aid, the employer is required to record the worker’s name; the date; a brief description of the injury or illness; and, when relevant, the number of days the worker was away from work, assigned to restricted duties, or transferred to another job as a result of the injury or illness. Employers with 10 or fewer employees at all times during the previous calendar year and employers in certain low-hazard industries are partially exempt from routinely keeping OSHA injury and illness records. Three federal agencies collect national data on nonfatal workplace violence in health care facilities: BLS, within DOL; NIOSH, within the Department of Health and Human Services (HHS); and BJS, within the Department of Justice (DOJ). The three agencies collect data on different types of workplace violence cases from different sources (see table 1). Workers in health care facilities experience substantially higher estimated rates of nonfatal injury due to workplace violence compared to workers overall, according to data from three federal data sets we reviewed (see fig. 2). BLS’s Survey of Occupational Injuries and Illnesses (SOII) data for 2013 show that the estimated rates of nonfatal workplace violence against health care workers in private-sector and state in-patient facilities–including hospitals and nursing and residential care facilities–are from 5 to 12 times higher than the estimated rates for workers overall, depending on the type of health care facility. More specifically, in 2013 the estimated rate of injuries for all private-sector workers due to such violence that resulted in days away from work was 2.8 per 10,000 workers. In contrast, the estimated rate for private-sector hospital workers was 14.7 per 10,000 workers, and for nursing and residential care workers the rate was 35.3 per 10,000 workers. The estimated rates of nonfatal injury due to workplace violence were highest in state hospitals and nursing and residential care facilities, according to BLS’s SOII data. Workers in these state facilities may have higher rates of workplace violence because they work with patient populations that are more likely to become violent, such as patients with severe mental illness who are involuntarily committed to state psychiatric hospitals, according to BLS research. Data from HHS’s National Electronic Injury Surveillance System-Work Supplement (NEISS-Work) data set show that in 2011 the estimated rate of nonfatal workplace violence injuries for workers in health care facilities was statistically greater than the estimated rate for all workers. Data from the National Crime Victimization Survey (NCVS) data set show that from 2009 through 2013 health care workers experienced workplace violence at more than twice the estimated rate for all workers (after accounting for the sampling error). Research also suggests that nonfatal workplace violence is prevalent in in-patient health care facilities. Although their results are not generalizable, three studies that surveyed hospital workers found that 19 to 30 percent of workers in a general hospital setting who completed the surveys reported being physically assaulted at work sometime within the year prior to each study (see app. II for more information on these studies). In addition, a study that surveyed staff in a psychiatric hospital found that 70 percent of staff reported being physically assaulted within the last year. Moreover, BLS data indicate that reported nonfatal workplace violence against health care workers has increased in recent years. Such cases reported by employers in BLS’s SOII increased by about 12 percent over 2 years, from an estimated 22,250 reported cases in 2011 to an estimated 24,880 in 2013. We also examined the estimated rates of workplace violence reported by employers in BLS’s SOII by the type of facility and found that there was relatively little change from 2011 through 2013, with the exception of a 70 incidents per 10,000 workers increase in the rate for state nursing and residential care facilities. The estimated number of health care workers reporting at least one workplace violence- related assault in BJS’s NCVS survey from 2009 through 2013 varied from year to year with no clear statistical trend (see fig. 3). Nonfatal and fatal workplace violence against health care workers involves different types of perpetrators and violence. For nonfatal violence, patients are the primary perpetrators, according to federal data and studies we reviewed. More specifically, patients were the perpetrators of an estimated 63 percent of the NEISS-Work cases where workers in health care facilities came to the emergency department for treatment after experiencing workplace violence-related injuries in 2011. Several of the studies we reviewed also found that patients were the primary perpetrators of nonfatal violence against health care workers, followed by the patient’s relatives and visitors (see app. II for more information on these studies). According to NEISS-Work data from 2011, hitting, kicking, and beating were the most common types of nonfatal physical violence reported by workers in health care facilities. As for fatal violence, the BLS Census of Fatal Occupational Injuries reported 38 workers in health care facilities died as a result of workplace violence assaults from 2011 through 2013, representing about 3 percent of all worker deaths due to workplace violence across all industries during those years. Many of the deaths in a health care setting involved a shooting, with many perpetrated by someone the worker knew, such as a domestic partner or co-worker. Health care workers we interviewed described a range of violent encounters with patients that resulted in injuries ranging from broken limbs to concussions (see table 2). Research suggests that patient-related factors can increase the risk of workplace violence. A study that surveyed over 5,000 workers in six hospitals in two states found that patient mental health or behavioral issues were contributing factors in about 64 percent of the patient- perpetrated violent events reported by health care workers who completed the survey, followed by medication withdrawal, pain, illicit drug/alcohol use, and being unhappy with care. In three of our discussion groups, health care workers said working with patients with severe mental illness or who are under the influence of drugs or alcohol contributed to workplace violence in health care facilities. Certain types of health care workers are more often the victims of workplace violence. According to BLS data from 2013, health care occupations like psychiatric aides, psychiatric technicians, and nursing assistants experienced high rates of workplace violence compared to other health care occupations and workers overall (see fig. 4). Furthermore, one study that surveyed over 5,000 workers in six hospitals in two states found that workers in jobs typically involving direct patient care had a higher percentage of physical assaults compared with other types of workers. For example, a higher percentage of nurse’s aides reported being physically assaulted within the last year (14 percent) than nurse managers (4.7 percent). Another study that surveyed over 300 staff in a psychiatric hospital found that ward staff, which had the highest levels of patient contact, were more likely than clinical care and supervisory workers to report being physically assaulted by patients. While the three national datasets we analyzed shed some light on the level of workplace violence committed against health care workers, the full extent of the problem is unknown for three main reasons: 1) differences in the criteria used to record workplace violence cases in the data sets, 2) health care workers not reporting all cases of workplace violence, and 3) employer inaccuracies in reporting cases of workplace violence. Not all workplace violence cases are included in the three national data sets we reviewed because of the criteria used by each of the data sets. With regard to the first two data sets (SOII and NEISS-Work), workplace violence that does not result in injuries severe enough to require days off from work or an emergency room visit are not included. For the NCVS data, cases that are not considered to be crimes are not included. Table 3 describes the number and types of workplace violence cases recorded in each of these datasets in 2011, the most recent year in which data were available from all three sources. Health care workers do not formally report all incidents of workplace violence for various reasons. Although the results are not generalizable, estimates of the percentage of cases that are formally reported ranged from 7 to 42 percent in the studies we reviewed (see app. II for more information on these studies). The health care workers surveyed in four of the five studies we reviewed most often reported the violence informally to their supervisors or co-workers. A study that surveyed 762 nurses from one hospital system found that the reasons health care workers provided for not formally reporting the violence included (1) not sustaining serious injuries, (2) inconvenience, and (3) the perception that violence comes with the job. Health care workers in all five of our discussion groups said that they do not report all cases of workplace violence unless they result in a severe injury. Health care workers in four discussion groups also said that they do not report all cases of workplace violence because the reporting process is too burdensome and because management discouraged reporting. Health care workers in two of our discussion groups reported fear of being blamed for causing the attack, losing their job, as well as financial hardships associated with their inability to work due to injury, as reasons for not formally reporting all cases of workplace violence. OSHA and BLS research indicate that employers do not always record or accurately record workplace injuries in general. Specifically, in a 2012 report OSHA found that for calendar years 2007 and 2008, approximately 20 percent of injury cases reconstructed by inspectors during a review of employee records were either not recorded or incorrectly recorded by the employer. OSHA is working on improving reporting by conducting additional outreach and training for employers on their reporting obligations. BLS research has also found that employers do not report all workplace injury cases in the SOII, and BLS is working on improving reporting by conducting additional research on the extent to which cases are undercounted in the SOII and exploring whether computer-assisted coding can improve reporting. There is limited information available on the associated costs of injuries due to workplace violence in health care. While DOL and HHS collect information on occupational injuries and illnesses due to violence in health care, they do not collect data on the costs. The BJS NCVS survey asks individuals about the medical expenses they incurred as a result of workplace violence; however, our analysis of the data did not identify enough cases to produce a national estimate of the costs. One of the states we reviewed, Washington, provided us with a report about the cost the state incurred due to workplace violence over a 5 year period. The state estimates between $4 million and $8 million each year from 2010 through 2014 in workers’ compensation costs for health care workers who were injured from workplace violence and received medical treatment for their injuries. Another state we reviewed, California, analyzed worker’s compensation injury data for one of their hospitals from 2003 to 2013. According to state officials, 1,169 of the 4,449 injuries were due to patient assaults and amounted to $16.6 million in worker’s compensation costs over this time period. In another study, researchers surveyed nurses from a hospital system in the mid-Atlantic region regarding medical expenses related to work-related assaults against them. They found that of the 106 nurses who reported injuries, the collective costs of treatment and lost wages for the 30 nurses requiring treatment was $94,156. OSHA increased its inspections of health care employers for workplace violence from 11 in 2010 to 86 in 2014 (see fig. 5). OSHA officials attribute this increase to a rise in employee complaints and programmed inspections following implementation of a 3-year National Emphasis Program (NEP) targeting nursing and residential care facilities, which began in April 2012. Workplace violence was one of the hazards included as part of the NEP, which required each OSHA region to inspect a minimum number of facilities from a list developed by OSHA’s national office of those facilities meeting or exceeding certain injury and illness rates. OSHA conducted a total of 344 inspections involving workplace violence in the health care sector from 1991 through April 2015. More than two- thirds of the 344 inspections since 1991 were unprogrammed, and over 70 percent of the unprogrammed inspections were conducted in response to complaints (see fig. 6). Sixty percent (205 inspections) of the 344 inspections were conducted by 3 of OSHA’s 10 regions. OSHA officials said that the higher number of inspections in certain regions could have been due to them receiving a higher number of workplace violence complaints than other regions. OSHA officials also said that the higher number of inspections in certain regions could have been due to the regions having more experienced workplace violence coordinators and inspectors, which increased their comfort in pursuing workplace violence cases. In April 2015, OSHA announced the expiration of the nursing and residential care facilities NEP. However, OSHA determined that the results of the NEP indicated a need for continued focus on efforts to reduce the identified hazards in those sectors, including workplace violence. Consequently, in June of 2015, OSHA issued new inspection guidance stating that all programmed and unprogrammed inspections of in-patient health care facilities–including hospitals and nursing and residential care facilities–are to cover the hazards included in the recently concluded NEP. This new inspection guidance applies to a broader group of health care facilities by including hospitals, in addition to nursing and residential care facilities, which were covered by the NEP. Unlike the NEP, the guidance does not require OSHA area offices to inspect a minimum number of facilities each year. To determine whether workplace violence is a potential hazard in a facility, OSHA inspectors are directed in an OSHA enforcement directive to take certain steps during inspections, including a review of an employer’s workplace injury and illness logs, interviews with employees, and personal observations of potential workplace violence hazards. If there are potential hazards, inspectors are expected to physically inspect and identify any hazards that increase exposure to potential violence, such as lack of appropriate lighting or the absence of security systems. In addition, inspectors are instructed to interview all employees who have observed or experienced any violent acts and review other records, such as police and security reports and workers’ compensation records. In addition, inspectors are instructed to determine the violence prevention measures an employer has in place and whether it has provided any related training to its employees. If inspectors determine that a general duty clause or other citation is warranted, they will consult with their regional office management, OSHA’s national office, and the Department of Labor’s solicitor’s office to develop the citation, according to OSHA officials. OSHA has established various policies and procedures to support its inspectors in conducting workplace violence inspections, including the following: Uniform inspection procedures. OSHA issued an enforcement directive in 2011 to provide its inspectors with uniform procedures for addressing workplace violence. This directive defines workplace violence, describes the steps for conducting inspections, and outlines the criteria for a general duty clause citation along with descriptions of the types of evidence needed to support each criterion. The directive also requires OSHA regional and area offices to ensure that OSHA inspectors are trained in workplace violence prevention to assist them in understanding specific workplace violence incidents, identify hazard exposure, and assist the employer in abating the hazard. Regional workplace violence coordinators. Every regional office has a designated workplace violence coordinator who functions as an in-house expert on workplace violence and provides advice and consultation to inspection teams, according to OSHA officials. In addition, according to OSHA officials, the coordinators hold bi-monthly teleconferences with OSHA national office managers to exchange information and discuss strategies for developing workplace violence cases. Inspector training. According to OSHA officials, all inspectors are required to complete web-based training as part of their initial training that includes four lessons related to workplace violence: (1) defining workplace violence, (2) identifying solutions to the violence, (3) conducting workplace violence inspections, and (4) protecting oneself during an inspection. Three other optional webinars are offered: a 1.5- hour webinar on the 2011 workplace violence enforcement directive that includes discussion of its purpose, procedures for conducting inspections and issuing citations for workplace violence, and resources available for workplace violence inspections. The second is a 1.5-hour webinar that focuses on identifying risks for violence and prevention strategies in health care and social services settings. The third is a 2-hour webinar that includes information on how to conduct inspections as part of the NEP targeting nursing and residential care facilities. Out of 1,026 OSHA staff who were invited to take the optional webinars, OSHA reports 652 staff have completed the webinar on the 2011 directive, 1,023 have completed the one on identifying risks and prevention strategies, and 713 have completed the webinar on the NEP, as of June 2015. OSHA has developed and disseminated voluntary guidelines and a variety of other informational materials to help educate health care and other employers on preventing workplace violence. As previously discussed, in 2015 OSHA issued an update of its written guidelines for health care and social service employers on preventing and responding to workplace violence. The guidelines identify the components that should be incorporated in a workplace violence prevention program and include checklists for employers to use in evaluating those programs. OSHA has a workplace violence web page with links to the 2015 guidelines, other publications, and resources and materials for employee training related to workplace violence, along with links for obtaining consultation services from OSHA and for filing complaints. In addition, OSHA launched a new webpage in December of 2015 with resources that employers and workers can use to address workplace violence in health care facilities. For example, the webpage links to a new OSHA publication that presents examples of health care facilities’ practices related to the five components recommended in OSHA’s voluntary guidelines. OSHA also formed an alliance with the Joint Commission to provide employers with information, guidance, and access to training resources to protect their employees’ health and safety that includes addressing workplace violence. As part of this alliance, OSHA has disseminated information on preventing workplace violence in health care through publication of three articles in a Joint Commission newsletter, with a fourth article planned. OSHA officials told us they obtained feedback from stakeholders on the workplace violence prevention guidelines and incorporated stakeholder comments into the final publication of the 2015 guidelines. These stakeholders confirmed the usefulness of OSHA’s revised guidelines, according to OSHA officials. OSHA officials also told us the agency has not conducted and does not plan to conduct any type of formal evaluation of the usefulness of these materials due to insufficient resources. OSHA also funds training on workplace violence prevention for employers and workers. OSHA provided training grants in 2012 and 2013 totaling $254,000 to three organizations that developed workplace violence prevention curricula and trained 1,900 health care workers. Additional training grants totaling over $514,000 were awarded to five organizations in 2014 to be used for programs that include training health care workers and employers in preventing and addressing workplace violence. While the number of inspections involving workplace violence in health care facilities has increased, a relatively small percentage of these inspections resulted in general duty clause citations related to workplace violence. From 1991 through October 2014, OSHA issued 18 general duty clause citations to health care employers for failing to address workplace violence. Seventeen of these citations were issued from 2010 through 2014 (see fig. 7). These citations were issued in about 5 percent of the 344 workplace violence inspections of health care employers that were conducted from 1991 to April 2015. All 18 citations arose from unprogrammed inspections. Fourteen of the citations arose from complaints—the most common type of unprogrammed inspection among these cases. For example, in one case, OSHA cited an employer for exposing employees working in a residential habilitation home to the hazard of violent behavior and being physically assaulted by patients with known histories of violence or the potential for violence. OSHA determined that the company failed to identify and abate existing and developing hazards associated with workplace violence. In all 18 of these cases, health care workers had been injured or killed by patients, clients, or residents. We found that the three regions that conducted the highest number of workplace violence inspections also issued the majority of workplace violence-related general duty citations to health care employers. Collectively, the three regions issued 12 of the 18 general duty citations issued since 1991. Staff from all 10 OSHA regional offices said it was challenging to cite employers for violating the general duty clause when workplace violence is identified as a hazard and staff from 4 OSHA regional offices said it was challenging to develop these cases within the 6-month statutory time frame required to develop a citation. As described in OSHA’s enforcement directive, to cite an employer for violating the general duty clause for a workplace violence hazard, OSHA inspectors must demonstrate that (1) a serious workplace violence hazard exists and the employer failed to keep its workplace free of hazards to which employees were exposed, (2) the hazard is recognized by the employer or within the industry, (3) the hazard caused or is likely to cause death or serious physical harm, and (4) there are feasible abatement methods to address the hazard. Some inspectors and other regional officials from 5 OSHA regional offices said it is difficult to collect sufficient evidence to meet all four criteria during an inspection. For example, two regional officials noted that while injuries may have occurred as a result of workplace violence at facilities they have inspected, the assaults may involve a single employee or a very small number of employees, or the assaults may not be frequent or serious enough to demonstrate a hazard that can cause serious physical harm or death. Another inspector noted that an employer may have a minimal workplace violence prevention program and that it is sometimes difficult to prove that the employer has not done enough to address the hazard. Staff, including officials and inspectors, from 5 of OSHA’s 10 regional offices said it would be helpful to have additional assistance to implement the 2011 workplace violence enforcement directive. They suggested having additional information on how to collect evidence and write up a workplace violence citation, examples of workplace violence issues that have been cited, examples of previously documented workplace violence case files, and examples of citations that have been upheld in court would be helpful. According to federal internal control standards, agency management should share quality information throughout the agency to enable personnel to perform key roles in achieving agency objectives. While OSHA’s webinar on the 2011 workplace violence enforcement directive provides general guidance on the types of evidence needed to develop a general duty clause citation, it does not provide the types of detailed information proposed by staff. For example, officials from one region said that although the training they received was helpful, assessing workplace violence hazards is new to many inspectors, and additional information would help inspectors fully understand how to inspect, collect evidence, and write up a workplace violence citation. Inspectors from another region suggested the national office provide an updated webinar with lessons learned and examples of what has been cited so inspectors can be consistent in how they develop these cases. Officials from OSHA’s national office told us they have considered developing additional training for inspectors on conducting workplace violence inspections and are planning to revise the 2011 enforcement directive. For example, they said that they would like to provide inspectors more specific guidance on developing a workplace violence case in different environments and additional information about the hazards and abatement measures applicable to different health care facilities. OSHA officials said the training would be developed and the directive would be revised by the end of 2016. Without this additional information, inspectors may continue to face challenges in conducting workplace violence inspections and developing citations. When inspectors identify workplace violence hazards during an inspection, but all the criteria for issuing a general duty clause citation are not met and a specific standard does not apply, inspectors have the option of issuing warning letters to employers, known as Hazard Alert Letters (HAL). These letters recommend that the employer voluntarily take steps to eliminate or reduce workers’ exposure to the hazard. The letters describe the specific hazardous conditions identified in an inspection, list corrective actions that can be taken to address them, and provide contact information to seek advice and consultation on addressing the hazards. From 2012 through May 2015, OSHA issued 48 HALs to health care employers recommending actions to address factors contributing to workplace violence. Several of the HALs we reviewed stated that workers had been assaulted, notified the employers that they failed to implement adequate measures to protect their workers from assaults, and recommended the employers take specific steps to better protect their workers. Agency officials informed us OSHA inspectors are not required to routinely conduct follow-up inspections after issuing HALs, and the uniform inspection procedures from the 2011 enforcement directive do not specify a process for contacting employers to determine whether hazards and deficiencies have been addressed. They explained, however, that a follow-up inspection would not normally be conducted if the employer or employer representative provides evidence that the hazard has been addressed. According to OSHA officials, if OSHA decides to conduct a follow-up inspection, OSHA’s recommended time period for a follow-up with employers is 12 months following employer receipt of the HAL, although this is not required in the inspection procedures from the 2011 enforcement directive. OSHA established a policy in 2007 to follow up on HALs related to ergonomics issues, but this policy does not apply to HALs related to workplace violence issues. OSHA established the ergonomics HAL policy after its ergonomics standard was invalidated under the Congressional Review Act in 2001. The ergonomics HAL follow-up policy outlines a process for contacting employers to determine whether ergonomic hazards and deficiencies identified in the letters have been addressed. OSHA inspectors are directed to schedule a follow-up inspection to determine if the hazards are being addressed if the employer does not respond or responds inadequately. In addition, OSHA was not able to tell us how many of the 48 health care employers who received HALs for workplace violence issues had follow- up inspections because the follow-up status of HALs is not centrally maintained. Each regional office workplace violence coordinator would have to be contacted to find out the status of each HAL. OSHA has a centralized information system, but has not systematically used it for tracking the status of HALs. While OSHA’s information system is capable of tracking the status of HALs, OSHA officials are not sure if regional offices are consistently entering updated information. According to federal internal control standards, agency management should perform ongoing monitoring as part of the normal course of operations. Without a uniform process to follow up on these HALs, OSHA will not know whether the hazards that placed employees at risk for workplace violence at these facilities continue to exist. In addition, without routine follow up on these cases, OSHA may not obtain the information needed to determine whether a follow-up inspection or other enforcement actions are needed. OSHA officials acknowledged that it can be challenging to develop a general duty clause citation for workplace violence and cited some potential benefits of having a workplace violence prevention standard. However, officials stated that OSHA is not planning at this time to develop a workplace violence prevention standard because it has identified other workplace hazards that are higher priorities for regulatory action. According to OSHA officials, the potential benefits of having a specific standard include setting clearer expectations for employers, increasing employer implementation of workplace violence prevention programs, and simplifying the process for determining when citations could be issued. Rather than pursuing a standard on workplace violence, the officials stated that OSHA has focused its efforts on increased enforcement using the general duty clause, issuing new guidance, and developing a new webpage for employers and workers with resources for addressing workplace violence in health care facilities. OSHA officials also highlighted other efforts the agency has taken to reduce workplace violence in health care facilities. These efforts included obtaining feedback from stakeholders on the employer guidelines, establishing a task force to develop a long term agency plan for workplace violence prevention and resources for OSHA staff and the public, and issuing publications on workplace violence prevention strategies. In addition, OSHA officials reported conducting a qualitative and quantitative review of data from its NEP for Nursing and Residential Care Facilities. However, OSHA’s review of the NEP entailed summarizing data collected from the regions 6 months after the program began on inspections that resulted in the issuance of ergonomics hazard alert letters. OSHA officials said they did not complete an overall evaluation of the program even though the NEP procedures provided that the agency do so. The NEP procedures stated that the national office was to collect data relevant to the effectiveness of the program from the regions and complete an evaluation. Additionally, the procedures specified that the evaluation should address the program’s role in meeting OSHA’s goals, such as the reduction in the number of injuries and abatement measures implemented. An OSHA official we spoke with could not provide a reason why OSHA did not conduct an evaluation of the NEP and was not aware of any plans for the agency to conduct such an evaluation. According to information provided by agency officials, they have not assessed how well OSHA’s approach to helping prevent workplace violence is working. According to federal internal control standards, agency management should assess the quality of agency performance over time and correct identified deficiencies. Such assessments involve analyzing data to determine whether the intended outcomes were achieved and identifying any changes that may improve results. Because OSHA has not assessed the results of its education and enforcement efforts, it is not in a position to know whether they have helped, for example, to increase employer awareness and implementation of abatement measures. Assessing how well OSHA’s approach is working could inform future efforts to address workplace violence in health care facilities. For example, completing the evaluation of the NEP results could provide OSHA with information to decide whether further action may be needed to address workplace violence hazards. OSHA could also consider cost-effective ways to conduct such assessments, such as reviewing a sample of workplace violence inspections that resulted in hazard alert letters to determine the extent to which employers implemented recommended abatement measures. All of the nine states we reviewed have enacted laws that require health care employers to establish a plan or program to protect workers from workplace violence. According to our review of information provided by state officials, these states have requirements, either in law or regulation, similar to the components of an effective workplace violence prevention program identified in OSHA’s voluntary guidelines (see table 4). Specifically, seven of the nine states require management and worker participation in workplace violence prevention efforts, such as through a committee or other means. Eight of the nine states require health care employers to analyze or assess worksites to identify hazards that may lead to violent incidents. All nine states require health care employers to take steps to prevent or control the hazards, such as changing policies, security features, or the physical layout of the facility. Eight of the nine states also require health care employers to train workers on workplace violence prevention, such as how workers can protect themselves and report incidents. All nine states require health care employers to record incidents of violence against workers, and eight of the states require health care employers to periodically evaluate or review their workplace violence prevention plan or program. According to state officials in the nine states we reviewed, the department of labor is responsible for ensuring compliance with these workplace violence prevention requirements, although in some states the department of health also has oversight responsibilities. In addition, under their OSHA-approved state plans, the state departments of labor in our selected states may issue citations to employers under their jurisdiction for violations of an applicable state standard or the state’s equivalent to the general duty clause. Similar to OSHA, state agency oversight activities included investigating complaints and reports of violent incidents, as well as conducting planned inspections. The departments of labor in the states we reviewed conducted varying numbers of inspections of health care employers involving workplace violence issues and in some cases cited employers for violations of their requirements. From 2010 through 2014, state officials from eight of the nine states reported conducting from 2 to 75 inspections of health care employers related to workplace violence. One state did not conduct inspections of health care employers regarding workplace violence. The completed inspections resulted in 0 to 74 reported citations. In addition to their workplace violence prevention laws, officials in some of the states we reviewed described other efforts to further address workplace violence against health care workers. For example, California, New York, and Oregon have a NIOSH-funded program for tracking and investigating work-related fatalities called the Fatality Assessment and Control Evaluation Program. The purpose of this program is to identify risk factors for work-related fatalities and disseminate prevention recommendations. Also, the state of Washington has an independent research program called the Safety and Health Assessment and Research for Prevention Program that conducts research projects on occupational health and safety. In addition, California department of labor officials stated that they are developing a workplace violence prevention standard that will be adopted by July 2016, which officials said would make it easier for inspectors to cite employers for workplace violence issues. Relatively few studies have been conducted on the effectiveness of workplace violence prevention programs, limiting what is known about the extent to which such programs or their components reduce workplace violence. After conducting a literature review, we identified five studies that evaluated the effectiveness of workplace violence prevention programs and met our criteria, such as having original data collection and quantitative evidence. Four of the five studies we reviewed suggest that workplace violence prevention programs can contribute to reduced rates of assault. Three Studies of the Veterans Health Administration system. In one study, researchers surveyed workers from 142 Department of Veterans Affairs (VA) hospitals in 2002 and identified facility-level characteristics associated with higher and lower rates of assaults. The researchers found that facility-wide implementation of alternate dispute resolution training was associated with reduced assault rates. In a separate study of the VA system, researchers examined the relationship between the implementation of a comprehensive workplace violence prevention program at 138 VA health care facilities and changes in assault rates from 2004 through 2009. The workplace violence prevention program included training, workplace practices, environmental controls, and security. The researchers found that facilities that fully implemented a number of training practices experienced a modest decline in assault rates. The training practices included assessing staff needs for training, having trainers present in the facility and actively training, and providing staff training on prevention and management of disruptive behavior and reporting disruptive behavior, among other things. In a third study, researchers described the processes that VA’s Veterans Health Administration (VHA) uses to evaluate and manage the risk of assaultive patients. The study stated that VHA’s approach included the use of committees made up of various stakeholders to assess threatening patients, and recommendations flagged in veterans’ electronic medical records to notify staff of individuals who may pose a threat to the safety of others. Researchers surveyed Chiefs of Staff at 140 VHA hospitals and found that committee processes and perceptions of effectiveness were associated with a reduction in assault rates. For example, facilities that rated their committees as “very effective” were the only facilities that experienced a significant decrease in assault rates from 2009 to 2010. Emergency departments study. In a fourth study, researchers found mixed results regarding the effect that a workplace violence prevention program had on the rate of assaults. The study was conducted with three emergency departments that implemented the program (intervention sites) and three emergency departments that did not implement the program (comparison sites). Implementation of the program took place in 2010 and included environmental changes, changes in policies and procedures, and staff training. Researchers measured assault rates in the intervention and comparison sites before and after the workplace violence program was implemented by surveying on a monthly basis over an 18-month period 209 health care workers who volunteered to participate in the study. The researchers found that workers at the intervention sites and the comparison sites reported significantly fewer assaults over the study period. Therefore, the researchers could not conclude that workers at the intervention sites experienced a significantly greater decrease in violence compared with workers at the comparison sites. However, at the facility level, the researchers found that two of the intervention sites experienced a significant decrease in violence, and no individual comparison site had any significant change in assaults. In-patient mental health facilities study. A fifth study we reviewed found that implementation of a workplace violence prevention program improved staff perceptions of the safety climate in the facility but did not result in an overall change in assault rates. This study evaluated a comprehensive workplace violence prevention program that New York implemented in three state-run, in-patient mental health facilities from 2000 through 2004. The study compared these facilities that implemented the program (intervention sites) with three state-run, in-patient mental health facilities that did not implement the program (comparison sites). Researchers surveyed 319 staff at the intervention sites and found that staff perceptions of management’s commitment to violence prevention and employee involvement in the program was significantly improved after the program was implemented. However, an analysis of the change in staff-reported physical assaults did not indicate a statistically significant reduction in assaults at the facility level in either the intervention or comparison sites. Research also suggests that workplace violence prevention legislation may increase employer adoption of workplace violence prevention programs. Two studies compared the workplace violence prevention programs reported by hospitals and psychiatric facilities in California— which enacted a workplace violence prevention law for hospitals in 1993—to facilities in New Jersey, where a similar law did not exist at the time of the study, according to the authors. Information was collected through interviews; facility walk-throughs; and a review of written policies, procedures, and training material. In the first study, researchers compared 116 California hospital emergency departments to 50 New Jersey hospital emergency departments and found that a significantly higher percentage of the California hospitals had written policies and procedures on workplace violence prevention compared to hospitals in New Jersey. In the second study, researchers compared 53 psychiatric units and facilities in California to 30 psychiatric units and facilities in New Jersey and found a higher percentage of California facilities that participated in the study had written workplace violence prevention policies compared to facilities in New Jersey. While New Jersey had a smaller percentage of facilities with written workplace violence prevention policies compared to California, the study found that New Jersey had a higher proportion of facilities (17 of 30 or 71 percent) than in California (25 of 53 or 61 percent) with workplace violence policies that address violence against personnel, patients, and visitors. In a third study, researchers found that rates of assault against employees in selected California hospital emergency departments decreased after enactment of the California law (from 1996 to 2001), whereas the assault rates in selected New Jersey hospital emergency departments increased over this same time period. However, the researchers could not conclude that these differences were attributable to the California law. Compared to workers overall, health care workers face an increased risk of being assaulted at work, often by the patients in their care. Given the high rate of violence committed against health care workers, particularly in in-patient facilities, there is an increasing need to help ensure that health care workers are safe as they perform their work duties. OSHA may issue general duty clause citations to employers who fail to protect their workers from hazardous conditions. While OSHA has increased the number of inspections of workplace violence in health care facilities in recent years, relatively few general duty clause citations resulted from these inspections. Inspectors reported facing challenges in developing the evidence needed to issue these citations, and officials and inspectors from 5 of OSHA’s 10 regions said it would be helpful to have additional information to assist them in implementing the 2011 enforcement directive. Without this additional information, inspectors may continue to experience difficulties in addressing challenges they reported facing in developing these citations. When inspectors do not have enough evidence to issue a general duty clause citation, OSHA inspectors can issue nonbinding hazard alert letters warning employers of a serious safety concern. However, without a policy requiring inspectors to follow-up on hazard alert letters, OSHA will not know whether employers have taken steps to address the safety hazards identified in these letters or whether a follow up inspection is needed. If the situations identified in the letters are left unchecked, health care workers may continue to be exposed to unsafe working conditions that could place them at an increased risk of workplace violence. OSHA has increased its education and enforcement efforts in recent years to raise awareness of the hazard of workplace violence and to help employers make changes that could reduce the risk of violence at their worksites. However, OSHA has done little to assess the results of its efforts. Without assessing the results of these efforts, OSHA is not in a position to know whether the efforts are effective or if additional action, such as development of a specific workplace violence prevention standard, may be needed. To help reduce the risk of violence against health care workers, we recommend that the Secretary of Labor direct the Assistant Secretary for Occupational Safety and Health to take the following actions: Provide additional information to assist inspectors in developing general duty clause citations in cases involving workplace violence. Establish a policy that outlines a process for following up on health care workplace violence-related hazard alert letters. To help determine whether current efforts are effective or if additional action may be needed, such as development of a workplace violence prevention standard for health care employers, the Secretary of Labor should direct the Assistant Secretary for Occupational Safety and Health to: Develop and implement cost-effective ways to assess the results of the agency’s efforts to address workplace violence. We provided a draft of this report to the Departments of Labor (DOL), Health and Human Services (HHS), Justice (DOJ), and Veterans Affairs (VA) for review and comment. We received formal written comments from the DOL and VA, which are reproduced in appendices III and IV. In addition, DOL’s Bureau of Labor Statistics, HHS, and DOJ provided technical comments, which we incorporated as appropriate. In its written comments, DOL’s Occupational Safety and Health Administration (OSHA) said it agreed with all three of our recommendations. With regard to our first recommendation, OSHA stated that the agency is in the process of revising its enforcement directive and developing a training course to further assist inspectors. With regard to our second recommendation, OSHA stated that the agency plans to include standardized procedures for following up on hazard alert letters in its revised enforcement directive. With regard to our third recommendation, OSHA stated that it intends to find a cost effective way to gauge its enforcement efforts to determine whether additional measures, such as developing a workplace violence prevention standard for health care workers, is necessary. In addition, OSHA stated that the agency is reviewing past inspections that resulted in citations or hazard alert letters to evaluate how these cases were developed and what measures may improve the process. In its written comments, VA said it agreed with our findings and three recommendations to OSHA, but suggested the recommendations could be more specific regarding the tools and processes necessary to support OSHA inspectors. For example, VA suggested that OSHA should develop measurable and performance based criteria for workplace violence prevention programs in the unique health care environment. We believe that our recommendations appropriately address our findings. VA also stated that our report did not fully describe the specific processes that the Veterans Health Administration uses to protect employees and patients from dangerous patient behaviors and provided a reference to a study about these processes. In response, we reviewed the study and incorporated its findings in the section of our report on research on the effectiveness of workplace violence prevention programs. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretaries of Labor, Health and Human Services, Justice, and Veterans Affairs, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. Please contact me on (202) 512-7215 or at [email protected] if you or your staff have any questions about this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VII. This report examines: (1) what is known about the degree to which workplace violence occurs in health care facilities and its associated costs, (2) steps OSHA has taken to protect health care workers from workplace violence and assess the usefulness of its efforts, (3) how selected states have addressed workplace violence in health care facilities, and (4) research on the effectiveness of workplace violence prevention programs in health care facilities. For the purposes of this report, we focused on workplace violence against health care workers. We used the National Institute for Occupational Safety and Health’s (NIOSH) definition of workplace violence, which is “violent acts (including physical assaults and threats of assaults) directed toward persons at work or on duty.” We did not focus on other types of violence, such as self-inflicted violence, bullying, or incivility among health care workers. To address these objectives, we: analyzed federal data used by three federal agencies to estimate workplace violence-related injuries and deaths in health care facilities; reviewed related studies identified in a literature review; interviewed federal officials, analyzed enforcement data, and reviewed relevant federal laws, regulations, inspection procedures, and guidelines; reviewed selected state workplace violence prevention laws from nine selected states and visited four of the states where we interviewed state officials, health care employers, and workers; and interviewed researchers and others knowledgeable about workplace violence prevention in health care facilities. We conducted this performance audit from August 2014 to March 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. To identify what is known about the degree to which workplace violence occurs in health care facilities and its associated costs, we reviewed federal data sources used by three federal agencies to estimate workplace violence-related injuries and deaths. The four national datasets we analyzed collect data on different types of workplace violence incidents from different sources (see table 5). The years of data we analyzed varied by data source, depending on the availability of data and the number of cases needed to develop national estimates, but the dates generally were from 2009 through 2013. We reported the estimated rates of nonfatal workplace violence against workers in health care facilities compared to workers overall (all industries combined) for each relevant data source. The rates of nonfatal workplace violence were calculated so that the base (denominator) was the same across all three data sources (the rate per 10,000 workers). We also reported information related to the health care occupations with high nonfatal workplace violence-related injury rates, the type of violence, and the perpetrator of the violence. For consistency purposes, we used 2011 as the common year of data from the three datasets with nonfatal injury data–BLS’s SOII, NIOSH’s NEISS-Work, and BJS’s NCVS–to report the number of nonfatal workplace violence cases in health care settings recorded in each source. The number of cases and rates of nonfatal workplace violence-related injury we report includes violence perpetrated against health care workers by other people. For the BLS SOII data, we reported cases where the workplace violence was caused by another person–intentional, unintentional, or unknown–and excluded cases where the violence was self-inflicted or caused by animals or insects. We focused on the health care industry and reported the BLS data for the three health care industry categories BLS uses: ambulatory health care services, hospitals, and nursing and residential care facilities. The estimated rates and number of workplace violence cases we report from the NCVS represent a subset of the workplace violence cases BJS typically reports. BJS defines assaults as both simple and aggravated, including threats. In addition, BJS defines violence to include all types of physical harm, including sexual assault, robbery, and aggravated and simple assault. We reported assaults, including rape and sexual assault, aggravated assault, and simple assault. We focused on actual assaults because these types of cases are more comparable to the cases we reported from the other federal data sources. We did not include cases of verbal threats of assault or robberies. Health care workers included survey respondents who described their job as working in the medical profession or mental health services field. We did not report data on the costs of workplace violence or the perpetrators of the violence from BJS’s NCVS because of data limitations. The survey asks individuals about the medical expenses they incurred as a result of workplace violence, but our analysis of the data identified 22 cases from 2009 through 2013 where dollar amounts were reported, which was too few cases to produce a national estimate. We decided not to report the perpetrator information from the survey data because BJS officials said that due to a limitation of the survey, it underestimates the number of workplace violence cases in which patients assault workers. Specifically, the variables that describe the relationship of the victim to the perpetrator in the survey are dependent on whether the victim knows the perpetrator. Survey respondents who answer that the perpetrator is a stranger are not subsequently asked if the perpetrator was a patient. Therefore, it is possible that many perpetrators who are patients are coded as strangers. To assess the reliability of the federal data, we reviewed relevant agency documentation, conducted electronic data testing, compared our results to related information reported by the federal agencies, and interviewed agency officials. Based on these reviews, we determined that the data were sufficiently reliable for the purposes of providing information about the number of cases and rates of workplace violence in the health care industry. All national estimates produced from our analysis of the federal data are subject to sampling errors. We express our confidence in the precision of our results as a 95 percent confidence interval. This is the interval that would contain the actual population value for 95 percent of the samples the respective agency could have drawn. For estimates derived from BLS’s SOII data, we used the agency-provided relative standard errors to estimate the associated confidence intervals. For estimates derived from the NIOSH NEISS-Work supplement, we used the multi-stage cluster sample variance estimation methodology detailed in the agency technical documentation to estimate the associated confidence intervals. For estimates derived from NCVS data, BJS provided us with generalized variance function parameters for the 5 calendar years’ worth of survey data, both individually and for all 5 calendar years combined. We used these parameters with formulas for deriving the sampling error of estimated totals and estimated ratios available in the NCVS technical documentation to estimate the associated confidence intervals. The tables below provide the estimates and 95 percent confidence intervals for the data we present in the body of this report. We conducted a literature review to identify research related to the prevalence of workplace violence and associated costs (objective 1) and the effectiveness of workplace violence prevention programs (objective 4). We searched relevant platforms, such as ProQuest Research Library and Social Services Abstracts, to identify studies published in government reports and peer-reviewed journals from January 2004 to June 2015. We also consulted with federal officials and researchers we interviewed to identify related research. See appendix VIII for a bibliography of the studies cited in this report. We screened more than 170 articles and focused our review on U.S. studies identified among this group that met the following additional criteria. First, they were studies based on original data collection rather than reviews of existing literature. Second, they provided quantitative evidence directly related to our research objectives. Lastly, they provided information related to physical violence against health care workers. For example, we eliminated studies that focused solely on verbal abuse, such as bullying or incivility among health care workers. We conducted detailed reviews of the 32 studies that met these initial screening criteria. Our reviews entailed an assessment of each study’s research methodology, including its data quality, research design, and analytic techniques, as well as a summary of each study’s major findings and conclusions. We also assessed the extent to which each study’s data and methods support its findings and conclusions. We eliminated studies that were not sufficiently reliable and methodologically rigorous for inclusion in our review. For example, we eliminated studies with low survey response rates and studies whose findings were based on information collected from a small number of health care workers. We assessed the methodological sufficiency of each study using internal guidance documents. We determined that 17 of the studies were sufficiently reliable and methodologically rigorous for inclusion in our review. To examine the steps OSHA has taken to protect health care workers from workplace violence, we reviewed relevant federal laws and regulations; analyzed OSHA’s guidance, inspection procedures, and enforcement data; and interviewed OSHA officials. We also collected information from all 10 OSHA regional offices on inspector training and how inspectors investigate workplace violence during inspections of health care employers. We analyzed enforcement data from two OSHA databases: the Integrated Management Information System (IMIS) database and the Occupational Safety and Health Information System (OIS) database, which replaced the IMIS system. We analyzed enforcement data from 1991 through April 2015 on federal OSHA inspections, including data on the type of inspection, inspection findings, citations, and penalties. To assess the reliability of the OSHA enforcement data, we reviewed relevant agency documentation, conducted electronic data testing, and interviewed agency officials. Based on these reviews, we determined that the data were sufficiently reliable for our purposes. To examine how selected states have addressed workplace violence in health care settings, we analyzed selected state laws and other information collected from state officials in nine states: California, Connecticut, Illinois, Maine, Maryland, New Jersey, New York, Oregon, and Washington. We focused our review on these nine states because they were the ones we identified from our search of legal databases; related studies; and interviews with federal officials, researchers, and national labor organizations. We did not conduct a nationwide review of state laws or collect information from all 50 states; therefore, other states may have these types of requirements. For the nine states we identified, we reviewed information provided by state officials on state requirements, including laws and regulations, for workplace violence prevention programs in health care settings. We confirmed our descriptions of the selected state requirements with state officials as of December 2015. We did not evaluate the quality or effectiveness of state requirements. We visited four of these states–California, Maryland, New York, and Washington–selected for variation in the length of time their state workplace violence prevention laws have been in place. During our visits, we interviewed state officials from the state’s department of labor and department of health, visited one health care facility in each state, and held discussion groups with health care workers. We visited four health care facilities, including two state psychiatric hospitals, a nursing home, and a hospital with an emergency department. We selected these types of facilities because BLS data indicate that most workplace violence incidents occur in hospitals and nursing and residential care facilities. During each of the health care facility visits, we met with security, management, and health care workers. We also participated in a guided tour of the facility. The information we obtained from the states and our site visits is not generalizable. We conducted five nongeneralizable discussion groups with health care workers to learn about their experience with workplace violence. These discussion groups were organized by labor organization officials that represent health care workers. The discussions occurred in Baltimore, Maryland; Los Angeles, California; New York, New York; Seattle, Washington; and Washington, D.C. These locations were selected to align with our selected site visit states. The labor organization officials invited health care workers who had been verbally and/or physically assaulted while performing their duties at work. A total of 54 health care workers participated in the discussion groups. The participants worked in various health care practice areas, including home health, acute care, mental health, and residential care. We asked the health care workers about their experience with workplace violence, whether they received workplace violence prevention training, the factors they consider when deciding whether to report an incident to their employer, the factors that contribute to workplace violence, and what could be done to reduce these incidents. We used their responses to identify themes and illustrative examples. Methodologically, discussion groups are not designed to (1) demonstrate the extent of a problem or to generalize results to a larger population, (2) develop a consensus to arrive at an agreed-upon plan or make decisions about what actions to take, or (3) provide statistically representative samples or reliable quantitative estimates. Instead, they are intended to generate in-depth information about the reasons for the discussion group participants’ attitudes on specific topics and to offer insights into their experiences. Because of these limitations, we did not rely entirely on the information collected from the discussion groups, but rather used several different methodologies to corroborate and support our findings. In addition to the contact named above, Mary Crenshaw (Assistant Director), Cathy Roark (Analyst-in-Charge), Hiwotte Amare, Carl Barden, James Bennett, Rachael Chamberlin, David Chrisinger, Sarah Cornetto, Lauren Gilbertson, LaToya King, Linda Kohn, Joel Marus, Ashley McCall, Jean McSween, Kathy Leslie, Terry Richardson, Stacy Spence, Walter Vance, and Kate van Gelder made significant contributions to this report. Arnetz, J. E., L. Hamblin, J. Ager, M. Luborsky, M.J. Upfal, J. Russell, and L. Essenmacher. “Underreporting of Workplace Violence: Comparison of Self-Report and Actual Documentation of Hospital Incidents,” Workplace Health & Safety, vol. 63, no. 5 (2015): 200-210. Arnetz, J. E., L. Hamblin, L. Essenmacher, M. J. Upfal, J. Ager, and M. Luborsky. “Understanding patient-to-worker violence in hospitals: A qualitative analysis of documented incident reports,” Journal of Advanced Nursing, vol. 71, no. 2 (2015): 338-348. Bride, B. E., Y.J. Choi, I.W. Olin, and P.M. Roman. “Patient Violence Towards Counselors in Substance Use Disorder Treatment Programs: Prevalence, Predictors, and Responses,” Journal of Substance Abuse Treatment (2015). Campbell, J.C., J.T. Messing, J. Kub, J. Agnew, S. Fitzgerald, B. Fowler, D. Sheridan, C. Lindauer, J. Deaton, and R. Bolyard. “Workplace Violence: Prevalence and Risk Factors in the Safe at Work Study,” Journal of Occupational and Environmental Medicine, vol. 53, no. 1 (2011): 82-89. Casteel, C., C. Peek-Asa, M. Nocera, J.B. Smith, J. Blando, S. Goldmacher, E. O’Hagan, D. Valiante, and R. Harrison. “Hospital Employee Assault Rates Before and After Enactment of the California Hospital Safety and Security Act,” Annals of Epidemiology, vol. 19, no. 2 (2009): 125-133. Gillespie, G. L., D.M. Gates, T. Kowalenko, S. Bresler, and P. Succop. “Implementation of a Comprehensive Intervention to Reduce Physical Assaults and Threats in the Emergency Department,” Journal of Emergency Nursing, vol. 40, no. 6 (2014): 586-591. Hanson, G. C., N.A. Perrin, H. Moss, N. Laharnar, and N. Glass. “Workplace violence against homecare workers and its relationship with workers health outcomes: a cross-sectional study,” BMC Public Health, vol. 15, no. 11 (2015): 1-13. Hodgson, M. J., R. Reed, T. Craig, F. Murphy, L. Lehmann, L. Belton, and N. Warren. “Violence in Healthcare Facilities: Lessons from the Veterans Health Administration,” Journal of Occupational and Environmental Medicine, vol. 46, no. 11 (2004): 1158-1165. Hodgson, M. J., D.C. Mohr, D.J. Drummond, M. Bell, and L. Van Male. “Managing Disruptive Patients in Health Care: Necessary Solutions to a Difficult Problem,” American Journal of Industrial Medicine, vol. 55 (2012): 1009-1017. Kelly, E. L., A.M. Subica, A. Fulginiti, J.S. Brekke, and R.W. Novaco. “A cross-sectional survey of factors related to inpatient assault of staff in a forensic psychiatric hospital,” Journal of Advanced Nursing, vol. 71, no. 5, (2015): 1110-1122. Kowalenko, T., D. Gates, G.L. Gillespie, P. Succop, and T.K. Mentzel. “Prospective study of violence against ED workers,” American Journal of Emergency Medicine, vol. 31 (2013): 197-205. Lipscomb, J., K. McPhaul, J. Rosen, J. Geiger Brown, M. Choi, K. Soeken, V. Vignola, D. Wagoner, J. Foley, and P. Porter. “Violence Prevention in the Mental Health Setting: The New York State Experience,” Canadian Journal of Nursing Research, vol. 38, no. 4 (2006): 96-117. Mohr, D. C., N. Warren, M.J. Hodgson, and D.J. Drummond. “Assault Rates and Implementation of a Workplace Violence Prevention Program in the Veterans Health Care Administration,” Journal of Occupational and Environmental Medicine, vol. 53, no. 5, (2011): 511-516. Peek-Asa, C., C. Casteel, V. Allareddy, M. Nocera, S. Goldmacher, E. O’Hagan, J. Blando, D. Valiante, M. Gillen, and R. Harrison. “Workplace Violence Prevention Programs in Hospital Emergency Departments,” Journal of Occupational and Environmental Medicine, vol. 49, no. 7 (2007): 756-763. Peek-Asa, C. C. Casteel, V. Allareddy, M. Nocera, S. Goldmacher, E. O’Hagan, J. Blando, D. Valiante, M. Gillen, and R. Harrison. “Workplace Violence Prevention Programs in Psychiatric Units and Facilities,” Archives of Psychiatric Nursing, vol. 23, no. 2 (2009): 166-176. Pompeii, L. A., A.L. Schoenfisch, H.J. Lipscomb, J.M. Dement, C.D. Smith, and M. Upadhyaya. “Physical Assault, Physical Threat, and Verbal Abuse Perpetrated Against Hospital Workers by Patients or Visitors in Six U.S. Hospitals,” American Journal of Industrial Medicine (2015): 1-11. Speroni, K.G., T. Fitch, E. Dawson, L. Dugan, and M. Atherton. “Incidence and Cost of Nurse Workplace Violence Perpetrated by Hospital Patients or Patient Visitors,” Journal of Emergency Nursing, vol. 40, no. 3 (2014): 218-228.

Workplace violence is a serious concern for the approximately 15 million health care workers in the United States. OSHA is the federal agency responsible for protecting the safety and health of the nation's workers, although states may assume responsibility under an OSHA-approved plan. OSHA does not require employers to implement workplace violence prevention programs, but it provides voluntary guidelines and may cite employers for failing to provide a workplace free from recognized serious hazards. GAO was asked to review efforts by OSHA to address workplace violence in health care. GAO examined the degree to which workplace violence occurs in health care facilities and OSHA's efforts to address such violence. GAO analyzed federal data on workplace violence incidents, reviewed information from the nine states GAO identified with workplace violence prevention requirements for health care employers, conducted a literature review, and interviewed OSHA and state officials. According to data from three federal datasets GAO reviewed, workers in health care facilities experience substantially higher estimated rates of nonfatal injury due to workplace violence compared to workers overall. However, the full extent of the problem and its associated costs are unknown. For example, in 2013, the most recent year that data were available, private-sector health care workers in in-patient facilities, such as hospitals, experienced workplace violence-related injuries requiring days off from work at an estimated rate at least five times higher than the rate for private-sector workers overall, according to data from the Department of Labor (DOL). The number of nonfatal workplace violence cases in health care facilities ranged from an estimated 22,250 to 80,710 cases for 2011, the most recent year that data were available from all three federal datasets that GAO reviewed. The most common types of reported assaults were hitting, kicking, and beating. The full extent of the problem and associated costs is unknown, however, because according to related studies GAO reviewed, health care workers may not always report such incidents, and there is limited research on the issue, among other reasons. DOL's Occupational Safety and Health Administration (OSHA) increased its education and enforcement efforts to help employers address workplace violence in health care facilities, but GAO identified three areas for improvement in accordance with federal internal control standards. Provide inspectors additional information on developing citations . OSHA has not issued a standard that requires employers to implement workplace violence prevention programs, but the agency issued voluntary guidelines and may cite employers for hazards identified during inspections—including violence in health care facilities—under the general duty clause of the Occupational Safety and Health Act of 1970. OSHA increased its yearly workplace violence inspections of health care employers from 11 in 2010 to 86 in 2014. OSHA issued general duty clause citations in about 5 percent of workplace violence inspections of health care employers. However, OSHA regional office staff said developing support to address the criteria for these citations is challenging and staff from 5 of OSHA's 10 regions said additional information, such as specific examples of issues that have been cited, is needed. Without such additional information, inspectors may continue to experience difficulties in addressing the challenges they reported facing. Follow up on hazard alert letters . When the criteria for a citation are not met, inspectors may issue warnings, known as hazard alert letters. However, employers are not required to take corrective action in response to them, and OSHA does not require inspectors to follow up to see if employers have taken corrective actions. As a result, OSHA does not know whether identified hazards have been addressed and hazards may persist. Assess the results of its efforts to determine whether additional action, such as development of a standard, may be needed . OSHA has not fully assessed the results of its efforts to address workplace violence in health care facilities. Without assessing these results, OSHA will not be in a position to know whether its efforts are effective or if additional action may be needed to address this hazard. GAO recommends that OSHA provide additional information to assist inspectors in developing citations, develop a policy for following up on hazard alert letters concerning workplace violence hazards in health care facilities, and assess its current efforts. OSHA agreed with GAO's recommendations and stated that it would take action to address them.

You are an expert at summarizing long articles. Proceed to summarize the following text: SCSEP evolved from Operation Mainstream, which trained and employed chronically unemployed adults under the Economic Opportunity Act of 1964. In 1965, Operation Mainstream provided funding to the Green Thumb organization, at the time a nonprofit affiliate of the National Farmers Union, to conduct a pilot training and employment program for economically disadvantaged older workers in several rural areas. Green Thumb was thus the first of the 10 nonprofit national sponsors that today administer most of the SCSEP funds. During the next 13 years (1965-1978), legislative and administrative actions instituted most of the basic aspects of today’s SCSEP: responsibility for the program was moved to the Department of Labor; the program was made part of the OAA and given the goal of providing subsidized employment in community service organizations to economically disadvantaged older Americans; all grantees were asked to attempt to place at least 10 percent of their program enrollees in unsubsidized jobs (the goal has been 20 percent since 1985); and 8 of the eventual 10 national sponsors, as well as most state governments, were made grantees for the program. Of the current 10 national sponsors, 5 were added because of OAA amendments and other congressional guidance to Labor, which directed that Labor add sponsors oriented toward certain ethnic groups with high concentrations of the elderly poor. Such direction explains Labor’s funding, as national sponsors, two African American organizations (1978) and three other organizations: one representing Hispanic Americans (1978); one, American Indians (1989); and one, Asian Americans (1989). The legislation, however, requires all sponsors to provide all SCSEP applicants an equal opportunity to participate in the program regardless of race or nationality. The OAA contains several provisions for Labor’s allocation of SCSEP funds. The hold harmless provision requires the Secretary of Labor to reserve for the national sponsors a funding amount sufficient to maintain the 1978 activity level. Any balance of the appropriation over the hold harmless amount is to be distributed to the sponsors and state governments mainly on an “equitable distribution” basis—that is, in accordance with the state-by-state distribution of persons 55 years old or older, adjusted for per capita income. A minor limitation on such a distribution is the requirement for a minimum allocation for each state, a provision designed to protect the smaller states. Another provision requires that the portion of any appropriation that exceeds the 1978 funding level in subsequent years will be split—55 percent for states and 45 percent for the national sponsors.However, the “55/45” provision—designed to provide state governments more parity with the national sponsors—has never been implemented. Every year since 1978, appropriations acts have overridden the 55/45 provision. These statutes have required that no more than 22 percent of the SCSEP appropriation be allocated to the state governments. At least 78 percent must be allocated to the national sponsors. A third provision that also still applies is the requirement for an equitable distribution of funds among areas within each state. The SCSEP appropriation for the 1994 program year ($410.5 million) accounted for about 28 percent of all OAA funds. All but two of the OAA programs are administered by the Department of Health and Human Services. Labor administers SCSEP through its Employment and Training Administration (ETA). Like other OAA programs, SCSEP’s authorization expired at the end of fiscal year 1995. The Congress is reviewing proposals for reauthorization. To receive a SCSEP grant, a national sponsor or state government must agree to provide a match, in cash or in kind, equal to at least 10 percent of the grant award. Many state governments make their match in the form of cash contributions. The national sponsors, on the other hand, normally provide in-kind matches in the form of donated office space, staff time, equipment, and the like. The in-kind matches for most national sponsors come not from the sponsors’ own resources but from those of the community service host agencies, where the SCSEP enrollees actually work. These host agencies typically are local libraries, nutrition centers, parks, and similar public service entities. National sponsors and state governments use the SCSEP grants to finance SCSEP part-time jobs in host agencies. The cost of such a job, or enrollee position—which generally must include at least 20 hours of work a week—is the amount determined sufficient to fund (1) an enrollee’s minimum wages, benefits, training, and incidental expenses for up to 1,300 hours a year in the program and (2) the associated administrative expenses. This cost amount, termed the “unit cost” by Labor, is adjusted periodically by Labor in consultation with the Office of Management and Budget (OMB). The unit cost is currently $6,061. Labor divides each year’s SCSEP appropriation by the unit cost amount to determine how many positions are available. Program enrollees, who must be 55 or older and earn no more than 125 percent of the federal poverty level, are paid the federal or local minimum wage—whichever is higher. For the 1994 program year, funding permitted the establishment of about 65,000 positions nationwide. An enrollee may leave a program position for such reasons as illness or acceptance of an unsubsidized job. Thus, during the 1994 program year, about 100,000 enrollees occupied the 65,000 positions; about three-quarters of these enrollees were women. Often, in the administration of SCSEP grants, entities other than the national sponsors and state governments participate as intermediaries between the sponsors and the host agencies. Some of these entities are municipalities; many are Area Agencies on Aging, organizations the state designates to plan and provide services to the elderly. These intermediaries sometimes enter into agreements with states and national sponsors as subgrantees to find specific host agencies for program enrollees. Of the 1994 program year appropriation, Labor allocated the national sponsors $320.2 million (78 percent) and the states and territories $90.3 million (22 percent). The 10 national sponsors that received grant awards were, as in previous years, the following: American Association of Retired Persons (AARP), Associacion Nacional Pro Personas Mayores (ANPPM), Green Thumb, National Asian Pacific Center on Aging (NAPCA), National Caucus and Center on Black Aged (NCCBA), National Council on Aging (NCOA), National Council of Senior Citizens (NCSC), National Indian Council on Aging (NICOA), National Urban League (NUL), and U.S. Forest Service (USFS). National sponsors operate locally through (1) subgrant agreements with local organizations, such as agencies on aging or community groups, and (2) local affiliates. Appendix II provides a short profile of the SCSEP activities of each national sponsor. Whenever the SCSEP program has a new appropriation level, Labor conducts with the national sponsors a meeting known as the “melon cutting.” At these meetings, Labor makes known its allocations to each of the national sponsors and presides over discussions in which national sponsors often trade enrollee positions in various areas. Sometimes, a representative from the National Association of State Units on Aging (NASUA) is invited to express states’ concerns, but the states have no formal control over the distribution of positions. As seen in figure 1, program year 1994 grant amounts to the national sponsors varied widely: the $102.5 million Green Thumb grant was the largest, and the $5.1 million grants each to the NICOA and NAPCA were the smallest. This variation partially reflects the differences in time that these organizations have participated in the program. With the exception of Alaska, Delaware, and Hawaii—which operate their own SCSEP programs and have no national sponsors—each state has at least two national sponsors. Fourteen states have six or more national sponsors. The District of Columbia and Puerto Rico also have SCSEP programs and national sponsors, but none of the U.S. Territories has. (See fig. 2.) As seen in figure 3, four of the sponsors operate in over half of the states; five of the sponsors operate in 16 or fewer states. Labor’s regulations allow SCSEP funds to be provided to eligible organizations through grants, contracts, or other agreements pursuant to the purposes of title V of the OAA. Department officials have chosen to fund the program through noncompetitive grants. The regulations specify that grants are the “appropriate instrument when the Department does not need to exercise considerable direction and control over the project.” Labor provides annual grant applications only to national organizations that currently sponsor SCSEP. Labor’s action is consistent with the statute and with expressions of intent by the Senate Appropriations Committee. Labor officials rely on annual Appropriations Committee report language such as the following from a recent Senate Appropriations report that seems to indicate support for the current sponsors: “It is the intent of the Committee that the current sponsors continue to build upon their past accomplishments.” In addition, the OAA, although it permits awards to other entities, creates a specific preference for awards to “national organizations and agencies of proven ability in providing employment services . . .” Labor’s procedures require that noncompetitive grants over $25,000 be included in an annual procurement plan that is forwarded for approval by the responsible Assistant Secretary to the Procurement Review Board (PRB). The PRB, whose members include designees of the Chief Financial Officer and the Solicitor, as well as the Director of the Division of Procurement and Grant Policy, is “to serve as a senior level clearinghouse to review proposed noncompetitive and major acquisitions.” The PRB advises whether competition is appropriate for each acquisition and whether long-term relationships with the same organizations are consistent with Labor policies. However, Labor exempts title V awards and does not involve the PRB in reviewing the program’s annual grant renewal decisions. Labor officials did not adequately explain the reason for this exemption. The hold harmless provision of the OAA’s title V, in effect, severely limits Labor’s ability to allocate funds among states in a way that ensures equitable distribution, that is, in accordance with the state-by-state distribution of persons 55 years old and older, adjusted to give greater weight to economically disadvantaged areas and persons. The result is a pattern of too many SCSEP positions in some states and too few in other states relative to their eligible populations. In addition, within states, Labor’s administrative inaction has permitted a continuing pattern of overserved and underserved counties. In applying the OAA’s hold harmless provision, Labor officials establish a reserve amount from each year’s SCSEP appropriation, delineated by state subtotals, to finance the 1978 level of national sponsor positions in each state. So, if the national sponsors together administered 100 positions in a certain state in 1978, they would receive thereafter, from a Labor set-aside of appropriated funds, enough funds to finance at least 100 positions in that state, assuming that the appropriation level is high enough to finance the 1978 total number of positions. Because the 1978 distribution of SCSEP positions did not, and still does not, correspond to the size of each state’s economically disadvantaged elderly population, the hold harmless provision in effect prevents a fully equitable distribution. For the 1994 program year, for example, $234.5 million of the total appropriation of $410 million was subject to the hold harmless provision and distributed accordingly. Had the $234.5 million been distributed in accordance with current age and per capita income data, every state would have received a different allocation and, in many cases, the increase or decrease would have been substantial. A total of 25 states would have gained or lost at least $500,000 each; in 13 of those states, the amount would have been over $1 million. Florida would have gained the most, $4.2 million, and New York would have lost the most, $3.9 million.(See app. III.) The hold harmless provision could be modified in two ways. The relevant provision states that the Secretary of Labor will reserve for the sponsors’ grants or contracts sums necessary to maintain at least their 1978 level of activities “under such grants or contracts.” Labor interprets this provision to require a state-by-state distribution of positions based on the sponsors’ 1978 activities. One option is to amend the hold harmless provision to specifically authorize Labor to base the distribution on the national sponsors’ 1978 total positions nationwide, rather than on the levels in each state. If the hold harmless provision were so amended, Labor would still be required to provide sufficient grants to the national sponsors to finance their 1978 number of total positions. But it would not necessarily be bound to the 1978 number of sponsor positions in any state. With the amendment, Labor could distribute all of the SCSEP dollars in accordance with the pattern of need, as measured by each state’s 55 and older population size and per capita income. Another approach would be to repeal the entire hold harmless provision. This would remove the authorizing legislation’s protection of the national sponsors’ historic base of positions and permit Labor officials to allocate funds according to need. Such a change could significantly shift funding from the national sponsors to the states. In some states, SCSEP positions may not be distributed among areas according to the equitable distribution provision of the OAA’s title V.Though the national sponsors administer about 80 percent of the enrollee positions, both states and national sponsors are responsible for equitably distributing enrollee positions. Deficiencies in equitable distribution, however, are evident in many cases when comparing a county-by-county pattern of SCSEP positions in a state with the county-by-county pattern of state residents who are eligible for participation as SCSEP enrollees. For such a comparison, we reviewed the states’ equitable distribution reports for 1989 and 1994. For example, in California, Illinois, and New York, we found that most counties had either too many or too few positions compared with the number that the distribution of eligible people would indicate. In California, for example, for program year 1994, 51 of the 59 counties had too many or too few positions. In some cases, the excess or shortfall was five positions or fewer, but, in several cases, the amount was greater. Fourteen of the counties had excesses or shortfalls of at least 15 positions. Orange County had a shortfall of 70 positions. Humboldt and San Francisco Counties each had an excess of 32 positions. State government and national sponsor officials offer several explanations for the sponsors’ not always distributing their SCSEP positions within a state strictly according to the equitable distribution guidance. First, the national sponsors are sometimes restricted geographically. In New York state, USFS, for example, does not enter such underserved areas as Brooklyn and the Bronx because they are urban communities and the Forest Service restricts its activities to national forests. Second, national sponsors with an ethnic focus are reluctant to serve areas that do not have significant numbers of their constituent ethnic group. Third, certain national sponsors, to save on administrative costs, may prefer to concentrate SCSEP positions in fewer locations, increasing the ratio of program enrollees to administrators. Fourth, certain national sponsors may be reluctant to shift positions from an overserved area where they have had long working relationships with subgrantees. In the case of the states, some have distributed their positions through existing administrative structures, without sufficiently considering the distribution of eligible people. Also, some states may have tried to achieve an equitable distribution among political jurisdictions rather than among eligible populations. Finally, some states have not adequately staffed their SCSEP program efforts or were not sufficiently active in coordinating distribution activities with national sponsors. In most states, the state government as well as several national sponsors operate SCSEP programs. Thirty-six states have four or more sponsors; while 14 states have six or more. In our talks with officials in 28 state governments, several expressed concern about duplicative national sponsor programs in certain areas, some of which also overlapped state government SCSEP programs. For example, in a northeastern state where eight national sponsors had been operating, a ninth sponsor was allowed to begin a SCSEP project in an area that, according to state officials, was already overserved. In addition, the state officials said, some national sponsors in the area were already using television spots to attract people to the program. In a southern state, state officials could not dissuade two national sponsors from operating in a city’s downtown area already served by the state’s SCSEP office. National—and some state—sponsors defend their remaining in overserved locations, citing many reasons for being in the communities where they are. However, Labor officials acknowledge that one consequence of several grantees operating in the same area is that program enrollees in proximity may receive different wages and benefits depending on the policies of the grantee organization. In a mid-Atlantic state, for example, the state unit on aging administers its own SCSEP positions as well as those of a national sponsor. The program that the enrollee is placed in—whether state or nationally sponsored and, consequently, the benefits package the enrollee receives—can depend on the time of day the enrollee applied for the program. For example, a morning applicant might be placed in the state program with a benefits package including federal holidays, sick leave, and annual leave benefits; the afternoon applicant might be placed in a national sponsor’s program with a different benefits package. Labor endorses an unwritten agreement among national sponsors that is intended to prevent enrollees from different sponsors from working at the same local host agency. The agreement is to help avoid situations in which host agencies or sponsors must explain why enrollees performing the same job tasks are compensated with different benefits and, perhaps, even wages. The drawback of this agreement, however, is that an applicant may be denied access to a particular host agency that could provide the best job and training experience for that person. Labor requires states and the national sponsors to ensure efficient and effective coordination of programs under this title. One goal of this coordination is to promote an equitable distribution of in-state funds. National sponsors are required to notify relevant state government officials of their plans to establish projects; state officials are to review and comment on such plans; and Labor is to review proposed project relocations and the distribution of projects within states. As part of its overview authority, Labor also has required states to compile annual distribution reports showing which of their counties are overserved or underserved, according to the size of their eligible populations. Most importantly, Labor is to make—limited by the OAA’s hold harmless and minimum funding provisions of title V—an equitable distribution of funds among and within states. It appears that Labor has taken few actions to more equitably distribute national sponsor activities within the states. The 1994 problems of underserved and overserved counties in California, Illinois, and New York were essentially the same ones that those states experienced 5 years earlier, in 1989. Labor officials acknowledge that they stop short of forcing the national sponsors to reallocate their positions, preferring instead to encourage sponsors to shift positions to underserved areas when enrollees vacate positions in overserved areas. State officials repeatedly pointed out that they lack the authority, under law or Labor regulation, to require the national sponsors to reallocate their positions to underserved counties. Labor could do more to encourage more equitably distributed national sponsor activities within a state. In extreme cases, Labor could increase national sponsors’ funding levels, rewarding sponsors willing to establish positions in underserved areas. Such encouragement would not contradict the hold harmless provision, which only applies among the states rather than within a state. Indeed, such encouragement could increase the effectiveness of the national sponsor role in the program. Another option for more equitably distributing SCSEP positions within the states is to increase the percentage of funds dedicated to state governments from each year’s appropriation from the current 22 percent to a higher percentage. If the Congress were to stop enacting the 22-percent limit on state funding, the OAA provision requiring that state governments receive 55 percent of all funding above the 1978 hold harmless amount would take effect. At our request, Labor ran a simulated allocation of the program year 1994 funding formula without the “78/22” cap in place. Under that simulation, the funds available to the states for program year 1994 would have increased from $90 million to about $155 million. National sponsor funding would have decreased from $320 million to $255 million (see app. IV). With their statewide administrative structures and additional funds, state governments might have more flexibility in serving their eligible populations or a greater incentive than the national sponsors to administer positions in underserved areas. In the three states where the state government administers 100 percent of the SCSEP grant money, comparatively few counties are underserved or overserved. For program year 1994, each of Delaware’s three counties had an equitable distribution of positions; each of Hawaii’s five counties had an equitable number of positions; and Alaska’s six geographic areas used for the program had close to equitable numbers. For example, one area of Alaska had 46 positions instead of the equitable number of 43; another had 34 instead of 36. These three states, however, are not typical in their geographic and population features. Increasing the states’ share of the SCSEP funds would most likely not result in a dramatically different profile of enrollees by ethnicity or sex. In the state programs, on average, the percentages of enrollees by ethnicity and sex were about the same as those in the national sponsor programs for the reporting period ending in June 1994. For example, in the state programs, 22 percent of the enrollees were black and 23 percent were male; the comparable percentages in the national sponsor programs were 24 percent black and 29 percent male. Congressional hearings earlier in the program’s history questioned national sponsors’ spending on their administration. In our review, we found that, in program year 1994, eight of the national sponsors shifted some administrative costs to another cost category, and therefore the true administrative costs exceeded the 15-percent statutory limit. This problem appears to be less widespread in the state-administered SCSEP programs. Each of the national sponsors has its own approach to administration. Some of the sponsors perform all of the administrative functions of the program directly. Others subcontract or delegate aspects of administration to other organizations or state agencies. In addition, all of the sponsors fund at least a portion of national headquarters operations from SCSEP grant funds. In 1994, to support about 850 full-time administrative positions, national sponsors budgeted about $6 million for travel and more than $9 million for rental and other office expenses. The 1976 SCSEP regulations permit sponsors to spend their SCSEP grant funds in three categories: administration, enrollee wages and benefits, and other enrollee costs. The OAA has established a 13.5-percent limit for administrative expenses. This limit may increase to 15 percent with a waiver from the Secretary of Labor. “. . . salaries, wages and fringe benefits for project administrators; costs of consumable office supplies used by project staff; costs incurred in the development, preparation, presentation, management and evaluation of the project; the costs of establishing and maintaining accounting and management information systems; costs incurred in the establishment and maintenance of advisory councils; travel of project administrators; rent, utilities, custodial services and indirect costs allowable to the project; training of staff and technical assistance to subproject sponsor staff; costs of equipment and material for use by staff; and audit services.” “enrollee physical examinations; transportation; enrollee training; special job or personal counseling for enrollees; and incidental expenses necessary for enrollee participation, such as work shoes, safety eyeglasses, uniforms, tools, and similar items.” Using application documents that grantees submitted for Labor’s approval—updated with some actual expense data not initially available for the period under review—we examined national sponsors’ budget documents for program year 1994 to see (1) how costs were apportioned among the categories and (2) whether administrative cost limits were being adhered to. We also discussed administrative cost matters with Labor staff and national sponsor officials. The results showed that eight of the sponsors had budgeted administrative expenses in excess of the limit by over $20 million, by classifying some administrative expenses as other enrollee costs and not including them under administrative expenses. The following case illustrates this practice: One national sponsor’s budget documents showed about $14 million for administrative expenses, placing the organization under the 13.5-percent limit. However, our examination identified other amounts, classified in the documents as other enrollee costs, that should have been treated as administrative costs. The sponsor classified as other enrollee costs, rather than as administrative costs, all salaries and benefits paid to its own field staff, including area supervisors, managers of field operations, and program development specialists ($5.9 million), and field staff’s travel ($1.8 million). If combined with the $14 million in acknowledged administrative costs, these expenses would raise total administrative costs for this grantee to more than 20 percent of the grant amount. We similarly recomputed the administrative costs for the other sponsors who understated these expenses (by classifying some as other enrollee costs). We found that the administrative percentages of the eight national sponsors that exceeded the 15-percent administrative expense limit ranged from 16.8 to 23 percent. Appendix V details the administrative expenses of each national sponsor for the 1994 program year. We also reviewed the other enrollee costs average percentages for the state governments in the SCSEP program and compared them with the national sponsors. For the state governments, the average, as a percentage of total grant amount, was about 6 percent in the 1994 program year; for the national sponsors, the comparable figure was about 8 percent. However, 23 state governments recorded other enrollee costs ranging from 7.0 to 13.2 percent. Labor’s SCSEP officials could better identify such administrative expense problems if Labor required that grantees provide better documentation of their administrative expenses, particularly those in the category of other enrollee costs. Because of grantees’ limited or vague reporting, Labor officials cannot adequately explain the other enrollee cost entries in the grantees’ application materials. For example, one grantee provided grant documentation that included an item shown as “other” in the category of other enrollee costs. This item, totaling $1,084,049, was delineated as $55,799 for the sponsor and $1,028,250 for a subgrantee, with no further information provided. At our request, Labor asked the sponsor for further documentation of this item. This documentation indicated that the sponsor and subgrantee expenses included costs that Labor could question for not being classified as administration, including $51,170 for postage, $132,874 for telephone service, and $522,494 for rent. From 1985 through the first half of 1995, the sponsors relied on grant provisions that incorporated proposed regulations instead of the 1976 regulations. These proposed regulations, published in July 1985, and never finalized, expanded the definition of other enrollee costs to permit several categories of costs that the 1976 regulations did not permit. These included expenses for orientation of host agencies, development of appropriate community service employment assignments, and “the costs associated with providing those functions, services, and benefits not categorized as administration or enrollee wages and fringe benefits.”Labor officials acknowledge that Labor operated the SCSEP program without formally amending the 1976 regulations. After the 1987 amendments to the OAA included the 1976 regulations’ 15-percent administrative expense limit as part of the law, Labor’s decision—to use as criteria the 1985 draft regulations—permitted sponsors to improperly characterize administrative expenses as other enrollee costs. Labor’s regulations permit sponsors to include in their administrative costs “. . . indirect costs allowable to the project.” A sponsor may use SCSEP grant money to pay for some of its general operating expenses provided that the sponsor can demonstrate that a part of those expenses indirectly supports SCSEP activities. Although our review concentrated on administrative issues other than indirect costs, Labor’s Office of Inspector General (OIG) has identified a continuing problem of improper indirect cost charges in the program. Under the policy of OMB Circular A-122, Labor’s Office of Cost Determination periodically negotiates indirect cost rates with the national sponsors. Each sponsor’s rate is the percentage of defined general operating costs—termed the “base”—that may be charged against its SCSEP grant as a SCSEP-related administrative expense. The categories of general operating expenses that may be included in the base are defined in each sponsor’s grant agreement with Labor. These categories vary somewhat among sponsors, but they typically include such expenses as executive salaries, payroll, accounting, personnel, depreciation, telephone, travel, and supply expenses. For example, one sponsor’s grant agreement with Labor specified that a rate of 35.21 percent may be applied against the sponsor’s base, defined as “Total direct costs excluding capital expenditures . . . membership fund costs, flow-through funds and program participant costs.” This means that 35.21 percent of the sponsor’s base expenses may be funded with SCSEP money, as long as that amount does not exceed the overall limit on the use of SCSEP grant money for administrative expenses. As shown in table 1, for the 1994 program year, the eight national sponsors that charge indirect costs have approved rates that ranged from 4.95 to 108.1 percent. However, exact comparisons of the rates may not be meaningful because these rates are applied to the sponsors’ different bases. SCSEP grantees have sometimes used the grant funds to pay for questionable indirect costs. One national sponsor charged to the grant more than $21,000 in indirect costs “. . . to promote employee morale and productivity including birthday, holiday and other cards, flowers, and expenses related to the company picnic and other employee morale events.” This was in addition to approximately $32,000 budgeted from direct costs for “. . . the purchase of refrigerators, microwaves, toaster ovens, and other appliances reasonably necessary to promote a positive work environment, and the purchase of bottled water for employees to promote health . . .” OMB guidance allows reasonable expenditures for such items, and we found no record of Labor’s objection to these expenditures. Sometimes, the use of SCSEP dollars for indirect costs involves considerably larger sums. On more than one occasion, Labor’s OIG questioned the propriety of a national sponsor’s use of SCSEP funds to pay for some of its operating expenses. One OIG report stated that the sponsor “. . . improperly charged to its indirect cost pool salaries and fringe benefits of employees of those divisions and offices responsible for [the national sponsor’s] own activities, such as fundraising and membership, and other non-Federal projects.” The questioned costs for program years 1988 to 1990 totaled over $700,000. The OIG stated, and program officials acknowledged, that if the amounts were upheld as improper, the national sponsor had no way of paying the money back. Yet for 3 years, while the dispute advanced through an administrative appeals process, Labor continued to award the sponsor SCSEP grants, with only a small modification to the sponsor’s indirect cost rate. A Labor official explained that the Department wanted to continue the funding while the matter was being adjudicated. However, the national sponsor and Labor decided to settle the matter before final adjudication: they agreed, early in 1995, that the sponsor would pay $400,000 (in full settlement of the $700,000 of disallowed costs) to Labor, without interest, over a 4-year period. The $400,000 is to be repaid from the sponsor’s nonfederal income in fixed quarterly installments: four payments of $12,500 in year 1, $18,750 in year 2, $31,250 in year 3, and $37,500 in year 4. At no time during the dispute did Labor’s program officials impose a cutback in total administrative spending, even a small one. Audits for additional program years are in process. Along with SCSEP’s goals of providing training and subsidized jobs, Labor has set for each sponsor a goal of placing at least 20 percent of the enrollees in unsubsidized jobs each program year. During our review, we noted that Labor had not clearly stated in any of its regulations the meaning of an unsubsidized placement. This made it virtually impossible for Labor to know how successful the sponsors are in achieving that objective. Without such a definition, the sponsors may interpret unsubsidized placement in many ways. One sponsor has defined it as one in which a program enrollee spends a specified minimum time and then moves into a paying, non-SCSEP job and holds it for a specified minimum time. Other sponsors have had no time requirements for post-SCSEP job retention or for program participation for claiming an unsubsidized placement. Labor officials agreed that determining SCSEP job placement success was a problem and initiated efforts to produce a useful definition. As we were concluding our review, Labor issued a directive defining unsubsidized placement for SCSEP purposes. States’ populations of those 55 years of age and older have changed since 1978. The statutory hold harmless provision locks in 1978 funding levels that do not correspond to each state’s eligible 55 and older population, adjusted by income; this limits Labor’s ability to equitably distribute SCSEP positions among the states. Consequently, some states in the SCSEP program are overserved and some are underserved. Labor could more equitably distribute SCSEP funds among states if the OAA’s title V hold harmless provision were amended or eliminated. Amending it to permit Labor to hold harmless only the sponsors’ 1978 nationwide total number of positions, rather than the 1978 funding level in each state, would enable Labor to (1) depart from the 1978 state-by-state pattern and (2) allot the funds so as to correct the problem of overserved and underserved states. Repealing the hold harmless provision, although an option, could significantly change the program’s character if it resulted in major shifts of funding allocations from national sponsors to state governments. Similarly, within states, the distribution of SCSEP funds leaves some counties overserved and some underserved. National sponsors are required by law to notify state governments and Labor of their plans for SCSEP positions in each state, but only Labor has the authority to effect a different pattern of positions among a state’s counties. Labor could adjust national sponsors’ funding levels to reward those willing to establish positions in underserved counties. Another step that might improve the distribution of funds within states would be legislative action to increase the percentage of positions funded by grants to state governments from the current 22 percent imposed by appropriations restrictions. The distribution patterns in the three states solely responsible for SCSEP activities were comparatively equitable. If these appropriations limitations did not exist, the share, over the hold harmless amount, going to the state governments would increase to 55 percent under the 55/45 provision of the authorizing legislation. The SCSEP program also has administrative expense problems. In the 1994 program year, we estimate that the national sponsors’ budgeted administrative expenses collectively exceeded by over $20 million the limit set by the OAA. This occurred because Labor’s 1985 draft regulations rather than the 1976 regulations guided the national sponsors’ cost allocations. Under the 1985 draft regulations, expenditures that we believe to be administrative expenses may be charged to other enrollee costs. Labor failed to require specific and useful reporting by grantees of their other enrollee costs. Therefore, sometimes, Labor could not readily identify what kinds of expenses were included in that category. The 1995 SCSEP regulations, which took effect in July 1995, allow a broad interpretation of other enrollee costs. Unless modified, these new regulations will permit the continuing allocation of administrative expenses. These funds could otherwise be spent to finance additional program positions. Labor’s use of a modified noncompetitive process for making SCSEP grants essentially results in continuing to offer grant applications only to organizations already in the program. However, in SCSEP’s case, Labor does not follow its normal procedure for noncompetitive grants, in which the PRB reviews grant decisions. If followed, PRB reviews can advise whether competition is appropriate for each acquisition and whether long-term relationships with the same grantees are consistent with Labor’s policies. Labor officials did not adequately explain the program’s exemption from this review, and we see no justification for it. If the Congress wishes to ensure equitable distribution of SCSEP funds among states, it should consider amending or eliminating the title’s hold harmless provision. Such an amendment would authorize Labor to hold harmless only the 1978 nationwide level of national sponsor positions. The Department would not be required to hold harmless the 1978 state-by-state levels. If the hold harmless provision were eliminated, (1) the national sponsors could experience reduced funding levels and (2) Labor could distribute the funds on the basis of the most current demographic data available. If the Congress wishes to better meet the OAA’s title V goal of equitably distributing SCSEP funds within states, it should consider increasing the portion of SCSEP grant funds allocated to state governments from the current 22 percent. One way to do that would be to forgo appropriations act language limiting the state governments to 22 percent of the annual appropriation. We recommend that the Secretary better meet the OAA’s title V goal of equitably distributing SCSEP funds within states. To do this, the Secretary should (1) require greater cooperation among national sponsors and states in equitable distribution matters and (2) adjust, as necessary, sponsors’ funding levels to reward sponsors that are willing to establish positions in underserved counties. In addition, we recommend that the Secretary revise the 1995 regulations to adopt the definition of administrative costs set out in the 1976 regulations. We also recommend that the Secretary enforce the statutory limit on administrative expenses and be prepared to reduce the funds available for administration of any grantee exceeding the legal limit by improperly categorizing costs or incurring improper indirect costs. Finally, we recommend that the Secretary no longer permit title V grants to be exempt from Labor’s normal review process and subject these grants to the same review as other noncompetitive grants. We provided copies of our draft report, for comment, to the Department of Labor and, through Labor, to the national sponsors. We met with Labor officials several times to discuss their concerns as well as those of the national sponsors. Where appropriate, we revised the report to include information provided by, and through, Labor. Labor’s comments and our detailed responses appear in appendix VI. Labor generally agreed with our recommendations that it (1) apply its normal noncompetitive review process to SCSEP grants and (2) require national sponsor grantees to cooperate more with states in the equitable distribution process. Specifically, Labor agreed to (1) have PRB review of SCSEP grant awards and (2) prepare procedures to enhance the role of states in the annual equitable distribution meetings. Labor also agreed to implement a process to ensure that it is apprised of disagreements on equitable distribution. Although Labor officials agreed to examine the matter more closely, they disagreed with our estimate that for the 1994 program year budget funds of over $20 million in administrative expenses were improperly allocated to the category of other enrollee costs. Citing recent audits of national sponsor organizations that did not disclose noncompliance, Labor and several of the national sponsors questioned our (1) use of budget data from grant applications and (2) criticism of criteria used for determining what costs should be allowed in the category of other enrollee costs. First, budget data submitted by the national sponsors were the only data available for the period we examined. More importantly, however, decisions by Labor officials on the appropriateness of expenses to be charged for the SCSEP program are made on budget data rather than actual expenses. Thus, our use of budget numbers that Labor uses seems appropriate. Second, with regard to Labor’s questioning of our criticism of the cost criteria used, during the period covered by our review, only the 1976 regulations had been formally promulgated. Because of Labor’s written comments about other enrollee costs, we discussed the issue with officials of Labor’s OIG and its contract auditors. Labor’s OIG staff told us that they measure grantee performance against the grant agreement. Since ETA’s program staff had incorporated the 1985 draft regulations into the grant agreements, the OIG staff had reviewed the grantees’ performance against those criteria and had not focused on this issue. However, OIG contract auditor staff agreed that administrative costs appear to have been shifted to the category of other enrollee costs after the 1985 draft regulations became part of the grant agreements. Those discussions and Labor’s position led us to recommend that the Secretary of Labor review the SCSEP regulations implemented in July 1995. Copies of this report are being sent to the Secretary of Labor and interested congressional committees. We will make copies available to others on request. Please call me on (202) 512-7014 if you have any questions concerning the report. Other major contributors are listed in appendix VII. To identify Senior Community Service Employment Program (SCSEP) grants for program years 1993-94, we reviewed grant applications, the Older Americans Act (OAA), and Labor’s regulations that relate to grant awards and to title V. We also reviewed prior studies, audits, and reports on SCSEP, including those by Labor’s Office of Inspector General (OIG). We interviewed officials in the Employment and Training Administration’s (ETA) divisions of Older Workers Programs and Acquisition and Assistance (the “Grant Office”) and in Labor’s Office of Cost Determination and Office of Procurement. We also interviewed the OIG staff currently involved in program audits and several contract auditors engaged in audits of the SCSEP national sponsors. To learn about Labor’s oversight, coordination among sponsors, subsidized placements, and the effects of administrative practices on program goals, we interviewed officials from the 10 national sponsor organizations; 28 of the state units that administer or have the opportunity to administer other organizations with an interest in SCSEP, including, the National Association of State Units on Aging (NASUA), the National Association of Area Agencies on Aging, and the U.S. Administration on Aging; and several organizations operating as subgrantees for national sponsors and state agencies. To learn about equitable distribution requirements and Labor’s implementation of the OAA’s hold harmless provision, we interviewed staff from ETA’s Office of the Comptroller and reviewed the data used in the funding allocation process. We also reviewed states’ equitable distribution reports for 1989 and 1994 to check compliance with and progress over time in meeting the OAA’s equitable distribution provision. To trace the evolution of SCSEP, we reviewed several legislative histories, from the program’s beginning as a pilot project to its present status. We also interviewed former congressional staff who had interests in SCSEP authorization, appropriations, and oversight. To select states for review, we tried to obtain a balanced perspective in geography, size, and degree of direct involvement with SCSEP. Our selection was not random. In discussing administrative and other enrollee costs for states or the national sponsors, unless otherwise noted, we used amounts budgeted in the grants rather than costs actually incurred. Labor acts on the budget information in the sponsors’ grant application packages during its approval process. Although we reviewed audits by Labor’s OIG and others, we did not personally audit the grantees or examine specific sponsor expenditures. We did not try to assess (1) the outcomes of training offered by national sponsors, states, or U.S. Territories; (2) the 502 (e)(1) section of the OAA allowing Labor to use small amounts of SCSEP funds to conduct experimental projects that involve placing enrollees in private business concerns; or (3) the relative performance in administering SCSEP of individual states and territories or individual national sponsors. We did not attempt to independently verify the accuracy of the data provided to us. We conducted our review between April 1994 and April 1995 in accordance with generally accepted government auditing standards. Senior Community Service Employment Program (SCSEP) national sponsor projects operate locally under two general approaches: (1) by subgrant agreements with local organizations, such as agencies on aging or community groups, and (2) through local affiliates of the national sponsor. National sponsor decisions on where they will administer their enrollee positions—based on how they choose to operate and the constraints that they operate under—alter the distribution of program resources within states. A profile of each national sponsor along with grant information for program year 1993 (the most recent complete year for which performance data were available) follows. (The number of staff shown as funded by the grant is based on grant application materials. The number of staff funded through the indirect cost portion of the grant may not be readily identifiable.) Year first provided funds: 1969 Administration: 10 area supervisors responsible for state projects run by AARP staff and enrollees in administrative positions Number of grant-funded employees: 144 Number of enrollees used in SCSEP administration: 502 (7 percent) States operating in: 34 (33 and Puerto Rico) State slots administered: Florida (342), North Dakota (15) Year first provided funds: 1978 Administration: 13 regional offices, one subgrantee operates SCSEP as Project Ayuda Number of grant-funded employees: 38 (estimate) States operating in: 10 (9 states and District of Columbia) (Puerto Rico added in program year 1994) Number of enrollees used in SCSEP administration: 45 (2.6 percent) State slots administered: Florida (23) Slots granted to states: none Benefits to enrollees: FICA, workers’ compensation, sick leave, vacation, paid holidays, and Liberty Mutual Insurance Definition of unsubsidized placement: Placement must have occurred in the same fiscal year that a person was a SCSEP enrollee. Person must stay on the job long enough to receive “a couple of paychecks.” Follow-up is at 60 days. Year first provided funds: 1965 Administration: 30 SCSEP state offices serving one or more states coordinate Green Thumb employees and enrollees used in administration Number of grant-funded employees: 417 States operating in: 45 (44 and Puerto Rico) Number of enrollees in used in SCSEP administration: 439 (2.6 percent) State slots administered: Montana, South Dakota, Ohio, Florida Slots granted to states: none Benefits to enrollees: FICA, workers’ compensation, personal leave (up to 50 hours maximum), bereavement leave (up to 3 days), sick leave, jury duty benefits, plus other fringe benefits in accordance with Green Thumb policy Definition of unsubsidized placement: Enrollee must have received job orientation, assessment, and counseling. Placement must be expected to last at least 90 days, must last at least 30 days. Job must have been procured within 90 days of leaving enrollee status and pay a wage equal to or greater than what they received as an enrollee. Year first provided funds: 1989 Administration: Los Angeles and Seattle projects supervised by headquarters staff, two subprojects Number of grant-funded employees: 14 States operating in: three (increases to eight in program year 1994) Number of enrollees in SCSEP administration: 26 (7.6 percent) State slots administered: none Slots granted to states: none Benefits to enrollees: FICA, workers’ compensation, up to 13 holidays, 4 hours per month sick leave, 1 personal day, 3 days bereavement leave, 10 days jury duty Definition of unsubsidized placement: Must go directly to the job from enrollee status. No minimum time on the job is required. Year first provided funds: 1978 Administration: NCCBA staff operate state projects—no subcontracts Number of grant-funded employees: 43 States operating in: 11 (10 states and District of Columbia) Number of enrollees used in SCSEP administration: 68 (3.7 percent) State slots administered: Florida Slots granted to states: none Benefits to enrollees: FICA, workers’ compensation, sick leave, annual leave, 11 paid holidays Definition of unsubsidized placement: Enrollee must have come from program directly with jobs preferred to last at least 30 continuous days. Job must have minimum hourly rate at least equal to $4.25. Follow up at 30, 60, and 90 days. No minimum time as an enrollee required. Year first provided funds: 1968 Administration: 3 regional offices, 63 subsponsor agencies, direct management of Los Angeles project Number of grant-funded employees: 77 States operating in: 21 Number of enrollees used in SCSEP administration: 188 (2.9 percent) State slots administered: (Arizona, New Jersey, Florida) Slots granted to states: (Arizona, New Jersey, Virginia) Benefits to enrollees: FICA, workers’ compensation, unemployment insurance (where required), as well as benefits consistent with host agency environment Definition of unsubsidized placement: Any job not federally funded or volunteer. No time limits in effect. Year first provided funds: 1968 Administration: All projects subcontracted to municipal, charitable, local, or state organizations. NCSC staff involved in training and subproject supervision. Number of grant-funded employees: 65 States operating in: 28 (27 and the District of Columbia) Number of enrollees used in SCSEP administration: 275 (2.7 percent) State slots administered: Alabama, Florida Slots granted to states: Maryland, District of Columbia Benefits to enrollees: FICA, workers’ compensation, 8 paid holidays, optional small hospital policy, 2 hours per pay period of leave Definition of unsubsidized placement: A job with pay equal to or better than that of the enrollee position. No time requirements exist on how long the placement must last or on how long the enrollee must have been out of the program. Year first provided funds: 1989 Administration: State coordinators in three states, one subproject Number of grant-funded employees: 10 States operating in: six (increased to 16 in program year 1994) Number of enrollees used in SCSEP administration: one (0.3 percent) Year first provided funds: 1978 Administration: subcontracts with 23 NUL affiliates in urban areas Number of grant-funded employees: 76 States operating in: 16 Number of enrollees used in SCSEP administration: 100 (4.5 percent) State slots administered: Florida Slots granted to states: none Benefits to enrollees: FICA, workers’ compensation, and unemployment compensation where applicable (New York and Michigan) Definition of unsubsidized placement: Placement in a position not funded by another government grant found within 30 days after leaving enrollee status; must have been an enrollee at least a week and must remain on the job at least 30 days. Year first provided funds: 1972 Administration: 225 projects at various USFS locations within the eight Forest Service regions, nine regional experimental stations, and headquarters; two subcontracts Number of grant-funded employees: 287 (4 full time, 283 part time) States operating in: 40 (38 states, the District of Columbia, and Puerto Rico) Number of enrollees used in SCSEP administration: 1 (0 percent) State slots administered: Florida Slots granted to states: New Hampshire, Vermont Benefits to enrollees: FICA, workers’ compensation, one hour of paid leave for every 20 hours worked, up to $35 allowance for annual physical exam Definition of unsubsidized placement: USFS has no required minimum for placement duration or separation from the program. Program year 1994 by state (continued) The amounts of the SCSEP grants have been affected by appropriations language that distributes the grant funds between the national sponsors and states in a way that differs from the language in the OAA. For program year 1994, the national sponsors received about $320 million (78 percent of the funds), and the states received about $90 million (22 percent of the funds). At our request, Labor ran a simulated allocation of the program year 1994 funding formula without the 78/22 appropriations language limit in place. Under that simulation, the funds in excess of the 1978 appropriation would have been split 55 percent for the states and 45 percent for the national sponsors. Of the $410.3 million appropriated for program year 1994, funds for the state sponsors would have increased by $65 million to about $155 million; national sponsor funding would have decreased by that amount to $255 million. The first three columns of the simulation (see table IV.1) represent simulated program year 1994 funding for the state sponsors. Column 1 shows each state’s 1978 funding level; column 2 shows the additional funds, in excess of the 1978 level, that would have been distributed to states on the basis of the “55-45” split; and column 3 is the sum of these first two columns. The national total for the state sponsors, including territorial allocations, is more than $155 million. The next three columns represent simulated funding for the national sponsors. Column 4 shows the amount of national sponsor funding in each state in 1978; column 5 shows the additional funds, in excess of the 1978 level, that would have been distributed to the national sponsors on the basis of the 55-45 split; and column 6 is the sum of columns 4 and 5. The national total for the national sponsors is about $255 million. Columns 7 to 9 combine the state sponsor and national sponsor funding. Column 7 is the sum of columns 1 and 4. Nationally, column 7 totals about $201 million, the amount of the 1978 allocation for the program. Column 8 is the sum of columns 2 and 5. Nationally, column 8 totals over $209 million and represents the funds for program year 1994 that exceed of the 1978 appropriation. Column 9 is the total of columns 7 and 8; nationally, column 9 totals the $410.3 million appropriation for program year 1994. 55%/45% state sponsors 2,236,065 55%/45% national sponsors 55%/45% total (continued) For program year 1994, most of the national sponsors allocated administrative costs to the category of other enrollee costs rather than the administrative category, which has an Older Americans Act (OAA) limit of 15 percent. Officials at Labor and some of the national sponsor organizations justified this practice because the costs included support of enrollee training or assessment activities or the costs of providing these services, expenditures allowed under the 1985 proposed SCSEP regulations. However, because the 1985 proposed regulations were never published in final form, they never superseded the 1976 legally promulgated regulations. Labor, while defending the 1985 draft definition of other enrollee costs, could not specifically explain how many of these allowed costs for program year 1994 related directly to the enrollees—nor did most of the documents provided by the national sponsors in response to Labor’s request to provide explanatory data. Some grantees provided the results of internal surveys of staff activity taken in 1985 or earlier to support their budget allocations. Others provided only their stated reliance upon Labor’s 1985 proposed regulation language as the basis for their including such administrative costs as other enrollee costs. When actual costs for program year 1994 were provided, we reviewed them and, where appropriate, included them in the tables. Tables V.2 to V.11 delineate grant costs for administration and other enrollee costs (1) from the individual national sponsor grant agreements and (2) as we identified them. Our delineation identifies costs allocated to other enrollee costs that, in our judgment, were administrative costs. All costs that could be attributed directly to enrollee training, special job-related or personal counseling, incidentals, or other direct support were excluded from the following tables. A combined total of (1) administrative costs from the grant agreement and (2) additional administrative costs identified by GAO from the other enrollee costs category is also shown for each grantee organization. A combined percentage for administration is computed as well. When actual cost data were provided by the grantees, those costs are shown in an “actual costs” column. In these instances, actual costs were added to the acknowledged administrative costs from the grant to derive totals and percentages. In cases where no actual cost data were provided, the actual cost column is blank. Using the budget data from the grant applications and, where available, actual cost data provided by the grantees, we found that administrative costs for most of the sponsors were higher than the 15-percent limit in the OAA. For program year 1994, the administrative costs labeled as other enrollee costs exceeded $18 million. (Using budget data alone, the total exceeded $20 million.) Table V.1 summarizes the additional administrative costs for all the national sponsors. Additional administrative cost (budget) Additional administrative cost (with actual) Percent of grant for all administration (with actual) American Association of Retired Persons (AARP) Association Nacional Pro Personas Mayores (ANPPM) National Asian Pacific Center on Aging (NAPCA) National Caucus and Center on Black Aged (NCCBA) National Council on Aging (NCOA) National Council of Senior Citizens (NCSC) National Urban League (NUL) National Indian Council on Aging (NICOA) U.S. Forest Service (USFS) AARP: SCSEP federal grant for program year 1994 ($49,894,391) Subtotal (A) AARP-identified administration (B) GAO total of administration (A) + (B) ANPPM: SCSEP federal grant for program year 1994 ($12,570,219) 15 (with waiver) Subtotal (A) ANPPM-identified administration (B) GAO total of administration (A) + (B) 22.4 Green Thumb: SCSEP federal grant for program year 1994 ($102,509,745) Subtotal (A) Green Thumb- identified administration (B) GAO total of administration (A) + (B) NAPCA: SCSEP federal grant for program year 1994 ($5,067,315) Subtotal (A) NAPCA-identified administration (B) GAO total of administration (A) + (B) NCCBA: SCSEP federal grant for program year 1994 ($12,298,332) 154,143 (est.) Subtotal (A) NCCBA-identified administration (B) GAO total of administration (A) + (B) No actual costs provided for these categories. NCOA: SCSEP federal grant for program year 1994 ($37,442,704) Subtotal (A) NCOA-identified administration (B) GAO total of administration (A) + (B) NCSC: SCSEP federal grant for program year 1994 ($62,845,065) Contingency for local project administration Subtotal (A) NCSC-identified administration (B) GAO total of administration (A) + (B) NICOA: SCSEP federal grant for program year 1994 ($5,066,911) Subtotal (A) NICOA-identified administration (B) GAO total of administration (A) + (B) NUL: SCSEP federal grant for program year 1994 ($14,341,274) Subtotal (A) NUL-identified administration (B) GAO total of administration (A) + (B) USFS: SCSEP federal grant for program year 1994 ($26,844,903) Subtotal (A) USFS-identified administration (B) GAO total of administration (A) + (B) The following are GAO’s comments on the Department of Labor’s letter dated July 31, 1995. 1. Concerning the appropriateness of the draft report title, SCSEP: Significant Changes Needed, the purpose of our review was not to question the need for the program or its results. We were asked to examine SCSEP’s administration; therefore, we have changed the title to Department of Labor: Senior Community Service Employment Program Delivery Could Be Improved Through Legislative and Administrative Actions to reflect that focus. More specifically, we found systemic flaws that may deny eligible people an opportunity to participate in the program and a cost allocation approach that allowed the improper budgeting and expenditure of millions of dollars, permitting national sponsors to exceed the statutory 15-percent limit on administrative costs. 2. SCSEP is a grant program for which applicants apply annually. Labor has the authority to decrease or deny altogether the funding amount sought if it has concerns about an applicant’s future performance. Therefore, Labor had a choice in funding the national sponsor in question. For this national sponsor, Labor had sufficient reason, on the basis of its Office of Inspector General (OIG) reports, to (1) be concerned about future performance and (2) consider a change to that grantee’s funding. 3. The statement, which we have rewritten to avoid the inference mentioned, seeks to explain program funding by identifying contributors and the differences between cash and in-kind contributions. 4. The report has been changed to include Labor’s updated data that reflect the proper proportion of women in the SCSEP program. 5. Although funding amounts are related to the time sponsors have participated in SCSEP, the wide variation in sponsors’ funding has been cited as a problem by several national sponsors as well as several states. Some of the smaller, ethnically targeted national sponsors have tried to serve targeted groups, these sponsors said, but have been thwarted by a reluctance on the part of some large national sponsors to leave areas they served. According to some state officials, the significant disparity between the funding they received and that received by some national sponsors left the states in a relatively powerless position in disputes over equitable distribution. 6. Noncompetitive grant awards that total several hundred million dollars a year are sufficiently sensitive to warrant the Procurement Review Board’s review. Further, constraints on the Board members’ time is not justification for weakening internal control measures. An independent review of grant award decisions, although administratively established and not explicitly required by law, is an important internal control. 7. In objecting to our views on the inadequacy of attempts to achieve equitable distribution of enrollee positions, Labor raised several issues. Concerning the issue of responsibility by states, we have revised the report to ensure that it clearly points out the responsibility that states, as well as national sponsors, have in achieving equitable distribution of enrollee positions. Concerning the issue of administrative efficiency related to the goal of equitable distribution, Labor cited our 1979 report, The Distribution of Senior Community Service Employment Positions (GAO/HRD-80-13, Nov. 8, 1979). Labor quoted that report on the approach taken by sponsors—and particularly national sponsors—to achieve equitable distribution. The report noted that, relative to the administrative limits required of the program, the national sponsors’ efforts to become cost effective did have merit. But the relationship between national sponsors’ and Labor’s efforts to achieve equitable distribution is more fully detailed in a later report, Information on the Senior Community Service Employment Program and the Proposed Transfer to the Department of Health and Human Services (GAO/HRD-84-42, Mar. 12, 1984). This 1984 report (p. 22) noted the following: “A Labor official stated that the distribution of enrollee positions within the states may not be equitable since some national sponsors established large clusters of enrollee positions early in the development of SCSEP, and these have been carried forward.” According to the 1984 report, Labor, in February 1979, asked for SCSEP sponsors in each state to (1) discuss and agree upon a rationale for distributing SCSEP funds, (2) identify areas that showed inequitable distribution, (3) establish plans for eliminating inequities without displacing current enrollees, and (4) send these plans to Labor. Labor officials said they did not receive many plans. In 1981, following up on that request, Labor asked national sponsors and state agencies, as a group effort, to report on the progress made toward achieving equitable distribution. Labor said that it received reports from approximately 90 percent of the states. As also noted in our 1984 report, Labor officials established a panel of representatives—from Labor, national sponsors, and state agencies—to review the equitable distribution reports and determine which states were making progress. The panel examined the state reports, but, according to our 1984 report, “The results were never formalized by Labor, and no general feedback was provided to the sponsors.” Labor did suggest to the program sponsors that they use the reports during their next planning sessions. In January 1984, Labor once again requested another equitable distribution report. According to our 1984 report, “while such cooperative efforts by national and state sponsors are directed toward equitable distribution, Labor does not know that such distribution has occurred.” When we began the review leading to this latest report, we asked Labor officials if they knew the status of equitable distribution in the states compared with its status 5 years earlier. Labor officials did not know for certain which states had progressed in equitable distribution. Concerning Labor’s complaint about census data, any comparison of distribution of positions between 1989 and 1994 is, necessarily, skewed. This is because the 1989 distribution of enrollee positions was made on the basis of 1980 census data, and the 1994 distribution was made on the basis of 1990 census data. The introduction of 1990 census data in the 1994 equitable distribution reports may have obscured progress made between 1989 and 1994 in some areas and exaggerated progress in others. 8. The number of enrollee positions available depends on the level of SCSEP funding, not on the hold harmless provision. When funding levels decline, past performance indicates that sponsors—state and national—leave some positions unfilled to ensure that enrollees in other positions may continue in the program. In receiving enrollee positions formerly available to a national sponsor under the hold harmless provision, a state sponsor would have the option of (1) administering these positions itself or (2) subcontracting the administration to others, including the original national sponsor. In addition, the forward funding nature of the program (see footnote 7) would give all parties concerned ample time to adjust to a change in sponsors. Therefore, it is not likely that removing the hold harmless provision would “place many enrollees ‘on-the-street’ without alternatives.” 9. Sponsors that emphasize different activities and target different groups may, nevertheless, serve the same people. All sponsors must provide enrollees positions and training that corresponds to their aptitudes and preferences—just as all sponsors, regardless of their ethnic focus, must accept potential enrollees only on the basis of age and income criteria, not on ethnicity or sex. 10. The unwritten agreement mentioned allows national sponsors to avoid situations that might provoke dissension because of differences in salaries or benefits of enrollees participating through different sponsors. This policy could possibly deny enrollees access to the type of training best suited to their needs. Whether such a denial is permanent or not is irrelevant. The policy serves the interests of SCSEP’s national sponsors rather than those of the elderly poor, for whom the program exists. 11. Several national sponsors—the U.S. Forest Service is an example—have geographic constraints on their decisions on areas to serve. Other national sponsors have a preference for serving specific ethnic or minority groups (whose languages and cultures may require specialized knowledge), which guides some of their decisions on areas to serve. States are not likely to face such constraints or preferences. In addition, some states with small populations have said (1) their level of effort in SCSEP has been curtailed by the minimal funding they receive and (2) more funding would allow them to increase their SCSEP efforts. 12. Labor raised two issues: (1) our use of budgeted rather than actual expense data in assessing administrative and other enrollee costs and (2) our interpretation of acceptable administrative costs in the SCSEP program. Regarding the first issue, during our review, we obtained from Labor’s SCSEP staff the data relevant to SCSEP grant awards. When we discussed actual cost data, staff described the separation of Labor’s program and fiscal oversight activities and the limited use of actual cost data in program planning and new grants approval. Actual cost data are not normally available until well after the grant year is completed. When we received Labor’s enclosure, indicating its revised view on the use of actual cost data, we asked when these data would be available. Actual data would not be available for 3 months or longer, Labor said. By that time, program year 1995 allocations had already been made. We also asked for any additional data the national sponsors had used to justify their budgeted costs for the 1994-95 program year. Labor said it did not have these data but would request them from the national sponsors. Nine of the national sponsors provided data or information intended to explain and support their allocation of costs to the category of other enrollee costs. In instances in which these data indicated that the expenses had directly supported other enrollee cost services, we have revised the totals we had originally developed using budgeted amounts and noted the revisions in the actual costs columns of tables V.2 through V.11. However, little of the cost data adequately distinguished other enrollee costs as being in direct support of the enrollees rather than general administrative operations. Ultimately, the relevance of the budgeted versus actual costs issue is questionable because Labor’s SCSEP program officials historically have based their application approval and oversight decisions primarily on budgeted costs, which should be supported by up-to-date and accurate cost data. Most of the data Labor received from the national sponsors did not directly support the budgeted costs they were asked to support. Regarding the second issue, Labor’s other response to our findings of misallocations questions our interpretation of acceptable administrative costs. Labor cites the authority of the 1985 SCSEP draft regulations and their incorporation into the grant agreements. As noted earlier in this report, these draft regulations have no legal authority. In 1976, Labor published the only formal regulations in effect for SCSEP before program year 1995. Labor’s proposed amended SCSEP regulations, published in 1985, remained in draft form. Because these regulations never became final, they never gained the force and effect of law. Between 1976 and 1995, the only regulations in effect that pertained to SCSEP were the 1976 regulations. Through its comments, Labor has (1) downplayed the existence of the legally promulgated 1976 regulations and (2) interpreted the draft 1985 regulations as having the force and effect of law, when, in fact, they do not. Labor officials have not provided us with an acceptable legal basis for using the 1985 draft regulations instead of the legally promulgated regulations of 1976. Finally, these officials also suggested that other Labor programs under other legislative authority may permit a different interpretation of cost allocations. This may be true, but with respect to SCSEP, the regulations and related provisions of the Older Americans Act (OAA) speak for themselves. A brief discussion of the context of the other enrollee costs issue may help in understanding it. The national sponsors have repeatedly criticized Labor’s refusal to recalculate the unit cost to administer an enrollee position. Labor officials have informally acknowledged that the administrative costs associated with a placement have increased significantly over time. They also have acknowledged that some expenses that have been allocated to the category of other enrollee costs by national and state sponsors would have been more appropriately included in the administrative cost category. Through the introduction of the 1985 SCSEP draft regulations, Labor, in effect, used the category of other enrollee costs as a way to provide sponsors, most national and some state, with additional funds to cover administrative expenses. The purpose of our review was not to determine whether the present level of funding for administrative expenses is adequate but to identify whether administrative expenses have been properly allocated under existing law and regulations. We continue to conclude that in many instances administrative expenses have not been properly allocated. Finally, the July 1995 regulations, which became final as we concluded our review, will allow many of the cost allocations of the type that violated the 1976 regulations to continue. We believe that Labor’s interpretation of these new regulations is inconsistent with the OAA’s 15-percent limit on administrative costs. This belief has prompted our recommendation that the Secretary of Labor clearly delineate the expenses allowable as other enrollee costs and adopt the definition of administrative costs set out in the 1976 regulations. 13. Labor’s OIG officials and contract auditors have told us that significant concern has existed about grantee indirect costs for several years. These costs have been the focus of most of Labor’s OIG audit activity for several of the grantee organizations. 14. While the Office of Management and Budget guidance allows reasonable expenditures for “employee morale activities,” we questioned the use of scarce program funds for such activities. In the report example Labor cited, one of the grantee organizations budgeted about $57,000 for items to promote staff morale and for recognition of staff achievement. We have changed the report to reflect the fact that $25,000 of the budgeted amount was from indirect costs and $31,944 was from direct costs. The grantee organization in question provided actual cost data showing that program year 1994 expenditures from its employee morale account were $21,347.27 rather than the budgeted amount of $21,821. 15. We have changed the report to reflect that reporting of only legitimate unsubsidized placements is the responsibility of states as well as national sponsors. Laurel H. Rabin, Communications Analyst Stefanie G. Weldon, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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 examined the Department of Labor's (DOL) Senior Community Service Employment Program (SCSEP), focusing on: (1) DOL process for awarding SCSEP grants; (2) the extent to which DOL equitably distributes SCSEP funds; and (3) SCSEP administrative costs. GAO found that: (1) in order to maintain 1978 activity levels, the Older Americans Act (OAA) requires DOL to award SCSEP grants to national sponsors and those with proven track records; (2) of the $410 million in SCSEP appropriations for program year 1994, $234.5 million was distributed under the 1978 activity level provision; (3) DOL's use of the 1978 allocation pattern severely limited its ability to achieve equitable distribution among states; (4) appropriations statutes have overriden the title V funding provision to require that no more than 22 percent of SCSEP appropriations be allocated to state governments; and (5) in program year 1994, national sponsors' administrative costs exceeded the 15-percent limit due to administrative expenses being charged to another cost category.

You are an expert at summarizing long articles. Proceed to summarize the following text: According to IRS data, between tax years 2002 to 2011, the number of large partnerships more than tripled from 2,832 to 10,099. Over the same time, total assets of large partnerships more than tripled to $7.49 trillion. However, these numbers suffer from the double-counting complexities illustrated in figure 1. For comparison, our interim report on large partnerships, which defined large partnerships as those with 100 or more direct partners and $100 million or more in assets, found that over the same time period the number of large partnerships more than tripled, from 720 in tax year 2002 to 2,226 in tax year 2011. Similarly, total assets tripled to $2.3 trillion in tax year 2011. Without an accepted definition of a large partnership, there is not necessarily a right or wrong answer of whether direct and indirect partners should be included. Direct partners do not capture the entire size and complexity of large partnership structures. Accounting for indirect partners does, but it also raises the issue of double counting discussed above. Given the size and complexity of large partnerships, IRS does not know the extent of double counting among this population. Large partnerships, especially those in higher asset brackets, are primarily involved in the finance and insurance sector. For example, in 2011, 73 percent of large partnerships reported being involved in the finance and insurance sector and the majority of large partnerships that reported $1 billion or more in assets were in this sector. IRS data also showed that almost 50 percent of large partnerships with 100,000 or more direct and indirect partners reported being in the finance and insurance sector. According to IRS officials and data, many of these entities are investment funds, such as hedge funds and private equity funds, which are pools of assets shared by investors that are counted legally as partners of the large partnership. Being investment vehicles, these funds tend to invest in other partnerships, as well as other types of business entities. One IRS official said that these investments can affect the partner size of other partnerships based on where they choose to invest (e.g., buying an interest in other partnerships). For example, if an investment fund with a million partners chose to invest in multiple small operating partnerships, such as oil and gas companies organized as partnerships, all of those partnerships would count as having more than a million partners as well. One IRS official said the partnerships with more than a million partners increased from 17 in tax year 2011 to 1,809 in tax year 2012. The official attributed most of the increase to a small number of investments funds that expanded their interests in other partnerships. If in the future those investment funds choose to divest their interests in other partnerships, the number of large partnerships would decrease significantly. Although the reasons for the changes are not clear, from tax years 2008 to 2010, the number of large partnerships with 500,000 or more direct and indirect partners changed from 70 in 2008 to 1,088 in 2009, and decreased to 70 in 2010. IRS data on large partnerships also show their complexity, as measured by the number of partners and extent of tiering, or levels, below the large partnership. Almost two-thirds of large partnerships in 2011 had more than 1,000 direct and indirect partners, although hundreds of large partnerships had more than 100,000. See figure 2 for more detail. In 2011, about two-thirds of large partnerships had at least 100 or more pass-through entities in the partnership structure. Because almost all large partnerships tend to be part of multitiered networks, their partners could be spread across various tiers below those partners that have a direct interest in the partnership. For example, in 2011, 78 percent of the large partnerships had six or more tiers. Determining the relationships and how income and losses are allocated within a large partnership structure through multiple pass-through entities and tiers is complicated. For example, in figure 3, the allocation from the audited partnership on the far left side of the figure crosses eight pass- through entities along the bold path before it reaches one of its ultimate owners on the right. This path also may not be the only path from the audited partnership to the ultimate owner. While figure 3 appears complex, it has only 50 partners and 10 tiers. Large partnership structures could be much more complex. In 2011, as noted above, 17 had more than a million partners. According to one IRS official, there are several large partnerships with more than 50 tiers. IRS audits few large, complex partnerships. According to IRS data, in fiscal year 2012, IRS closed 84 field audits of the 10,143 large partnership returns filed in calendar year 2011—or a 0.8 percent audit rate. This is the same audit rate we found for fiscal year 2012 in our interim report, which defined large partnerships as having 100 or more direct partners and $100 million or more in assets. The audit rate for large partnerships remains well below that of C corporations with $100 million or more in assets, which was 27.1 percent in fiscal year 2012. See table 1. Table 1 also shows that most large partnership field audits closed from fiscal years 2007 through 2013 did not find tax noncompliance. In 2013, for example, 64.2 percent of the large partnership audits resulted in no change to the reported income or losses. In comparison, IRS audits of C corporations with $100 million or more in assets had much lower no change rates. For example, audits of large corporations had a no change rate of 21.4 percent in 2013. When the field audits of large partnership returns did result in changes, the changes to net income that the audits recommended were minimal in comparison to audits of large corporations, as shown in table 2. This could be because positive changes on some audits were cancelled out by negative changes on other audits. In 3 of the 7 years, the total adjustments from the field audits were negative. That is, they favored the large partnerships being audited. This did not occur for audits of large corporations. See table 2. In terms of audit costs, the number of days and hours spent on the audits of large partnerships in fiscal year 2013 has increased since fiscal year 2007, but varied from year to year in the interim, as shown in table 3. In contrast, the audit days and hours spent on audits of large corporation are decreasing while obtaining audit results that are noticeably better than those of large partnership audits. IRS does not track its audit results for large partnerships and therefore does not know what is causing the results in tables 1, 2, and 3. Consequently, it is not clear whether the results are due to IRS selecting large partnerships that were tax compliant versus IRS not being able to find noncompliance that did exist. The high no change rates and minimal adjustment amounts for IRS audits of large partnerships may be due to a number of challenges that can cause IRS to spend audit time on administrative tasks, or waiting on action by a large partnership or IRS stakeholder rather than doing actual audit work. Under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), the period for auditing partnerships does not expire before 3 years after the original due date of the return or date of return filing, whichever is later. IRS on average takes approximately 18 months after a large partnership return is received until the audit is started, leaving on average another 18 months to conduct an audit, as illustrated in figure 4. Once a large partnership audit has been initiated, it falls under the TEFRA audit procedures. Congress enacted the TEFRA audit procedures in response to concerns about IRS’s ability to audit partnership returns. According to the congressional Joint Committee on Taxation (JCT), the complexity and fragmentation of partnership audits prior to TEFRA, especially for large partnerships with partners in many audit jurisdictions, resulted in the statute of limitations expiring for some partners while other partners were required to pay additional taxes as a result of the audits. TEFRA addressed these issues by altering the statute of limitations and requiring each partner of a partnership to report certain items like income, consistent with how the partnership reports them. However, according to IRS officials and in focus groups we held with IRS auditors, using the TEFRA procedures to audit large, complex partnership structures present a number of administrative complexities for IRS. These complexities may reduce the time IRS spends on actual audit work, adversely affecting IRS audit results for large partnerships. For example, one of the primary challenges for doing large partnership audits under TEFRA that IRS focus group participants reported was identifying the Tax Matters Partner (TMP). The TMP is the partnership representative who is to work with IRS to facilitate a partnership audit. The responsibilities of the TMP include (1) supplying IRS with information about each partner, (2) keeping the partners of the partnership informed and getting their input on the audit, and (3) executing a statute of limitations extension, if needed. Without being able to identify a qualified TMP in a timely manner, IRS may experience delays during large partnership audits. IRS focus group participants cited numerous examples of difficulties in identifying the TMP. One difficulty is that the TMP can be an entity, not a person. If an entity is designated as the TMP, IRS has to track down an actual person to act as a representative for the TMP. Focus group participants said that some large partnerships do not designate a TMP or designate an entity as TMP to delay the start of the audit, which would limit the audit time remaining under the statute of limitations. Entities will often be elusive about designating the TMP. The entities will use this tactic as a first line of defense against an audit. The burden for ensuring that the TMP meets the requirements of TEFRA largely falls on IRS. Time spent identifying a qualified TMP, according to IRS focus group participants, could take weeks or months. As shown in figure 4, IRS has a window of about 1.5 years to complete large partnership audits. A reduction of a few months from the 1.5 years IRS has to complete large partnership audits means that the time IRS has for the audit would be markedly reduced. Another challenge TEFRA poses is determining the extent to which IRS passes through audit adjustments to the taxable partners in a large partnership structure. In that large partnerships are nontaxable entities, TEFRA requires that audit adjustments be passed through to the taxable partners, unless the partnership agrees to pay the related tax at the partnership level. To pass through the audit adjustments to the taxable partners, IRS has to first link, or connect, the partners’ returns to the partnership return being audited. However, IRS officials said linking a large number of partners’ returns can be a significant drain on IRS’s resources. If a large partnership has hundreds or thousands of partners at multiple tiers, the additional tax owed by each partner as a result of large partnership audit may not be substantial enough to be worth passing through once those partners’ returns are linked. If the audit adjustment is lower than a certain level, IRS will not pass it to the taxable partners; and the time and resources spent linking the partners’ returns, and preparing a plan to pass through the audit adjustment to certain taxable partners’ returns, becomes effectively meaningless. Aside from the TEFRA challenges, another challenge involves the complexities arising from large partnership structures, which hinder IRS’s ability to identify tax noncompliance with complex tax laws. For example, IRS officials reported having difficulty in identifying the business purpose for the large partnerships or in determining the source of income or losses within their structures (i.e. knowing which entity in a tiered structure is generating the income or losses). Without this information, it is difficult for IRS to determine if a tax shelter exists, an abusive tax transaction is being used, and if income and losses are being properly characterized. I think noncompliance of large partnerships is high because a lot of what we have seen in terms of complexity and tiers of partnership structures… I don’t see what the driver is to create large partnership structures other than for tax purposes to make it difficult to identify income sources and tax shelters. To help IRS auditors better understand the complexity of the TEFRA audit procedures and the large partnership structures, various IRS stakeholders and specialists are to provide support during the audit. However, IRS focus group participants stated that they do not have the needed level of timely support. These include TEFRA coordinators to help with the TEFRA audit procedures, IRS counsel to help navigate the TEFRA audit procedures and provide input on substantive tax issues, and specialists who have expertise in a variety of areas. The support provided by IRS stakeholders is important because many IRS focus group participants said that their knowledge of partnership tax law was limited and they may only work on a partnership audit once every few years. The challenges identified by IRS are not recent occurrences but may have grown over time as the number and size of large partnerships has grown. For example, in 1990, the Department of the Treasury (Treasury) and IRS reported that applying TEFRA to large partnership audits resulted in an inefficient use of limited IRS resources. They cited a number of reasons for the inefficient use of resources, such as having to collect and review information on a large number of partners and the difficulty of passing through audit adjustments to those partners. IRS by itself cannot fully address the tax law and resource challenges in auditing large partnership returns. For example, IRS cannot make the structures or laws less complex and cannot change the TEFRA audit procedures in statute. In addition, IRS has recently experienced budget reductions, constraining the resources potentially available for large partnership audits. Despite these limitations, IRS has initiated efforts that may help address the challenges auditing large partnership returns. First, IRS can sometimes use a closing agreement to resolve an audit under the TEFRA audit procedures, if both IRS and the partnership agree to its terms. This agreement allows the tax owed from the net audit adjustment at the highest marginal tax rate to be collected at the partnership level, meaning IRS does not have to pass through the audit adjustments to the taxable partners. IRS does not track the number of closing agreements but IRS officials said that IRS enters into relatively few. IRS officials are encouraging audit teams to pursue closing agreements for large partnership audits. However, closing agreements come with challenges because the partnership must be willing to agree and the IRS review process can be extensive. Aside from closing agreements, the IRS efforts affect steps IRS takes at the beginning of an audit—such as understanding the complexity of large partnerships and selecting returns for audits. However, IRS has not yet determined the effectiveness of these efforts. The Chairman of the House of Representatives Committee on Ways and Means and the Administration have also put forth proposals to address some of challenges associated with the TEFRA audit procedures. While the proposals differ somewhat and apply to partnerships with different numbers of partners, both would allow IRS to collect tax at the partnership level instead of having to pass audit adjustments through to the taxable partners. In our ongoing work on large partnerships, we are assessing options for improving the large partnership audit process and, if warranted, will offer reforms for Congress to consider and recommendations to IRS. Chairman Levin, Ranking Member McCain, 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. We provided a draft of this testimony to IRS for comment. IRS provided technical comments, which were incorporated, as appropriate. If you or your staff have any questions about this testimony, please contact me at (202) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony included Tom Short, Assistant Director, Vida Awumey, Sara Daleski, Deirdre Duffy, Robert Robinson, Cynthia Saunders, Erik Shive, Albert Sim, A.J. Stephens, and Jason Vassilicos. 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.

Businesses organized as partnerships have increased in number in recent years while the number of C corporations (i.e. those subject to the corporate income tax) has decreased. The partnership population includes large partnerships (those GAO defined as having $100 million or more in assets and 100 or more direct and indirect partners). Their structure varies. Some large partnerships have direct partners that are partnerships and may bring many of their own partners into the structure. By tiering partnerships in this manner, very complex structures can be created with hundreds of thousands of direct and indirect partners. Tiered large partnerships are challenging for the Internal Revenue Service (IRS) to audit because of the difficulty of tracing income from its source through the tiers to the ultimate partners. GAO was asked to study the challenges large partnerships pose for IRS. GAO describes the number of large partnerships and their assets, IRS's large partnership audit results and the challenges IRS faces in auditing these entities, and options for addressing these challenges. GAO analyzed IRS data on partnerships, reviewed IRS documentation, interviewed IRS officials, met with IRS auditors in six focus groups, and interviewed private sector lawyers knowledgeable about partnerships. Internal Revenue Service (IRS) data show, from tax years 2002 to 2011, the number of large partnerships more than tripled. According to IRS officials, many large partnerships are hedge funds or other investment funds where the investors are legally considered partners. Many others are large because they are tiered and include investment funds as indirect partners somewhere in a tiered structure. According to IRS data, there were more than 10,000 large partnerships in 2011. A majority had more than 1,000 direct and indirect partners although hundreds had more than 100,000. A majority also had six or more tiers. IRS audits few large partnerships—0.8 percent in fiscal year 2012 compared to 27.1 percent for large corporations. Of the audits that were done, about two-thirds resulted in no change to the partnership's reported net income. The remaining one-third resulted in an average audit adjustment to net income of $1.9 million. These minimal audit results may be due to challenges hindering IRS's ability to effectively audit large partnerships. Challenges included administrative tasks required by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and the complexity of large partnership structures due to tiering and the large number of partners. For example, IRS auditors said that it can sometimes take months to identify the person who represents the partnership in the audit, as required by TEFRA, reducing the time available to conduct the audit. Complex large partnerships also make it difficult to pass through audit adjustments across tiers to the taxable partners. IRS cannot resolve some of the challenges because they are rooted in tax law, such as those required by TEFRA. Congress and the Administration have proposed statutory changes to the audit procedures for partnerships, such as requiring partnerships to pay taxes on net audit adjustments rather than passing them through to the taxable partners. In addition, IRS has implemented some changes to its large partnership audit process, such as understanding the complexity of large partnerships and selecting returns for audits. GAO makes no recommendations but will issue a report later in 2014 assessing IRS's large partnership audit challenges. IRS provided technical comments, which were incorporated.

You are an expert at summarizing long articles. Proceed to summarize the following text: Of the four agencies that received over $40 billion in funding for science- related activities under the Recovery Act, DOE received the largest amount of funds. Table 1 shows Recovery Act funding, obligations, and expenditures for these agencies. Of the $35.2 billion it received under the Recovery Act for science-related projects and activities, DOE reported that it had obligated $34.6 billion (98 percent) and spent $18.9 billion (54 percent) as of September 30, 2011. This is an increase from March 10, 2011, when DOE reported that it had obligated $33.1 billion and spent $12.5 billion. Table 2 shows Recovery Act funding, obligations, and expenditures for DOE’s program offices. Our Recovery Act recommendations have focused primarily on the following four DOE programs and projects: The EECBG program, which provides grants to states, territories, tribes, and local communities for projects that improve energy efficiency, reduce energy use, and reduce fossil fuel emissions. The Office of Environmental Management, which cleans up contaminated sites across the country where decades of nuclear weapons research, development, and production left a legacy of dangerously radioactive, chemical, and other hazardous wastes. The LGP, which guarantees loans for energy projects that (1) use either new or significantly improved technologies as compared with commercial technologies already in use in the United States and (2) avoid, reduce, or sequester emissions of air pollutants or man-made greenhouse gases. The Weatherization Assistance Program, which enables low-income families to reduce their utility bills by making long-term energy- efficiency improvements to their homes by, for example, installing insulation, sealing leaks, and modernizing heating or air conditioning equipment. Table 3 shows Recovery Act funding, obligations, and expenditures for these DOE programs as of September 30, 2011. The Recovery Act provided about $3.2 billion for DOE’s EECBG, funding the program for the first time since it was authorized in the Energy Independence and Security Act (EISA) of 2007. DOE awarded this funding as follows: About $1.94 billion as formula grants to more than 2,000 local communities—including cities, counties, and tribal communities. About $767 million as formula grants to the states, five territories, and the District of Columbia. About $40 million for Administrative and Training/Technical Assistance. About $453 million through competitive grants to local communities. Our April 2011 report on the EECBG program focused on the approximately $2.7 billion awarded through formula grants. In that report, we found that more than 65 percent of EECBG funds had been obligated for three types of activities: (1) energy-efficiency retrofits (36.8 percent), which includes activities such as grants to nonprofit organizations and governmental agencies for retrofitting their existing facilities to improve energy efficiency; (2) financial incentive programs (18.5 percent), which includes activities such as rebates, subgrants, and revolving loans to promote recipients’ energy-efficiency improvements; and (3) energy-efficiency and conservation programs for buildings and facilities (9.8 percent), which includes activities such as installing storm windows or solar hot water technology. We also found that DOE did not always collect information on the various methods that recipients use to monitor contractors and subrecipients. As a result, DOE does not always know whether the monitoring activities of recipients are sufficiently rigorous to ensure compliance with federal requirements. In addition, DOE officials have experienced challenges in assessing the extent to which the EECBG program is reducing energy use and increasing energy savings. Most recipients report estimates to comply with program reporting requirements, and DOE takes steps to assess the reasonableness of these estimates but does not require recipients to report the methods or tools used to develop estimates. In addition, while DOE provides recipients with a software tool to estimate energy savings, DOE does not require that recipients use the most recent version. Based on these findings, we recommended that DOE (1) explore a means to capture information on recipients’ monitoring activities and (2) solicit information on recipients’ methods for estimating energy-related impact metrics and verify that recipients who use DOE’s estimation tool use the most recent version. DOE generally agreed with our recommendations and has taken steps to implement them. DOE took action on our first recommendation by collecting additional information related to subrecipient monitoring, in order to help ensure that they comply with the terms and conditions of the award. These changes will help improve DOE’s oversight of recipients. DOE implemented our second recommendation by making changes to the way it collects data to apply a unified methodology to the calculation of impact metrics. DOE officials also said the calculation of estimated impact metrics will now be performed centrally by DOE by applying known national standards to existing recipient-reported performance metrics. The Recovery Act provided about $6 billion to expand and accelerate cleanup activities at numerous contaminated sites across the country.This funding substantially boosted the Office of Environmental Management’s annual appropriation for cleanup, which has generally been between $6 billion and $7 billion. As of September 30, 2011, DOE had obligated all of the $6 billion in Recovery Act funding. DOE officials told us that they planned to have 92 percent of the funds spent by September 30, 2011, and DOE had expended about 88 percent (nearly $5.3 billion) by that time. As of May 2011, DOE had selected 109 projects for Recovery Act funding at 17 DOE sites in 12 states. DOE designated 80 percent of this funding to speed cleanup activities at four large sites: the Hanford Site in Washington State, Idaho National Laboratory, the Oak Ridge Reservation in Tennessee, and the Savannah River Site in South Carolina. DOE generally chose to use Recovery Act funds for cleanup projects that could be started and finished quickly. The majority of the projects selected also had existing contracts, which allowed the department to update and validate new cost and schedule targets within a short time frame. DOE generally funded four types of projects: (1) decontaminating or demolishing facilities, (2) removing contamination from soil and groundwater, (3) packaging and disposing of transuranic and other wastes, and (4) supporting the maintenance and treatment of liquid tank wastes. According to DOE officials, as of the end of May 2011, DOE had completed 28 Recovery Act projects. In July 2010, we reported that DOE has faced challenges in both managing Recovery Act projects and measuring how Recovery Act funding has affected cleanup and other goals. that one-third of Recovery Act-funded environmental cleanup projects did not meet cost and schedule targets, which DOE attributed to technical, regulatory, safety, and contracting issues. DOE took steps aimed at strengthening project management and oversight for Recovery Act projects, such as increasing project reporting requirements and placing tighter controls on when funds are disbursed to sites. By October 2010, DOE had made improvements in both cost and schedule performance. GAO, Recovery Act: Most DOE Cleanup Projects Appear to Be Meeting Cost and Schedule Targets, but Assessing Impact of Spending Remains a Challenge, GAO-10-784 (Washington, D.C., July 29, 2010). very different and potentially misleading information. Second, DOE had not yet developed a clear means of measuring how cleanup work funded by the act would affect environmental risk or the land and facilities requiring DOE cleanup. Third, it is unclear to what extent Recovery Act funding will reduce the costs of cleaning up the DOE sites over the long term. DOE’s estimate of $4 billion in life-cycle cost savings resulting from Recovery Act funding was not calculated in accordance with Office of Management and Budget’s guidance on benefit-cost analysis or DOE’s guidance on life-cycle cost analysis. Our analysis indicated that those savings could be 80 percent less than DOE estimated. Without clear and consistent measures, it will be difficult to say whether or how Recovery Act funding has affected DOE’s cleanup goals. DOE officials define footprint reduction as the “physical completion of activities with petition for regulatory approval to follow.” longer relevant since the Office of Management and Budget now requires contractor and subcontractor jobs to be reported online. In February 2009, the Recovery Act amended the LGP, authorizing DOE to also guarantee loans for some projects using commercial technologies. Projects supported by the Recovery Act must employ renewable energy systems, electric power transmission systems, or leading-edge biofuels that meet certain criteria; begin construction by the end of fiscal year 2011; and pay wages at or above market rates. The Recovery Act originally provided nearly $6 billion to cover the credit subsidy costs for projects meeting those criteria.reduction of $3.5 billion of this funding to be used for other purposes. According to our analysis of DOE data, as of September 30, 2011, DOE’s LGP had obligated about 78 percent of the remaining $2.5 billion in Recovery Act funds, leaving $552 million unobligated. The Recovery Act required that borrowers begin construction of their projects by September 30, 2011, to receive funding, and the unobligated funds expired and are no longer available to DOE. GAO-10-627. Consequently, we reported that DOE’s program management could improve its ability to evaluate and implement the LGP by implementing the following four recommendations: (1) develop relevant performance goals that reflect the full range of policy goals and activities for the program, and to the extent necessary, revise the performance measures to align with these goals; (2) revise the process for issuing loan guarantees to clearly establish what circumstances warrant disparate treatment of applicants; (3) develop an administrative appeal process for applicants who believe their applications were rejected in error and document the basis for conclusions regarding appeals; and (4) develop a mechanism to systematically obtain and address feedback from program applicants and, in so doing, ensure that applicants’ anonymity can be maintained. In response to our recommendations, DOE stated that it recognizes the need for continuous improvement to its LGP as those programs mature but neither explicitly agreed nor disagreed with our recommendations. In one instance, DOE specifically disagreed with our findings: the department maintained that applicants are treated consistently within solicitations. Nevertheless, the department stated that it is taking steps to address concerns identified in our report. For example, with regard to appeals, DOE indicated that its process for rejected applications should be made more transparent and stated that the LGP continues to implement new strategies intended to reduce the need for any kind of appeals, such as enhanced communication with applicants and allowing applicants an opportunity to provide additional data to address deficiencies DOE has identified in applications. DOE directly addressed our fourth recommendation by creating a mechanism in September 2010 for submitting feedback—including anonymous feedback—through its website. We tested the mechanism and were satisfied that it worked. We have an ongoing mandate under the 2007 Revised Continuing Appropriations Resolution to review DOE’s execution of the LGP and to report our findings to the House and Senate Committees on Appropriations. We are currently conducting ongoing work looking at the LGP, which will examine the status of the applications to the LGP’s nine solicitations and will assess the extent to which has DOE adhered to its process for reviewing loan guarantees for loans to which DOE has closed or committed. We expect to issue a report on LGP in early 2012. The Recovery Act provided $5 billion for the Weatherization Assistance Program, which DOE is distributing to each of the states, the District of Columbia, five territories, and two Indian tribes. The $5 billion in funding provided by the Recovery Act represents a significant increase for a program that has received about $225 million per year in recent years. During 2009, DOE obligated about $4.73 billion of the $5 billion in Recovery Act weatherization funding to recipients, while retaining the remaining funds to cover the department’s expenses. Initially, DOE provided each recipient with the first 10 percent of its allocated funds, which could be used for start-up activities, such as hiring and training staff, purchasing equipment, and performing energy audits of homes. Before a recipient could receive the next 40 percent, DOE required it to submit a plan for how it would use its Recovery Act weatherization funds. By the end of 2009, DOE had approved the weatherization plans of all 58 recipients and had provided all recipients with half of their funds. In our May 2010 report,buildings can improve production numbers quickly, state and local officials have found that expertise with multifamily projects is limited and that they lack the technical expertise for weatherizing large multifamily buildings. We also found that state agencies are not consistently dividing weatherization costs for multifamily housing with landlords. In addition, we found that determination and documentation of client income eligibility varies between states and local agencies and that DOE allows applicants to self-certify their income. We also found that DOE has issued guidance requiring recipients of Recovery Act weatherization funds to implement a number of internal controls to mitigate the risk of fraud, waste, and abuse, but that the internal controls to ensure local weatherization agencies comply with program requirements are applied inconsistently. we found that although weatherizing multifamily In our May 2010 report, we made eight recommendations to DOE to clarify its weatherization guidance and production targets. DOE generally concurred with the recommendations, has fully implemented two of them and taken some steps to address a third. For example, we recommended that DOE develop and clarify weatherization program guidance that considers and addresses how the weatherization program guidance is impacted by the introduction of increased amounts of multifamily units. DOE has issued several guidance documents addressing multi-family buildings that, among other things, provide guidance on conducting energy audits on multi-family units. We also recommended that DOE develop and clarify weatherization program guidance that establishes best practices for how income eligibility should be determined and documented and that does not allow the self-certification of income by applicants to be the sole method of documenting income eligibility. In response to our recommendation, DOE issued guidance that clarified the definition of income and strengthened income eligibility requirements. For example, the guidance clarified that self-certification of income would only be allowed after all other avenues of documenting income eligibility are exhausted. Additionally, for individuals to self-certify income, a notarized statement indicating the lack of other proof of income is required. Finally, DOE agreed with our recommendation that it have a best practice guide for key internal controls, but DOE officials stated that there were sufficient documents in place to require internal controls, such as the grant terms and conditions and a training module, and that because the guidance is located in on the website, a best practice guide would be redundant. Therefore, DOE officials stated that they do not intend to fully implement our recommendation. Nonetheless, DOE distributed a memorandum dated May 13, 2011, to grantees reminding them of their responsibilities to ensure compliance with internal controls and the consequences of failing to do so. We will continue to monitor DOE’s progress in implementing the remaining recommendations. We expect to issue a report on the use of Recovery Act funds for the Weatherization Assistance Program and the extent to which program recipients are meeting Recovery Act and program goals, such as job creation and energy and cost savings, as well as the status of DOE’s response to our May 2010 recommendations by early 2012. Of the over $1.4 billion Commerce received under the Recovery Act for science-related projects and activities, Commerce reported that it had obligated nearly all of it (98 percent) and spent $894 million (62 percent) as of September 30, 2011. Table 6 shows Recovery Act funding, obligations, and expenditures for Commerce. As part of our February 2010 report,Recovery Act grants from Commerce’s National Institute of Standards and Technology had to delay or recast certain scheduled engineering or construction-related activities to fully understand, assess, and comply with the Recovery Act reporting and other requirements. In contrast, Commerce’s National Oceanic and Atmospheric Administration officials said federal requirements did not impact the processing of Recovery Act acquisitions. we found that some recipients of Of the $1 billion NASA received under the Recovery Act for science- related projects and activities, NASA reported that it had obligated nearly $1 billion (100 percent) and spent $948 million (95 percent) as of September 30, 2011. Table 4 shows Recovery Act funding, obligations, and expenditures for NASA. In a March 2009 report, we found that NASA large-scale projects had experienced significant cost and schedule growth, but the agency had undertaken an array of initiatives aimed at improving program management, cost estimating, and contractor oversight. However, we also noted that until these practices became integrated into NASA’s culture, it was unclear whether funding would be well spent and whether the achievement of NASA’s mission would be maximized. In our most recent update of that report, we found that, although cost and schedule growth remained an issue, Recovery Act funding enabled NASA to mitigate the impact of cost increases being experienced on some projects and to address problems being experienced by other projects. In several cases, NASA took advantage of the funding to build additional knowledge about technology or design before key milestones. In our July 2010 report,agencies’, use and oversight of noncompetitive contracts awarded under the Recovery Act. We found that most of the funds that NASA had obligated under Recovery Act contract actions, about 89 percent, were obligated on existing contracts. We found that officials at several agencies said the use of existing contracts allowed them to obligate funds quickly. Of the funds NASA obligated for new actions, over 79 percent were obligated on contracts that were competed. We also found that NASA undertook efforts to provide oversight and transparency of Recovery Act-funded activities. For example, NASA issued guidance to the procurement community on the implementation of the Recovery Act, prohibited the commingling of funds, and increased reporting to senior management. we reviewed NASA’s, as well as other Of the $3 billion it received under the Recovery Act for projects and activities, NSF reported that it had obligated nearly all of the $3 billion (almost 100 percent) and spent $1.4 billion (46 percent) as of September 30, 2011. Table 5 shows Recovery Act funding, obligations, and expenditures for NSF. In our October 2010 report, we reviewed the effectiveness of new and expanded activities authorized by the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science Act of 2007 (America COMPETES Act). The act authorized NSF’s Science Master’s Program, later funded by the Recovery Act. This program, along with 24 new programs and 20 existing programs, was funded to increase federal investment in basic scientific research and science, technology, engineering, and mathematics (STEM) education in the United States. The Science Master’s Program awarded 21 grants in fiscal year 2010, totaling $14.6 million. We found that evaluating the effectiveness of federal basic research and STEM education programs such as those authorized by the act can be inherently difficult. We also found that NSF was taking steps to evaluate the long-term effectiveness of their funded projects. As part of its broader initiative to pilot and review new approaches to the evaluation of its programs, NSF developed goals and metrics for activities in its education portfolio to reflect its increased expectations for evaluation of its funded projects. Chairman Broun, Ranking Member Tonko, and Members of the Subcommittee, this completes my prepared statement. As noted, we are continuing to monitor agencies’ use of Recovery Act funds and implementation of programs. I would be happy to respond to any questions you may have at this time. For further information regarding this testimony, please contact me at (202) 512-3841. Tanya Doriss, Kim Gianopoulos, Carol Kolarik, Holly Sasso, Ben Shouse and Jeremy Williams made key contributions to this testimony. Recovery Act Education Programs: Funding Retained Teachers, but Education Could More Consistently Communicate Stabilization Monitoring Issues. GAO-11-804. Washington, D.C.: September 2011. Recovery Act: Status of Department of Energy’s Obligations and Spending. GAO-11-483T. Washington, D.C.: March 17, 2011. Recovery Act: Energy Efficiency and Conservation Block Grant Recipients Face Challenges Meeting Legislative and Program Goals and Requirements. GAO-11-379. Washington, D.C.: April 2011. NASA: Assessments of Selected Large-Scale Projects. GAO-11-239SP. Washington, D.C.: March 3, 2011. Recovery Act: Opportunities to Improve Management and Strengthen Accountability over States’ and Localities’ Uses of Funds. GAO-10-999. Washington, D.C.: September 2010. Recovery Act: Contracting Approaches and Oversight Used by Selected Federal Agencies and States. GAO-10-809. Washington, D.C.: July 15, 2010. Recovery Act: Most DOE Cleanup Projects Appear to Be Meeting Cost and Schedule Targets, but Assessing Impact of Spending Remains a Challenge. GAO-10-784. Washington, D.C.: July 2010. Department of Energy: Further Actions Are Needed to Improve DOE’s Ability to Evaluate and Implement the Loan Guarantee Program. GAO-10-627. Washington, D.C.: July 2010. Recovery Act: States’ and Localities’ Uses of Funds and Actions Needed to Address Implementation Challenges and Bolster Accountability. GAO-10-604. Washington, D.C.: May 2010. Recovery Act: Increasing the Public’s Understanding of What Funds Are Being Spent on and What Outcomes Are Expected. GAO-10-581. Washington, D.C.: May 27, 2010. Recovery Act: Factors Affecting the Department of Energy’s Program Implementation. GAO-10-497T Washington, D.C.: March 4, 2010. Recovery Act: Project Selection and Starts Are Influenced by Certain Federal Requirements and Other Factors. GAO-10-383. Washington, D.C.: February 10, 2010. Recovery Act: GAO’s Efforts to Work with the Accountability Community to Help Ensure Effective and Efficient Oversight. GAO-09-672T. Washington, D.C.: May 5, 2009. American Recovery and Reinvestment Act: GAO’s Role in Helping to Ensure Accountability and Transparency for Science Funding. GAO-09-515T. Washington, D.C.: March 19, 2009. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The American Recovery and Reinvestment Act of 2009 (Recovery Act) is intended to preserve and create jobs and promote economic recovery, among other things. The Congressional Budget Office estimated in 2011 that the Recovery Act would cost $840 billion, including more than $40 billion in science-related activities at the Department of Energy (DOE), Department of Commerce, the National Aeronautics and Space Administration (NASA), and the National Science Foundation (NSF). These activities support fundamental research, demonstrate and deploy advanced energy technologies, purchase scientific instrumentation and equipment, and construct or modernize research facilities. The Recovery Act assigned GAO with a range of responsibilities, such as bimonthly reviews of how selected states and localities used funds, including for science-related activities. This statement updates the status of science-related Recovery Act funding for DOE, Commerce, NASA, and NSF and provides the status of prior recommendations from GAO's Recovery Act reports. This testimony is based on prior GAO work updated with agency data as of September 30, 2011. As of September 30, 2011, DOE, Commerce, NSF, and NASA had obligated about 98 percent of the more than $40 billion appropriated for science-related activities identified at those agencies. They had spent $22 billion, or 54 percent of appropriated funds. DOE received the majority of this funding, and the four agencies vary in the amount of Recovery Act funds they have obligated and spent for their programs, as well as the challenges they have faced in implementing the Recovery Act. For example: 1) Loan Guarantee Program for Innovative Technologies. As of September 30, 2011, DOE had obligated about 78 percent of the nearly $2.5 billion provided for this program, which among other things guarantees loans for projects using new or significantly improved technologies as compared with commercial technologies already in use in the United States and reported spending about 15 percent of those funds. In a July 2010 report (GAO-10-627), GAO made four recommendations for DOE to improve its evaluation and implementation of the program. DOE has begun to take steps to address our recommendations but has not fully addressed them, and GAO continues to believe DOE needs to make improvements to the program. 2) Weatherization Assistance Program. As of September 30, 2011, DOE had obligated the full $5 billion of Recovery Act funding provided for the Weatherization Assistance Program, which enables low-income families to reduce their utility bills by making long-term energy-efficiency improvements to their homes, and reported spending about 72 percent of those funds. In a May 2010 report (GAO-10-604), GAO made eight recommendations to DOE to clarify guidance and production targets. To date, DOE has implemented two of those recommendations: (1) it issued guidance on multi-family buildings and (2) clarified the definition of income and strengthened income eligibility requirements. 3) Commerce, NASA, and NSF. As of September 30, 2011, Commerce, NASA, and NSF each had obligated nearly all of their science-related Recovery Act funding. Commerce spent about 62 percent, NASA spent about 95 percent, and NSF spent about 46 percent of this funding. GAO has reported several times on the use of these funds and the challenges agencies faced. In a February 2010 report (GAO-10-383), GAO found that some recipients of Commerce's Recovery Act grants faced challenges complying with Recovery Act reporting and other federal requirements and had to delay or recast certain scheduled activities as a result. In a March 2009 report (GAO-09-306SP), GAO found that NASA's large-scale projects, including those that received Recovery Act funds, had experienced significant cost and schedule delays. In a March 2011 report, (GAO-11-239SP), GAO found that Recovery Act funds allowed NASA to reduce the impact of cost increases on some projects and to address problems being experienced by others. In GAO's October 2010 report (GAO-11-127R), it found that NSF's program to increase investment in science, technology, engineering, and mathematics education took steps to evaluate the long-term effectiveness of its projects and developed goals and metrics for that evaluation.

You are an expert at summarizing long articles. Proceed to summarize the following text: Ensuring that pharmaceuticals are available for those with legitimate medical need while combating the abuse and diversion of prescription drugs involves the efforts of both federal and state government agencies. Under the FD&C Act, FDA is responsible for ensuring that drugs are safe and effective before they are available in the marketplace. The Controlled Substances Act, which is administered by DEA, provides the legal framework for the federal government’s oversight of the manufacture and wholesale distribution of controlled substances, that is, drugs and other chemicals that have a potential for abuse. The states address certain issues involving controlled substances through their own controlled substances acts and their regulation of the practice of medicine and pharmacy. In response to concerns about the influence of pharmaceutical marketing and promotional activities on physician prescribing practices, both the pharmaceutical industry and the Department of Health and Human Services’s (HHS) Office of Inspector General have issued voluntary guidelines on appropriate marketing and promotion of prescription drugs. As the incidence and prevalence of painful diseases have grown along with the aging of the population, there has been a growing acknowledgment of the importance of providing effective pain relief. Pain can be characterized in terms of intensity—mild to severe—and duration—acute (sudden onset) or chronic (long term). The appropriate medical treatment varies according to these two dimensions. In 1986, WHO determined that cancer pain could be relieved in most if not all patients, and it encouraged physicians to prescribe opioid analgesics. WHO developed a three-step analgesic ladder as a practice guideline to provide a sequential use of different drugs for cancer pain management. For the first pain step, treatment with nonopioid analgesics, such as aspirin or ibuprofen, is recommended. If pain is not relieved, then an opioid such as codeine should be used for mild-to-moderate pain as the second step. For the third step—moderate-to-severe pain—opioids such as morphine should be used. Beginning in the mid-1990s, various national pain-related organizations issued pain treatment and management guidelines, which included the use of opioid analgesics in treating both cancer and noncancer pain. In 1995, the American Pain Society recommended that pain should be treated as the fifth vital sign to ensure that it would become common practice for health care providers to ask about pain when conducting patient evaluations. The practice guidelines issued by the Agency for Health Care Policy and Research provided physicians and other health care professionals with information on the management of acute pain in 1992 and cancer pain in 1994, respectively. Health care providers and hospitals were further required to ensure that their patients received appropriate pain treatment when the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), a national health care facility standards-setting and accrediting body, implemented its pain standards for hospital accreditation in 2001. OxyContin, a schedule II drug manufactured by Purdue Pharma L.P., was approved by FDA in 1995 for the treatment of moderate-to-severe pain lasting more than a few days, as indicated in the original label. OxyContin followed Purdue’s older product, MS Contin, a morphine-based product that was approved in 1984 for a similar intensity and duration of pain and during its early years of marketing was promoted for the treatment of cancer pain. The active ingredient in OxyContin tablets is oxycodone, a compound that is similar to morphine and is also found in oxycodone- combination pain relief drugs such as Percocet, Percodan, and Tylox. Because of its controlled-release property, OxyContin contains more active ingredient and needs to be taken less often (twice a day) than these other oxycodone-containing drugs. The OxyContin label originally approved by FDA indicated that the controlled-release characteristics of OxyContin were believed to reduce its potential for abuse. The label also contained a warning that OxyContin tablets were to be swallowed whole, and were not to be broken, chewed, or crushed because this could lead to the rapid release and absorption of a potentially toxic dose of oxycodone. Such a safety warning is customary for schedule II controlled-release medications. FDA first approved the marketing and use of OxyContin in 10-, 20-, and 40-milligram controlled-release tablets. FDA later approved 80- and 160-milligram controlled-release tablets for use by patients who were already taking opioids. In July 2001, FDA approved the revised label to state that the drug is approved for the treatment of moderate-to-severe pain in patients who require “a continuous around-the-clock analgesic for an extended period of time.” (See app. II for a summary of the changes that were made by FDA to the original OxyContin label.) OxyContin sales and prescriptions grew rapidly following its market introduction in 1996. Fortuitous timing may have contributed to this growth, as the launching of the drug occurred during the national focus on the inadequacy of patient pain treatment and management. In 1997, OxyContin’s sales and prescriptions began increasing significantly, and they continued to increase through 2002. In both 2001 and 2002, OxyContin’s sales exceeded $1 billion, and prescriptions were over 7 million. The drug became Purdue’s main product, accounting for 90 percent of the company’s total prescription sales by 2001. Media reports of OxyContin abuse and diversion began to surface in 2000. These reports first appeared in rural areas of some states, generally in the Appalachian region, and continued to spread to other rural areas and larger cities in several states. Rural communities in Maine, Kentucky, Ohio, Pennsylvania, Virginia, and West Virginia were reportedly being devastated by the abuse and diversion of OxyContin. For example, media reports told of persons and communities that had been adversely affected by the rise of addiction and deaths related to OxyContin. One report noted that drug treatment centers and emergency rooms in a particular area were receiving new patients who were addicted to OxyContin as early as 1999. Pain patients, teens, and recreational drug users who had abused OxyContin reportedly entered drug treatment centers sweating and vomiting from withdrawal. In West Virginia, as many as one-half of the approximately 300 patients admitted to a drug treatment clinic in 2000 were treated for OxyContin addiction. The media also reported on deaths due to OxyContin. For example, a newspaper’s investigation of autopsy reports involving oxycodone-related deaths found that OxyContin had been involved in over 200 overdose deaths in Florida since 2000. In another case, a forensic toxicologist commented that he had reviewed a number of fatal overdose cases in which individuals took a large dose of OxyContin, in combination with alcohol or other drugs. After learning about the initial reports of abuse and diversion of OxyContin in Maine in 2000, Purdue formed a response team made up of its top executives and physicians to initiate meetings with federal and state officials in Maine to gain an understanding of the scope of the problem and to devise strategies for preventing abuse and diversion. After these meetings, Purdue distributed brochures to health care professionals that described several steps that could be taken to prevent prescription drug abuse and diversion. In response to the abuse and diversion reports, DEA analyzed data collected from medical examiner autopsy reports and crime scene investigation reports. The most recent data available from DEA show that as of February 2002, the agency had verified 146 deaths nationally involving OxyContin in 2000 and 2001. According to Purdue, as of early October 2003, over 300 lawsuits concerning OxyContin were pending against Purdue, and 50 additional lawsuits had been dismissed. The cases involve many allegations, including, for example, that Purdue used improper sales tactics and overpromoted OxyContin causing the drug to be inappropriately prescribed by physicians, and that Purdue took inadequate actions to prevent addiction, abuse, and diversion of the drug. The lawsuits have been brought in 25 states and the District of Columbia in both federal and state courts. 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 LSD—have a high potential for abuse and no currently accepted medical use. Schedule II drugs—which include opioids such as morphine and oxycodone, the primary ingredient in OxyContin— have a high potential for abuse among drugs with an accepted medical use and may lead to severe psychological or physical dependence. Drugs on schedules III through V have 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 drugs 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 FD&C Act and implementing regulations, FDA is responsible for ensuring that all new drugs are safe and effective. FDA reviews scientific and clinical data to decide whether to approve drugs based on their intended use, effectiveness, and the risks and benefits for the intended population, and also monitors drugs for continued safety after they are in use. FDA also regulates the advertising and promotion of prescription drugs under the FD&C Act. FDA carries out this responsibility by ensuring that prescription drug advertising and promotion is truthful, balanced, and accurately communicated. The FD&C Act makes no distinction between controlled substances and other prescription drugs in the oversight of promotional activities. FDA told us that the agency takes a risk-based approach to enforcement, whereby drugs with more serious risks, such as opioids, are given closer scrutiny in monitoring promotional messages and activities, but the agency has no specific guidance or policy on this approach. The FD&C Act and its implementing regulations require that all promotional materials for prescription drugs be submitted to FDA at the time the materials are first disseminated or used, but it generally is not required that these materials be approved by FDA before their use. As a result, FDA’s actions to address violations occur after the materials have already appeared in public. In fiscal year 2002, FDA had 39 staff positions dedicated to oversight of drug advertising and promotion of all pharmaceuticals distributed in the United States. According to FDA, most of the staff focuses on the oversight of promotional communications to physicians. FDA officials told us that in 2001 it received approximately 34,000 pieces of promotional material, including consumer advertisements and promotions to physicians, and received and reviewed 230 complaints about allegedly misleading advertisements, including materials directed at health professionals. FDA issues two types of letters to address violations of the FD&C Act: untitled letters and warning letters. Untitled letters are issued for violations such as overstating the effectiveness of the drug, suggesting a broader range of indicated uses than the drug has been approved for, and making misleading claims because of inadequate context or lack of balanced information. Warning letters are issued for more serious violations, such as those involving safety or health risks, or for continued violations of the act. Warning letters generally advise a pharmaceutical manufacturer that FDA may take further enforcement actions, such as seeking judicial remediation, without notifying the company and may ask the manufacturer to conduct a new advertising campaign to correct inaccurate impressions left by the advertisements. Under the Controlled Substances Act, FDA notifies DEA if FDA is reviewing a new drug application for a drug that has a stimulant, depressant, or hallucinogenic effect on the central nervous system and has abuse potential. FDA performs a medical and scientific assessment as required by the Controlled Substances Act, and recommends to DEA an initial schedule level to be assigned to a new controlled substance. FDA plans to provide guidance to the pharmaceutical industry on the development, implementation, and evaluation of risk management plans as a result of the reauthorization of the Prescription Drug User Fee Act of 1992 (PDUFA). FDA expects to issue this guidance by September 30, 2004. FDA defines a risk management program as a strategic safety program that is designed to decrease product risks by using one or more interventions or tools beyond the approved product labeling. Interventions used in risk management plans may include postmarketing surveillance, education and outreach programs to health professionals or consumers, informed consent agreements for patients, limitations on the supply or refills of products, and restrictions on individuals who may prescribe and dispense drug products. All drug manufacturers have the option to develop and submit risk management plans to FDA as part of their new drug applications. DEA is the primary federal agency responsible for enforcing the Controlled Substances Act. DEA has the authority to regulate transactions involving the sale and distribution of controlled substances at the manufacturer and wholesale distributor levels. DEA registers legitimate handlers of controlled substances—including manufacturers, distributors, hospitals, pharmacies, practitioners, and researchers—who must comply with regulations relating to drug security and accountability through the maintenance of inventories and records. All registrants, including pharmacies, are required to maintain records of controlled substances that have been manufactured, purchased, and sold. Manufacturers and distributors are also required to report their annual inventories of controlled substances to DEA. The data provided to DEA are available for use in monitoring the distribution of controlled substances throughout the United States and identifying retail-level registrants that received unusual quantities of controlled substances. DEA regulations for schedule II prescription drugs, unlike those for other prescription drugs, require that each prescription must be written and signed by the physician and may not be telephoned in to the pharmacy except in an emergency. Also, a prescription for a schedule II drug may not be refilled. A physician is required to provide a new prescription each time a patient obtains more of the drug. DEA also sets limits on the quantity of schedule II controlled substances that may be produced in the United States in any given year. Specifically, DEA sets aggregate production quotas that limit the production of bulk raw materials used in the manufacture of controlled substances. DEA determines these quotas based on a variety of data including sales, production, inventories, and exports. Individual companies must apply to DEA for manufacturing or procurement quotas for specific pharmaceutical products. For example, Purdue has a procurement quota for oxycodone, the principle ingredient in OxyContin, that allows the company to purchase specified quantities of oxycodone from bulk manufacturers. State laws govern the prescribing and dispensing of prescription drugs by licensed health care professionals. Each state requires that physicians practicing in the state be licensed, and state medical practice laws generally outline standards for the practice of medicine and delegate the responsibility of regulating physicians to state medical boards. States also require pharmacists and pharmacies to be licensed. The regulation of the practice of pharmacy is based on state pharmacy practice acts and regulations enforced by the state boards of pharmacy. 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 regulatory boards 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 some cases, consumers can purchase prescription drugs, including controlled substances, such as OxyContin, from Internet pharmacies without a valid prescription. In addition to these regulatory boards, 15 states operate prescription drug monitoring programs as a means to control the illegal diversion of prescription drugs that are controlled substances. Prescription drug monitoring programs are designed to facilitate the collection, analysis, and reporting of information on the prescribing, dispensing, and use of controlled substances within a state. They provide data and analysis to state law enforcement and regulatory agencies to assist in identifying and investigating activities potentially related to the illegal prescribing, dispensing, and procuring of controlled substances. For example, physicians in Kentucky can use the program to check a patient’s prescription drug history to determine if the individual may be “doctor shopping” to seek multiple controlled substance prescriptions. An overriding goal of prescription drug monitoring programs is to support both the state laws ensuring access to appropriate pharmaceutical care by citizens and the state laws deterring diversion. As we have reported, state prescription drug monitoring programs offer state regulators an efficient means of detecting and deterring illegal diversion. However, few states proactively analyze prescription data to identify individuals, physicians, or pharmacies that have unusual use, prescribing, or dispensing patterns that may suggest potential drug diversion or abuse. Although three states can respond to requests for information within 3 to 4 hours, providing information on suspected illegal prescribing, dispensing, or doctor shopping at the time a prescription is written or sold would require states to improve computer capabilities. In addition, state prescription drug monitoring programs may require additional legal authority to analyze data proactively. At the time that OxyContin was first marketed, there were no industry or federal guidelines for the promotion of prescription drugs. Voluntary guidelines regarding how drug companies should market and promote their drugs to health care professionals were issued in July 2002 by the Pharmaceutical Research and Manufacturers of America (PhRMA). In April 2003, HHS’s Office of Inspector General issued voluntary guidelines for how drug companies should market and promote their products to federal health care programs. Neither set of guidelines distinguishes between controlled and noncontrolled substances. PhRMA’s voluntary code of conduct for sales representatives states that interactions with health care professionals should be to inform these professionals about products, to provide scientific and educational information, and to support medical research and education. The question-and-answer section of the code addresses companies’ use of branded promotional items, stating, for example, that golf balls and sports bags should not be distributed because they are not primarily for the benefit of patients, but that speaker training programs held at golf resorts may be acceptable if participants are receiving extensive training. Purdue adopted the code. In April 2003, HHS’s Office of Inspector General issued final voluntary guidance for drug companies’ interactions with health care professionals in connection with federal health care programs, including Medicare and Medicaid. Among the guidelines were cautions for companies against offering inappropriate travel, meals, and gifts to influence the prescribing of drugs; making excessive payments to physicians for consulting and research services; and paying physicians to switch their patients from competitors’ drugs. Purdue conducted an extensive campaign to market and promote OxyContin that focused on encouraging physicians, including those in primary care specialties, to prescribe the drug for noncancer as well as cancer pain. To implement its OxyContin campaign, Purdue significantly increased its sales force and used multiple promotional approaches. OxyContin sales and prescriptions grew rapidly following its market introduction, with the growth in prescriptions for noncancer pain outpacing the growth in prescriptions for cancer pain. DEA has expressed concern that Purdue marketed OxyContin for a wide variety of conditions to physicians who may not have been adequately trained in pain management. Purdue has been cited twice by FDA for OxyContin advertisements in medical journals that violated the FD&C Act. FDA has also taken similar actions against manufacturers of two of the three comparable schedule II controlled substances we examined, to ensure that their marketing and promotion were truthful, balanced, and accurately communicated. In addition, Purdue provided two promotional videos to physicians that, according to FDA appear to have made unsubstantiated claims and minimized the risks of OxyContin. The first video was available for about 3 years without being submitted to FDA for review. From the outset of the OxyContin marketing campaign, Purdue promoted the drug to physicians for noncancer pain conditions that can be caused by arthritis, injuries, and chronic diseases, in addition to cancer pain. Purdue directed its sales representatives to focus on the physicians in their sales territories who were high opioid prescribers. This group included cancer and pain specialists, primary care physicians, and physicians who were high prescribers of Purdue’s older product, MS Contin. One of Purdue’s goals was to identify primary care physicians who would expand the company’s OxyContin prescribing base. Sales representatives were also directed to call on oncology nurses, consultant pharmacists, hospices, hospitals, and nursing homes. From OxyContin’s launch until its July 2001 label change, Purdue used two key promotional messages for primary care physicians and other high prescribers. The first was that physicians should prescribe OxyContin for their pain patients both as the drug “to start with and to stay with.” The second contrasted dosing with other opioid pain relievers with OxyContin dosing as “the hard way versus the easy way” to dose because OxyContin’s twice-a-day dosing was more convenient for patients. Purdue’s sales representatives promoted OxyContin to physicians as an initial opioid treatment for moderate-to-severe pain lasting more than a few days, to be prescribed instead of other single-entity opioid analgesics or short-acting combination opioid pain relievers. Purdue has stated that by 2003 primary care physicians had grown to constitute nearly half of all OxyContin prescribers, based on data from IMS Health, an information service providing pharmaceutical market research. DEA’s analysis of physicians prescribing OxyContin found that the scope of medical specialties was wider for OxyContin than five other controlled-release, schedule II narcotic analgesics. DEA expressed concern that this resulted in OxyContin’s being promoted to physicians who were not adequately trained in pain management. Purdue’s promotion of OxyContin for the treatment of noncancer pain contributed to a greater increase in prescriptions for noncancer pain than for cancer pain from 1997 through 2002. According to IMS Health data, the annual number of OxyContin prescriptions for noncancer pain increased nearly tenfold, from about 670,000 in 1997 to about 6.2 million in 2002. In contrast, during the same 6 years, the annual number of OxyContin prescriptions for cancer pain increased about fourfold, from about 250,000 in 1997 to just over 1 million in 2002. The noncancer prescriptions therefore increased from about 73 percent of total OxyContin prescriptions to about 85 percent during that period, while the cancer prescriptions decreased from about 27 percent of the total to about 15 percent. IMS Health data indicated that prescriptions for other schedule II opioid drugs, such as Duragesic and morphine products, for noncancer pain also increased during this period. Duragesic prescriptions for noncancer pain were about 46 percent of its total prescriptions in 1997, and increased to about 72 percent of its total in 2002. Morphine products, including, for example, Purdue’s MS Contin, also experienced an increase in their noncancer prescriptions during the same period. Their noncancer prescriptions were about 42 percent of total prescriptions in 1997, and increased to about 65 percent in 2002. DEA has cited Purdue’s focus on promoting OxyContin for treating a wide range of conditions as one of the reasons the agency considered Purdue’s marketing of OxyContin to be overly aggressive. Purdue significantly increased its sales force to market and promote OxyContin to physicians and other health care practitioners. In 1996, Purdue began promoting OxyContin with a sales force of approximately 300 representatives in its Prescription Sales Division. Through a 1996 copromotion agreement, Abbott Laboratories provided at least another 300 representatives, doubling the total OxyContin sales force. By 2000, Purdue had more than doubled its own internal sales force to 671. The expanded sales force included sales representatives from the Hospital Specialty Division, which was created in 2000 to increase promotional visits on physicians located in hospitals. (See table 1.) The manufacturers of two of the three comparable schedule II drugs have smaller sales forces than Purdue. Currently, the manufacturer of Kadian has about 100 sales representatives and is considering entering into a copromotion agreement. Elan, the current owner of Oramorph SR, has approximately 300 representatives, but told us that it is not currently marketing Oramorph SR. The manufacturer of Avinza had approximately 50 representatives at its product launch. In early 2003, Avinza’s manufacturer announced that more than 700 additional sales representatives would be promoting the drug under its copromotion agreement with the pharmaceutical manufacturer Organon—for a total of more than 800 representatives. By more than doubling its total sales representatives, Purdue significantly increased the number of physicians to whom it was promoting OxyContin. Each Purdue sales representative has a specific sales territory and is responsible for developing a list of about 105 to 140 physicians to call on who already prescribe opioids or who are candidates for prescribing opioids. In 1996, the 300-plus Purdue sales representatives had a total physician call list of approximately 33,400 to 44,500. By 2000, the nearly 700 representatives had a total call list of approximately 70,500 to 94,000 physicians. Each Purdue sales representative is expected to make about 35 physician calls per week and typically calls on each physician every 3 to 4 weeks. Each hospital sales representative is expected to make about 50 calls per week and typically calls on each facility every 4 weeks. Purdue stated it offered a “better than industry average” salary and sales bonuses to attract top sales representatives and provide incentives to boost OxyContin sales as it had done for MS Contin. Although the sales representatives were primarily focused on OxyContin promotion, the amount of the bonus depended on whether a representative met the sales quotas in his or her sales territory for all company products. As OxyContin’s sales increased, Purdue’s growth-based portion of the bonus formula increased the OxyContin sales quotas necessary to earn the same base sales bonus amounts. The amount of total bonuses that Purdue estimated were tied to OxyContin sales increased significantly from about $1 million in 1996, when OxyContin was first marketed, to about $40 million in 2001. Beginning in 2000, when the newly created hospital specialty representatives began promoting OxyContin, their estimated total bonuses were approximately $6 million annually. In 2001, the average annual salary for a Purdue sales representative was $55,000, and the average annual bonus was $71,500. During the same year, the highest annual sales bonus was nearly $240,000, and the lowest was nearly $15,000. In 2001, Purdue decided to limit the sales bonus a representative could earn based on the growth in prescribing of a single physician after a meeting with the U.S. Attorney for the Western District of Virginia at which the company was informed of the possibility that a bonus could be based on the prescribing of one physician. In addition to expanding its sales force, Purdue used multiple approaches to market and promote OxyContin. These approaches included expanding its physician speaker bureau and conducting speaker training conferences, sponsoring pain-related educational programs, issuing OxyContin starter coupons for patients’ initial prescriptions, sponsoring pain-related Web sites, advertising OxyContin in medical journals, and distributing OxyContin marketing items to health care professionals. In our report on direct-to-consumer advertising, we found that most promotional spending is targeted to physicians. For example, in 2001, 29 percent of spending on pharmaceutical promotional activities was related to activities of pharmaceutical sales representatives directed to physicians, and 2 percent was for journal advertising—both activities Purdue uses for its OxyContin promotion. The remaining 69 percent of pharmaceutical promotional spending involved sampling (55 percent), which is the practice of providing drug samples during sales visits to physician offices, and direct-to-consumer advertising (14 percent)—both activities that Purdue has stated it does not use for OxyContin. According to DEA’s analysis of IMS Health data, Purdue spent approximately 6 to 12 times more on promotional efforts during OxyContin’s first 6 years on the market than it had spent on its older product, MS Contin, during its first 6 years, or than had been spent by Janssen Pharmaceutical Products, L.P., for one of OxyContin’s drug competitors, Duragesic. (See fig. 1.) During the first 5 years that OxyContin was marketed, Purdue conducted over 40 national pain management and speaker training conferences, usually in resort locations such as Boca Raton, Florida, and Scottsdale, Arizona, to recruit and train health care practitioners for its national speaker bureau. The trained speakers were then made available to speak about the appropriate use of opioids, including oxycodone, the active ingredient in OxyContin, to their colleagues in various settings, such as local medical conferences and grand round presentations in hospitals involving physicians, residents, and interns. Over the 5 years, these conferences were attended by more than 5,000 physicians, pharmacists, and nurses, whose travel, lodging, and meal costs were paid by the company. Purdue told us that less than 1 percent annually of the physicians called on by Purdue sales representatives attended these conferences. Purdue told us it discontinued conducting these conferences in fall 2000. Purdue’s speaker bureau list from 1996 through mid-2002 included nearly 2,500 physicians, of whom over 1,000 were active participants. Purdue has paid participants a fee for speaking based on the physician’s qualifications; the type of program and time commitment involved; and expenses such as airfare, hotel, and food. The company currently marketing the comparable drug Avinza has a physician speaker bureau, but does not sponsor speaker training and conferences at resort locations. Kadian’s current company does not have a physician speaker bureau and has not held any conferences. From 1996, when OxyContin was introduced to the market, to July 2002, Purdue has funded over 20,000 pain-related educational programs through direct sponsorship or financial grants. These grants included support for programs to provide physicians with opportunities to earn required continuing medical education credits, such as grand round presentations at hospitals and medical education seminars at state and local medical conferences. During 2001 and 2002, Purdue funded a series of nine programs throughout the country to educate hospital physicians and staff on how to comply with JCAHO’s pain standards for hospitals and to discuss postoperative pain treatment. Purdue was one of only two drug companies that provided funding for JCAHO’s pain management educational programs. Under an agreement with JCAHO, Purdue was the only drug company allowed to distribute certain educational videos and a book about pain management; these materials were also available for purchase from JCAHO’s Web site. Purdue’s participation in these activities with JCAHO may have facilitated its access to hospitals to promote OxyContin. For the first time in marketing any of its products, Purdue used a patient starter coupon program for OxyContin to provide patients with a free limited-time prescription. Unlike patient assistance programs, which provide free prescriptions to patients in financial need, a coupon program is intended to enable a patient to try a new drug through a one-time free prescription. A sales representative distributes coupons to a physician, who decides whether to offer one to a patient, and then the patient redeems it for a free prescription through a participating pharmacy. The program began in 1998 and ran intermittently for 4 years. In 1998 and 1999, each sales representative had 25 coupons that were redeemable for a free 30-day supply. In 2000 each representative had 90 coupons for a 7-day supply, and in 2001 each had 10 coupons for a 7-day supply. Approximately 34,000 coupons had been redeemed nationally when the program was terminated following the July 2001 OxyContin label change. The manufacturers of two of the comparable drugs we examined—Avinza and Kadian—used coupon programs to introduce patients to their products. Avinza’s coupon program requires patients to make a copayment to cover part of the drug’s cost. Purdue has also used Web sites to provide pain-related information to consumers and others. In addition to its corporate Web site, which provides product information, Purdue established the “Partners Against Pain” Web site in 1997 to provide consumers with information about pain management and pain treatment options. According to FDA, the Web site also contained information about OxyContin. Separate sections provide information for patients and caregivers, medical professionals, and institutions. The Web site includes a “Find a Doctor” feature to enable consumers to find physicians who treat pain in their geographic area. As of July 2002, over 33,000 physicians were included. Ligand, which markets Avinza, one of the comparable drugs, has also used a corporate Web site to provide product information. Purdue has also funded Web sites, such as FamilyPractice.com, that provide physicians with free continuing medical educational programs on pain management. Purdue has also provided funding for Web site development and support for health care groups such as the American Chronic Pain Association and the American Academy of Pain Medicine. In addition, Purdue is one of 28 corporate donors—which include all three comparable drug companies—listed on the Web site of the American Pain Society, the mission of which is to improve pain-related education, treatment, and professional practice. Purdue also sponsors painfullyobvious.com, which it describes as a youth-focused “message campaign designed to provide information—and stimulate open discussions—on the dangers of abusing prescription drugs.” Purdue also provided its sales representatives with 14,000 copies of a promotional video in 1999 to distribute to physicians. Entitled From One Pain Patient to Another: Advice from Patients Who Have Found Relief, the video was to encourage patients to report their pain and to alleviate patients’ concerns about taking opioids. Purdue stated that the video was to be used “in physician waiting rooms, as a ‘check out’ item for an office’s patient education library, or as an educational tool for office or hospital staff to utilize with patients and their families.” Copies of the video were also available for ordering on the “Partners Against Pain” Web site from June 2000 through July 2001. The video did not need to be submitted to FDA for its review because it did not contain any information about OxyContin. However, the video included a statement that opioid analgesics have been shown to cause addiction in less than 1 percent of patients. According to FDA, this statement has not been substantiated. As part of its marketing campaign, Purdue distributed several types of branded promotional items to health care practitioners. Among these items were OxyContin fishing hats, stuffed plush toys, coffee mugs with heat-activated messages, music compact discs, luggage tags, and pens containing a pullout conversion chart showing physicians how to calculate the dosage to convert a patient to OxyContin from other opioid pain relievers. In May 2002, in anticipation of PhRMA’s voluntary guidance for sales representatives’ interactions with health care professionals, Purdue instructed its sales force to destroy any remaining inventory of non-health- related promotional items, such as stuffed toys or golf balls. In early 2003, Purdue began distributing an OxyContin branded goniometer—a range and motion measurement guide. According to DEA, Purdue’s use of branded promotional items to market OxyContin was unprecedented among schedule II opioids, and was an indicator of Purdue’s aggressive and inappropriate marketing of OxyContin. Another approach Purdue used to promote OxyContin was to place advertisements in medical journals. Purdue’s annual spending for OxyContin advertisements increased from about $700,000 in 1996 to about $4.6 million in 2001. All three companies that marketed the comparable drugs have also used medical journal advertisements to promote their products. Purdue has been cited twice by FDA for using advertisements in professional medical journals that violated the FD&C Act. In May 2000, FDA issued an untitled letter to Purdue regarding a professional medical journal advertisement for OxyContin. FDA noted that among other problems, the advertisement implied that OxyContin had been studied for all types of arthritis pain when it had been studied only in patients with moderate-to-severe osteoarthritis pain, the advertisement suggested OxyContin could be used as an initial therapy for the treatment of osteoarthritis pain without substantial evidence to support this claim, and the advertisement promoted OxyContin in a selected class of patients— the elderly—without presenting risk information applicable to that class of patients. Purdue agreed to stop dissemination of the advertisement. The second action taken by FDA was more serious. In January 2003, FDA issued a warning letter to Purdue regarding two professional medical journal advertisements for OxyContin that minimized its risks and overstated its efficacy, by failing to prominently present information from the boxed warning on the potentially fatal risks associated with OxyContin and its abuse liability, along with omitting important information about the limitations on the indicated use of OxyContin. The FDA requested that Purdue cease disseminating these advertisements and any similar violative materials and provide a plan of corrective action. In response, Purdue issued a corrected advertisement, which called attention to the warning letter and the cited violations and directed the reader to the prominently featured boxed warning and indication information for OxyContin. The FDA letter was one of only four warning letters issued to drug manufacturers during the first 8 months of 2003. In addition, in follow-up discussions with Purdue officials on the January 2003 warning letter, FDA expressed concerns about some of the information on Purdue’s “Partners Against Pain” Web site. The Web site appeared to suggest unapproved uses of OxyContin for postoperative pain that may have been inconsistent with OxyContin’s labeling and lacked risk information about the drug. For example, one section of the Web site did not disclose that OxyContin is not indicated for pain in the immediate postoperative period—the first 12 to 24 hours following surgery—for patients not previously taking the drug, because its safety in this setting has not been established. The Web site also did not disclose that OxyContin is indicated for postoperative pain in patients already taking the drug or for use after the first 24 hours following surgery only if the pain is moderate to severe and expected to persist for an extended period of time. Purdue voluntarily removed all sections of the Web site that were of concern to FDA. FDA has also sent enforcement letters to other manufacturers of controlled substances for marketing and promotion violations of the FD&C Act. For example, in 1996, FDA issued an untitled letter to Zeneca Pharmaceuticals, at the time the promoter of Kadian, for providing information about the drug to a health professional prior to its approval in the United States. Roxane Laboratories, the manufacturer of Oramorph SR, was issued four untitled letters between 1993 and 1995 for making misleading and possibly false statements. Roxane used children in an advertisement even though Oramorph SR had not been evaluated in children, and a Roxane sales representative issued a promotional letter to a pharmacist that claimed, among other things, that Oramorph SR was superior to MS Contin in providing pain relief. FDA has sent no enforcement letters to Ligand Pharmaceuticals concerning Avinza. Beginning in 1998, Purdue, as part of its marketing and promotion of OxyContin, distributed 15,000 copies of an OxyContin video to physicians without submitting it to FDA for review. This video, entitled I Got My Life Back: Patients in Pain Tell Their Story, presented the pain relief experiences of various patients and the pain medications, including OxyContin, they had been prescribed. FDA regulations require pharmaceutical manufacturers to submit all promotional materials for approved prescription drug products to the agency at the time of their initial use. Because Purdue did not comply with this regulation, FDA did not have an opportunity to review the video to ensure that the information it contained was truthful, balanced, and accurately communicated. Purdue has acknowledged the oversight of not submitting the video to FDA for review. In February 2001, Purdue submitted a second version of the video to FDA, which included information about the 160-milligram OxyContin tablet. FDA did not review this second version until October 2002, after we inquired about its content. FDA told us it found that the second version of the video appeared to make unsubstantiated claims regarding OxyContin’s effect on patients’ quality of life and ability to perform daily activities and minimized the risks associated with the drug. The 1998 video used a physician spokesperson to describe patients with different pain syndromes and the limitations that each patient faced in his or her daily activities. Each patient’s pain treatment was discussed, along with the dose amounts and brand names of the prescription drugs, including OxyContin, that either had been prescribed in the past or were being prescribed at that time. The physician in the videos also stated that opioid analgesics have been shown to cause addiction in less than 1 percent of patients—a fact that FDA has stated has not been substantiated. At the end of the video, the OxyContin label was scrolled for the viewer. In 2000, Purdue submitted another promotional video to FDA entitled I Got My Life Back: A Two Year Follow up of Patients in Pain, and it submitted a second version of this video in 2001, which also included information on the 160-milligram OxyContin tablet. Purdue distributed 12,000 copies of these videos to physicians. Both versions scrolled the OxyContin label at the end of the videos. FDA stated that it did not review either of these videos for enforcement purposes because of limited resources. Distribution of all four Purdue videos was discontinued by July 2001, in response to OxyContin’s labeling changes, which required the company to modify all of its promotional materials, but copies of the videos that had already been distributed were not retrieved and destroyed. FDA said that it receives numerous marketing and promotional materials for promoted prescription drugs and that while every effort is made to review the materials, it cannot guarantee that all materials are reviewed because of limited resources and competing priorities. FDA officials also stated that pharmaceutical companies do not always submit promotional materials as required by regulations and that in such instances FDA would not have a record of the promotional pieces. There are several factors that may have contributed to the abuse and diversion of OxyContin. OxyContin’s formulation as a controlled-release opioid that is twice as potent as morphine may have made it an attractive target for abuse and diversion. In addition, the original label’s safety warning advising patients not to crush the tablets because of the possible rapid release of a potentially toxic amount of oxycodone may have inadvertently alerted abusers to possible methods for misuse. Further, the rapid growth in OxyContin sales increased the drug’s availability in the marketplace and may have contributed to opportunities to obtain the drug illicitly. The history of abuse and diversion of prescription drugs in some geographic areas, such as those within the Appalachian region, may have predisposed some states to problems with OxyContin. However, we could not assess the relationship between the growth in OxyContin prescriptions or increased availability with the drug’s abuse and diversion because the data on abuse and diversion are not reliable, comprehensive, or timely. While OxyContin’s potency and controlled-release feature may have made the drug beneficial for the relief of moderate-to-severe pain over an extended period of time, DEA has stated that those attributes of its formulation have also made it an attractive target for abuse and diversion. According to recent studies, oxycodone, the active ingredient in OxyContin, is twice as potent as morphine. In addition, OxyContin’s controlled-release feature allows a tablet to contain more active ingredient than other, non-controlled-release oxycodone-containing drugs. One factor that may have contributed to the abuse and diversion of OxyContin was FDA’s original decision to label the drug as having less abuse potential than other oxycodone products because of its controlled- release formulation. FDA officials said when OxyContin was approved the agency believed that the controlled-release formulation would result in less abuse potential because, when taken properly, the drug would be absorbed slowly, without an immediate rush or high. FDA officials acknowledged that the initial wording of OxyContin’s label was “unfortunate” but was based on what was known about the product at that time. FDA officials told us that abusers typically seek a drug that is intense and fast-acting. When OxyContin was approved, FDA did not recognize that if the drug is dissolved in water and injected its controlled-release characteristics could be disrupted, creating an immediate rush or high and thereby increasing the potential for misuse and abuse. DEA officials told us that OxyContin became a target for abusers and diverters because the tablet contained larger amounts of active ingredient and the controlled- release formulation was easy for abusers to compromise. The safety warning on the OxyContin label may also have contributed to the drug’s potential for abuse and diversion, by inadvertently providing abusers with information on how the drug could be misused. The label included the warning that the tablets should not be broken, chewed, or crushed because such action could result in the rapid release and absorption of a potentially toxic dose of oxycodone. FDA places similar safety warnings on other drugs to ensure that they are used properly. FDA officials stated that neither they nor other experts anticipated that crushing the controlled-release tablet and intravenously injecting or snorting the drug would become widespread and lead to a high level of abuse. The large amount of OxyContin available in the marketplace may have increased opportunities for abuse and diversion. Both DEA and Purdue have stated that an increase in a drug’s availability in the marketplace may be a factor that attracts interest by those who abuse and divert drugs. Following its market introduction in 1996, OxyContin sales and prescriptions grew rapidly through 2002. In 2001 and 2002 combined, sales of OxyContin approached $3 billion, and over 14 million prescriptions for the drug were dispensed. (See table 2.) OxyContin also became the top- selling brand-name narcotic pain reliever in 2001 and was ranked 15th on a list of the nation’s top 50 prescription drugs by retail sales. According to DEA, the abuse and diversion of OxyContin in some states may have reflected the geographic area’s history of prescription drug abuse. The White House Office of National Drug Control Policy (ONDCP) designates geographic areas with illegal drug trade activities for allocation of federal resources to link local, state, and federal drug investigation and enforcement efforts. These areas, known as High-Intensity Drug Trafficking Areas (HIDTA), are designated by ONDCP in consultation with the Attorney General, the Secretary of the Treasury, heads of drug control agencies, and governors in the states involved. According to a 2001 HIDTA report, the Appalachian region, which encompasses parts of Kentucky, Tennessee, Virginia, and West Virginia, has been severely affected by prescription drug abuse, particularly pain relievers, including oxycodone, for many years. Three of the four states— Kentucky, Virginia, and West Virginia—were among the initial states to report OxyContin abuse and diversion. Historically, oxycodone, manufactured under brand names such as Percocet, Percodan, and Tylox, was among the most diverted prescription drugs in Appalachia. According to the report, OxyContin has become the drug of choice of abusers in several areas within the region. The report indicates that many areas of the Appalachian region are rural and poverty-stricken, and the profit potential resulting from the illicit sale of OxyContin may have contributed to its diversion and abuse. In some parts of Kentucky, a 20-milligram OxyContin tablet, which can be purchased by legitimate patients for about $2, can be sold illicitly for as much as $25. The potential to supplement their incomes can lure legitimate patients into selling some of their OxyContin to street dealers, according to the HIDTA report. The databases DEA uses to track the abuse and diversion of controlled substances all have limitations that prevent an assessment of the relationship between the availability of OxyContin and areas where the drug is being abused or diverted. Specifically, these databases, which generally do not provide information on specific brand-name drugs such as OxyContin, are based on data gathered from limited sources in specific geographic areas and have a significant time lag. As a result, they do not provide reliable, complete, or timely information that could be used to identify abuse and diversion of a specific drug. DEA officials told us that it is difficult to obtain reliable data on what controlled substances are being abused by individuals and diverted from pharmacies because available drug abuse and diversion tracking systems do not capture data on a specific brand-name product or indicate where a drug product is being abused and diverted on a state and local level. Because of the time lags in reporting information, the data reflect a delayed response to any emerging drug abuse and diversion problem. For example, the Drug Abuse Warning Network (DAWN) estimates national drug-related emergency department visits or deaths involving abused drugs using data collected by the Substance Abuse and Mental Health Services Administration (SAMHSA). The data are collected from hospital emergency departments in 21 metropolitan areas that have agreed to voluntarily report drug-abuse-related information from a sample of patient medical records, and from medical examiners in 42 metropolitan areas. However, DAWN cannot make estimates for rural areas, where initial OxyContin abuse and diversion problems were reported to be most prevalent, nor does it usually provide drug-product-specific information, and its data have a lag time of about 1 year. DEA stated that development of enhanced data collection systems is needed to provide “credible, legally defensible evidence concerning drug abuse trends in America.” DEA relies primarily on reports from its field offices to determine where abuse and diversion are occurring. DEA officials stated that the initial areas that experienced OxyContin abuse and diversion problems included rural areas within 8 states—Alaska, Kentucky, Maine, Maryland, Ohio, Pennsylvania, Virginia, and West Virginia. In July 2002, DEA told us that it learned that OxyContin abuse and diversion problems had spread into larger areas of the initial 8 states, as well as parts of 15 other states, to involve almost half of the 50 states. According to DEA officials, while DEA field offices continue to report OxyContin as a drug of choice among abusers, OxyContin has not been and is not now considered the most highly abused and diverted prescription drug nationally. OxyContin is the most abused single-entity prescription product according to those DEA state and divisional offices that report OxyContin abuse. Since becoming aware of reports of abuse and diversion of OxyContin, federal and state agencies and Purdue have taken actions intended to address these problems. To protect the public health, FDA has strengthened OxyContin label warnings and requested that Purdue develop and implement an OxyContin risk management plan. In addition, DEA has stepped up law enforcement actions to prevent abuse and diversion of OxyContin. State Medicaid fraud control units have also attempted to identify those involved in the abuse and diversion of OxyContin. Purdue has initiated drug abuse and diversion education programs, taken disciplinary actions against sales representatives who improperly promote OxyContin, and referred physicians who were suspected of improperly prescribing OxyContin to the appropriate authorities. However, until fall 2002 Purdue did not analyze its comprehensive physician prescribing reports, which it routinely uses in marketing and promoting OxyContin, and other indicators to identify possible physician abuse and diversion. Reports of abuse and diversion of OxyContin that were associated with an increasing incidence of addiction, overdose, and death prompted FDA to revise the drug’s label and take other actions to protect the public health. In July 2001, FDA reevaluated OxyContin’s label and made several changes in an effort to strengthen the “Warnings” section of the label. FDA added a subsection—“Misuse, Abuse, and Diversion of Opioids”—to stress that physicians and pharmacists should be alert to the risk of misuse, abuse, and diversion when prescribing or dispensing OxyContin. FDA also added a black box warning—the highest level of warning FDA can place on an approved drug product. FDA highlighted the language from the original 1995 label—stating that OxyContin is a schedule II controlled substance with an abuse liability similar to morphine—by moving it into the black box. Also, while the original label suggested that taking broken, chewed, or crushed OxyContin tablets “could lead to the rapid release and absorption of a potentially toxic dose of oxycodone,” a more strongly worded warning in the black box stated that taking the drug in this manner “leads to rapid release and absorption of a potentially fatal dose of oxycodone” (emphasis added). (See table 3.) In addition to the black box warning, FDA also changed the language in the original label that described the incidence of addiction inadvertently induced by physician prescribing as rare if opioids are legitimately used in the management of pain. The revised label stated that data are not available to “establish the true incidence of addiction in chronic patients.” As mentioned earlier, the indication described in the original label was also revised to clarify the appropriate time period for which OxyContin should be prescribed for patients experiencing moderate-to-severe pain. The language in the 1995 label was changed from “where use of an opioid analgesic is appropriate for more than a few days” to “when a continuous, around-the-clock analgesic is needed for an extended period of time.” (See table 4.) A summary of changes made by FDA to the original OxyContin label is given in appendix II. Beginning in early 2001, FDA collaborated with Purdue to develop and implement a risk management plan to help identify and prevent abuse and diversion of OxyContin. As a part of the risk management plan in connection with the labeling changes, Purdue was asked by FDA to revise all of its promotional materials for OxyContin to reflect the labeling changes. In August 2001, FDA sent a letter to Purdue stating that all future promotional materials for OxyContin should prominently disclose the information contained in the boxed warning; the new warnings that address misuse, abuse, diversion, and addiction; and the new precautions and revised indication for OxyContin. Purdue agreed to comply with this request. FDA officials told us that it is standard procedure to contact a drug manufacturer when the agency becomes aware of reports of abuse and diversion of a drug product so that FDA and the drug manufacturer can tailor a specific response to the problem. While FDA’s experience with risk management plans is relatively new, agency officials told us that OxyContin provided the opportunity to explore the use of the plans to help identify abuse and diversion problems. FDA is currently making decisions about whether risk management plans will be requested for selected opioid products. Also, in September 2003, FDA’s Anesthetic and Life Support Drugs Advisory Committee held a public hearing to discuss its current review of proposed risk management plans for opioid analgesic drug products to develop strategies for providing patients with access to pain treatment while limiting the abuse and diversion of these products. FDA has also taken other actions to address the abuse and diversion of OxyContin. It put information on its Web site for patients regarding the appropriate use of OxyContin. FDA worked with Purdue to develop “Dear Health Care Professional” letters, which the company distributed widely to health care professionals to alert them that the package insert had been revised to clarify the indication and strengthen the warnings related to misuse, abuse, and diversion. FDA also has worked with DEA, SAMHSA, the National Institute on Drug Abuse, ONDCP, and the Centers for Disease Control and Prevention to share information and insights on the problem of abuse and diversion of OxyContin. In April 2001, DEA developed a national action plan to deter abuse and diversion of OxyContin. According to DEA officials, this marked the first time the agency had targeted a specific brand-name product for monitoring because of the level and frequency of abuse and diversion associated with the drug. Key components of the action plan include coordinating enforcement and intelligence operations with other law enforcement agencies to target people and organizations involved in abuse and diversion of OxyContin, pursuing regulatory and administrative action to limit abusers’ access to OxyContin, and building national outreach efforts to educate the public on the dangers related to the abuse and diversion of OxyContin. DEA has also set Purdue’s procurement quota for oxycodone at levels lower than the levels requested by Purdue. DEA has increased enforcement efforts to prevent abuse and diversion of OxyContin. From fiscal year 1996 through fiscal year 2002, DEA initiated 313 investigations involving OxyContin, resulting in 401 arrests. Most of the investigations and arrests occurred after the initiation of the action plan. Since the plan was enacted, DEA initiated 257 investigations and made 302 arrests in fiscal years 2001 and 2002. Among those arrested were several physicians and pharmacists. Fifteen health care professionals either voluntarily surrendered their controlled substance registrations or were immediately suspended from registration by DEA. In addition, DEA reported that $1,077,500 in fines was assessed and $742,678 in cash was seized by law enforcement agencies in OxyContin-related cases in 2001 and 2002. Among several regulatory and administrative actions taken to limit abusers’ access to OxyContin and controlled substances, DEA’s Office of Diversion Control, in collaboration with the Department of Justice’s Office of Justice Programs, Bureau of Justice Assistance, provides grants to states for the establishment of prescription drug monitoring programs. The conference committee report for the fiscal year 2002 appropriation to the Department of Justice directed the Office of Justice Programs to make a $2 million grant in support of the Harold Rogers Prescription Drug Monitoring Program, which enhances the capacity of regulatory and law enforcement agencies to collect and analyze controlled substance prescription data. The program provided grants to establish new monitoring programs in Ohio, Pennsylvania, Virginia, and West Virginia. California, Kentucky, Massachusetts, Nevada, and Utah also received grants to enhance existing monitoring programs. DEA has also attempted to raise national awareness of the dangers associated with abuse and diversion of OxyContin. In October 2001 DEA joined 21 national pain and health organizations in issuing a consensus statement calling for a balanced policy on prescription medication use. According to the statement, such a policy would acknowledge that health care professionals and DEA share responsibility for ensuring that prescription medications, such as OxyContin, are available to patients who need them and for preventing these drugs from becoming a source of abuse and diversion. DEA and the health organizations also called for a renewed focus on educating health professionals, law enforcement, and the public about the appropriate use of opioid pain medications in order to promote responsible prescribing and limit instances of abuse and diversion. DEA is also working with FDA to encourage state medical boards to require, as a condition of their state licensing, that physicians obtain continuing medical education on pain management. When OxyContin was first introduced to the market in 1996, DEA granted Purdue’s initial procurement quota request for oxycodone. According to DEA, increases in the quota were granted for the first several years. Subsequently, concern over the dramatic increases in sales caused DEA to request additional information to support Purdue’s requests to increase the quota. In the last several years, DEA has taken the additional step of lowering the procurement quota requested by Purdue for the manufacture of OxyContin as a means for addressing abuse and diversion. However, DEA has cited the difficulty of determining an appropriate level while ensuring that adequate quantities were available for legitimate medical use, as there are no direct measures available to establish legitimate medical need. State Medicaid fraud control units and medical licensure boards have taken action in response to reports of abuse and diversion of OxyContin. State Medicaid fraud control units have conducted investigations of abuse and diversion of OxyContin, but generally do not maintain precise data on the number of investigations and enforcement actions completed. Although complete information was not available from directors of state Medicaid fraud control units in Kentucky, Maryland, Pennsylvania, Virginia, and West Virginia with whom we spoke, each of those directors told us that abuse and diversion of OxyContin is a problem in his or her state. The directors told us that they had investigated cases that involved physicians or individuals who had either been indicted or prosecuted for writing medically unnecessary OxyContin prescriptions in exchange for cash or sexual relationships. State medical licensure boards have also responded to complaints about physicians who were suspected of abuse and diversion of controlled substances, but like the Medicaid fraud control units, the boards generally do not maintain data on the number of investigations that involved OxyContin. Representatives of state boards of medicine in Kentucky, Pennsylvania, Virginia, and West Virginia told us that they have received complaints from various sources, such as government agencies, health care professionals, and anonymous tipsters, about physicians suspected of abuse and diversion of controlled substances. However, each of the four representatives stated that his or her board does not track the complaints by specific drug type and consequently cannot determine whether the complaints received allege physicians’ misuse of OxyContin. Each of the four representatives also told us that his or her medical licensure board has adopted or strengthened guidelines or regulations for physicians on prescribing, administering, and dispensing controlled substances in the treatment of chronic pain. For example, in March 2001, the Kentucky Board of Medical Licensure adopted guidelines to clarify the board’s position on the use of controlled substances for nonterminal/nonmalignant chronic pain. The boards of medicine in Pennsylvania, Virginia, and West Virginia each have guidelines for the appropriate use of controlled substances that are similar to those adopted by Kentucky. In response to concerns about abuse and diversion of OxyContin, in April 2001 FDA and Purdue began to discuss the development of a risk management plan to help detect and prevent abuse and diversion of OxyContin. Purdue submitted its risk management plan to FDA for review in August 2001. The plan includes some actions that Purdue proposed to take, as well as others that it has already taken. Purdue’s risk management plan includes actions such as strengthening the safety warnings on OxyContin’s label for professionals and patients, training Purdue’s sales force on the revised label, conducting comprehensive education programs for health care professionals, and developing a database for identifying and monitoring abuse and diversion of OxyContin. Under the risk management plan, OxyContin’s label was strengthened, effective in July 2001, by revising the physician prescribing information and adding a black box warning to call attention to OxyContin’s potential for misuse, abuse, and diversion. (See app. II.) Purdue trained its sales force on the specifics of the revised label and provided sales representatives with updated information on the appropriate use of opioid analgesics, legal guidelines associated with promotion of its products, and their responsibility and role in reporting adverse events. Purdue also reiterated to its sales representatives that failure to promote products according to the approved label, promotional materials, and applicable FDA standards would result in disciplinary action by the company. According to Purdue, from April 2001 through May 2003 at least 10 Purdue employees were disciplined for using unapproved materials in promoting OxyContin. Disciplinary actions included warning letters, suspension without pay, and termination. Purdue also has provided education programs for health care professionals and the public under its risk management plan. For example, in 2001 Purdue supported seminars that examined ways health care professionals can help prevent abuse and diversion of opioids. Purdue worked with DEA and other law enforcement agencies to develop and implement antidiversion educational programs. In 2002, Purdue also launched the Web site painfullyobvious.com to educate teenagers, parents, law enforcement officers, and discussion leaders about the dangers of prescription drug abuse. Because reliable data on the abuse and diversion of controlled substance drugs are not available, Purdue developed the Researched Abuse, Diversion, and Addiction-Related Surveillance (RADARS) System, as part of its risk management plan, to study the nature and extent of abuse of OxyContin and other schedule II and III prescription medications and to implement interventions to reduce abuse and diversion. According to Purdue, RADARS collects and computes abuse, diversion, and addiction rates for certain drugs based on population and determines national and local trends. Since the launch of OxyContin, Purdue has provided its sales force with considerable information to help target physicians and prioritize sales contacts within a sales territory. Sales representatives routinely receive daily, weekly, monthly, and quarterly physician prescribing reports based on IMS Health data that specify the physicians who have written prescriptions for OxyContin and other opioid analgesics, and the number of prescriptions written. Although this information has always been available for use by Purdue and its sales representatives, it was not until fall 2002 that Purdue directed its sales representatives to begin using 11 indicators to identify possible abuse and diversion and to report the incidents to Purdue’s General Counsel’s Office for investigation. Among the possible indicators are a sudden unexplained change in a physician’s prescribing patterns that is not accounted for by changes in patient numbers, information from credible sources such as a pharmacist that a physician or his or her patients are diverting medications, or a physician who writes a large number of prescriptions for patients who pay with cash. As of September 2003, Purdue—through its own investigations—had identified 39 physicians and other health care professionals who were referred to legal, medical, or regulatory authorities for further action. Most of the 39 referrals stemmed from reports by Purdue’s sales force. Other actions included in the plan that were taken by Purdue prior to submission of its risk management plan include discontinuance of the 160- milligram tablet of OxyContin to reduce the risk of overdose from this dosage strength, the development of unique markings for OxyContin tablets intended for distribution in Mexico and Canada to assist law enforcement in identifying OxyContin illegally smuggled into the United States, and the distribution of free tamper-resistant prescription pads designed to prevent altering or copying of the prescription. Purdue also implemented a program in 2001 to attempt to predict “hot spots” where OxyContin abuse and diversion were likely to occur, but discontinued the program in 2002 when Purdue concluded that nearly two-thirds of the counties identified had no abuse and diversion. At present, both federal agencies and the states have responsibilities involving prescription drugs and their abuse and diversion. FDA is responsible for approving new drugs and ensuring that the materials drug companies use to market and promote these drugs are truthful, balanced, and accurate. However, FDA examines these promotional materials only after they have been used in the marketplace because the FD&C Act generally does not give FDA authority to review these materials before the drug companies use them. Moreover, the FD&C Act provisions governing drug approval and promotional materials make no distinction between controlled substances, such as OxyContin, and other prescription drugs. DEA is responsible for registering handlers of controlled substances, approving production quotas and monitoring distribution of controlled substances to the retail level. It is the states, however, that are responsible for overseeing the practice of medicine and pharmacy where drugs are prescribed and dispensed. Some states have established prescription drug monitoring programs to help them detect and deter abuse and diversion. However, these programs exist in only 15 states and most do not proactively analyze prescription data to identify individuals, physicians, or pharmacies that have unusual use, prescribing, or dispensing patterns that may suggest potential drug diversion or abuse. The significant growth in the use of OxyContin to treat patients suffering from chronic pain has been accompanied by widespread reports of abuse and diversion that have in some cases led to deaths. The problem of abuse and diversion has highlighted shortcomings at the time of approval in the labeling of schedule II controlled substances, such as OxyContin, and in the plans in place to detect misuse, as well as in the infrastructure for detecting and preventing the abuse and diversion of schedule II controlled substances already on the market. Addressing abuse and diversion problems requires the collaborative efforts of pharmaceutical manufacturers; the federal and state agencies that oversee the approval and use of prescription drugs, particularly controlled substances; the health care providers who prescribe and dispense them; and law enforcement. After the problems with OxyContin began to surface, FDA and Purdue collaborated on a risk management plan to help detect and prevent abuse and diversion. Although risk management plans were not in use when OxyContin was approved, they are now an optional feature of new drug applications. FDA plans to complete its guidance to the pharmaceutical industry on risk management plans by September 30, 2004. The development of this guidance, coupled with FDA’s current review of proposed risk management plans for modified-release opioid analgesics, provides an opportunity to help ensure that manufacturers include a strategy to monitor the use of these drugs and to identify potential problems with abuse and diversion. To improve efforts to prevent or identify the abuse and diversion of schedule II controlled substances, we recommend that the Commissioner of Food and Drugs ensure that FDA’s risk management plan guidance encourages pharmaceutical manufacturers that submit new drug applications for these substances to include plans that contain a strategy for monitoring the use of these drugs and identifying potential abuse and diversion problems. We provided a draft of this report to FDA, DEA, and Purdue, the manufacturer of OxyContin, for their review. FDA and DEA provided written comments. (See apps. IV and V.) Purdue’s representatives provided oral comments. FDA said that it agreed with our recommendation that its risk management plan guidance should encourage all pharmaceutical manufacturers submitting new drug applications for schedule II controlled substances to include strategies to address abuse and diversion concerns. FDA stated that the agency is working on the risk management plan guidance. FDA also noted that the FD&C Act makes no distinction between controlled substances and other prescription drugs in its provisions regulating promotion, but that as a matter of general policy, the agency more closely scrutinizes promotion of drugs with more serious risk profiles. However, FDA does not have written guidance that specifies that promotional materials for controlled substances receive priority or special attention over similar materials for other prescription drugs. Furthermore, our finding that FDA did not review any of the OxyContin promotional videos provided by Purdue until we brought them to the agency’s attention raises questions about whether FDA provides extra attention to promotional materials for controlled substances that by definition have a high potential for abuse and may lead to severe psychological or physical dependence. FDA recommended that we clarify our description of the content of the warning letter issued to Purdue and provide additional information describing the extent of the corrective action taken by Purdue. FDA also recommended noting in the report that part of the risk management plan in connection with the 2001 labeling changes was a requirement that all OxyContin promotional materials be revised to reflect the labeling changes and all future materials prominently disclose this information. Finally, FDA noted that the promotional videos discussed in the report were submitted by Purdue prior to the labeling change and discontinued as a result of the labeling change. As we note in the report, Purdue acknowledged that all the promotional videos were not submitted to FDA at the time they were distributed. Moreover, although Purdue told us that these videos were no longer distributed after the label change, those videos that had been distributed were not collected and destroyed. We revised the report to reflect FDA’s general comments. FDA also provided technical comments that we incorporated where appropriate. In its written comments, DEA agreed that the data on abuse and diversion are not reliable, comprehensive, or timely, as we reported. DEA reiterated its previous statement that Purdue’s aggressive marketing of OxyContin fueled demand for the drug and exacerbated the drug’s abuse and diversion. DEA also stated that Purdue minimized the abuse risk associated with OxyContin. We agree with DEA that Purdue conducted an extensive campaign to market and promote OxyContin using an expanded sales force and multiple promotional approaches to encourage physicians, including primary care specialists, to prescribe OxyContin as an initial opioid treatment for noncancer pain, and that these efforts may have contributed to the problems with abuse and diversion by increasing the availability of the drug in the marketplace. However, we also noted that other factors may have contributed to these problems. We also agree that Purdue marketed OxyContin as having a low abuse liability, but we noted that this was based on information in the original label approved by FDA. DEA also acknowledged that the lack of a real measure of legitimate medical need for a specific product (OxyContin), substance (oxycodone), or even a class of substances (controlled release opioid analgesics) makes it difficult to limit manufacturing as a means of deterring abuse and diversion. DEA also noted that it is essential that risk management plans be put in place prior to the introduction of controlled substances into the marketplace, consistent with our recommendation. We revised the report to provide some additional detail on problems associated with OxyContin and Purdue’s marketing efforts. DEA provided some technical comments on the draft report that we incorporated where appropriate. Purdue representatives provided oral comments on a draft of this report. In general, they thought the report was fair and balanced; however, they offered both general and technical comments. Specifically, Purdue stated that the report should add the media as a factor contributing to the abuse and diversion of OxyContin because media stories provided the public with information on how to “get high” from using OxyContin incorrectly. Our report notes that the safety warning on the original label may have inadvertently alerted abusers to a possible method for misusing the drug. However, we note that the original label was publicly available from FDA once OxyContin was approved for marketing. Purdue also suggested that we include Duragesic, also a schedule II opioid analgesic, as a fourth comparable drug to OxyContin. The three comparable drugs we used in the report were chosen in consultation with FDA as comparable opioid analgesics to OxyContin, because they were time-released, morphine- based schedule II drugs formulated as tablets like OxyContin. In contrast, Duragesic, which contains the opioid analgesic fentanyl and provides pain relief over a 72-hour period, is formulated as a skin patch to be worn rather than as a tablet. Purdue representatives also provided technical comments that were incorporated where appropriate. We also provided sections of this draft report to the manufacturers of three comparative drugs we examined. Two of the three companies with a drug product used as a comparable drug to OxyContin reviewed the portions of the draft report concerning their own product, and provided technical comments, which were incorporated where appropriate. The third company did not respond to our request for comments. As agreed with your offices, unless you publicly announce this report’s contents 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 Commissioner of Food and Drugs, the Administrator of the Drug Enforcement Administration, Purdue, and the other pharmaceutical companies whose drugs we examined. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please call me at (202) 512-7119 or John Hansen at (202) 512-7105. Major contributors to this report were George Bogart, Darryl Joyce, Roseanne Price, and Opal Winebrenner. To identify the strategies and approaches used by Purdue Pharma L.P. (Purdue) to market and promote OxyContin, we interviewed Purdue officials and analyzed company documents and data. Specifically, we interviewed Purdue officials concerning its marketing and promotional strategies for OxyContin, including its targeting of physicians with specific specialties and its sales compensation plan to provide sales representatives with incentives for the drug’s sales. We also interviewed selected Purdue sales representatives who had high and midrange sales during 2001 from Kentucky, Pennsylvania, Virginia, and West Virginia— four states that were initially identified by the Drug Enforcement Agency (DEA) as having a high incidence of OxyContin drug abuse and diversion—and from California, Massachusetts, and New Jersey—three states that DEA did not initially identify as having problems with OxyContin. We asked the sales representatives about their training, promotional strategies and activities, and targeting of physicians. We also interviewed physicians who were among the highest prescribers of OxyContin regarding their experiences with Purdue sales representatives, including the strategies used to promote OxyContin, as well as their experiences with sales representatives of manufacturers of other opioid analgesics. We reviewed Purdue’s quarterly action plans for marketing and promoting OxyContin for 1996 through 2003, Purdue’s sales representative training materials, and materials from ongoing OxyContin-related litigation. To obtain information on how Purdue’s marketing and promotion of OxyContin compared to that of other companies, we identified, in consultation with the Food and Drug Administration (FDA), three opioid analgesics that were similar to OxyContin. The three drugs— Avinza, Kadian, and Oramorph SR—are all time-released, morphine-based analgesics that are classified as schedule II controlled substances. We examined the promotional materials each drug’s manufacturer submitted to FDA and any actions FDA had taken against the manufacturers related to how the drugs were marketed or promoted. We also interviewed company officials about how they marketed and promoted their respective drugs. Because of their concerns about proprietary information, the three companies did not provide us with the same level of detail about their drugs’ marketing and promotion as did Purdue. To examine factors that contributed to the abuse and diversion of OxyContin, we reviewed DEA abuse and diversion data as part of an effort to compare them with DEA’s OxyContin state distribution data and with IMS Health data on the rates of OxyContin sales and prescription dispensing to determine if they occurred in similar geographic areas. We also analyzed the distribution of Purdue sales representatives by state and compared them with the availability of OxyContin and abuse and diversion data to determine whether states with high rates of OxyContin sales and prescription dispensing and abuse and diversion problems had more sales representatives per capita than other states. However, limitations in the abuse and diversion data prevent an assessment of the relationship between the availability of OxyContin and areas where the drug was abused and diverted. We also reviewed the High Intensity Drug Trafficking Area (HIDTA) reports on states with histories of illegal drug activities. We interviewed DEA and FDA officials, physicians who prescribed OxyContin, officials from physician licensing boards in selected states, officials from national health practitioner groups, and company officials and sales representatives about why OxyContin abuse and diversion have occurred. To determine the efforts federal and state agencies and Purdue have made to identify and prevent abuse and diversion of controlled substances such as OxyContin, we interviewed FDA officials and analyzed information from FDA regarding the marketing and promotion of controlled substances, specifically OxyContin; FDA’s decision to approve the original label for OxyContin; and FDA’s subsequent decision to revise OxyContin’s labeling, as well as FDA’s role in monitoring OxyContin’s marketing and advertising activities. We also interviewed DEA officials about the agency’s efforts to identify and prevent abuse and diversion, including its national action plan for OxyContin, and how it determines the prevalence of OxyContin abuse and diversion nationally. We also interviewed officials from national practitioner associations, Medicaid fraud control units, and physician licensing boards in states with initial reports of abuse and diversion—Kentucky, Maryland, Pennsylvania, Virginia, and West Virginia—regarding concerns they had about the abuse and diversion of OxyContin. We reviewed Purdue’s OxyContin risk management plan submissions to FDA from 2001 through 2003 to identify actions taken by Purdue to address abuse and diversion of OxyContin. Table 5 provides a description of the changes made by FDA to sections of the original OxyContin approved label from June 1996 through July 2001. These changes included a black box warning, the strongest warning an FDA-approved drug can carry, and specifically addressed areas of concern related to the opioid characteristics of oxycodone and its risk of abuse and diversion. DEA uses several databases to monitor abuse and diversion of controlled substances, including OxyContin and its active ingredient oxycodone. Specifically, the agency monitors three major databases—the Drug Abuse Warning Network (DAWN), the National Forensic Laboratory Information System (NFLIS), and the System to Retrieve Information from Drug Evidence (STRIDE). DEA also monitors other data sources to identify trends in OxyContin abuse and diversion, such as the Substance Abuse and Mental Health Services Administration’s (SAMHSA) National Survey on Drug Use and Health, formerly the National Household Survey on Drug Abuse, and the Monitoring the Future Study funded by the National Institute on Drug Abuse. SAMHSA operates the DAWN system, which estimates national drug- related emergency department visits and provides death counts involving abused drugs. DAWN collects data semiannually on drug abuse from hospital emergency department admission and medical examiner data from 21 metropolitan areas and a limited number of metropolitan medical examiners who agree to voluntarily report medical record samples. The emergency department and medical examiner data generally do not differentiate oxycodone from OxyContin, unless the individual provides the information to the hospital or identifiable tablets are found with the person. Although samples from hospitals outside the 21 metropolitan areas are also available, DAWN is not able to make drug-related emergency department visit or death estimates for rural or suburban areas. NFLIS, a DEA-sponsored project initiated in 1997, collects the results of state and local forensic laboratories’ analyses of drugs seized as evidence by law enforcement agencies. NFLIS is used to track drug abuse and trafficking involving both controlled and noncontrolled substances and reports results by a drug’s substance, such as oxycodone, and not by its brand name. DEA stated that because new laboratories are being added, its data should not yet be used for trending purposes. As of March 2003, 35 state laboratories and 52 local or municipal laboratories participated in the project. STRIDE, another DEA database, reports the results of chemical evidence analysis done by DEA laboratories in drug diversion and trafficking cases. Oxycodone data are reported by combining single and combination oxycodone drugs and do not provide specific enough information to distinguish OxyContin cases and exhibits. The database’s lag time, which varies by laboratory, depends on how quickly the findings are entered after the seizure of the drug substance and its analysis. The National Survey on Drug Use and Health, another SAMHSA database, is used to develop national and state estimates of trends in drug consumption. Prior to 2001, the self-reported survey asked participants if they had illicitly used any drug containing oxycodone. In 2001, the survey included a separate section for pain relievers, and asked participants if they had used OxyContin, identifying it by its brand name, that had not been prescribed for them. State samples from the survey are combined to make national- and state-level estimates of drug use, and because the estimated numbers derived for OxyContin are so small, it is not possible to project illicit OxyContin use on a regional, state, or county basis. The Monitoring the Future Survey, funded by the National Institute on Drug Abuse and conducted by the University of Michigan, annually monitors the illicit use of drugs by adolescent students in the 8th, 10th, and 12th grades. The 2002 survey included new questions using the brand names of four drugs, including OxyContin, in its survey on the annual and 30-day prevalence of drug use.

Amid heightened awareness that many patients with cancer and other chronic diseases suffer from undertreated pain, the Food and Drug Administration (FDA) approved Purdue Pharma's controlled-release pain reliever OxyContin in 1995. Sales grew rapidly, and by 2001 OxyContin had become the most prescribed brandname narcotic medication for treating moderate-to-severe pain. In early 2000, reports began to surface about abuse and diversion for illicit use of OxyContin, which contains the opioid oxycodone. GAO was asked to examine concerns about these issues. Specifically, GAO reviewed (1) how OxyContin was marketed and promoted, (2) what factors contributed to the abuse and diversion of OxyContin, and (3) what actions have been taken to address OxyContin abuse and diversion. Purdue conducted an extensive campaign to market and promote OxyContin using an expanded sales force to encourage physicians, including primary care specialists, to prescribe OxyContin not only for cancer pain but also as an initial opioid treatment for moderate-to-severe noncancer pain. OxyContin prescriptions, particularly those for noncancer pain, grew rapidly, and by 2003 nearly half of all OxyContin prescribers were primary care physicians. The Drug Enforcement Administration (DEA) has expressed concern that Purdue's aggressive marketing of OxyContin focused on promoting the drug to treat a wide range of conditions to physicians who may not have been adequately trained in pain management. FDA has taken two actions against Purdue for OxyContin advertising violations. Further, Purdue did not submit an OxyContin promotional video for FDA review upon its initial use in 1998, as required by FDA regulations. Several factors may have contributed to the abuse and diversion of OxyContin. The active ingredient in OxyContin is twice as potent as morphine, which may have made it an attractive target for misuse. Further, the original label's safety warning advising patients not to crush the tablets because of the possible rapid release of a potentially toxic amount of oxycodone may have inadvertently alerted abusers to methods for abuse. Moreover, the significant increase in OxyContin's availability in the marketplace may have increased opportunities to obtain the drug illicitly in some states. Finally, the history of abuse and diversion of prescription drugs, including opioids, in some states may have predisposed certain areas to problems with OxyContin. However, GAO could not assess the relationship between the increased availability of OxyContin and locations of abuse and diversion because the data on abuse and diversion are not reliable, comprehensive, or timely. Federal and state agencies and Purdue have taken actions to address the abuse and diversion of OxyContin. FDA approved a stronger safety warning on OxyContin's label. In addition, FDA and Purdue collaborated on a risk management plan to help detect and prevent OxyContin abuse and diversion, an approach that was not used at the time OxyContin was approved. FDA plans to provide guidance to the pharmaceutical industry by September 2004 on risk management plans, which are an optional feature of new drug applications. DEA has established a national action plan to prevent abuse and diversion of OxyContin. State agencies have investigated reports of abuse and diversion. In addition to developing a risk management plan, Purdue has initiated several OxyContin-related educational programs, taken disciplinary action against sales representatives who improperly promoted OxyContin, and referred physicians suspected of improper prescribing practices to the authorities.

You are an expert at summarizing long articles. Proceed to summarize the following text: Community and migrant health centers are financed in part with federal grants administered by HRSA. HHS awards grants to public and nonprofit entities to plan, develop, and operate health centers for medically underserved populations. To assist in providing health care to these groups, HHS awarded over $750 million in grant assistance in fiscal year 1996. Like all patients, those receiving care from community or migrant health centers may seek compensation for medical malpractice if they believe the treatment they receive does not meet an acceptable standard of care. Patients may seek payment for economic losses such as medical bills, rehabilitation costs, and lost income; and noneconomic losses such as pain, suffering, and anguish. To obtain protection against malpractice claims before FTCA coverage became available, most centers had purchased private comprehensive malpractice insurance. The Congress enacted the Federally Supported Health Centers Assistance Act of 1992 (P.L. 102-501) to provide FTCA medical malpractice coverage to community and migrant health centers. This law made FTCA coverage available to grantees for a 3-year period beginning January 1, 1993, and ending December 31, 1995. It provided centers an opportunity to reduce their malpractice insurance expenditures. The Congress extended the availability of permanent FTCA coverage to centers in December 1995. FTCA coverage, which is provided at no cost to the centers, is an alternative to private comprehensive malpractice insurance and gives centers a chance to redirect their savings to the provision of health services. Centers opting for FTCA coverage may decide to purchase a supplemental or “gap” policy to cover events not covered by FTCA. Even with the purchase of a gap policy, HRSA expects that centers will spend less on insurance than they would if they continued to purchase comprehensive coverage. In a center not covered by FTCA, patients or their representatives would file a malpractice claim with the private carrier insuring the provider. Insurers are generally responsible for investigating claims, defending the provider, and paying any successful claims, up to a stated policy limit. If not resolved by the insurer, a claim could result in a lawsuit filed in state court. In addition to insuring centers against instances of malpractice, insurers may provide risk management services. Private carriers generally view these services as a way to reduce the incidence of malpractice, and in turn, reduce or minimize their liability. Malpractice claims against FTCA-covered centers are resolved differently from those filed against centers with private insurance. Patients of FTCA-covered centers must file administrative claims with HHS. Claims must be filed within 2 years after the patient has discovered or should have discovered the injury and its cause. Under FTCA procedures, the claim is filed against the federal government rather than against the provider. After reviewing the claim, the HHS Office of General Counsel may attempt to negotiate a financial settlement or, if it finds the case to be without merit, it may disallow the claim. Claimants dissatisfied with HHS’ determination have 6 months to file a lawsuit against the federal government in federal district court. Claimants may also file suit if HHS fails to respond to their claims within 6 months of receipt. If a claim results in the filing of a medical malpractice suit, the Attorney General, supported by the Department of Justice (DOJ), represents the interest of the United States in either settling the case out of court or in defending the case during the trial. If the claim continues to trial, the case is heard in a federal district court without a jury; punitive damages cannot be awarded. Protection against malpractice claims through FTCA has been provided to federally employed health care providers since 1946, when the government waived its sovereign immunity for torts, including medical malpractice. Prior to this date, individuals were prohibited from bringing a civil action against the federal government for damages resulting from the negligent or other wrongful acts or omissions of its employees acting within the scope of their employment. Since then, the federal government defends malpractice claims made against federal employees practicing medicine at agencies such as the Department of Veterans Affairs, the Indian Health Service, and the Department of Defense, so long as those practitioners were providing care within the scope of their employment. While FTCA coverage may reduce centers’ insurance costs, it imposes a potentially significant liability on the federal government because FTCA does not limit the amount for which the government can be held liable. Private policies generally limit the amount that can be paid on a claim, typically to $500,000 or $1 million. The total amount paid for all claims is also usually limited. For example, a policy with coverage limits of $1 million/$3 million will pay up to $1 million for each claim and no more than $3 million for all claims annually. As FTCA does not specify a monetary limitation, payments could be substantially higher than the monetary limits of private malpractice insurance policies. While most eligible centers did not rely on FTCA coverage during the demonstration period, centers now seem to be taking greater advantage of the opportunity to reduce their costs. The number of centers relying on FTCA coverage appears to have increased significantly. During the demonstration period, all centers were required to apply for FTCA coverage but did not necessarily cancel their private comprehensive malpractice insurance. As a result, most centers incurred the cost of private insurance during the demonstration period and were not relying on FTCA coverage. As of March 21, 1997, 452 of 716 eligible centers have applied for FTCA coverage. HRSA has told centers to cancel private comprehensive malpractice insurance when they come under FTCA but remains uncertain, as it was in the demonstration period, about which FTCA-covered centers have actually terminated that insurance and are thus not paying for duplicate coverage. During the demonstration period, many centers were uncertain FTCA coverage would be permanently extended and retained private insurance. Centers feared that converting back to private comprehensive malpractice insurance, if an extension was not enacted, would be both difficult and costly. Others were concerned about the possibility that not all claims would be covered by FTCA. While HRSA permits centers to combine gap policies with FTCA coverage, the expense and difficulty associated with obtaining gap coverage was an additional concern. The permanent extension of FTCA and provisions in the new law appear to have eased many of the centers’ concerns. Since the demonstration began, private insurers have developed more gap policies to insure against incidents not covered by FTCA. The new law made FTCA coverage optional for centers. Centers that do not want FTCA coverage are no longer required to apply for it. In addition, the new law addressed other concerns raised by the centers during the demonstration period. For example, FTCA coverage was expanded to include part-time practitioners in the fields of family practice, general internal medicine, general pediatrics, and obstetrics and gynecology. Centers were also given greater assurance that the federal government would cover their claims. During the demonstration period, DOJ could invalidate HHS’ decision to grant a center FTCA coverage after a claim was filed. Now, HHS’ decision is binding upon the Attorney General. The possibility of reducing center costs also influenced many of the center officials with whom we spoke. For example, one center in New England reported its malpractice insurance costs were reduced by almost $600,000 since 1993. A center official there told us that the savings have been used to improve medical staff retention and will also be used to expand patient programs. Another center in the Midwest reported savings of $350,000. Of the center officials we spoke to who now intend to rely on FTCA coverage, all reported the opportunity to reduce costs as the main factor in choosing FTCA over private comprehensive malpractice insurance. Although FTCA participation appears to have grown substantially since the demonstration period, not all centers have opted for FTCA coverage. Of the approximately 716 centers currently eligible for this coverage, 264 of the eligible centers, or 37 percent of them, have not applied for it. FTCA is still a relatively recent option for centers and some center personnel may be questioning the desirability of this coverage for their facility. Uncertainty about which practitioners and services are not covered by FTCA, the availability of private policies to cover any gaps, and questions about the FTCA claims resolution process may all contribute to a center’s decision to retain private coverage. Center officials from two southern states told us that their malpractice premiums were low enough that there was little incentive to convert to FTCA coverage. Officials from other centers that do not have FTCA coverage told us that resistance from the medical staff and the loss of tailored risk management services are also contributing factors in their decision to keep private insurance. Few of the 138 FTCA claims filed against health centers since the beginning of FTCA coverage have been resolved. Although the number of FTCA claims filed against centers has increased since the demonstration period began in 1993, only five settlements have been made and all have been relatively small. Table 1 shows the number of claims filed and compensation sought and awarded by fiscal year. In addition to the five claims that have been settled, seven others have been disallowed by HHS. The total amount of compensation sought by the 126 remaining claimants is in excess of $400 million. Thirty-two FTCA claims have resulted in lawsuits that have been filed in federal court. The 94 remaining claims are pending in HHS. Current claims and settlement experience may not be an accurate indicator of future claims. Although claim payments to date have been relatively small, one large settlement or court award could dramatically increase the total. Other factors also make it difficult to predict future payments. There may be a time lag between alleged instances of malpractice and claim filings, as claimants have 2 years from the date of the alleged incident to file a claim. However, a prior analysis of claims reported by centers before the demonstration period showed that their claims experience was considered favorable by actuaries in relation to the insurance premiums they paid. HRSA has drafted a legislative proposal limiting the federal government’s liability for FTCA claims filed against migrant and community health centers. This proposal, initially recommended by HHS’ OIG and currently under review by the Secretary of HHS, calls for capping the amount a claimant may seek in damages from an FTCA-covered center at $1 million. This would be comparable with the $1 million cap per claim that private insurance carriers typically place on malpractice policies, including those sold to health centers. If enacted, this proposal would, for the first time, limit the federal government’s liability under FTCA and would be an exception for only federally funded health centers. According to HHS’ OIG report, this cap could save the federal government as much as $30.6 million over a 3-year period, if all health centers elected FTCA coverage. Of the 126 unresolved FTCA claims, which include the 32 pending lawsuits, 59 seek compensation in excess of $1 million. HRSA’s collection of FTCA participation data has been limited. This information is necessary to determine whether FTCA coverage is reducing health centers’ costs and is also critical to the agency’s ability to provide risk management. Although HRSA has attempted to collect data related to centers’ use and savings under FTCA, these attempts have not been effective. HHS has also failed to respond to claimants in a timely manner, which gives them the opportunity to file lawsuits in federal court. While HRSA intends to provide centers with some risk management services, it has not developed a comprehensive risk management plan and presently does not intend to provide some of the important risk management activities currently provided by private insurers and other federal agencies. HRSA cannot accurately report the amount centers spent on comprehensive private malpractice insurance during the FTCA demonstration period, nor can the agency report with certainty the total cost reductions realized by FTCA-covered centers during that period. HRSA officials were unable to identify those centers that canceled these comprehensive policies during the demonstration period and relied on FTCA coverage. Although HRSA collected data from centers regarding their insurance costs and savings under FTCA, we found that these data were not reliable for determining whether centers canceled their private comprehensive malpractice insurance and reduced their costs. The form HRSA provided to centers was not accompanied by instructions. In addition, the form did not provide centers with a means of reporting and identifying all of their malpractice insurance expenditures. Consequently, centers may have supplied inappropriate data or reported expenditures inaccurately while other information, critical to determining actual cost reductions, was not obtained. Without reliable information on centers’ reliance on FTCA it will be difficult for HRSA to target its limited risk management services on FTCA-covered centers. Similarly, without sound data on cost reductions, HRSA will be unable to determine if coverage under FTCA saves centers money. HRSA is now taking steps to end dual coverage, which has hampered HRSA’s data collection efforts and oversight of FTCA. While HRSA advised centers in April 1996 that they must choose between FTCA coverage and private comprehensive malpractice insurance, it did not establish a date after which duplicate insurance will no longer be an allowable charge to the grant at centers with FTCA coverage. We spoke with officials at 27 centers with FTCA coverage. Of those 27 centers, 6 were also covered by private comprehensive malpractice insurance. We subsequently advised HRSA that a deadline was needed to ensure that health centers reduce their costs by terminating duplicate coverage. HRSA officials agreed and recently issued a directive to FTCA-covered centers to cancel their private comprehensive malpractice insurance by March 31, 1997. In many cases, HHS has not contacted claimants regarding their claims, and some claimants have filed suit in federal court. Claimants are precluded from filing suit for 6 months unless HHS has denied the claim. For 22 of the 32 claims involving FTCA-covered centers that have resulted in federal lawsuits, HHS had not responded to the claimants or contacted them to discuss a settlement during the 6-month period. HHS officials told us that in many cases they had been unable to obtain documentation and medical reviews needed to assess the merits of these claims and were therefore not prepared to either settle or deny them. DOJ is now responsible for representing the government in these lawsuits. If HHS had achieved a settlement in any of these cases, some of the costs of FTCA administration associated with involving another federal agency, preparing for trial, and defending the case in court might have been avoided. Risk management provides an opportunity to limit financial losses resulting from allegations of improper patient care. It also offers providers a way to improve service to patients, avoid patient injuries, and reduce the frequency of malpractice claims. The health care experts we spoke with consistently promoted risk management as a tool to simultaneously minimize loss and improve the quality of patient care. Although the law extending FTCA coverage to centers does not direct HRSA to provide risk management, HRSA officials acknowledge both the need to minimize the federal government’s potential liability and provide risk management services to centers. HRSA has begun to provide centers with some of these services. However, HRSA is not planning as extensive a risk management program as some private insurance carriers or other federal agencies with FTCA malpractice coverage, such as the Department of Defense and the Indian Health Service. (App. III provides more details on the purpose and potential benefits of risk management for health care facilities.) A wide range of risk management services was offered to health facilities and practitioners by the insurance companies and federal agencies we interviewed. While some provided extensive services—including site inspections, periodic risk reassessments, and telephone hotlines to respond to center concerns—others offered these services on request or to larger facilities. The more commonly offered services included claims tracking, analysis, and feedback on specific incidents, educational seminars, risk management publications, and the opportunity to obtain specific guidance on center concerns. Most of the health center officials we spoke with valued their insurer’s risk management services. Many regarded the opportunity to discuss a new procedure or a potential malpractice claim with a risk manager as the most important feature of their insurer’s risk management plan. Several officials said they were reluctant to cancel private comprehensive malpractice coverage in favor of FTCA because they would then lose the risk management services they have come to rely upon. In contrast, other centers find risk management services are still available from their private insurer if they purchase a supplemental policy to cover gaps in FTCA coverage. Additionally, HRSA has advised centers that the purchase of private risk management services by centers will be an allowable charge to their grant. Recently, HRSA has begun to take steps to provide centers with risk management. HRSA has contracted with the National Association of Community Health Centers (NACHC) to provide telephone consultations with centers regarding FTCA and risk management issues. NACHC may also provide a limited number of special risk management seminars to centers through HRSA-sponsored training. HRSA officials told us that they will obtain a subscription for all FTCA-covered centers to the Armed Forces Institute of Pathology’s annual publication, Open File, which is exclusively devoted to risk management issues. Individually tailored risk management assessments may also be offered to centers through HRSA’s Technical Assistance Program. This assistance would supplement the agency’s periodic site inspections of centers, already a routine component of its grant management process. While HRSA has taken important steps in providing centers with some risk management services, some critical risk management activities—performed by other insurers, including other federal agencies—have been excluded from its efforts. For example, it has not established a policy for providing centers with specific feedback based on their claims experience nor has it instituted a useful claims tracking system, widely regarded by risk management experts as an essential component of managing risk. The experts we spoke to told us that a tracking system provides a way of identifying problem practitioners as well as patterns among practitioners and facilities. While HRSA officials agreed with the importance of these risk management activities, they told us that the initial activities related to the implementation of FTCA for health centers necessarily took priority over the development of a comprehensive risk management plan. Community and migrant health centers are being challenged by increasing financial pressures, jeopardizing their service to large medically needy populations. By opting for FTCA coverage, centers can reduce their malpractice insurance expenditures and redirect these funds to providing needed services to their communities. Malpractice coverage provided by FTCA differs in many ways from that provided by private malpractice insurance coverage. One of the significant differences is the lack of a monetary limitation on liability coverage, which could play a signiftcantant role in determining the federal government’s ultimate cost of providing FTCA coverage to community and migrant health centers and which heightens the importance of a sound risk management plan. As more centers rely on FTCA for malpractice coverage, the federal government’s potential liability will increase as will the need for risk management. Insurers and other federal agencies have employed a variety of risk management practices to limit liability and improve clinical practices. The growth in FTCA coverage offers both the challenge of a greater federal liability to manage and a new opportunity to help community and migrant health centers improve the quality of their care. We recommend that the Secretary of Health and Human Services direct the Administrator of HRSA to develop a comprehensive risk management plan, including procedures to capture claims information and to identify problem-prone clinical procedures, practitioners, and centers. We provided HHS an opportunity to comment on a draft of this report, but it did not provide comments in time for inclusion in the final report. However, program officials provided us with updated claims information and also offered several technical comments based on their review of the draft report, which we have incorporated as appropriate. In addition, we also discussed the findings presented in this report with program officials who generally agreed with the facts we presented and with our evaluation of HRSA’s management of FTCA coverage for community health centers. We are sending copies of this report to the Director of the Office of Management and Budget, the Secretary of Health and Human Services, and interested congressional committees. We will make copies available to others upon request. Major contributors include Paul Alcocer, Geraldine Redican, Barbara Mulliken, and Betty Kirksey. Please call me at (312) 220-7767 if you or your staff have any questions concerning this report. To review HHS’ implementation of FTCA coverage for community health centers, we spoke with officials from HRSA’s Bureau of Primary Health Care in Bethesda, Maryland, as well as the agency’s regional FTCA coordinators. To assess the FTCA claims resolution process and to determine the status of claims filed, we met with and obtained data from the Public Health Service Claims Office, HHS’ Office of General Counsel, and DOJ. However, we did not independently verify the status of these claims. To obtain information on why community health centers do and do not participate in the FTCA program, we interviewed officials from the National Association of Community Health Centers (NACHC) and three state primary care associations. We also interviewed officials from 35 community health centers, including 27 centers with FTCA coverage and 8 centers that were not participating in the FTCA program. To determine the types of risk management services provided to community health centers, we interviewed representatives of seven insurers and three risk management consulting firms providing these services. We also discussed these services with some of the community health center officials we interviewed. We identified the insurance carriers through discussions with HRSA officials in both headquarters and regional offices, community health centers, NACHC, and others knowledgeable about the malpractice market. We selected carriers selling malpractice insurance in a variety of geographic areas, including both coasts, the midwest, and the south. We also selected carriers with significant experience insuring community health centers. We estimate that collectively, these carriers have insured over 300 community health centers against malpractice claims. We also discussed the unique risk management needs of community health care centers with a variety of health care experts. In addition, we contacted the Armed Forces Institute of Pathology and the Indian Health Service to discuss their risk management programs. Alcona Citizens for Health, Inc. (MI) Barnes-Kasson County Hospital (PA) Brownsville Community Health Center (TX) Citizens of Lake County for Health Care, Inc. (TN) Columbia Valley Community Health Services (WA) Country Doctor Community Clinic (WA) Crusaders Central Clinic Association (IL) Detroit Community Health Connection, Inc. (MI) East Arkansas Family Health Center, Inc. (AR) El Rio Santa Cruz Neighborhood Health Center, Inc. (AZ) Erie Family Health Center, Inc. (IL) Grace Hill Neighborhood Health Center (MO) Greater New Bedford Community Health Center, Inc. (MA) Indian Health Board of Minneapolis, Inc. (MN) Kitsap Community Clinic (WA) La Clinica de Familia, Inc. (NM) La Clinica del Pueblo de Rio Arriba (NM) Lamprey Health Care, Inc. (NH) Laurel Fork-Clear Fork Health Centers, Inc. (TN) Lawndale Christian Health Center (IL) Manet Community Health Center, Inc. (MA) Memphis Health Center, Inc. (TN) Missoula City/County Health Department (MT) Model Cities Health Center, Inc. (MN) Ossining Open Door Health Center (NY) Perry County Medical Center, Inc. (TN) Presbyterian Medical Services (NM) Providence Ambulatory Health Care Foundation, Inc. (RI) Sea Mar Community Health Center (WA) Shawnee Health Service Development Corporation (IL) Southern Ohio Health Services Network (OH) South Plains Health Provider Organization, Inc. (TX) Southwest Community Health Center, Inc. (CT) The Clinic in Altgeld (IL) Westside Health Services, Inc. (NY) Risk management offers physicians and other health care practitioners and facilities a means of improving patient services, avoiding patient injuries, and reducing the frequency of malpractice claims. Organizations such as the American Medical Association, the American Hospital Association, the Joint Commission on the Accreditation of Healthcare Organizations, and the Physician Insurers Association of America (PIAA) recognize risk management as an effective tool for minimizing liability and enhancing quality care. The insurers and health care experts we spoke with concurred that risk management provides the underwriter or, in the case of FTCA coverage, the federal government, the possibility of preventing instances of malpractice from occurring and thereby reducing financial liability. They also told us that risk management can help educate physicians and other medical personnel while improving their performance. Many of the center officials we spoke with also valued risk management services. The insurance industry and federal officials we spoke with consistently underscored claims tracking and analysis as one of risk management’s most critical components. Claims tracking and analysis provides a way of identifying patterns in the types of malpractice claims filed against providers. This information may be used to identify facilities or practitioners that pose risks and problem-prone clinical practices. It can also be key to implementing corrective actions, such as selecting a practitioner or an entire facility for other risk management services. Aggregating and analyzing claims data and sharing results with health care providers may reduce the number of claims by bringing to light factors that lead to claims. Analyzing claims made and settled is done by individual insurers, organizations representing groups of insurers, such as PIAA, and federal agencies administering health programs FTCA covers for malpractice claims. Many insurers collect medical malpractice data. Data collected may relate to the cause of claims and their severity, the amounts requested and paid by type of injury, and demographic features of claimants and providers. For example, PIAA, which represents physician-owned or -directed professional liability insurance companies, routinely collects and analyzes data from 21 of its member companies. PIAA has issued special reports on topics such as lung cancer, medication errors, and orthopedic surgical procedures. This information can alert providers to situations that may put them at greater risk for a malpractice claim and increase their awareness of new or continuing problem areas. The federal government also recognizes the value of analyzing claims data as both a risk management tool and a means of improving quality care. The Armed Forces Institute of Pathology (AFIP) performs detailed claims analysis for all branches of the military and other federal agencies, such as the Department of Veterans Affairs, that are covered by FTCA. In addition to conducting studies, AFIP also provides direct feedback and responds to queries from facilities seeking to improve performance and minimize risk. The Indian Health Service (IHS) provides health care services at both hospitals and outpatient facilities. IHS performs its own analysis of claims, although on a smaller scale than AFIP. IHS has tracked claims for 10 years and provides routine feedback to all facilities and practitioners after a claim has been resolved. It has also created a database of all filed claims and has issued reports of its analysis to IHS facilities. 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Pursuant to a legislative requirement, GAO reviewed the implementation of Federal Tort Claims Act (FTCA) coverage for community health centers, focusing on the: (1) health centers' use of FTCA coverage; (2) status of claims filed against FTCA-covered centers through March 21, 1997; and (3) Department of Health and Human Services' (HHS) management of FTCA for community and migrant health centers, and its efforts to reduce claims through risk management programs. GAO noted that: (1) the permanent authorization of FTCA coverage, the greater availability of supplemental policies to cover incidents not covered under FTCA, and the reports of some centers already realizing substantial savings have contributed to the willingness of many centers to now obtain FTCA coverage; (2) although the Health Resources and Services Administration (HRSA) required centers to apply for FTCA coverage during the demonstration period, centers were not compelled to cancel their private comprehensive malpractice insurance; (3) although HRSA does not have complete data on center participation during the 3-year demonstration period, it appears that most centers retained their private comprehensive malpractice insurance during this time; (4) because these centers were covered by both FTCA and their private policies, they did not reduce their insurance costs; (5) of the 716 centers eligible for FTCA coverage, 452 have elected this coverage and are now required to cancel their private comprehensive malpractice insurance; (6) despite this level of participation, a significant number of centers have not reapplied for FTCA coverage since its recent extension; (7) as of March 21, 1997, 264 of the 716 centers eligible for FTCA coverage, or 37 percent, had not applied for it; (8) since the demonstration period began in 1993, there have been 138 claims filed against FTCA-covered centers alleging damages of more than $414 million; (9) however, the actual amount of the federal government's liability for these claims is unclear; (10) as of March 21, 1997, only five claims have been settled, with total payments of $355,250; (11) at the recommendation of HHS' Office of Inspector General, HRSA developed a legislative proposal that, if enacted, would limit the federal government's liability to $1 million for claims filed against FTCA-covered centers; (12) by extending FTCA coverage to centers, the federal government has assumed potential liabilities that need oversight and careful management; (13) HHS could improve its administration of FTCA coverage for community and migrant health centers by strengthening data collection efforts and claims management practices; (14) HHS has 6 months in which to either deny a claim or make a settlement offer before a claimant may file suit in federal court; (15) for 22 of the 32 claims that have resulted in federal lawsuits, HHS had not attempted to respond to the claimants during this 6-month period; and (16) risk management services can help centers minimize liability by reducing their financial exposure to claims.

You are an expert at summarizing long articles. Proceed to summarize the following text: In 2007, VA established the VCL, a 24-hour crisis line staffed by responders trained to assist veterans in emotional crisis. Through an interagency agreement, VA collaborated with SAMHSA to use a single, national toll-free number for crisis calls that serves both Lifeline and the VCL. Through this interagency agreement, VA and SAMHSA set up a cooperative relationship between the agencies that would provide consistent suicide-prevention techniques to callers. The national toll-free number presents callers with choices. Callers are greeted by a recorded message that explains the function of the crisis line and prompts individuals to press “1” to reach the VCL. Callers who do not press “1” by the end of the message are routed to one of Lifeline’s 164 local crisis centers. All callers who press “1” are routed first to the VCL primary center. Calls that are not answered at the VCL primary center within 30 seconds of the time that the caller presses “1” during the Lifeline greeting are automatically routed to one of five VCL backup call centers. If a call is not answered by the VCL backup call center that initially receives it, the call may be sent to another VCL backup call center. VA entered into a contract with a firm to oversee the operations of the VCL backup call centers. At the time of our 2016 report, there were a total of 164 Lifeline local crisis centers, 5 of which also serve the VCL. VA added online chat and text message capabilities to the VCL in fiscal years 2009 and 2012, respectively. The number of online chats and text messages handled by the VCL generally increased every year, though the number of online chats decreased in fiscal year 2015. In our covert testing of the VCL’s call response time in July and August 2015, we found that it was uncommon for VCL callers to wait an extended period before reaching a responder since all of our calls that reached the VCL were answered in less than 4 minutes. However, we also found VA did not meet its goal of answering 90 percent of calls to the VCL within 30 seconds for test calls that we made. Our test calls included a generalizable sample of 119 test calls that could be used to describe all callers’ wait times when calling the VCL during this period. On the basis of our test calls, we estimated that during July and August 2015 about 73 percent of all VCL calls were answered at the VCL primary center within 30 seconds. VA officials told us that, during fiscal year 2015, about 65 to 75 percent of VCL calls were answered at the VCL primary center and about 25 to 35 percent of VCL calls were answered at the backup call centers. These VA-reported results indicate that about 65 to 75 percent of VCL calls were answered within either 30 or 60 seconds. These results are consistent with our test results for July and August 2015. During our 2016 review, VA officials told us that VA attempts to maximize the percentage of calls answered at the VCL primary center because these responders have additional resources—including access to veterans’ VA electronic medical records—that are unavailable to VCL backup call center responders. All responders—whether at primary or backup centers—receive specialized training to assist callers in crisis. To improve its performance toward meeting the goal of answering 90 percent of calls at the VCL primary center within 30 seconds, VA implemented two changes in fiscal year 2015—namely, staggered work shifts for responders and new call-handling procedures. Staggered work shifts. VA implemented staggered shifts for responders at the VCL primary center on September 6, 2015. Staggered shifts are work schedules that allow employees to start and stop their shifts at different times as a way to ensure better coverage during peak calling periods. Specifically, it helps schedule more employees to work when call volume is highest and fewer employees to work when call volume is lowest. Additionally, staggered shifts help limit disruptions in service as responders begin and end their shifts. By comparing VCL telephone call data from September through December of 2014 to that of September through December of 2015, we found that VA’s implementation of staggered shifts at the VCL primary center had mixed results. For example, the average percentage of calls answered per hour at the VCL primary center from September through December 2015—after staggered shifts were implemented—was 75 percent, slightly less than the average of 79 percent answered during the corresponding period in 2014 before staggered shifts were implemented. However, the VCL received an average of about 1.3 more calls per hour during this period in 2015 than it received during the corresponding period in 2014 and, according to VA officials, the VCL primary center employed fewer responder staff in 2015 than 2014. New call-handling procedures. VA implemented new call handling procedures at the VCL primary center beginning in June 2015 that provided responders with specific guidance to more efficiently handle “noncore” callers—those callers who were not seeking crisis assistance but rather seeking help with other issues, such as help with veterans’ benefits questions. For example, if a caller reached the VCL with a question about VA disability benefits, the VCL primary center responder would verify that the caller was not in crisis and transfer the caller to the Veterans Benefits Administration to address the question. VCL telephone call data provided by VA suggest that the average time VCL primary center responders spent handling noncore calls decreased by approximately 30 percent over a 5-month period after responder training began on these new call-handling procedures. We would expect that as the average time VCL primary center responders spent handling noncore calls decreased, these responders would have more time available to answer additional incoming calls. To determine the timeliness of the VCL’s responses to online chats and text messages, we conducted a covert test in July and August 2015 using nongeneralizable samples of 15 online chats and 14 text messages. All 15 of our test online chats received responses within 60 seconds, 13 of which were within 30 seconds. This result was consistent with VA data that indicated VCL responders sent responses to over 99 percent of online chat requests within 1 minute in fiscal years 2014 and 2015. During our 2016 review, VA officials told us that all online chats are expected to be answered immediately. Although this was an expectation, we found in 2016 that VA did not have formal performance standards for how quickly responders should answer online chat requests and expected to develop them before the end of fiscal year 2016. However, our tests of text messages revealed a potential area of concern. Four of our 14 test text messages did not receive a response from the VCL. Of the remaining 10 test text messages, 8 received responses within 2 minutes, and 2 received responses within 5 minutes. As we reported in May 2016, VA officials stated that text messages are expected to be answered immediately, but, as with online chats, VA had not developed formal performance standards for how quickly responders should answer text messages. VA data indicated that VCL responders sent responses to 87 percent of text messages within 2 minutes of initiation of the conversation in both fiscal years 2014 and 2015. During our 2016 review, VA officials said that VA planned to establish performance standards for answering text messages before the end of fiscal year 2016. VA officials noted and we observed during a site visit that some incoming texts were abusive in nature or were not related to a crisis situation. According to VA officials, in these situations, if this is the only text message waiting for a response, a VCL responder will send a response immediately. However, if other text messages are awaiting responses, VA will triage these text messages and reply to those with indications of crisis first. This triage process may have contributed to the number of our test texts that did not receive responses within 2 minutes. The VCL’s text messaging service provider offered several reasons for the possible nonresponses that we encountered in our test results. These included: (1) incompatibilities between some devices used to send text messages to the VCL and the software VA used to process the text messages, (2) occasional software malfunctions that freeze the text messaging interface at the VCL primary center, (3) inaudible audio prompts used to alert VCL primary center responders of incoming text messages, (4) attempts by people with bad intentions to disrupt the VCL’s text messaging service by overloading the system with a large number of texts, and (5) incompatibilities between the web browsers used by the VCL primary center and the text messaging software. At the time of our 2016 review, VA officials told us that they did not monitor and test the timeliness and performance of the VCL text messaging system, but rather relied solely on the VCL’s text messaging service provider for such monitoring and testing. They said that the provider had not reported any issues with this system. According to the provider, no routine testing of the VCL’s text messaging system was conducted. Standards for internal control in the federal government state that ongoing monitoring should occur in the course of normal operations, be performed continually, and be ingrained in the agency’s operations. We concluded that without routinely testing its text messaging system, or ensuring that its provider tests the system, VA cannot ensure that it is identifying limitations with its text messaging service and resolving them to provide consistent, reliable service to veterans. We recommended that VA regularly test the VCL’s text messaging system to identify issues and correct them promptly. In response, VA developed and implemented procedures to regularly test the VCL’s text messaging system, as well as its telephone and online chat systems. We believe this change will allow VA to more reliably and quickly identify and correct errors in the text messaging system and therefore help veterans reach VCL responders in a timelier manner. As we reported in May 2016, VA had sought to enhance its capabilities for overseeing VCL primary center operations through a number of activities—including establishing a call center evaluation team, implementing revised performance standards for VCL primary center responders, implementing silent monitoring of VCL primary center responders, and analyzing VCL caller complaints. Establishment of a call center evaluation team. In October 2013, VA established a permanent VCL call center evaluation team that is responsible for monitoring the performance of the VCL primary center. As we reported in May 2016, the call center evaluation team analyzes VCL data, including information on the number of calls received and the number of calls routed to backup call centers from the primary center. VA officials told us that they use these data to inform management decisions about VCL operations. Implementation of revised performance standards for VCL primary center responders. In October 2015, VA implemented new performance standards for all VCL primary center responders that will be used to assess their performance in fiscal year 2016. According to VA officials, these performance standards include several measures of responder performance—such as demonstrating crisis-intervention skills, identifying callers’ needs, and addressing those needs in an appropriate manner using VA approved resources. Silent monitoring of VCL primary center responders. In February 2016, VA officials reported that they were beginning silent monitoring of all VCL responders using recently developed standard operating procedures, standard data collection forms, and standard feedback protocols. Analysis of VCL caller complaints. In October 2014, VA created a mechanism for tracking complaints it receives from VCL callers and external parties, such as members of Congress and veterans, about the performance of the VCL primary and backup call centers. According to VA officials, each complaint is investigated to validate its legitimacy and determine the cause of any confirmed performance concerns. The results and disposition of each complaint are documented in VA’s complaint tracking database. In 2011, VA established key performance indicators to evaluate VCL primary center operations; however, in our May 2016 review, we found these indicators did not have established measureable targets or time frames for their completion. VCL key performance indicators lacked measurable targets. We found that VA’s list of VCL key performance indicators did not include information on the targets the department had established to indicate their successful achievement. For example, VA included a key performance indicator for the percentage of calls answered by the VCL in this list but did not include information on what results would indicate success for (1) the VCL as a whole, (2) the VCL primary center, or (3) the VCL backup call centers. As another example, VA had not established targets for the percentage of calls abandoned by callers prior to speaking with VCL responders. Measureable targets should include a clearly stated minimum performance target and a clearly stated ideal performance target. These targets should be quantifiable or otherwise measurable and indicate how well or at what level an agency or one of its components aspires to perform. Such measurable targets are important for ensuring that the VCL call center evaluation team can effectively measure VCL performance. VCL key performance indicators lack time frames for their completion. We found that VA’s list of VCL key performance indicators did not include information on when the department expected the VCL to complete or meet the action covered by each key performance indicator. For example, for VA’s key performance indicator for the percentage of calls answered by the VCL, the department had not included a date by which it would expect the VCL to complete this action. As another example, VA had not established dates by which it would meet targets yet to be established for the percentage of calls abandoned by callers prior to speaking with VCL responders. Time frames for action are a required element of performance indicators and are important to ensure that agencies can track their progress and prioritize goals. Guidance provided by the Office of Management and Budget states that performance goals—similar to VA’s key performance indicators for the VCL—should include three elements: (1) a performance indicator, which is how the agency will track progress; (2) a target; and (3) a period. Without establishing targets and time frames for the successful completion of its key performance indicators for the VCL, we concluded that VA could not effectively track and publicly report progress or results for its key performance indicators for accountability purposes. We recommended that VA document clearly stated and measurable targets and time frames for key performance indicators needed to assess VCL performance. While VA officials have informed us that they have created scorecards that track information related to calls answered, staffing, and average handle times, as of March 2017, clearly stated and measurable targets and time frames have not yet been developed. As we reported in May 2016, VA’s backup call coverage contract, awarded in October 2012 and in place at the time of our review, did not include detailed performance requirements in several key areas for the VCL backup call centers. Clear performance requirements for VCL backup call centers are important for defining VA’s expectations of these service partners. However, VA had taken steps to strengthen the performance requirements of this contract by modifying it in March 2015 and was beginning the process of replacing it with a new contract. According to VA officials, the new contract was awarded in April 2016. October 2012 backup call coverage contract. This contract provided a network of Lifeline local crisis centers that could serve as VCL backup call centers managed by a contractor. This contractor was responsible for overseeing and coordinating the services of VCL backup call centers that answer overflow calls from the VCL primary center. This contract as initially awarded included few details on the performance requirements for VCL backup call centers. For example, the contract did not include any information on the percentage of VCL calls routed to each VCL backup call center that should be answered. Detailed performance requirements on these key aspects of VCL backup call center performance are necessary for VA to effectively oversee the performance of the contractor and the VCL backup call centers. By not specifying performance requirements for the contractor on these key performance issues, we believe that VA missed the opportunity to validate contractor and VCL backup call center performance and mitigate weaknesses in VCL call response. As we reported in May 2016, VA officials told us about several concerns with the performance of the backup call centers operating under the October 2012 contract based on their own observations and complaints reported to the VCL. These concerns included the inconsistency and incompleteness of VCL backup call centers’ responses to VCL callers, limited or missing documentation from records of VCL calls answered by VCL backup call center responders, limited information provided to VA that could be used to track VCL backup call center performance, and the use of voice answering systems or extended queues for VCL callers reaching some VCL backup call centers. For example, VA officials reported that some veterans did not receive complete suicide assessments when their calls were answered at VCL backup call centers. In addition, VA officials noted that they had observed some VCL backup call centers failing to follow VCL procedures, such as not calling a veteran who may be in crisis when a third-party caller requested that the responder contact the veteran. According to VA officials, these issues led to additional work for the VCL primary center, including staffing one to two responders per shift to review the call records submitted to the VCL primary center by backup call centers and to determine whether these calls required additional follow-up from the VCL primary center. These officials estimated that 25 to 30 percent of backup call center call records warranted additional follow-up to the caller from a VCL primary center responder, including approximately 5 percent of backup call center call records that needed to be completely reworked by a VCL primary center responder. March 2015 backup call coverage contract modification. Given these concerns, in March 2015, VA modified the October 2012 backup call coverage contract to add more explicit performance requirements for its backup call coverage contractor, which likely took effect more quickly than if the department had waited for a new contract to be awarded. These modified requirements included (1) the establishment of a 24- hours-a-day, 7-days-a-week contractor-staffed emergency support line that VCL backup call centers could use to report problems, (2) a prohibition on VCL backup call centers’ use of voice answering systems, (3) a prohibition on VCL backup call centers placing VCL callers on hold before a responder conducted a risk assessment, (4) documentation of each VCL caller’s suicide risk assessment results, and (5) transmission of records for all VCL calls to the VCL primary center within 30 minutes of the call’s conclusion. Development of new backup call coverage contract. In July 2015, VA began the process of replacing its backup call coverage contract by publishing a notice to solicit information from prospective contractors on their capability to satisfy the draft contract terms for the new contract; this new backup call coverage contract was awarded in April 2016. We found that these new proposed contract terms included the same performance requirement modifications that were made in March 2015, as well as additional performance requirements and better data reporting from the contractor that could be used to improve VA’s oversight of the VCL backup call centers. Specifically, the proposed contract terms added performance requirements to address VCL backup call center performance—including a requirement for 90 percent of VCL calls received by a VCL backup call center to be answered by a backup call center responder within 30 seconds and 100 percent to be answered by a backup call center responder within 2 minutes. In addition, the proposed contract terms included numerous data reporting requirements that could allow VA to routinely assess the performance of its VCL backup call centers and identify patterns of noncompliance with the contract’s performance requirements more efficiently and effectively than under the prior contract. The proposed terms for the new contract also state that VA will initially provide and approve all changes to training documentation and supporting materials provided to VCL backup call centers in order to promote the contractor’s ability to provide the same level of service that is being provided by the VCL primary center. In May 2016, we found that when callers did not press “1” during the initial Lifeline greeting, their calls may take longer to answer than if the caller had pressed “1” and been routed to either the VCL primary center or a VCL backup call center. As previously discussed, VA and SAMHSA collaborated to link the toll-free numbers for both Lifeline and the VCL through an interagency agreement. The greeting instructs callers to press “1” to be connected to the VCL; if callers do not press “1,” they will be routed to one of SAMHSA’s 164 Lifeline local crisis centers. To mimic the experience of callers who did not press “1” to reach the VCL when prompted, we made 34 covert nongeneralizable test calls to the national toll-free number that connects callers to both Lifeline and the VCL during August 2015 and we did not press “1” to be directed to the VCL. For 23 of these 34 calls, our call was answered in 30 seconds or less. For 11 of these calls, we waited more than 30 seconds for a responder to answer— including 3 calls with wait times of 8, 9, and 18 minutes. Additionally, one of our test calls did not go through, and during another test call we were asked if we were safe and able to hold. VA’s policy prohibits VCL responders from placing callers on hold prior to completing a suicide assessment; Lifeline has its own policies and procedures. According to officials and representatives from VA, SAMHSA, and the VCL backup call centers, as well as our experience making test calls where we did not press “1,” there are several reasons why a veteran may not press “1” to be routed to the VCL, including an intentional desire to not connect with VA, failure to recognize the prompt to press “1” to be directed to the VCL, waiting too long to respond to the prompt to press “1” to be directed to calling from a rotary telephone that does not allow the caller to press “1” when prompted. As we found in May 2016, VA officials had not estimated the extent to which veterans intending to reach the VCL did not press “1” during the Lifeline greeting. These officials explained that their focus had been on ensuring that veterans who did reach the VCL received appropriate service from the VCL primary center and backup call centers. In addition, SAMHSA officials said that they also did not collect this information. These officials reported that SAMHSA did not require the collection of demographic information, including veteran status, for a local crisis center to participate in the Lifeline network. However, they noted that SAMHSA could request through its grantee that administers the Lifeline network that local crisis centers conduct a one-time collection of information to help determine how often and why veterans reach Lifeline local crisis centers. SAMHSA officials explained that they could work with the Lifeline grantee to explore optimal ways of collecting this information that would be (1) clinically appropriate, (2) a minimal burden to callers and Lifeline’s local crisis centers, and (3) in compliance with the Office of Management and Budget’s paperwork reduction and information collection policies. The interagency agreement between VA and SAMHSA assigns SAMHSA responsibilities for monitoring the use of the national toll-free number that is used to direct callers to both the VCL and Lifeline. These responsibilities include monitoring the use of the line, analyzing trends, and providing recommendations about projected needs and technical modifications needed to meet these projected needs. Using the information collected from the Lifeline local crisis centers on how often and why veterans reach Lifeline, as opposed to the VCL, VA and SAMHSA officials could then assess whether the extent to which this occurs merits further review and action. Although the results of our test were not generalizable, substantial wait times for a few of our covert calls suggested that some callers may experience longer wait times to speak with a responder in the Lifeline network than they would in the VCL’s network. We concluded that without collecting information to examine how often and why veterans do not press “1” when prompted to reach the VCL, VA and SAMHSA could not determine the extent veterans reach the Lifeline network when intending to reach the VCL and may experience longer wait times as a result. In addition, limitations in information on how often and why this occurs did not allow VA and SAMHSA to determine whether or not they should collaborate on plans to address the underlying causes of veterans not reaching the VCL. Standards for internal control in the federal government state that information should be communicated both internally and externally to enable the agency to carry out its responsibilities. For external communications, 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. We recommended VA and SAMHSA collaborate in taking the following two actions: (1) collect information on how often and why callers intending to reach the VCL instead reach Lifeline local crisis centers and (2) review the information collected and, if necessary, develop plans to address the underlying causes. We understand that VA and SAMHSA have been coordinating on these issues. However, as of March 2017, both of these recommendations remain open. Chairman Roe, Ranking Member Walz, and Members of the Committee, this concludes our statement for the record. For questions about this statement, please contact Seto J. Bagdoyan at (202) 512-6722 or [email protected] or Randall B. Williamson 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. In addition to the contacts listed, GAO staff who made key contributions to this statement are Jennie F. Apter, Christie Enders, Cathleen J. Hamann, Marcia A. Mann, Vikki Porter, Lisa Rogers, and Julie T. Stewart. 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 established the VCL in July 2007 to provide support to veterans in emotional crisis. Between fiscal years 2008, its first full year of operation, and 2015, the number of calls received by the VCL increased almost 700 percent, exceeding VA's expectations. As VA began to address increasing numbers of requests for assistance, reports of dissatisfaction with VCL's service periodically appeared in the media. This statement summarizes GAO's May 2016 report on VA's oversight of the VCL. Specifically, the statement describes (1) the extent to which VA met response-time goals for VCL calls and text messages, (2) how VA monitored VCL primary center call center operations, and (3) how VA worked with VCL service partners to help ensure veterans receive high-quality service. For the May 2016 report, GAO visited the VCL's primary center and two backup call centers; tested VCL response time through a generalizable sample of covert telephone calls and a nongeneralizable sample of text messages in July and August 2015; reviewed internal reports and policies and plans; and interviewed VA officials. GAO contacted VA and SAMHSA for an update on actions taken in response to the report's recommendations. In May 2016, GAO found that the Department of Veterans Affairs (VA) did not meet its call response-time goals for the Veterans Crisis Line (VCL), although extended call wait times were not common; issues with text messages were also found. VA's goal was to answer 90 percent of VCL calls at the VCL primary center within 30 seconds in the period GAO studied. Calls not answered within 30 seconds were to route to VCL backup call centers; however, for 5 months of fiscal year 2015, calls were routed to VCL backup call centers after 60 seconds. According to VA officials about 65 to 75 percent of VCL calls were answered at the VCL primary center in fiscal year 2015 within either 30 or 60 seconds. GAO's covert testing in July and August 2015 confirmed this. Specifically, 119 covert test calls showed that an estimated 73 percent of calls made during this period were answered within 30 seconds. GAO also covertly tested the VCL's text messaging services and found that 4 of 14 GAO test text messages did not receive responses. GAO recommended that VA regularly test the VCL's text messaging system to identify issues and correct them promptly. In response, VA developed and implemented procedures to regularly test the VCL's text messaging system, as well as its telephone and online chat systems. In May 2016, GAO found that VA had taken a number of steps to improve its monitoring of the VCL primary center operations. For example, VA had established a permanent VCL call center evaluation team and created a mechanism for tracking complaints about the performance of the VCL primary center from VCL callers or external parties. However, GAO found that VA had not specified quantifiable or otherwise measurable targets and had not included dates for when it would expect the VCL to complete actions covered by each key performance indicator. This was inconsistent with guidance provided by the Office of Management and Budget. GAO recommended that VA document clearly stated and measurable targets and time frames for key performance indicators needed to assess VCL performance. Although VA agreed, as of March 2017, this recommendation remains open. GAO also found that VA had established an interagency agreement with its service partner, the Department of Health and Human Services' (HHS) Substance Abuse and Mental Health Services Administration (SAMHSA), to manage the shared operations of the VCL and Lifeline (a public-private network that provides free and confidential support to people in suicidal crisis or emotional distress). Despite these efforts to coordinate, VA and SAMHSA did not collect information needed to assess how often and why callers intending to reach the VCL do not follow voice prompts and instead reach Lifeline local crisis centers. As a result, VA and SAMHSA did not know the extent to which this occurred and could not determine the underlying causes that may need to be addressed. GAO recommended that VA and SAMHSA (1) collect information on how often and why callers intending to reach the VCL instead reach Lifeline local crisis centers and (2) review the information collected and, if necessary, develop plans to address the underlying causes. Although VA and SAMHSA agreed, as of March 2017, these recommendations remain open. In its May 2016 report, GAO made four recommendations to VA and HHS to improve the VCL. VA and HHS concurred with the recommendations and while action has been taken on one, three remain open as of March 2017.

You are an expert at summarizing long articles. Proceed to summarize the following text: MDA’s mission is to develop and field an integrated and layered Ballistic Missile Defense System to defend the United States, its deployed forces, allies, and friends against all ranges of enemy ballistic missiles in all phases of flight. This is challenging, requiring a complex combination of defensive components—space-based sensors, surveillance and tracking radars, advanced interceptors, command and control, and reliable communications—that work together as an integrated system. A typical hit-to-kill engagement scenario for an intercontinental ballistic missile (ICBM) would unfold as follows: Infrared sensors aboard early-warning satellites detect the hot plume of a missile launch and alert the command authority of a possible attack. Upon receiving the alert, land- or sea-based radars are directed to track the various objects released from the missile and, if so designed, to identify the warhead from among spent rocket motors, decoys, and debris. When the trajectory of the missile’s warhead has been adequately established, an interceptor—consisting of a “kill vehicle” mounted atop a booster—is launched to engage the threat. The interceptor boosts itself toward a predicted intercept point and releases the kill vehicle. The kill vehicle uses its onboard sensors and divert thrusters to detect, identify, and steer itself into the warhead. With a combined closing speed on the order of 10 kilometers per second (22,000 miles per hour), the warhead is destroyed through a “hit-to-kill” collision with the kill vehicle above the atmosphere. To develop a system capable of carrying out such an engagement, MDA is executing an evolutionary acquisition strategy in which the fielding of missile defense capabilities is organized in 2-year increments known as blocks. Each block is intended to provide the Ballistic Missile Defense System with capabilities that will enhance the development and overall performance of the system. The first block—Block 2004—ended on December 31, 2005, and fielded a limited initial capability that included early versions of the Ground-based Midcourse Defense; Aegis Ballistic Missile Defense; Patriot Advanced Capability-3; and the Command, Control, Battle Management, and Communications element. During calendar year 2006 and 2007, MDA is focusing its program of work on the enhancement of four fielded BMDS elements—GMD, Aegis BMD, Sensors, and C2BMC. The primary contribution of Block 2006 is that it fields additional assets and continues the evolution of Block 2004 by providing improved GMD interceptors, enhanced Aegis BMD missiles, upgraded Aegis BMD ships, a Forward-Based X-Band—Transportable radar, and enhancements to the C2BMC software. MDA divides each year’s budget request into a request for the current block and requests for future blocks that have not yet formally begun. For example, in fiscal year 2006, MDA requested funds for Block 2006 and for blocks that begin in 2008, 2010, 2012, and 2014. When MDA submitted its Block 2006 budget to Congress in February 2005, the agency requested funding for not only the four elements fielding assets during Block 2006, but also for the continued development of three elements—ABL, STSS, and THAAD—that will not field assets for operational use until future blocks. According to MDA officials, these elements—which are primarily developmental elements—were included in the block because the agency believed that during the block time frame the elements offered some emergency capability. MDA also requested fiscal year 2006 funds for two other developmental elements, MKV and KEI. However, MDA did not include funding for these elements in its Block 2006 budget request because they provided no capability during the block. Instead, MDA requested funding for MKV in its fiscal year 2006 request for Advanced Component Development and Prototypes—a program element that is not tied to any block—and for KEI in the agency’s fiscal year 2006 request for Block 2014. Table 1 provides a brief description of all elements being developed by MDA. As part of MDA’s planning process, the agency defines overarching goals for the development and fielding of the current BMDS block. These goals identify the composition of the block (the elements in development and those planned for fielding), the type and quantity of assets to be fielded, the cost associated with element development and fielding (including operation and sustainment activites), and the performance expected of fielded assets. For example, in March 2005, MDA told Congress that its Block 2006 program of work would include seven elements—ABL, Aegis BMD, C2BMC, GMD, Sensors, STSS, and THAAD. Further, MDA identified the cumulative number of assets that Aegis BMD, C2BMC, GMD, and the Sensors elements would field by the end of the block, and the performance that those assets would deliver in terms of probability of engagement success, the land area from which a ballistic missile launch could be denied, and the land area that could be protected from a ballistic missile launch. Finally, MDA told Congress that it would try to complete all Block 2006 work for $20.458 billion. To enable MDA to meet its overarching goals, each element’s program office establishes its own plan for fielding and/or developmental activities. For example, each program office develops a delivery plan and a test schedule that contributes to MDA’s performance and fielding goals. The programs also work with their prime contractor to plan the block of work so that it can be completed within the program’s share of MDA’s budget. Since 2002, missile defense has been seen as a national priority and has been funded at nearly requested levels. However, DOD’s Program Budget Decision in December 2004 called for MDA to plan for a $5 billion reduction in funding over fiscal years 2006-2011. Future MDA budgets could be affected by cost growth in federal entitlement programs that are likely to decrease discretionary spending and by increased DOD expenditures, such as expenses created by the Iraq conflict. Last year we reported that MDA strayed from the knowledge-based acquisition strategy that allows successful developers to deliver, within budget, a product whose performance has been demonstrated. In doing so, MDA fielded assets before their capability was known and the full cost of the capability was not transparent to decision makers. We noted that it was possible for MDA to return to a knowledge-based approach to development while still fielding capability in blocks, but that corrective action was needed to put all BMDS elements on a knowledge-based approach. That is, instead of concurrently developing, testing and fielding the BMDS, MDA would need to adopt knowledge points at which the program would determine if it was ready to begin new acquisition activities. These knowledge points would be consistent with those called out in DOD’s acquisition system policy. To provide a basis for holding MDA accountable for delivering within estimated resources and to ensure the success of future MDA development efforts, we recommended that the Secretary of Defense implement a knowledge-based acquisition strategy for all the BMDS elements, assess whether the current 2-year block strategy was compatible with the knowledge-based development strategy, and adopt more transparent criteria for reporting each element’s quantities, cost, and performance. DOD has not taken any action on the first two recommendations because it considers MDA’s acquisition strategy as knowledge-based and because MDA’s block strategy is compatible with the strategy MDA is implementing. Neither did DOD agree to take action on our third recommendation to adopt more transparent criteria for identifying and reporting program changes. In its comments, DOD responded that MDA is required by statute to report significant variances in each block’s baseline and that these reports along with quarterly DOD reviews provide an adequate level of program oversight. MDA made progress during fiscal year 2006 in carrying out planned accomplishments for the block elements, but it will not deliver the value originally planned for Block 2006. Costs have increased, while the scope of work has decreased. It is also likely that in addition to fielding fewer assets other Block 2006 work will be deferred to offset growing contractor costs. Actual costs cannot be reconciled with original goals because the goals have been changed, work travels to and from other blocks, and individual program elements do not account for costs consistently. In addition, although element program offices achieved most of their 2006 test objectives, the performance of the BMDS cannot yet be fully assessed because there have been too few flight tests conducted to anchor the models and simulations that predict overall system performance. Several elements continue to experience technical problems which pose questions about the performance of the fielded system and could delay the enhancement of future blocks. Block 2006 costs have increased because of technical problems and greater than expected GMD operations and sustainment costs. In March 2006, shortly after the formal initiation of Block 2006, increasing costs and other events prompted MDA to reduce the quantity of assets it intended to field during the block. Although the agency reduced the scope of Block 2006, most of the elements’ prime contractors reported that work completed during fiscal year 2006 cost more than planned. Consequently, MDA officials told us it is likely that other work planned for Block 2006 will be deferred until Block 2008 to cover fiscal year 2006 overruns. Furthermore, changing goals, inconsistent reporting of costs by the individual elements, and MDA’s past practice of accounting for the cost of deferred work prevents a determination of the actual cost of Block 2006. MDA’s cost goal for Block 2006 has increased by approximately $1 billion. In March 2005, MDA established a goal of $20.458 billion for the development, fielding, and sustainment of all Block 2006 components. However by March 2006, it had grown by about $1 billion. Cost increases were caused by the: addition of previously unknown operations and sustainment requirements, realignment of the GMD program to support a successful return to flight, realignment of the Aegis BMD program to address technical challenges and invest in upgrades to keep pace with the near term threat, and preparations for round-the-clock operation of the BMDS when the system was put on alert. In an effort to keep costs within the goal, MDA shifted THAAD’s future development costs of $1.13 billion to another block. That is, the agency moved the cost associated with THAAD’s development in fiscal years 2006 through 2011—which in March 2005 was considered a Block 2006 cost—to Block 2008. This accounting change accommodated the cost increase. According to MDA’s November 2006 Report to Congress, THAAD costs will be reported as part of Block 2008 costs to better align the agency’s resources with the planned delivery of THAAD fire units in 2008. Tables 2 and 3 compare the Block 2006 cost goal established for the BMDS in March 2005 and March 2006. For the purposes of this report, we have adjusted the March 2005 cost goal to reflect the deletion of future THAAD cost from Block 2006. This enables the revised cost goal that excludes THAAD to be compared with the original cost goal. Had THAAD’s cost been removed from MDA’s March 2005 cost goal, Block 2006 would have actually totaled about $19.3 billion. Comparing this with the March 2006 revised goal of approximately $20.3 billion reveals the $1 billion increase in estimated Block 2006 costs. The 2-year block structure established by MDA has proven to be a complicated concept for its BMDS elements to implement. According to officials, MDA defines its block structure in two types of capabilities: Early Capability–A capability that has completed sufficient testing to provide confidence that the capability will perform as designed. In addition, operator training is complete and logistical support is ready. So far, Aegis BMD, C2BMC, and GMD are the only elements that have met these criteria. Full Capability–These capabilities have completed all system-level testing and have shown that they meet expectations. At this stage, all doctrine, organization, training, material, leadership, personnel, and facilities are in place. According to MDA officials, the early capability is typically fielded during one block and the full capability is usually attained during the next or a subsequent block. However, not all elements account for Block 2006 costs in the same manner. For example, table 4 below shows that some elements included costs that will be incurred to reach full capability—costs that will be recognized in fiscal year 2009 through 2011—while other elements have not. According to agency officials, the cost of all activities needed to validate the performance of Block 2006 Fielded Configuration elements should be included as part of the BMDS Block 2006 costs even though these activities may occur during future blocks. According to officials from MDA’s Systems Engineering and Integration Directorate, the C2BMC and Aegis BMD programs’ cost accounting for Block 2006 are the most accurate because the programs included the costs to conduct follow-on testing in subsequent years. Additionally, the officials said that other elements of the BMDS will conduct similar tests in the years following the actual delivery of their Block 2006 capabilities; however, the costs were not included as Block 2006 costs. If each BMDS element were to consistently report block costs, the planned costs for Block 2006 would be higher than MDA’s current reported costs of $20.34 billion. MDA is making some progress toward achieving its revised Block 2006 goals, but the number of fielded assets and their overall performance will be less than planned when MDA submitted its Block 2006 goals to Congress in March 2005. MDA notified Congress that it was revising its Block 2006 Fielded Configuration Baseline in March 2006, shortly after submitting its fiscal year 2007 budget. When MDA provided Congress with its quantity goals in March 2005, it stated those goals cumulatively. That is, MDA added the number of Block 2004 assets that it planned to field by December 31, 2005, to the number of assets planned for Block 2006. However, in the case of GMD interceptors, MDA was unable to meet its Block 2004 quantity goals, which, in effect, caused MDA’s Block 2006 goal for interceptors to increase. For example, MDA planned to field 18 GMD interceptors by December 31, 2005, and to field an additional 7 interceptors during Block 2006, for a total of 25 interceptors by the end of Block 2006. But, because it did not meet its Block 2004 fielding goal—fielding only 10 of the 18 planned interceptors— MDA could not meet its Block 2006 cumulative goal of 25 without increasing its Block 2006 deliveries. For purposes of this report, we determined the number of assets that MDA would have to produce to meet its Block 2006 cumulative quantity goal. Table 5 depicts only those quantities and shows how they have changed over time. According to MDA, it reduced the number of GMD interceptors in March 2006 for four primary reasons: delays in interceptor deliveries caused by an explosion at a a halt in production after several flight test failures and pending Mission Readiness Task Force (MRTF) reviews, a MRTF review that redirected some interceptors from fielding to testing, and the temporary suspension of fielding interceptors due to manufacturing and quality issues associated with the exoatomospheric kill vehicle (EKV). MDA also delayed a partial upgrade to the Thule early warning radar until a full upgrade can be accomplished. According to a July 11, 2005, DOD memorandum, the full upgrade of Thule is the most economical option and it meets DOD’s desire to retain a single configuration of upgraded early warning radars. Additionally, the delivery of Aegis BMD Standard Missile -3 (SM-3) was reduced as technical challenges associated with the Divert Attitude Control System were addressed and as investments in upgrades were made to keep pace with emerging ballistic missile threats. According to Aegis BMD officials, the program also revised the upgrade schedule for engagement destroyers because other priorities prevent the Navy from making one ship available before the end of the block. Budget cuts to the C2BMC program also caused MDA to defer the installation of C2BMC suites at three sites. MDA had planned to install the suites at U.S. Central Command, European Command, and another site that was to be determined before the end of the block. However, MDA now plans to place less expensive Web browsers at these sites. MDA made progress in fielding additional BMDS assets in 2006 and is generally on track to meet most of its revised block goals. MDA’s delivery schedules and System Element Review reports show that MDA planned to accomplish these goals by making the following progress by December 31, 2006: adding 4 Aegis BMD missiles to inventory, adding 2 new Aegis BMD destroyers for long-range surveillance and tracking, upgrading 2 Aegis BMD destroyers and 2 Aegis BMD cruisers to perform both engagement and long-range surveillance and tracking, adding 1 new Aegis BMD destroyer and 1 new cruiser with both engagement and long-range surveillance and tracking capability, completing a number of activities prior to delivering the FBX-T radar, delivering the hardware for the 3 Web browsers, and emplacing 8 GMD interceptors. With the exception of the GMD interceptors, MDA completed all work as planned. The GMD program was only able to emplace four interceptors by December 2006, rather than the eight planned. However, program officials told us that the contractor has increased the number of shifts that it is working and the program believes that with this change the contractor can accelerate deliveries and emplace as many as 24 interceptors by the end of the block. However, to do so, the GMD program will have to more than double its 2007 interceptor emplacement rate. Even though MDA reduced the quantity of assets it planned to deliver during Block 2006 to free up funds, most of the MDA’s prime contractors overran their fiscal year 2006 budgets. Collectively, the prime contractors developing elements included in Block 2006 exceeded their budgets by approximately $478 million, with GMD accounting for about 72 percent of the overrun. Table 6 contains our analysis of prime contractors’ cost and schedule performance in fiscal year 2006 and the potential overrun or underrun of each contract at completion. All estimates of the contracts’ cost at completion are based on the contractors’ performance through fiscal year 2006. Appendix II provides further details regarding the cost and schedule performance of the prime contractors for the seven elements shown in table 6. As shown in table 6, the Sensors element is the only Block 2006 element that according to our analysis performed within its fiscal year 2006 budget. The ABL, Aegis BMD, GMD, and STSS programs overran their fiscal year budgets as a result of technical problems and integration issues encountered during the year. We could not assess the C2BMC contractor’s cost and schedule performance because MDA suspended Earned Value reporting during the year as the contractor replanned its Block 2006 program of work. In addition to analyzing the fiscal year 2006 cost and schedule performance of elements included in Block 2006, we also analyzed the performance of elements included in other blocks. Of the elements reporting Earned Value data, only KEI performed within its budget. THAAD’s integration problems once again caused it to exceed its budget. We were unable to determine whether the work accomplished by the MKV contractor cost more than originally planned because Contract Performance Reports were suspended in February 2006 as the program transitioned from an advanced technology development program to a system development program. This transition prompted MKV to establish a new baseline for the program, which the contractor will not report against until early in fiscal year 2007. MDA officials told us that MDA is likely to defer some Block 2006 work activities (other than the delivery of assets) into future blocks in an effort to operate within the funds programmed for the block. If the agency reports the cost of deferred work as it has in the past, the cost of Block 2006 will not include all work that benefits the block and the cost of the future block will be overstated. The deferral of work, while necessary to offset increased costs, complicates making a comparison of a block’s actual costs with its original estimate. According to the Statement of Federal Financial Accounting Standards Number 4, a federal program should report the full cost of its outputs, which is defined as the total amount of resources used to produce the output. In March 2006, we reported that the cost of MDA’s Block 2004 program of work was understated because the reported costs for the block did not include the cost of Block 2004 activities that were deferred until Block 2006. Conversely, the cost of Block 2006 is overstated because the deferred activities from Block 2004 do not directly contribute to the output of Block 2006. Similarly, if MDA decides to defer Block 2006 activities until Block 2008 as officials in MDA’s Office of Agency Operations told us is likely, the cost of those activities will likely be captured as part of Block 2008 costs. Most BMDS elements achieved their primary calendar year 2006 test objectives and conducted test activities on schedule. By December 2006– the midpoint of Block 2006–three of the six Block 2006 elements and all elements considered part of future blocks—met their 2006 primary test objectives. Only the ABL, Aegis BMD, and STSS elements were unable to achieve these objectives. Although the elements encountered test delays, some were able to achieve noteworthy accomplishments. For example, in its third flight test, the GMD program exceeded its test objectives by intercepting a target. This intercept was particularly noteworthy because it was the first successful intercept attempt for the program since 2002. Also, although the test was for only one engagement scenario, it was notable because it was GMD’s first end-to-end test. The GMD program originally planned to conduct four major flight tests, during fiscal year 2006, two using operational interceptors. However, the program was only able to conduct three flight tests during the fiscal year. In one, an operational interceptor was launched against a simulated target; in a second test, a simulated target was launched to demonstrate the ability of the Beale radar to provide a weapon system task plan; and in the other, an interceptor was launched against an actual target. It was in the third test that—for one end-to-end scenario—the program exceeded test objectives by destroying a target representative of a real world threat. The objectives of the fourth test were to be similar to those of the third test— an interceptor flying-by a target with no expectation of a hit. However, program officials told us that the success of the earlier tests caused them to accelerate the objectives of the fourth test by making it an intercept attempt. The fourth test has not yet taken place because a delay in the third test caused a similar delay in the fourth test and because components of the test interceptor are being changed to ensure that they will function reliably. This test is currently scheduled no earlier than the third quarter of fiscal year 2007. Both the C2BMC and Sensors elements conducted all planned test activities on schedule and were able to meet their 2006 objectives. The C2BMC software, which enables the system to display real-time target information collected by BMDS sensors, was tested in several flight tests with the Aegis BMD and GMD programs and was generally successful. The Sensors element was also able to complete all tests planned to ensure that the Forward-Based X-Band— Transportable (FBX-T) radar will be ready for operations. The warfighter will determine when the FBX-T will become operational, but MDA officials told us that this may not occur until the United States is able to provide the radar’s data to Japan. MDA was unable to successfully execute the 2006 test objectives for the STSS program. Thermal vacuum testing that was to be conducted after the first payload was integrated with space vehicle 1 was delayed as a result of integration problems. According to program officials, testing began in January 2007 and it was expected to be completed in late February 2007. Although the Aegis BMD program conducted its planned test activities on schedule, it was unable to achieve all of its test objectives for 2006. Since the beginning of Block 2006, the program has conducted one successful intercept, which tested the new Standard Missile-3 design that is being fielded for the first time during Block 2006. This new missile design provides a capability against more difficult threats and has a longer service life than the missile produced in Block 2004. In December 2006, a second intercept attempt failed because the weapon system component was incorrectly configured and did not classify the target as a threat, which prevented the interceptor from launching. Had this test been successful, it would have been the first time that the pulse mode of the missile’s Solid Divert and Attitude Control System would have been partially flight tested. A sixth BMDS element–ABL–experienced delays in its testing schedule and was also unable to achieve its fiscal year 2006 test objectives. ABL is an important element because if it works as desired, it will defeat enemy missiles soon after launch, before decoys are released to confuse other BMDS elements. Development of the element began in 1996, but MDA has not yet demonstrated that all of ABL’s leading-edge technologies will work. The ABL program plans to prove critical technologies during a lethality demonstration. This demonstration is a key knowledge point for ABL because it is the point at which MDA will decide the program’s future. However, technical problems encountered with the element’s Beam Control/Fire Control component caused the program to experience over a 3-month delay in its ground test program, which has delayed the planned lethality demonstration until 2009. In addition, all software problems have not been completely resolved and, according to ABL’s Program Manager, will have to be corrected before flight testing can begin, which could further delay the lethality demonstration. The KEI element also has a key decision point—a booster flight test— within the next few years. In preparation for this test, the program successfully conducted static fire tests and wind tunnel tests in fiscal year 2006 to better assess booster performance. Upon completion of KEI’s 2008 flight test and ABL’s 2009 lethalithy demonstration, MDA will compare the progress of the two programs and decide their futures. In January 2005, MDA established ABL as the primary boost phase defense element. At the same time, MDA restructured the KEI program to develop an upgraded long-range midcourse interceptor and reduced KEI’s role in the boost phase to that of risk mitigation. A KEI official told us that a proposal is being developed that suggests MDA approach the 2009 decision as a down select or source selection that would decide whether ABL or KEI would be the BMDS boost phase capability. The MKV program accomplished all of its planned activities as scheduled during fiscal year 2006, which included several successful propulsion tests. In November 2005, the program tested a preliminary design of MKV’s liquid propellant divert and attitude control system–the steering mechanism for the carrier and kill vehicles. This test was a precursor to a successful July 2006 test of the liquid divert and attitude control system’s divert thruster, which was conducted under more realistic conditions. The program also executed a solid propellant divert and attitude control system test in December 2005. Results of the December test, combined with a technology assessment, led program officials to pursue a low-risk, high-performance liquid fueled divert and attitude control system. The MKV program will continue to explore other divert and attitude control system technologies for future use. The THAAD program achieved its primary fiscal year 2006 test objectives, although it did experience test delays. The program planned to conduct five flight tests during fiscal year 2006, but was only able to execute four. During the program’s first two flight tests, program officials demonstrated the missile’s performance, including the operation of the missile’s divert and attitude control system and the control of its kill vehicle. The third flight test conducted in July 2006 demonstrated THAAD’s ability to successfully locate and intercept a target, a primary 2006 test objective. The fourth THAAD flight test was declared a “no-test” after the target malfunctioned shortly after its launch, forcing program officials to terminate the test. THAAD officials told us that the aborted test will be deleted from the test schedule and any objectives of the test that have not been satisfied will be rolled-up into future tests. The program planned to conduct its fifth (missile only) flight test–to demonstrate the missile’s performance in the low atmosphere–in December 2006. However, due to reprioritization in test flights, the fifth flight test is now scheduled for the second quarter of fiscal year 2007. Flight test 6, the next scheduled flight test, was successfully conducted at the end of January 2007. It was the first flight test performed at the Pacific Missile Range. In March 2005, MDA set performance goals for Block 2006 that included a numerical goal for the probability of a successful BMDS engagement, a defined area from which the BMDS would prevent an enemy from launching a ballistic missile, and a defined area that the BMDS would protect from ballistic missile attacks. In March 2006, MDA altered its Block 2006 performance goals commensurate with reductions in Block 2006 fielded assets. Although MDA revised its goal downward, insufficient data exists to assess whether MDA is on track to meet its new goal. MDA uses the WILMA model to predict overall BMDS performance even though this model has not been validated or verified by DOD’s Operational Test Agency. According to Operational Test Agency officials, WILMA is a legacy model that does not have sufficient fidelity for BMDS performance analysis. MDA officials told us the agency is working to develop an improved model that can be matured as the system matures. In addition, the GMD program has not completed sufficient flight testing to provide a high level of confidence that the BMDS can reliably intercept ICBMs. In September 2006, the GMD program completed an end-to-end test of one engagement sequence that the GMD element might carry out. While this test provided some assurance that the element will work as intended, the program must test other engagement sequences, which would include other GMD assets that have not yet participated in an end- to-end flight test. Additionally, independent test agencies told us that additional flight tests are needed to have a high level of confidence that GMD can repeatedly intercept incoming ICBMs. Additional tests are also needed to demonstrate that the GMD element can use long-range surveillance and tracking data developed by the Aegis BMD element. In March 2006, we reported that Aegis BMD was unable to participate in a GMD flight test, which prevented MDA from exercising Aegis BMD’s long- range surveillance and tracking capability in a manner consistent with an actual defensive mission. The program office told us that the Aegis BMD is capable of performing this function and has demonstrated its ability to surveil and track ICBMs in several exercises. Additionally, Aegis BMD has shown that it can communicate this data to GMD in real time. However, because of other testing priorities, GMD has not used this data to prepare a weapon system task plan in real time. Rather GMD developed the plan in post-test activities. Officials in the Office of the Director for Operational Test and Evaluation told us that having GMD prepare the test plan in real time would provide the data needed to more accurately gauge BMDS performance. Delayed testing and technical problems may also impact the performance of the system and the timeliness of future enhancements to the fielded system. For example, the performance of the new configuration of the Aegis BMD SM-3 missile is unproven because design changes in the missile’s solid divert and attitude control system and one burn pattern of the third stage rocket motor, according to program officials, were not flight tested before they were cut into the production line. MDA is considering a full flight test of the pulsed solid divert and attitude control system during the third quarter of fiscal year 2007. The solid divert and attitude control system is needed to increase the missile’s ability to divert into its designated target and counter more complex threats. The zero pulse-mode of the missile’s third stage rocket motor, which is expected to provide a capability against a limited set of threat scenarios, will not be fully tested until fiscal year 2009. Confidence in the performance of the BMDS is also reduced because the GMD element continues to struggle with technical issues affecting the reliability of some GMD interceptors. For example, GMD officials told us that the element has experienced one anomaly during each of its flight tests since its first flight test conducted in 1999. This anomaly has not yet prevented the program from achieving any of its primary test objectives; but, to date, neither its source nor solution has been clearly identified or defined. Program officials plan to continue their assessment of current and future test data to identify the root cause of the problem. The reliability of emplaced GMD interceptors also remains uncertain because inadequate mission assurance/quality control procedures may have allowed less reliable or inappropriate parts to be incorporated into the manufacturing process. Program officials plan to replace these parts in the manufacturing process, but not until interceptor 18. The program plans to begin retrofitting the previous 17 interceptors in fiscal year 2009. According to GMD officials, the cost of retrofitting the interceptors will be at least $65.5 million and could be more if replacement of some parts proves more difficult than initially expected. The ABL program also experienced a number of technical problems during fiscal year 2006 that delayed future decisions for the BMDS program. As previously noted, the program’s 2008 lethality demonstration will be delayed until 2009. The delay is caused by Beam Control/Fire Control (BC/FC) software, integration, and testing difficulties and unexpected hardware failures. According to contractor reports, additional software tests were needed because changes were made to the tested versions, the software included basic logic errors, and unanticipated problems were caused by differences in the software development laboratory and ABL aircraft environments. MDA enjoys a significant amount of flexibility in developing the BMDS, but it comes at the cost of transparency and accountability. Because the BMDS program has not formally entered the system development and demonstration phase of the acquisition cycle, it is not yet required to apply several important oversight mechanisms contained in certain acquisition laws that, among other things, provide transparency into program progress and decisions. This has enabled MDA to be agile in decision making and to field an initial BMDS capability quickly. On the other hand, MDA operates with considerable autonomy to change goals and plans, making it difficult to reconcile outcomes with original expectations and to determine the actual cost of each block and of individual operational assets. Past Congresses have established a framework of laws that make major defense acquisition programs accountable for their planned outcomes and cost, give decision makers a means to conduct oversight, and ensure some level of independent program review. The threshold application of these acquisition laws is typically triggered by a program’s entry into system development and demonstration—a phase during which the weapon system is designed and then demonstrated in tests. The BMDS has not entered into system development and demonstration because it is being developed outside DOD’s normal acquisition cycle. To provide accountability, major defense acquisition programs are required by statute to document program goals in an acquisition program baseline that, as implemented by DOD, has been approved by a higher- level DOD official prior to the program’s initiation. The baseline, derived from the users’ best estimates of cost, schedule, and performance requirements, provides decision makers with the program’s total cost for an increment of work, average unit costs for assets to be delivered, the date that an initial operational capability will be fielded, and the weapon’s intended performance parameters. The baseline is considered the program’s initial business case–evidence that the concept of the program can be developed and produced within existing resources. Once approved, major acquisition programs are required to measure their program against the baseline or to obtain approval from a higher-level acquisition executive before making significant changes. Programs are also required to regularly provide detailed program status information to Congress, including information on program cost, in Selected Acquisition Reports. In addition, Congress has established a cost monitoring mechanism that requires programs to report significant increases in unit cost measured from the program baseline. Other statutes ensure that DOD provides some independent program verification external to the program. Title 10, United States Code (U.S.C.), section 2434 prohibits the Secretary of Defense from approving system development and demonstration, or production and deployment, of a major defense acquisition program unless an independent estimate of the program’s full life-cycle cost has been considered by the Secretary. The independent verification of a program’s cost estimate allows decision makers to gauge whether the program is executable given other budget demands and it increases the likelihood that a program can execute its plan within estimated costs. In addition, 10 U.S.C. § 2399 requires completion of initial operational test and evaluation of a weapon system before a program can begin full-rate production. The Director of Operational Test and Evaluation, a DOD office independent of the acquisition program, not only approves the adequacy of the test plan and its subsequent evaluation, but also reports to the Secretary of Defense whether the test and evaluation were adequate and whether the test’s results confirm that the items are effective and suitable for combat. By law, appropriations are to be applied only to the objects for which the appropriations were made except as otherwise provided by law. Research and development appropriations are typically specified by Congress to be used to pay the expenses of basic and applied scientific research, development, test, and evaluation. On the other hand, procurement appropriations are, in general, specified by Congress to be used for the purchase of weapon systems and equipment, that is, production or manufacturing. In the 1950s, Congress established a policy that items being purchased with procurement funds be fully funded in the year that the item is procured. This policy is meant to prevent a program from incrementally funding the purchase of operational systems. According to the Congressional Research Service, “incremental funding fell out of favor because opponents believed it could make the total procurement costs of weapons and equipment more difficult for Congress to understand and track, create a potential for DOD to start procurement of an item without necessarily stating its total cost to Congress, permit one Congress to ‘tie the hands’ of future Congresses, and increase weapon procurement costs by exposing weapons under construction to uneconomic start-up and stop costs.” Congress continues to enact legislation that improves program transparency. In 2006, Congress added 10 U.S.C. § 2366a, which prohibits programs from entering system development and demonstration until certain certifications are made. For example, the decision authority for the program must certify that the program has a high likelihood of accomplishing its intended mission and that the program is affordable considering unit cost, total acquisition cost, and the resources available during the year’s covered by DOD’s future years defense program. Similar to other government programs, one of the laws affecting MDA decisions is the Antideficiency Act. The fundamental concept of the Antideficiency Act is to ensure that spending does not exceed appropriated funds. The act is one of the major laws in which Congress exercises its constitutional control of the public purse. The fiscal principles underlying the Antideficiency Act are quite simple. Government officials may not make payments, or commit the United States to make payments at some future time, for goods or services unless the available appropriation is sufficient to cover the cost in full. To ensure that it is always in compliance with this law, MDA adjusts its goals and defers work as needed to execute the BMDS within its available budget. In 2001, DOD conducted extensive missile defense reviews to decide how best to defend the United States, deployed troops, friends, and allies from ballistic missile attacks. The studies determined that DOD needed to find new approaches to acquire and deploy missile defenses. Flexibility was one of the hallmarks of the new approach that DOD chose to implement. One flexibility accorded MDA was the authority to develop the BMDS outside of DOD’s normal acquisition cycle, by not formally entering the system development and demonstration phase. This effectively enabled MDA to defer application of certain acquisition laws until the agency transfers a fully developed capability to a military service for production, operation, and sustainment—the point at which DOD directed that the BMDS program reenter the acquisition cycle. At that point, basic development and initial fielding would generally be complete. Because MDA currently does not have to apply many of the oversight requirements for major defense acquisition programs directed by acquisition laws, the BMDS program operates with unusual autonomy. In 2002, the Under Secretary of Defense for Acquisition, Technology, and Logistics delegated to MDA the authority to establish its own baseline and make changes to that baseline without approval outside of MDA. Because it has not formally entered system development and demonstration, MDA can also initiate a block of capability and move forward with its fielding without an independent cost estimate or an independent test of the effectiveness and suitability of assets intended for operational use. The ability to make decisions on its own and proceed without independent verifications reduces decision timelines, making the BMDS program more agile than other DOD programs. MDA’s ability to quickly field a missile defense capability is also enhanced by its ability to field the BMDS before all testing is complete. MDA considers the assets it has fielded to be developmental assets and not the result of the production phase of the acquisition cycle. Because MDA has not advanced the BMDS or its elements into the acquisition cycle, it is continuing to produce and field assets without completing the operational test and evaluation normally required by 10 U.S.C. § 2399 before full-rate production. For example, MDA has acquired and emplaced 14 ground- based interceptors for operational use before both developmental and operational testing is completed. The agency’s strategy is to continue developmental testing while fielding assets and to also incorporate operational realism into these tests so that the Director of Operational Test and Evaluation can make an operational assessment of the fielded assets’ capability. Because all of MDA’s funding comes from the Research, Development, Test, and Evaluation appropriation account, MDA enjoys greater flexibility in how it can use funds compared to a traditional DOD acquisition program where funding is typically divided into research, development, and evaluation, procurement, and operations and maintenance. This is particularly true of an element. For example, a Block 2006 element like GMD covers a wide range of activities, from research and development on future enhancements to the fabrication of interceptors for operations. If the GMD program runs into problems with one activity, it can defer work on another to cover the cost of the problems. MDA’s flexibility to change goals for each element complements the flexibility in how it uses its funds. After a new block of the BMDS has been presented in the budget, MDA can change the outcomes–in terms of planned delivery of assets and other work activities–that are expected of the block. While this freedom enables MDA to operate within its budget, it decouples the activities actually completed from the activities that were budgeted, making it difficult to assess the value of what is actually accomplished. For example, between 2003 and mid-2005, MDA changed its Block 2004 delivery goals three times, progressively decreasing the number of assets planned for the block when it was initially approved for funding. This trend has continued into Block 2006, with the agency changing its delivery plans once since it presented its initial Block 2006 goals to Congress. MDA is required to report such changes only if MDA’s Director considers the changes significant. In addition to deferring the delivery of assets from one block to another, MDA also has the flexibility to defer other work activities from a current to a future block. This creates a rolling scope, making it difficult to keep track of what an individual block is responsible for delivering. For example, during Block 2004, MDA deferred some planned development, deployment, characterization, and verification activities until Block 2006 so that it could cover contractor budget overruns. MDA is unable to determine exactly how much work was deferred. However, according to a November 2006 report to Congress, MDA found it necessary to defer the work until Block 2006 to make Block 2004 funding available to implement a new GMD test strategy following two GMD flight test failures, resolve quality issues associated with GMD interceptors and its exoatmospheric kill vehicle, and add an FBX-T radar to the initial deployed capability. Agency officials are already anticipating the deferral of work from Block 2006 into Block 2008. In fiscal year 2006, the work of five of the six contractors responsible for elements included in Block 2006 cost more than expected. Given program funding limits, MDA officials told us that they will either have to defer work or request additional funds from Congress during the remaining years of the block. MDA did not increase its fiscal year 2007 budget request; therefore, it is likely that the agency will once again have to defer some planned work into the next block. Not only do changes in a block’s work plan make it difficult to know what outcomes the program expects to achieve, the changes also have the potential to impact the BMDS’ performance. For example, by decreasing the number of fielded interceptors, MDA decreases the likelihood that it can defeat enemy missiles if multiple threats are prevalent because the number of available interceptors will be limited. In addition, if activities, such as testing and validation, are not complete when assets are fielded, the assets may not perform as expected and changes may be needed. This effect of early fielding was seen in Block 2004 when GMD interceptors were fielded before testing was complete. Later tests showed that the interceptors may contain unreliable parts, some of which MDA now plans to replace. Although acquisition laws governing major defense acquisition programs as well as DOD acquisition policy recognize the need for independent program reviews, few such reviews are part of the BMDS program. This has contributed to the difficulty in assessing MDA’s progress toward expected outcomes. As described above, major programs are required by law to have an independent cost estimate (performed by the DOD Cost Analysis Improvement Group) for entry into system development and demonstration, as well as production and deployment. According to MDA officials, MDA has so far obtained an independent assessment of only one BMDS element’s life-cycle cost estimate—Aegis BMD’s estimate for Block 2004. In our opinion, without a full independent cost estimate, MDA has established optimistic block goals that could not be met. This is supported by an MDA spokesman’s statement that the agency’s optimism in establishing Block 2004 cost and quantity goals contributed to several goal changes. According to MDA officials, unlike its action on its Block 2004 cost goal, MDA did not request an assessment of MDA’s Block 2006 goal. Further, DOD policy calls for a milestone decision authority with overall responsibility for the program that is independent of the program. Although the Director reports to the Under Secretary of Defense for Acquisition, Technology, and Logistics and keeps the Under Secretary and congressional defense committees informed of MDA decisions, MDA’s Director is authorized to make most program decisions without prior approval from a higher-level authority. The Under Secretary of Defense delegated this authority to the Director in a February 2002 memorandum. The Secretary of Defense also appointed MDA’s Director as both the BMDS Program Manager and its Acquisition Executive (including the authority to serve as milestone decision authority until an element is transferred out of MDA). As the Acquisition Executive, the Director was given responsibility for establishing programmatic policy and conducting all research and development of the BMDS. This delegation included responsibility for formulating BMDS acquisition strategy, making program commitments and terminations, deciding on affordability trade-offs, and baselining the capability and configuration of blocks and elements. Because MDA can redefine outcomes, the actual cost of a block cannot be compared with the cost originally estimated. MDA considers the cost of deferred work—which may be the delayed delivery of assets or other work activities—as a cost of the block in which the work is performed, even though the work benefits and was planned for a prior block. Further, MDA does not track the cost of deferred work from one block to the next and, therefore, cannot make adjustments that would match the cost with the block it benefits. For example, in March 2006, we reported that MDA deferred some Block 2004 work until Block 2006 so that it could use the funds appropriated for that work to cover unexpected cost increases caused by such problems as poor quality control procedures and technical problems during development, testing, and production. MDA officials told us that additional funds have been, or will be, requested during Block 2006 to carry out the work. However, the officials could not tell us how much of the Block 2006 budget is attributable to the deferred work. These actions caused Block 2004 cost to be understated and Block 2006 cost to be overstated. In addition, if MDA delays some Block 2006 work until Block 2008, as expected, Block 2006 cost will become more difficult to compare with its original estimate as the cost of the deferred work will no longer count against the block. The Director, MDA, determines whether he reports the cost of work being deferred to future blocks and, so far, has not done so. The planned and actual unit costs of assets being acquired for operational use are equally hard to determine. Because the BMDS and its elements are a single major defense acquisition program that has not officially entered into system development and demonstration, it is not required to provide the detailed reports to Congress directed by statute. While it is possible to reconstruct planned unit costs from budget documents, the planned unit cost of some assets—for example, GMD interceptors—is not easy to determine because the research and development funds used to buy the interceptors are spread across 3 to 5 budget years. Also, because MDA is not required to report significant increases in unit cost, it is not easy to determine whether an asset’s actual cost has increased significantly from its expected cost. For example, we were unable to compare the actual and planned cost of a GMD interceptor. By comparison, the Navy provides more transparency in reporting on the cost of ships, some of which are incrementally funded with procurement funds. When a Navy ship program overruns the cost estimate used to justify the budget, the Navy identifies the additional funding needed to cover the overruns separately from other shipbuilding programs. Using research and development funds to purchase fielded assets further reduces cost transparency because these dollars are not covered by the full-funding policy for procurement. Therefore, when the program for a 2- year block is first presented in the budget, Congress is not necessarily fully aware of the dimensions and cost of that block. Although a particular block may call for the delivery of a specific number of interceptors, the full cost of those interceptors may not be contained in that block. In addition, incremental funding has the potential to “tie the hands” of future Congresses to finish funding for assets started in prior years. Otherwise, Congress could run the risk of a production stoppage and the increased costs associated with restarting the production line. During Block 2004, poor quality control procedures that MDA officials attribute to acquisition streamlining and schedule pressures caused the missile defense program to experience test failures and slowed production. MDA has initiated a number of actions to correct its quality control weaknesses and those actions have been largely successful. Although MDA continues to identify quality control procedures that need improvement, the number of deficiencies has declined and contractors are responding to MDA’s improvement efforts. These efforts include a teaming approach designed to restore the reliability of MDA’s suppliers, regular quality inspections to quickly identify and find resolutions for quality problems, and award fees with an increased emphasis on quality assurance. In addition, MDA’s attempts to improve quality assurance have attracted the interest of other government agencies and contractors. MDA is leading quality improvement conferences and co-sponsoring a Space Quality Improvement Council. Officials in MDA’s Office of Quality, Safety, and Mission Assurance and in GMD’s Program Office attribute the weaknesses in MDA’s quality control processes to acquisition streamlining and schedule pressures. According to a former DOD Director of Operational Test and Evaluation, during the early 1990’s there was a common goal for DOD management to streamline the acquisition process to reduce burgeoning costs of new weapons. By streamlining the process, DOD commissions and task forces hoped to drastically cut system development and production time and reduce costs by eliminating management layers, eliminating certain reporting requirements, using more commercial-off-the-shelf systems and subsystems, reducing oversight from within as well as from outside DOD, and by eliminating perceived duplication of testing. In addition to acquisition streamlining, schedule pressures caused MDA to be less attentive to quality assurance issues. This was particularly true for the GMD element that was tasked with completing development and producing assets for operational use within 2 years of a Presidential directive to begin fielding an initial missile defense capability. While the GMD program had realized for some time that its quality controls needed to be strengthened, the program’s accelerated schedule left little time to address quality problems. MDA has initiated a number of mechanisms to rectify the quality control weaknesses identified in the BMDS program. For example, as early as 2003, MDA, in concert with industry partners, Boeing, Lockheed Martin, Raytheon, and Orbital Sciences began a teaming approach to restore reliability in a key supplier. In exchange for allowing the supplier to report to a single customer—MDA—the supplier gave MDA’s Office of Quality, Safety, and Mission Assurance authority to make a critical assessment of the supplier’s processes. This assessment determined that the supplier’s manufacturing processes lacked discipline, its corrective action procedures were ineffective, its technical data package was inadequate, and personnel were not properly trained. The supplier responded by hiring a Quality Assurance Director, five quality assurance professionals, a training manager, and a scheduler. In addition, the supplier installed an electronic problem reporting database, formed new boards—such as a failure review board—established a new configuration management system, and ensured that manufacturing activity was consistent with contract requirements. According to MDA, by 2005, these changes began to produce results. Between March 2004 and September 2005, test failures declined by 43 percent. In addition, open quality control issues decreased by 64 percent between September 2005 and August 2006 and on-time deliveries increased by 9 percent between March 2005 and August 2006. MDA’s teaming approach was expanded in 2006 to another problem supplier and many systemic solutions are already underway. MDA also continues to carry-out regular contractor quality inspections. For example, during fiscal year 2006, MDA completed quality audits of 6 contractors and identified a total of 372 deficiencies and observations. As of December 2006, the contractors had closed 157 or 42 percent of all audit findings. These audits are also producing other signs of quality assurance improvements. For example, after an August 2006 review of Raytheon’s production of the last five GMD exoatmospheric kill vehicles, MDA auditors reported less variability in Raytheon’s production processes, increasing stability in its statistical process control data, fewer test problem reports and product waivers, compliance with manufacturing “clean room” requirements, and a sustained improvement in product quality. Because of the emphasis placed on the recognition of quality problems, Raytheon is conducting regular inspections independently of MDA to identify problems. Over the course of 2006, MDA also continued to incorporate MDA Assurance Provisions (MAP) into its prime contracts. The MAP provides MDA methods to measure, verify, and validate mission success through the collection of metrics, risk assessment, technical evaluations, independent assessments, and reviews. Four BMDS elements–BMDS Sensors, C2BMC, KEI, and THAAD–modified their contracts during 2006 to incorporate the MAP. The remaining five BMDS elements have not yet included the plan on their contracts because the contract is mostly in compliance with the MAP or because of the timing and additional costs of adding the requirements. MDA also encourages better quality assurance programs and contractors’ implementation of best practices through award fee plans. In 2003, three BMDS elements–BMDS Sensors, KEI, and THAAD–revised their contracts to include 25 MAP criteria in their award fee plans. For example, the BMDS Sensors element included system quality, reliability, and configuration control of data products as part of its award fee criteria for its FBX-T contract. Contractors are also bringing their best practices to the table. For example, in an effort to prevent foreign object debris in components under assembly, Raytheon and Orbital Sciences have placed all tools in special tool boxes known as shadow boxes. Raytheon has also incorporated equipment into the production process that handles critical components, removing the possibility that the components will be dropped or mishandled by production personnel. Because of its quality assurance efforts, contractors and other government agencies have called on MDA to lead quality conferences and sponsor an improvement council. MDA’s Office of Quality, Safety, and Mission Assurance was co-sponsor of a conference on quality in the space and defense industry and the office’s Director has also served as panel discussion chair at numerous other conferences. The conferences focus on the safety, reliability, and quality aspects of all industries and agencies involved in defense and space exploration. MDA is also a co-sponsor of the Space Quality Improvement Council, a council established to cooperatively address critical issues in the development, acquisition, and deployment of national security space systems. Contractors are also adopting some MDA methods for improving quality assurance. For example, Raytheon Integrated Defense Systems has adopted the MAP as a performance standard for all of its defense programs. In a general sense, our assessment of MDA’s progress on missile defense is similar to that of previous years: accomplishments have been made and capability has been increased, but costs have grown and the scope of planned work has been reduced. The fielding of additional assets, the ability to put BMDS on alert status, and the first end-to-end test of GMD were notable accomplishments during fiscal year 2006. On the other hand, it is not easy to answer the question of how well BMDS is progressing relative to the funds it has received and goals it has set for those funds. As with previous years, we have found it difficult to reconcile the progress made in Block 2006 with the original cost and scope of the program. The block concept, while a useful construct for harvesting and fielding capability incrementally, is a muddy construct for accountability. Although BMDS is managed within a relatively level budget of about $10 billion a year, the scope of planned work is altered several times each year. Consequently, work travels from one block to another, weakening the connection between the actual cost and scope of work done and the estimated cost and scope of work used to justify budget requests. Block 2006 is a case in point. Compared with its original budget justification, it now contains unanticipated work from Block 2004 but has deferred some of its own planned work to future blocks. Costs for the THAAD element are no longer being counted in Block 2006 although they were last year. Some developmental elements that will be fielded in later blocks, such as KEI and MKV, are not considered part of Block 2006, while ABL, which is also a developmental element to be fielded in later blocks, is considered part of Block 2006. Establishing planned and actual costs for individual assets is also elusive because MDA’s development of the BMDS outside of DOD’s acquisition cycle blurs the audit trail. Using research and development funds—funds that are not covered by the full-funding policy—contributes to the difficulty in determining some assets’ cost. None of the foregoing is to suggest that MDA has acted inconsistently with the authorities it has been granted. Indeed, by virtue of its not having formally begun system development and demonstration, coupled with its authority to use research and development funds to manufacture and field assets, MDA has the sanctioned flexibility to manage exactly as it has. It could be argued that without this latitude, the initial capability fielded last year and put on alert this year would not have been possible. Yet, the question remains as to whether this degree of flexibility should be retained on a program that will spend about $10 billion a year for the foreseeable future. It does not seem unreasonable to expect a program of this magnitude to be held to a higher standard of accountability than delivering some capability within budgeted funds. In fact, the program is likely to undergo greater scrutiny as DOD faces increasing pressure to make funding trade-offs between its investment portfolios, ongoing military operations, and recapitalization of its current weapon systems. Within BMDS, key decisions lie ahead for DOD. Perhaps the most significant decision in the next 2 years will be to determine what investments should be made in the two boost phase elements—ABL and KEI—under development. This decision would benefit greatly from good data on actual versus expected performance, actual versus expected cost, and independent assessments of both cost and performance. The recommendations that follow build upon those we made in last year’s report on missile defense. In general, those recommendations called for the Secretary of Defense to align individual BMDS elements around a knowledge-based strategy and to determine whether a block approach to fielding was compatible with such a strategy. To increase transparency in the missile defense program, we recommend that the Secretary of Defense: Develop a firm cost, schedule, and performance baseline for those elements considered far enough along to be in system development and demonstration, and report against that baseline. Propose an approach for those same elements that provides information consistent with the acquisition laws that govern baselines and unit cost reporting, independent cost estimates, and operational test and evaluation for major DOD programs. Such an approach could provide necessary information while preserving the MDA Director’s flexibility to make decisions. Include in blocks only those elements that will field capabilities during the block period and develop a firm cost, schedule, and performance baseline for that block capability including the unit cost of its assets. Request and use procurement funds, rather than research, development, test, and evaluation funds, to acquire fielded assets. Conduct an independent evaluation of ABL and KEI after key demonstrations, now scheduled for 2008 and 2009, to inform decisions on the future of the two programs. DOD’s comments on our draft report are reprinted in appendix I. DOD partially concurred with our first three recommendations and non- concurred with the last two. In partially concurring with the first recommendation, DOD recognized the need for greater program transparency, but objected to implementing an element-centric approach to reporting, believing that this would detract from managing the BMDS as a single integrated system. We agree that management of the BMDS as a single, integrated program should be preserved. However, since DOD already requests funding and awards contracts by the individual elements that compose the BMDS, we believe that establishing a baseline for those elements far enough along to be considered in system development and demonstration provides the best basis for transparency of actual performance. This would not change DOD’s approach to managing the BMDS, because merely reporting the cost and performance of individual elements would not cause each element to become a major defense acquisition program. DOD stated that MDA intends to modify its current biennial block approach that is used to define reporting baselines. In making this change, MDA states that it intends to work with both Congress and GAO to ensure that its new approach provides useful information for accountability purposes. At this point, we believe that the information needed to define a reporting baseline for a block would best be derived from individual elements. That having been said, a discourse can be had on whether elements are the only way to achieve the needed transparency and we welcome the opportunity to work toward constructive changes. DOD also partially concurred with our second recommendation that BMDS elements effectively in system development and demonstration provide information consistent with the acquisition laws that govern baselines and unit cost reporting, independent cost estimates, and operational test and evaluation for major programs. DOD did commit to providing additional information to Congress to promote accountability, consistency, and transparency. Nonetheless, DOD remains concerned that having elements, rather than the BMD system, report according to these laws will have a fragmenting effect on the development of an integrated system and put more emphasis on individual programs as though each is a major defense acquisition program. We believe that greater transparency into the BMDS program depends on DOD reporting in the same manner that it requests program funding. This ensures that decision makers can reconcile the expected cost and performance of assets DOD plans to acquire with actual cost and performance. We recognize that MDA does provide Congress with information on cost and testing, but this information is not of the caliber or consistency called for by acquisition laws. DOD stated that our third recommendation on reporting at the BMDS-level appears to be inconsistent with our recommendations on reporting at the element level. The basis for our third recommendation is that a block, which is a construct to describe and manage a defined BMDS-wide capability, must be derived from the capabilities that individual elements can yield. Except for activities like integrated tests that involve multiple elements, the cost, schedule, and performance of the individual assets to be delivered in a block come from the elements. Further, those elements that are not far enough along to deliver assets or capabilities within a particular block should not be considered part of that block. We believe that as MDA works to modify its current biennial block approach, it needs to be clearer and more consistent about what is and is not included in a block and that the cost, schedule, and performance of the specific assets in the block should be derived from the information already generated by the elements. DOD did not concur with our recommendation that it request and use procurement funds to acquire fielded assets. It noted that the flexibility provided by Research, Development, Test, and Evaluation funding is necessary to develop and acquire new capabilities quickly that can respond to new and unexpected ballistic missile threats. We recognize the need to be able to respond to such threats. However, other DOD programs are also faced with unexpected threats that must be addressed quickly and have found ways to do so while acquiring operational assets with procurements funds. If MDA requires more flexibility than other programs, there should be a reasonable budgetary accommodation available other than funding the entire budget with Research, Development, Test, and Evaluation funds. More needs to be done to get a better balance between flexibility and transparency. Thus, we continue to believe that decision makers should be informed of the full cost of assets at the time DOD is asking for approval to acquire them and that procurement funds are the best way to provide that transparency. DOD also did not concur with our fifth recommendation to conduct an independent evaluation of ABL and KEI to inform the upcoming decisions on these programs. It believes that MDA’s current integrated development and decision-making approach should continue as planned. We continue to believe that MDA would benefit from an independent evaluation of both ABL and KEI. However, we do believe such an evaluation should be based on the results of the key demonstrations planned for the elements in 2008 and 2009. We have modified our recommendation accordingly. We are sending copies of this report to the Secretary of Defense and to the Director, MDA. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you, or your staff, have any questions concerning this report, please contact me at (202) 512-4841. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. The major contributors are listed in appendix IV. Like other government agencies, MDA acquires the supplies and services needed to fulfill its mission by awarding contracts. Two types of contracts are prevalent at MDA—contracts for support services and contracts for hardware. The contractors that support MDA’s mission are commonly known as support contractors, while the contractors that are responsible for developing elements of the Ballistic Missile Defense System (BMDS) are called prime contractors. According to MDA’s manpower database, about 8,186 personnel positions—not counting prime contractors—currently support the missile defense program. These positions are filled by government civilian and military employees, contract support employees, employees of federally funded research and development centers (FFRDC), researchers in university and affiliated research centers, and a small number of executives on loan from other organizations. At least 94 percent of the 8,186 positions are paid by MDA through its research and development appropriation. Of this 94 percent, only about 33 percent, or 2,578 positions, are set aside for government civilian personnel. Another 57 percent, or 4,368 positions, are support contractors that are supplied by 44 different defense companies. The remaining 10 percent are positions either being filled, or expected to be filled, by employees of FFRDCs and university and affiliated research centers that are on contract or under other types of agreements to perform missile defense tasks. Table 7 illustrates the job functions that contract employees carry out. MDA officials explained that the utilization of support contractors is key to its operation of the BMDS because it allows the agency to obtain necessary personnel and develop weapon systems more quickly. Additionally, the officials told us that its approach is consistent with federal government policy on the use of contractors. MDA officials estimate that while the average cost of the agency’s government employee is about $140,000 per year, a contract employee costs about $175,000 per year. Table 8 highlights the staffing levels for each BMDS element. Prime contractors developing elements of the Ballistic Missile Defense System (BMDS) typically receive most of the funds MDA requests from Congress each fiscal year. The efforts of prime contractors may be obtained through a wide range of contract types. Because MDA is requiring its prime contractors to perform work that includes enough uncertainty that the cost of the work cannot be accurately estimated, all of the agency’s prime contracts are cost reimbursement arrangements. Under a cost reimbursement contract, a contractor is paid for reasonable, allowable, and allocable costs incurred in performing the work directed by the government to the extent provided in the contract. The contract includes an estimate of the work’s total cost for the purpose of obligating funds and establishes a ceiling cost that the contractor may not exceed without the approval of the contracting officer. Many of the cost reimbursement contracts awarded by MDA include an award fee. Cost plus award fee contracts provide for a fee consisting of a base amount, which may be zero, that is fixed at the inception of the contract and an award amount, based upon a subjective evaluation by the government, that is meant to encourage exceptional performance. The amount of the award fee is determined by the government’s assessment of the contractor’s performance compared to criteria stated in the contract. This evaluation is conducted at stated intervals during performance, so that the contractor can be periodically informed of the quality of its performance and, if necessary, areas in which improvement are required. Two of the cost reimbursement contracts shown in table 9—MKV and C2BMC—differ somewhat from other elements’ cost reimbursement contracts. The MKV prime contract is an indefinite delivery/indefinite quantity cost-reimbursement arrangement. This type of contract allows the government to direct work through a series of task orders. Such a contract does not procure or specify a firm quantity of services (other than a minimum or maximum quantity). This contracting approach permits MDA to order services as they are needed after requirements materialize and provides the government with flexibility because the tasks can be aligned commensurate with available funding. Since the MKV element is relatively new to the BMDS, its funding is less predictable than other elements’ and the ability to decrease or increase funding on the contract each year is important to effectively manage the program. The C2BMC element operates under an Other Transaction Agreement that is not subject to many procurement laws and regulations. However, even though an Other Transaction Agreement is not required to include all of the standard terms and conditions meant to safeguard the government, the C2BMC agreement was written to include similar clauses and provisions. We found no evidence at this time that the C2BMC agreement does not adequately protect MDA’s interests. MDA chose the Other Transaction Agreement to facilitate a collaborative relationship between industry, government, federally funded research and development centers, and university research centers. Contract officials told us that a contract awarded under the Federal Acquisition Regulation is normally regarded as an arms-length transaction in which the government gives the contractor a task that the contractor performs autonomously. While an important purpose of an Other Transaction Agreement is to broaden DOD’s technology and industrial base by allowing the development and use of instruments that reduce barriers to participation in defense research by commercial firms that traditionally have not done business with the government, the agreements’ value in encouraging more collaborative environments is also recognized. Table 9 outlines the contractual instruments that MDA uses to procure the services of its prime contractors. Excluding the C2BMC and MKV elements, MDA budgeted approximately $3 billion for its prime contractors to execute planned work during fiscal year 2006. To determine if these contractors are executing the work planned within the funds and time budgeted, each BMDS program office requires its prime contractor to provide monthly reports detailing cost and schedule performance. In these reports, which are known as Contract Performance Reports, the prime contractor makes comparisons that inform the program as to whether the contractor is completing work at the cost budgeted and whether the work scheduled is being completed on time. If the contractor does not use all funds budgeted or completes more work than planned, the report shows positive cost and/or schedule variances. Similarly, if the contractor uses more money than planned or cannot complete all of the work scheduled, the report shows negative cost and/or schedule variances. A contractor can also have mixed performance. That is, the contractor may spend more money than planned (a negative cost variance) but complete more work than scheduled (a positive schedule variance). Using data from Contract Performance Reports, a program manager can assess trends in cost and schedule performance, information that is useful because trends tend to persist. Studies have shown that once a contract is 15 percent complete, performance metrics are indicative of the contract’s final outcome. We used contract performance report data to assess the fiscal year 2006 cost and schedule performance of prime contractors for seven of the nine BMDS elements being developed by MDA. When possible, we also predicted the likely cost of each prime contract at completion. Our predictions of final contract cost are based on the assumption that the contractor will continue to perform in the future as it has in the past. An assessment of each element is provided below. The Aegis BMD program has awarded a prime contract for each of its two major components—the Aegis BMD Weapon System and the Standard Missile-3. During fiscal year 2006, the work of both prime contractors cost a little more than expected, but only the weapon system contractor was slightly behind schedule. Even though the weapon system contractor was unable to perform fiscal year 2006 work at the planned cost, its cumulative cost performance remains positive because of good performance in prior years. At year’s end, the weapon system contract had a cumulative favorable cost variance of $0.1 million, but an unfavorable cumulative schedule variance of $0.8 million. As shown in figure 1, the contractor’s cost and schedule performance fluctuated significantly throughout the year. The decline in the Aegis BMD Weapon System contractor’s cost performance began shortly after the contractor adjusted its cost and schedule baseline in September 2005. At that time, the contractor corrected its baseline to account for a December 2004 DOD budget cut. However, it did not make adjustments to the baseline to incorporate new work that the government directed. This caused the contractor’s cost performance to decline significantly because although the cost of the new effort was being reported, the baseline included no budget for the work. Recognizing that the contract baseline still needed to be replanned, the Director issued approval to restructure the program and rebaseline the contract in December 2005. To accommodate the work added to the contract, MDA and the contractor realigned software deliveries for Block 2006. The contractor completed the rebaselining effort in April 2006, and since then the contractor has performed within budgeted cost and schedule. Based on the contractor’s fiscal year 2006 cost performance, we estimate that at completion the contract may cost from $0.1 to $4.7 million more than anticipated. For fiscal year 2006, the Standard Missile-3 contractor incurred an unfavorable cost variance of $7.8 million and a favorable schedule variance of $0.7 million. Even though the contractor was unable to complete fiscal year 2006 work within the funds budgeted, it ended the year with a cumulative positive cost variance of $3.1 million. The cumulative positive cost variance was the result of the contractor performing 2005 work at $10.9 million less than budgeted. In addition, although the contractor performed work ahead of schedule in fiscal year 2006, it was unable to overcome a negative schedule variance of $9.6 million created in 2005 caused by delayed hardware deliveries and delayed test events. The contractor ended fiscal year 2006 with a cumulative $8.9 million negative schedule variance. Figure 2 shows cumulative variances at the beginning of fiscal year 2006 year along with a depiction of the contractor’s cost and schedule performance throughout the fiscal year. The unfavorable cost variance for fiscal year 2006 was caused by performance issues associated with the third stage rocket motor, the kinetic warhead and the missile’s guidance system. In addition, production costs associated with the Solid Divert and Attitude Control System were higher than anticipated. If the contractor continues to perform as it did in fiscal year 2006, we estimate that at completion the contract could cost from $1.9 million less than expected to $2.7 million more than expected. Our analysis of ABL’s Contract Performance Reports indicates that the prime contractor’s cost and schedule performance continued to decline during fiscal year 2006. The contractor overran its fiscal year 2006 budget by $54.8 million and did not perform $26.4 million of work on schedule. By September 2006, this resulted in an unfavorable cumulative cost variance of $77.9 million and an unfavorable cumulative schedule variance of $50 million. Figure 3 shows the decline in cost and schedule performance for the ABL prime contractor throughout fiscal year 2006. During the fiscal year, the ABL contractor needed additional time and money to solve technical challenges associated with the element’s Beam Control/Fire Control component. Software, integration, and testing difficulties caused significant delays with the component. Software problems were caused by the incorporation of numerous changes, basic logic errors, and differences between the environment of the software development laboratory and the environment aboard the aircraft. Integration and testing of the complex system and hardware failures also contributed to the delays. Together, according to ABL’s program manager, these problems caused the contractor to experience about a 3 1/2 month schedule delay that in turn delays the program’s lethality demonstration from 2008 to 2009. Also, if the contractor’s cost performance continues to decline as it did in fiscal year 2006, we estimate that at completion the contract could overrun its budget by about $112.1 million to $248.3 million. We were unable to fully evaluate the contractor’s performance for the C2BMC program because the contractor did not report all data required to conduct earned value analysis for 7 months of the fiscal year. During fiscal year 2006, the C2MBC contractor ended the Block 2004 increment or Part 3 of its Other Transaction Agreement and began work on its Block 2006 program of work, referred to as Part 4 of the agreement. The contractor completed its Block 2004 program of work (Part 3) in December 2005 and was awarded the Block 2006 increment (Part 4) on December 28, 2005. However, budget cuts prompted the program to reduce the C2BMC enhancements planned for Block 2006 and revise its agreement with the contractor. Shortly after, the program received additional funds which led to a re-negotiation of the Part 4 agreement. The new scope of work included enhancements that could not be completed within available funding. In March 2006, the program began to replan its Block 2006 increment of work (Part 4) and suspended earned value management reporting. During the replan, which occurred throughout most of fiscal year 2006, the contractor reported only actual cost data in lieu of comparing actual costs to budgeted cost. The cost of the revised agreement on the Block 2006 increment of work was negotiated in October 2006. The GMD prime contractor’s cost performance continued to decline during fiscal year 2006, but its fiscal year schedule performance improved. By September 2006, the cumulative cost of all work completed was $1.06 billion more than expected and in fiscal year 2006 alone, work cost about $347 million more than budgeted. The contractor was able to complete $90.2 million of fiscal year 2006 work ahead of schedule; but the cumulative schedule variance continued to be negative at $137.8 million. Figure 4 depicts the cost and schedule performance for the GMD contractor during fiscal year 2006. Based on its fiscal year 2006 performance, the GMD contractor could overrun the total budgeted cost of the contract by about $1.5 to $1.9 billion. The GMD program recently finished rebaselining its contract to reflect a significant program realignment to reduce program risk and to execute the program within available funding. While the new baseline was being implemented, earned value metrics, according to program officials, were significantly distorted because progress was measured against a plan of work that the program was no longer following. The contractor is in the process of developing a new contract baseline that incorporates the program’s new scope, schedule, and budget. By the end of September 2006, phase one of the new baseline covering fiscal year 2006-2007 efforts had been implemented and validated through Integrated Baseline Reviews of the prime contractor and its major subcontractors. Implementation of the phase 2 baseline covering the remaining contract effort was completed in October 2006 with the final integrated baseline reviews of the prime and major subcontractors completed by mid-December 2006. Based on the data provided by the contractor during fiscal year 2006, technical and quality issues with the exoatmospheric kill vehicle (EKV) are the leading contributors to cost overruns and schedule slips for the GMD program. In fiscal year 2006, EKV related work cost $135.2 million more than budgeted. Quality problems identified after faulty parts had been incorporated into components required rework and forced the subcontractor to increase screening tests to identify defective parts. Development issues with two boosters being developed to carry the exoatmospheric kill vehicles into space also increased costs during fiscal year 2006. The element’s Orbital Boost Vehicle experienced cost growth totaling $15.0 million while the Boost Vehicle+ booster experienced growth of $74.1 million. The Orbital Boost Vehicle’s cost grew as the need for more program management, systems engineering, and production support was required to work an extended delivery schedule. The Boost Vehicle+ contractor incurred additional costs as a result of its efforts to redesign the booster’s motors. For example, the contractor spent additional time preparing drawings and providing technical oversight of suppliers. The contractor also experienced cost growth as it readied the Sea-based X-Band radar for deployment. Maintenance, repair, and certification problems cost more than expected. In addition to making changes that an independent review team suggested were needed before the radar was made operational, the contractor had to repair an unexpected ballast leak requiring the installation of hydraulic valves and other engineering changes. GMD’s cumulative negative schedule variance is primarily caused by a subcontractor needing more time than planned to manufacture exoatmospheric kill vehicles. In addition, the prime contractor delayed planned tests because test interceptors were being produced at a slower rate. According to program officials, variances improved during fiscal year 2006 as the subcontractor delivered components on schedule. In July 2005, the KEI program modified its prime contract to require that the KEI element be capable of intercepting enemy missiles in the midcourse of their flight. Consequently, the program is rebaselining its prime contract to better align its cost and schedule objectives with the new work content. During fiscal year 2006, the contractor’s work cost approximately $0.6 million less than expected and the contractor completed about $0.6 million of work ahead of schedule. Cumulatively, the contractor’s cost performance has been positive, with all work to date being performed for $3.6 million less than budgeted. However, by year’s end, the cumulative schedule variance was a negative $5.3 million. We cannot estimate whether the total contract can be completed within budgeted cost because the contract is only 6 percent complete and trends cannot be developed until at least 15 percent of the contract is completed. Figure 5 highlights the contractor’s performance during fiscal year 2006. The KEI prime contractor was able to perform within its budgeted costs during fiscal year 2006 as a result of its efficient use of test resources. Although the contractor improved its negative schedule variance over the course of the year, its cumulative schedule variance remains unfavorable because requirements changes have delayed the development of the element’s design and of manufacturing processes. Schedule delays caused the program to postpone its element-level System Design Review originally scheduled for July 2007. However, the contractor asserts that there is no impact to the booster flight test currently scheduled for fiscal year 2008. Our analysis of the performance of the contractor developing the MKV element was limited because MDA suspended contract performance reporting in February 2006 as the program transitioned from an advanced technology development program to a system development program. The transition prompted MKV to establish a new contract baseline. Although the contractor could begin reporting after the baseline is in place, it is not issuing Contract Performance Reports until an Integrated Baseline Review is completed. Until that time, the contractor is measuring its progress against an integrated master schedule. As of September 2006, the Sensor’s contractor had underrun its fiscal year 2006 budget by $3.8 million and it was ahead in completing $5.4 million of scheduled work. Considering prior years performance, the contractor is performing under budget with a favorable cumulative cost variance of $20.2 million and ahead of schedule with a favorable cumulative schedule variance of $26.6 million. Judging from the contractor’s cost and schedule performance in fiscal year 2006, we estimate that at the contract’s completion, the contractor will underrun the budgeted cost of the contract by between $26.3 million and $44.9 million. Figure 6 shows the favorable trend in FBX-T 2006 performance. According to program officials, the cumulative favorable cost variance is driven by reduced cost in radar hardware and manufacturing created by machine process improvements and staffing efficiencies. The favorable cumulative schedule variance primarily results from a positive $17 million cumulative schedule variance brought forward from fiscal year 2005 that was created when the contractor began manufacturing radars 2 through 4 ahead of schedule. The STSS contractor’s cost and schedule performance continued to degrade during fiscal year 2006. During the fiscal year, the contractor overran budgeted costs by about $66.8 million and was unable to complete $84.1 million of work as scheduled. Combining the contractor’s performance during fiscal year 2006 with its performance in prior years, the contract has a cumulative unfavorable cost variance of approximately $163.7 million and a cumulative negative schedule variance of $104.4 million. If the contractor’s performance continues to decline, the contract could exceed its budgeted cost at completion by $567.3 million to $1.4 billion. Figure 7 depicts the cumulative cost and schedule performance of the STSS prime contractor. Quality issues at the payload subcontractor and technical difficulties encountered by the prime contractor during payload integration and testing contributed to the STSS element’s cumulative unfavorable cost and schedule variances. The first satellite’s payload experienced hardware failures when tested in a vacuum and at cold temperatures, slowing integration with the first satellite. Integration issues were also discovered as the payload was tested at successively higher levels of integration. According to program officials, the prime contractor tightened its inspection and oversight of the subcontractor responsible for integrating and testing the satellite payloads. Also, a re-education effort was undertaken to ensure that all personnel on the program knew and understood program instructions. Although the prime contractor continued to experience negative variances during the fiscal year, it should be noted that the subcontractor’s performance with respect to the second payload improved as the result of these added steps. However, the degradation of the prime contractor’s performance offset the improved performance of the subcontractor. During fiscal year 2006, the THAAD contractor expended more money and time than budgeted to accomplish planned work. During fiscal year 2006, the contractor incurred a negative cost variance of $87.9 million, which boosted the cumulative negative cost variance to $104.2 million. Similarly, the contractor did not complete $37.9 million of work scheduled for fiscal year 2006 on time. However, because the contractor completed prior years’ work ahead of schedule, the cumulative negative schedule variance was $28 million. Based on fiscal year performance, we estimate that at completion the contract could exceed its budgeted cost by between $134.7 million and $320.2 million. The THAAD prime contractor’s negative cost variance for the fiscal year can be attributed to the increased cost of missile manufacturing, re- designs, and rework, as well as launcher hardware design, integration difficulties, and software problems. However, the contractor is performing well in regard to the radar portion of the contract, which is offsetting a portion of the negative cost variance. The program’s negative schedule variance is largely driven by the missile, the launcher, and systems tests. The negative missile variance is mainly caused by problems with the Divert Attitude Control System and delays in activation of a test facility. To examine the progress MDA made in fiscal year 2006 toward its Block 2006 goals, we examined the efforts of individual programs, such as the GMD program, that are developing BMDS elements under the management of MDA. The elements included in our review collectively accounted for 72 percent of MDA’s fiscal year 2006 research and development budget request. We evaluated each element’s progress in fiscal year 2006 toward Block 2006 schedule, testing, performance, and cost goals. In making this comparison, we examined System Element Reviews, test and production schedules, test reports, and MDA briefing charts. We developed data collection instruments, which were submitted to MDA and each element program office, to gather detailed information on completed program activities including tests, prime contracts, and estimates of element performance. In addition, we visited an operational site at Vandenberg Air Force Base, California; and we visited MDA contractor facilities including Orbital Sciences Corporation in Chandler, Arizona; Raytheon in Tucson, Arizona; and Lockheed Martin in Sunnyvale, California. To understand performance issues, we talked with officials from MDA’s System’s Engineering and Integration Directorate. We also discussed fiscal year 2006 progress and performance with officials in MDA’s Agency Operations Office, each element program office, as well as the office of DOD’s Director, Operational Test and Evaluation, DOD’s office of Program Analysis and Evaluation, and DOD’s Operational Test Agency. To assess each element’s progress toward its cost goals, we reviewed Contract Performance Reports and, when available, the Defense Contract Management Agency’s analyses of these reports. We also interviewed officials from the Defense Contract Management Agency. We applied established earned value management techniques to data captured in Contract Performance Reports to determine trends and used established earned value management formulas to project the likely costs of prime contracts at completion. We reviewed each element’s prime contract and also examined fiscal year 2006 award fee plans and award fee letters. In assessing MDA’s flexibility, transparency, and accountability, we interviewed officials from the Office of the Under Secretary of Defense’s Office for Acquisition, Technology, and Logistics. We also examined Government Auditing Standards, a Congressional Research Service report, U.S. Code Title 10, DOD acquisition system policy, and the Statement of Federal Financial Accounting Standards Number 4. To determine the progress MDA has made in ensuring quality, we talked with officials from MDA’s Office of Safety, Quality, and Mission Assurance. We also held discussions with MDA’s Office of Agency Operations, and discussed quality issues at contractor facilities including Orbital Sciences Corporation in Chandler, Arizona; Raytheon in Tucson, Arizona; and Lockheed Martin in Sunnyvale, California. To ensure that MDA-generated data used in our assessment are reliable, we evaluated the agency’s management control processes. We discussed these processes with MDA senior management. In addition, we confirmed the accuracy of MDA-generated data with multiple sources within MDA and, when possible, with independent experts. To assess the validity and reliability of prime contractors’ earned value management systems and reports, we interviewed officials and analyzed audit reports prepared by the Defense Contract Audit Agency. Finally, we assessed MDA’s internal accounting and administrative management controls by reviewing MDA’s Federal Manager’s Financial Integrity Report for Fiscal Years 2003, 2004, 2005, and 2006. Our work was performed primarily at MDA headquarters in Arlington, Virginia. At this location, we met with officials from the Aegis Ballistic Missile Defense Program Office; Airborne Laser Program Office; Command, Control, Battle Management, and Communications Program Office; Multiple Kill Vehicle Program Office; MDA’s Agency Operations Office; MDA’s Office of Quality, Safety, and Mission Assurance; DOD’s office of the Director, Operational Test and Evaluation; DOD’s office of Program Analysis and Evaluation; and the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics. We held a teleconference with officials from DOD’s Operational Test Agency, also in Arlington, Virginia. In addition, we met with officials in Huntsville, Alabama, including officials from the Ground-based Midcourse Defense Program Office, the Terminal High Altitude Area Defense Project Office, the Kinetic Energy Interceptors Program Office, and the Defense Contract Management Agency. We conducted our review from June 2006 through March 2007 in accordance with generally accepted government auditing standards. In addition to the individual named above, Barbara Haynes, Assistant Director; LaTonya Miller; Ivy Hubler; Steven Stern; Meredith Allen; Sigrid McGinty; Tony Beckham; and Adam Vodraska made key contributions to this report.

Over the next 5 years, the Missile Defense Agency (MDA) expects to invest $49 billion in the BMD system's development and fielding. MDA's strategy is to field new capabilities in 2-year blocks. In January 2006, MDA initiated its second block--Block 2006--to protect against attacks from North Korea and the Middle East. Congress requires GAO to assess MDA's progress annually. This year's report addresses MDA's progress during fiscal year 2006 and follows up on program oversight issues and the current status of MDA's quality assurance program. GAO assessed the progress of each element being developed by MDA, examined acquisition laws applicable to major acquisition programs, and reviewed the impact of implemented quality initiatives. During fiscal year 2006, MDA fielded additional assets for the Ballistic Missile Defense System (BMDS), enhanced the capability of some assets, and realized several noteworthy testing achievements. For example, the Ground-based Midcourse Defense (GMD) element successfully conducted its first end-to-end test of one engagement scenario, the element's first successful intercept test since 2002. However, MDA will not meet its original Block 2006 cost, fielding, or performance goals because the agency has revised those goals. In March 2006, MDA: reduced its goal for fielded assets to provide funds for technical problems and new and increased operations and sustainment requirements; increased its cost goal by about $1 billion--from $19.3 to $20.3 billion; and reduced its performance goal commensurate with the reduction of assets. MDA may also reduce the scope of the block further by deferring other work until a future block because four elements incurred about $478 million in fiscal year 2006 budget overruns. With the possible exception of GMD interceptors, MDA is generally on track to meet its revised quantity goals. But the deferral of work, both into and out of Block 2006, and inconsistent reporting of costs by some BMDS elements, makes the actual cost of Block 2006 difficult to determine. In addition, GAO cannot assess whether the block will meet its revised performance goals until MDA's models and simulations are anchored by sufficient flight tests to have confidence that predictions of performance are reliable. Because MDA has not entered the Department of Defense (DOD) acquisition cycle, it is not yet required to apply certain laws intended to hold major defense acquisition programs accountable for their planned outcomes and cost, give decision makers a means to conduct oversight, and ensure some level of independent program review. MDA is more agile in its decision-making because it does not have to wait for outside reviews or obtain higher-level approvals of its goals or changes to those goals. Because MDA can revise its baseline, it has the ability to field fewer assets than planned, defer work to a future block, and increase planned cost. All of this makes it hard to reconcile cost and outcomes against original goals and to determine the value of the work accomplished. Also, using research and development funds to purchase operational assets allows costs to be spread over 2 or more years, which makes costs harder to track and commits future budgets. MDA continues to identify quality assurance weaknesses, but the agency's corrective measures are beginning to produce results. Quality deficiencies are declining as MDA implements corrective actions, such as a teaming approach, designed to restore the reliability of key suppliers.

You are an expert at summarizing long articles. Proceed to summarize the following text: Many federal and state agencies oversee the regulation of California manufacturing firms. Laws relating to the workplace and employment are overseen at the federal level by the Department of Labor (governing unemployment insurance, employee benefits such as pensions, compensation issues such as minimum wage and overtime requirements, and workplace safety); the Equal Employment Opportunity Commission (EEOC); and the National Labor Relations Board. At the state level, California agencies that oversee laws related to employment include the California Department of Industrial Relations (addressing workers’ compensation; occupational safety and health; and labor standards covering wages, hours of work, and other employment conditions) and the Department of Fair Employment and Housing (protecting individuals’ rights to seek, obtain, and hold employment without discrimination). With respect to tax law, beyond the Internal Revenue Service (IRS) at the federal level, a number of state agencies are involved. The Franchise Tax Board collects personal, corporate, bank, and franchise taxes; the State Board of Equalization collects sales and use taxes, as well as other specific taxes; and the Employment Development Department collects unemployment insurance, disability insurance, employment training, and personal income withholding taxes. Environmental laws are overseen at the federal level, by the Environmental Protection Agency (EPA) and at the state level by the California Environmental Protection Agency (Cal/EPA). In an earlier report analyzing the framework of federal workplace regulation, we noted that the magnitude, complexity, and dynamics of this framework pose a challenge for employers of all sizes. In that report, we identified 26 key statutes and one executive order on workplace regulation that affect all types of businesses, including manufacturers. The employers and union representatives with whom we met for that study generally supported the aims of these federal laws and regulations but also called for changing agencies’ approaches to developing and enforcing regulations and urged agencies to develop a more service-oriented approach to workplace regulation in general. In a more recent study that attempted to identify the impact of federal regulation on several businesses, we suggested that measuring the incremental impact of all federal regulations on individual companies, although perhaps not impossible, would be an extremely difficult endeavor. Further, while many of the companies participating in that study recognized that regulations provide benefits to society and their own businesses, they all had varied concerns about regulatory costs and the regulatory process. These concerns included perceptions of high compliance costs; unreasonable, unclear, and inflexible demands; excessive paperwork; and the tendency of regulators to focus on deficiencies. Recent changes in federal law and current initiatives by federal agencies are targeted to reducing the compliance burden on businesses as well as making the regulatory requirements clearer and more accessible. In 1980, the Congress passed two laws to reform the federal regulatory processes: (1) the Paperwork Reduction Act, which attempted to minimize the paperwork and reporting burdens federal agencies impose on nonfederal entities, and (2) the Regulatory Flexibility Act, which required agencies to assess the impact of their regulations on small entities, including small businesses. More recently, the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) made several changes to regulatory procedures, including (1) amending the Regulatory Flexibility Act to allow for judicial review of agency decisions, (2) requiring the publication of “small entity compliance guides” to explain the actions a small business or other small entity must take to comply with a rule or a group of rules, and (3) establishing a congressional review process through which the Congress can disapprove final agency regulations. To comply with SBREFA, agencies must also answer questions from small entities concerning information on and advice about complying with statutes and regulations, including interpreting the law and applying it to specific circumstances supplied by the small entity. In addition to changes required by law, under the administration’s National Partnership for Reinventing Government (formerly the National Performance Review), a series of initiatives was undertaken. Agencies were to identify obsolete regulations that could be eliminated, create partnerships between regulators and those being regulated, and identify specific regulations that could be revised. Agencies proposed plans for changing the way they enforced regulations to increase the use of partnership arrangements and reduce the emphasis on identifying procedural violations unrelated to performance. Agencies also revised their customer service standards. To conduct business in California, a manufacturing firm must comply with numerous federal and state laws and regulations dealing with labor, tax, and environmental concerns. The requirements of these laws and regulations cover diverse issues, such as overtime pay, unemployment insurance, and air pollution. With some exceptions (particularly with laws concerning labor issues), these requirements apply in equal force to manufacturing firms of all sizes, from the smallest to the largest. Smaller firms, though, may be exempted from certain requirements, such as those prohibiting racial or sexual discrimination and those requiring family leave. Most regulation involves both federal and state requirements, with California law frequently providing stricter requirements than those mandated under federal law. Table 1 broadly summarizes significant labor, tax, and environmental requirements that apply to California manufacturing firms and sets forth specific federal and state legal requirements that affect firms with different numbers of employees. For descriptive purposes, these requirements are classified into nine categories of different business issues, ranging from wage and hour matters to environmental concerns. Each of these categories represents complex regulatory schemes, originating from federal and state statutes, regulations, and judicial decisions. For a more detailed summary of these regulatory requirements, see appendix II (labor law), appendix III (tax law), and appendix IV (environmental law). For the most part, these labor, tax, and environmental requirements apply regardless of the number of workers employed by a firm. However, as indicated in table 1, some of these laws have specific legal provisions that are triggered as the number of employees at a firm increases. In general, neither tax nor environmental requirements vary with an increasing number of employees. When a firm hires its first employee, it must immediately comply with all requirements for federal and state income tax withholding, federal and state unemployment insurance taxes, and federal Medicare and Social Security taxes. Similarly, any firm, regardless of its size, must generally comply with all relevant environmental requirements if it produces specific amounts of some type of pollution or handles certain amounts of specified hazardous substances. Some labor law requirements, though, show greater sensitivity to the number of employees in a firm. In particular, adding employees to a firm has critical impact on the application of federal civil rights laws and certain federal requirements for employee benefits. Thus, federal law includes prohibitions against racial, religious, and sexual discrimination that apply only if a firm has at least 15 employees. Certain federal requirements for employee benefits also exempt firms of smaller sizes; for example, federal requirements for 12 weeks of unpaid family leave for an employee for medical or family-related reasons apply only if a firm has at least 50 employees. In addition, some other federal requirements are triggered only after a firm hires a specified number of employees, such as the requirement to give employees 60 days’ notice of a plant closing or mass layoff (100 employees) or to conduct a programmed OSHA safety inspection of a firm in a low-hazard industry (10 employees). In California, however, overlapping state labor law requirements have muted the impact of some of the federal thresholds, extending the same or similar requirements to smaller firms. For example, state law prohibits sexual harassment in firms of any size, and racial or sexual discrimination at all firms with at least five employees. As another example, state law requires all firms with at least five employees to allow their female employees up to 4 months’ pregnancy disability leave in addition to federal family leave requirements. Regarding OSHA, California law does not exempt firms of any size from safety inspections. Both federal and state governments play active roles in the regulation of the workplace, taxes, and the environment. The relationship between federal and state laws is complex and, to varying degrees, the requirements are intertwined. Thus, under the overall regulatory schemes, employers must comply with both federal and state laws and regulations. In the case of California, employers often face more comprehensive labor, tax, and environmental regulation by the state than by federal law. In addition, some areas of state regulation have no federal counterpart. Thus, federal regulatory reform efforts intended to lessen the burden of compliance may be limited by those requirements under state laws that are more comprehensive. Although some areas of labor law regulation are covered only by state law (for example, workers’ compensation insurance and disability insurance), most regulation includes various forms of federal and state interaction, ranging from the total preemption of any state regulation by federal regulation to “dual control” by federal and state governments to the implementation of minimum federal standards by state authorities. Certain federal statutes either explicitly or implicitly preempt state regulation: ERISA, the National Labor Relations Act, and the Immigration and Nationality Act. However, other statutes—for example, the Fair Labor Standards Act—specifically allow dual control if the state regulation is stricter than federal requirements. Still other federal statutes, such as the Occupational Safety and Health Act, allow states to set up and enforce their own regulatory program with federal approval, in lieu of a federal program. In California, the net effect of these combined federal and state labor law requirements is that California manufacturing firms must, in many cases, meet higher labor standards than those required by the federal government. For instance, as of March 1998 the California minimum wage was $5.75—an amount that is 60 cents higher than that required under federal law. Similarly, while the California Occupational Safety and Health Administration (Cal/OSHA) program administers all federal health and safety standards, it includes additional state standards. Tax regulation is conducted independently by both federal and state governments. Each has authority to tax its citizens and corporations for the support of its operations. Therefore, a California firm must follow separate federal and state tax codes for withholding employees’ federal and state income taxes, and for payment of corporate income taxes. Certain taxes—Medicare and Social Security—are levied only by the federal government. Unemployment insurance tax, on the other hand, is collected by both federal and state governments to run the states’ federally approved unemployment compensation programs. Even though federal and state governments run parallel tax programs, different definitions for the same key regulatory terms create complexity for employers. For example, the definition of an “employee” varies between states (including California) and the federal government. California law provides a broader definition of “employee” than that found in federal law, thereby including more workers under the provisions of state income tax withholding and unemployment insurance than would be included using the federal definition. In doing so, California ensures broader coverage of its citizens under the state unemployment insurance and disability insurance programs. Environmental regulation has become, since the 1970s, a joint effort among federal, state, and local authorities. Traditionally, regulation of pollution control, like other “police powers,” had been left to state and local governments. However, with the passage of major federal environmental statutes in the 1970s, EPA has broad authority to set minimum standards for air, water, and hazardous substances control. Typically, state authorities have used these federal minimum standards to create their own environmental program, continuing to enforce these standards within their own state. As with other regulatory areas, California environmental requirements in some areas have added stringency to the federal law. Thus, under California law, employers dealing with chemicals known to the state to cause cancer have a broad requirement to give “reasonable and clear” warning to any individual exposed to those chemicals. As another example of state regulation, employers that produce 12,000 kilograms of hazardous waste per year must develop a plan for waste reduction every 4 years, and failure to take action on the plan can lead to monetary penalties under the state program. Thus, in these three major areas of regulation—labor, tax, and environment—the combination of federal and California state law creates a complex web of regulation for employers. Moreover, California law often sets higher standards for regulatory compliance than required by federal law. Consequently, federal reform efforts may be limited in practical effect by the existence of supplementary or independent state regulatory programs. California and federal agencies have taken proactive steps to inform manufacturers about employers’ duties under existing laws and regulations as well as about proposed changes in those requirements. For example, federal and state agencies have made information available to the public on many laws and requirements through publications and Web sites. In addition, many federal and state agencies have established focal points and other mechanisms through which manufacturing employers can obtain information about the agency-specific laws. (See table 2.) Many agencies also provide information tailored to meet the needs of small businesses and start-up employers. However, California manufacturing employers cannot rely on a single governmental source or focal point to provide them with a comprehensive understanding of the many federal and state workplace, tax, and environmental laws that apply to them and must seek out information from the public agency responsible for enforcing the law. Consequently, firms we visited continued to rely on the expertise and knowledge provided by trade and business associations like the California Chamber of Commerce or by professional practitioners. Although no one federal agency has yet compiled a comprehensive set of federal laws applicable to manufacturers, the federal government, according to agency officials, has striven to expand its role beyond the promulgation and enforcement of regulations. Agencies have attempted to help businesses better understand their legal responsibilities and assist them to make regulatory compliance less burdensome. Manufacturers, in California and throughout the nation, can learn about their federal legal responsibilities from a multitude of publications, including law handbooks, informational brochures, and guides that federal agencies have compiled and made available to the business community. For example, IRS has a variety of publications that describe various business taxes and record-keeping requirements for small businesses. With the cooperation of the Small Business Administration (SBA), it disseminates much of this information through SBA district and regional offices. Labor has a variety of guides and a small business handbook that summarizes the laws Labor enforces. The guides aim to clarify the various duties placed on employers so they can more easily develop compliance strategies and identify the appropriate agency for questions and assistance. EPA has prepared publications that outline the federal environmental laws and regulations relevant to each industry sector as well as information about environmental problems and solutions, case studies, and tips about complying with regulations. For example, EPA’s publication entitled Profile of the Electronics and Computer Industry describes the manufacturing processes in the industry and identifies federal laws that apply to the industry. EPA has prepared similar profiles for 26 other industry sectors. Federal agencies responsible for enforcing workforce, tax, and environmental laws, in response to SBREFA and because of their interest in helping businesses better understand applicable laws, have placed their agencies’ laws and regulations on their Internet Web sites. Although many agencies have tailored their Web sites to address the special needs of small businesses and start-up employers in order to comply with SBREFA, much of what the agencies have made available to small businesses is also applicable and helpful to businesses of all sizes. For example, the EEOC has developed a small business information Web site that includes laws and processes that apply to all businesses. Federal agencies have also offered businesses the opportunity via Web sites to comment on the potential burden proposed changes to laws or regulations could have on their business activities. Examples follow: IRS’ Web site includes a list of tax regulations issued since August 1, 1995, with references to plain-language summaries and IRS news bulletins that provide businesses with changes in procedures and tax rulings. The Web site also offers the opportunity for interested parties to comment on proposed changes to regulations. In addition, it includes a business tax kit with a small business tax guide, information on how a business can apply for an employer identification number, and other taxpayer information. Labor’s Web site includes a handbook for small businesses that summarizes laws Labor oversees. The Web site also provides “interactive” expert advice on workplace laws in a format that mimics the interaction an individual might have with a human expert. Called Employment Laws Assistance for Workers and Small Business (“elaws”), the system provides manufacturers with advice on issues such as workplace safety and the Family and Medical Leave Act. The EEOC Web site also provides information about laws for small businesses; record-keeping and reporting requirements; substantive issues of concern to small businesses; and types of assistance, guidance, and publications available. EPA’s Web site, in addition to providing regulations and proposed rules, catalogs and profiles the laws and regulations that are relevant and applicable to several specific industries. EPA’s Office of Compliance, with input from trade groups and other federal and state agencies, has developed on-line “assistance centers” for five specific industry sectors heavily populated with small businesses that face substantial federal regulation, and it expects to add four more shortly. The centers have been designed to serve as the first place that small businesses and agencies that assist small businesses can go to get comprehensive, easy-to-understand compliance information specifically targeting these sectors. In addition to technical and regulatory information, the Web site provides users with a link to regulatory experts. SBA’s U.S. Business Advisor Web site is a compilation of laws, regulations, and proposed changes to laws from other executive agencies that cover many but not all of the environmental, safety, communications, health, immigration, and labor requirements of small businesses. In addition, the Web site contains answers to questions most commonly asked of the Department of Defense, OSHA, and IRS. In addition to providing information in publications and on Web sites, federal agencies offer manufacturers opportunities to attend training or seminars at which they can meet agency staff, learn about the current regulatory environment and record-keeping requirements, and receive technical assistance to facilitate compliance with federal laws and regulations. In addition, IRS has produced a videotape that it distributes through its district offices to help business people understand tax laws and record-keeping requirements related to starting a new business. The California state agencies responsible for enforcing workplace, tax, and environmental laws and the agency tasked with promoting economic growth in California have taken major steps to make information about the state’s laws and permit requirements for various business activities available and accessible to manufacturers in California. Although manufacturers cannot turn to a single state agency to learn about their legal responsibilities, state agencies, like their federal counterparts, have developed informational publications, including guides to starting up businesses in the state, law handbooks, brochures, and pamphlets. For example, the Department of Fair Employment and Housing has prepared brochures and publications to provide businesses with information about housing, equal employment opportunity (EEO), and discrimination laws. The state’s Franchise Tax Board, besides having the state’s tax code available in a hard copy handbook format, has also prepared a chart that provides a brief synopsis of each of the state’s tax laws and the names of the state agencies responsible for enforcing them. Cal/EPA has compiled the state’s environmental laws in a handbook. Several California state agencies have placed their laws, regulations, and requirements on their Internet Web sites for businesses to access. In addition, some agencies have provided businesses the opportunity to comment on proposed regulations using these Web sites. California’s tax agencies—the Employment Development Department, the Franchise Tax Board, and the State Board of Equalization—provide information about employer tax publications, forms, and tax rates as well as other information, such as the answers to questions most commonly asked by businesses. Cal/EPA has made its regulations and many state and local requirements for permits available to businesses through its Internet Web site. Moreover, current forms and applications required by a wide range of authorities that provide permits are available to businesses on the Internet, and some forms can be completed electronically on the Internet. The Department of Industrial Relations, the state agency responsible for worker safety and employment laws, is working toward making all of the laws it enforces available to manufacturers as well. Through California’s Trade and Commerce Agency Web site, manufacturers can access a handbook that describes the state and local processes for obtaining permits in general and the necessary paperwork businesses must prepare when applying for environmental permits. State regulatory agencies offer business representatives the opportunity to attend seminars, training workshops, and presentations designed to educate representatives on their firms’ legal responsibilities. The Franchise Tax Board has a taxpayer advocate branch that provides taxpayer education and informational seminars on Saturdays. In addition, program specialists are available to assist taxpayers with complaints or problems they may have as a result of tax audits. The Cal/OSHA staff performs outreach to businesses to ensure that they are aware of the state’s worker safety requirements. In addition, the California Trade and Commerce Agency’s Office of Permit Assistance provides businesses with a focal point for learning about requirements for obtaining state environmental permits at one location. This office has compiled and collated information from other state and local agencies responsible for enforcing state and local environmental permit requirements into the California Permit Handbook, a streamlined guide for understanding the environmental permits most often required in California. Office staff also provide technical consultation for businesses experiencing difficulties complying with state or local permit requirements. Cal/EPA has developed a system through which small businesses can access many state agencies’ laws and regulations at one location, and the Office of Administrative Law will have the entire California Code of Regulations available on the Internet through this system within the next 2 months. The agency compiled and collated many of the state and local laws and permit requirements and established permit assistance centers throughout the state. Staff at these centers help businesses understand the state, local, and regional environmental and other permit requirements businesses must satisfy before they can start up or expand. To extend this type of assistance to people located outside the geographic areas covered by existing permit assistance centers, Cal/EPA has developed an on-line program, called CalGOLD, by which people can determine the federal, state, and local permit requirements through the Internet. Someone wanting to start up a new or expand an existing business can submit information on the type of manufacturing and its proposed location, and the system will identify many of the relevant permit requirements needed to operate the business. CalGOLD also provides users with linkages to other federal, state, or local agencies’ addresses or Web sites to contact for assistance. California’s Chamber of Commerce has a number of resources available to manufacturers, most of which must be purchased, that can help businesses learn about and comply with many California and federal laws applicable to them. The Chamber of Commerce has an Internet Web site that member businesses can access to learn about employment, worker health and safety, and environmental and other requirements. In addition, the Chamber of Commerce offers businesses its California Labor Law Digest, which explains the labor laws, provides compliance advice, and includes record-keeping forms and checklists. Individuals can also purchase business start-up kits with federal, state, and local forms that they must complete before operating a new business. The Chamber of Commerce periodically issues newsletters, regulatory updates, and business survival guides to help businesses understand the current regulatory environment and any proposed changes that may affect their business operations. From the Chamber of Commerce, businesses can also purchase the posters that the government requires employers to display to inform their employees of workplace laws that protect them. In addition, associations representing the electronics and aerospace industries and human resource managers keep their memberships informed of proposed legislation and changes to existing legislation that may have an impact on their members’ business opportunities. For example, the American Electronics Association, a trade group representing the U.S. electronics, software, and information technology industries, has tracked and supported federal legislation providing for an increase in the number of highly skilled, high-technology foreign workers who are provided visas to work in this country under the federal H-1B program. In addition, the American Electronics Association has an Internet Web site, publishes newsletters, and sponsors conferences and seminars to keep its members informed of new legislation or changes to existing California and federal legislation. The Aerospace Industries Association (a national trade association for the aerospace industry), learns about changes in state laws through ongoing networking with its members and also monitors federal legislation that may have an impact on aerospace manufacturers. To keep its members informed of new or changing legislation, it publishes a monthly newsletter. The Society for Human Resource Management offers its human resource professionals a variety of ways they can learn about proposed changes in the regulatory environment. For example, it analyzes the impact current court decisions and legislation may have on the human resource community and makes this information available to its membership through its Web site and various publications. Many firms rely on trade and advocacy organizations to keep them informed about applicable laws and administrative record-keeping requirements. To learn what they need to do to comply with existing laws and paperwork requirements, firm officials have used the Chamber of Commerce’s Internet Web site, telephone hot line, newsletters, and business guides. Several firms’ officials cited the California Chamber of Commerce’s Web site and newsletters as the most reliable sources of information about state and federal laws and proposed changes. Another firm official said that the Society for Human Resource Management, through newsletters, has been effective in keeping his firm aware of changes to laws that have an impact on its human resource operations. Despite public agency and trade association efforts to inform manufacturers about applicable laws and regulations, the firms we visited continue to rely on expertise and assistance from the professional practitioners they hire. The owner of the smallest manufacturing firm we visited contracts with an environmental consulting firm to keep him informed of legal responsibilities; assist with documenting the firm’s compliance with safety, health, and environmental standards; and inspect the plant each quarter for compliance. The consulting firm also prepared the manufacturer’s permit application for its metal-plating process and waste treatment and made subsequent revisions to the original permit application. Firms, in general, used private attorneys specializing in labor law for counsel on human resource and personnel issues. For example, one firm, in implementing a new leave policy to comply with the Family Medical Leave Act (FMLA), consulted extensively with its lawyer specializing in labor law. Firm officials said they have been hesitant to rely on information provided by public regulatory agencies for several reasons. Some said that they have experienced difficulties in identifying the appropriate department or person to contact at a public agency. When they did obtain information from agency staff, officials with a few firms said they had concerns about its accuracy and reliability. One firm official said that when she contacted a federal agency for assistance she was told that the agency official could not interpret a law for her and suggested instead that she seek an attorney’s assistance. Another firm official said that several staff he consulted at the same regulatory agency interpreted the same law inconsistently. One official at a small firm said that even if public agencies have developed programs to help him learn about the relevant laws, he is too busy managing his employees and the production line to spend time researching and learning about laws and instead hires consultants to do this work for him. The firms we visited have devised different strategies to ensure compliance with those legal requirements related to their human resource operations—in general, the workplace and tax requirements listed in appendixes II and III. The type of strategy varied with the size of the firm, with larger firms more often having experts on board to handle specialized issues. The human resource staff at the firms we visited were generally aware of the firms’ legal requirements and had developed their human resource policies and procedures to meet their legal responsibilities. These individuals sometimes used outside resources to address these requirements, particularly when compliance involved very routine or highly complex tasks. Although firms generally seemed to have integrated these compliance strategies into their daily operations, firm officials continued to voice concerns about the general burden, complexity, cost, and paperwork associated with many regulatory requirements. Further, firms said that the ambiguity sometimes associated with requirements left firms unsure of whether they were in compliance. Finally, some firms expressed concerns in particular about state laws, although the firms did identify areas in which state laws have improved the workplace. As part of their regular operations, manufacturing employers must typically conduct a number of human resource management activities, which include the following personnel-related activities: setting compensation; recruiting, hiring, promoting, and terminating workers; providing training and development; assigning duties; monitoring performance; addressing labor relations; meeting health and safety requirements; administering health, pension, and other benefits; and maintaining personnel records. The location of responsibility for these activities within firms varied according to their size, industry, and particular management style and culture and was influenced by such other forces as market competition and federal and state law. At the firms we visited, activities that human resource managers oversee were affected by workplace and tax laws to the extent that these activities related to employee compensation, but these activities were not affected by environmental laws. Our case study analysis of human resource operations at the California manufacturing firms we visited indicated that larger firms had more complex human resource systems, staffed with more specialized personnel. This finding was expected and consistent with the views of experts we consulted and the general human resource literature. At the smallest firm, which had fewer than 10 employees, the owner directly handled many human resource issues, such as hiring, leave, and terminations; his secretary helped with payroll and paperwork associated with enrolling employees in the pension and health plans. At firms that had closer to 100 employees, a human resource manager handled many human resource functions. The largest firm we visited, a subsidiary of a multinational company, had several human resource specialists at its California location but handled some issues, such as its health insurance contract, through its corporate office. Responsibility for understanding and complying with legal requirements related to human resource operations at these firms was focused largely in the human resource departments but overlapped into other parts of the firms’ organization. Hence, compliance with human resource-related requirements involved multiple departments and required coordination among them. For example, meeting employee health and safety requirements, as set under OSHA and similar state laws, was addressed by human resource personnel, a separate OSHA/environmental department, or the firm’s production department. In the very small firm, the owner, who managed the firm’s manufacturing operations, was closely involved with ensuring that health and safety requirements were met. In somewhat larger firms, this was a joint effort of staff overseeing the manufacturing activities (who ensured that safety requirements were met on the production floor) and human resource departments (who handled administrative areas such as accident reports to OSHA). In the largest firm, an environmental and safety group oversaw implementation of OSHA requirements. Similarly, human resource staff worked with accounting or payroll groups to comply with requirements related to employees’ pay. For example, completing tax withholding forms or determining which employees should be paid extra for overtime to comply with the Fair Labor Standards Act (FLSA) were examples of human resource functions that were integrated with payroll or accounting. At the firms we visited, efforts to comply with those federal and state laws related to hiring, termination, and other workplace issues have been integrated into the employers’ standard operations. Firms have incorporated policies that meet their legal requirements into employee handbooks. For example, one firm’s employee handbook included sections addressing equal employment opportunity provisions, determining which employees were exempt or nonexempt from overtime pay, managing family and medical leave and pregnancy leave, limiting contributions to the 401(k) plan, and reporting employee injuries. Firms have implemented personnel procedures in many areas to ensure compliance with legal requirements. For example, to comply closely with EEO laws, one firm distributed lists of acceptable, nondiscriminatory questions to company staff before they interviewed potential employees. Several firms have modified their leave policies to comply with FMLA. Further, firms provided training on chemical and equipment safety that met California’s safety and health requirements. Notifying employees who are separating from the firm of their rights to extended health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) was also a standard procedure at firms covered by the requirement. Several firms routinely held safety committee meetings in which management and line workers discussed compliance with safety requirements. Also, completing the I-9 forms indicating that new employees were authorized to work in the United States was a routine procedure when new employees began their employment. The firms we visited frequently retained outside resources to perform certain tasks required by law, particularly those involving either very routine or very complex processes. Examples follow: To deal with routine duties involving employee payroll taxes and income tax withholding, most of the firms relied on an outside payroll service. The firms used the expertise of payroll specialists to ensure that they complied with various laws related to payroll procedures, including those requiring new employee registers, and EEO reporting. For example, with the recent requirement that new employees’ names be sent to a state agency to determine if the employee has any outstanding child support due, the payroll service for several of the firms we visited will routinely forward the names of all new employees, eliminating the need for the firm itself to report the names. Outside firms that administered certain programs completed some required reports that were particularly complex. For example, detailed annual forms required by ERISA for pension funds were prepared for a fee by the companies administering the retirement funds at all the firms we visited. Three of the firms had their health insurance administrators collect insurance payments directly from former employees with coverage under COBRA, which allowed them to continue their coverage after their employment with the firm ended. Timely collection of these funds from former employees had been an administrative problem for some firms. As table 3 shows, firms we visited used outside help to address requirements for many human resource functions. During our in-depth discussions with managers from the firms visited, each expressed some frustration about certain governmental requirements imposed on them, although there was little pattern in their complaints. Certain laws were not a problem for some firms because they had not encountered a workplace situation covered under those laws, whereas others, who had considerable experience with situations covered by the laws, found them burdensome. For example, two firms found the FMLA requirements to be no problem because no employees had ever asked for that type of leave, whereas two firms with greater family leave usage found the process of categorizing and recording leave a greater concern. Compliance with requirements to accommodate the needs of disabled workers was not an issue for several firms; some said they had not had any employees who needed special accommodations. In one case, the firm had built its plant to include handicapped access ramps and bathrooms, which it believed probably eliminated the need for some special accommodations. A January 1, 1998, change in California state law that eliminated the requirement to pay certain workers extra wages for working more than 8 hours a day—a state regulation that had been more stringent than the federal FLSA requirement—exemplifies the variation in employers’ concerns with workplace regulation. Although the regulation was repealed with the aim of permitting more flexibility in setting worker schedules, two of the firms reported that they have continued to provide overtime pay for work beyond 8 hours a day. Managers at one firm said overtime pay provides an incentive for employees to work at least their regular hours, thereby maximizing manufacturing machine use; the other firm’s managers believed that the 8-hour day rule maintained employee morale and productivity. Managers at firms often articulated frustration with excessively difficult requirements or burdensome paperwork, particularly when the managers believed the requirement did not accomplish results. Some firms complained about the requirement for tracking and categorizing family and medical leave under FMLA separately from other leave, as required under federal law. Two firms, both with several hundred employees, have decided to require that all leave be approved by one specific person in order to ensure accurate and consistent approval, even though it is burdensome for that individual. Managers at one firm were particularly frustrated with the requirement to provide separate family and medical leave because they believed they already had a very liberal leave policy without the FMLA-generated paperwork requirements. Some firms had difficulties with requirements under the COBRA provisions that govern health insurance, particularly with defining and identifying qualifying events, such as when former spouses of employees qualify for extended coverage, and informing all qualified beneficiaries. Regarding EEO requirements, one manager commented that under law he is required to collect information on applicants’ ethnic background for the EEO-1 form but is not allowed to ask applicants questions about race, age, and other characteristics. Another firm has decided not to let its workforce exceed 100 employees or bid on government contracts over a particular size to avoid certain EEO requirements, such as the need to prepare affirmative action plans and an EEO reporting form that it considers administratively burdensome. Another manager commented that she keeps careful records about attendance at EEO training and resolution of internal EEO investigations—a time-consuming process—to attempt to protect the company in the event of a lawsuit. However, some company managers believed that such steps might not be sufficient to protect the firms from potential legal liability. Managers at firms we visited were also frustrated about legal requirements that they believed were unclear and left them vulnerable to fines or litigation because of noncompliance. For example, two firms complained about what they perceived to be subjective, vague distinctions between workers who are and are not exempt from the overtime pay requirements under FLSA and the related state law. One called it “the most confusing part of labor law,” noting that it left the company vulnerable to being out of compliance and to paying back wages. The other, commenting that some job classifications in the firm are ambiguous under the law for purposes of coverage, said it looks for a clear distinction on its own and tries to apply its determinations in a consistent manner. Managers at firms also expressed concerns about ambiguity related to employee safety and health requirements as interpreted by enforcement personnel. Managers we talked to believed that the “shifting sands” of enforcement personnel’s interpretations of regulations made compliance more difficult. One plant manager said it seems that no matter how careful a company is in trying to meet Cal/OSHA requirements, Cal/OSHA inspectors will eventually write them up for some violation. A human resource manager at another firm said she believes that when Cal/OSHA inspects a firm, it always finds something wrong. A representative at another firm said unhappy employees have filed anonymous complaints with Cal/OSHA because they have learned that Cal/OSHA always finds something wrong if it inspects the plant. Some areas of concern were related to state laws only. One area that firms particularly expressed concern about was workers’ compensation for injuries. While employers acknowledged that employees should receive compensation for workplace injuries, employers believed that some employees take advantage of the system and abuse the benefit. One manager commented that the state workers’ compensation insurance board makes determinations in employees’ favor more often than it should. She commented that some employees take advantage of the system and abuse the benefit; when they know they can qualify for workers’ compensation, she said, they will do anything to stay out of work, including having unethical medical practitioners falsify medical reports. She noted that this is frustrating because employers can do little to control costs. Another employer expressed frustration with the workers’ compensation program because it covers injuries related to medical conditions that existed before employment with the firm. Although the firms’ managers had many specific concerns about regulations affecting human resources, they also cited some areas in which they believed regulations had helped to improve the workplace. Several firms had concerns about the health and safety requirements, as discussed earlier, but commented that compliance with them had improved health and safety conditions in the workplace. For example, one manager said that the ready availability of the material safety data sheets required by Cal/OSHA facilitated the identification of a chemical that was irritating an employee’s eye and enabled the employee to obtain treatment. Another mentioned that when his firm used safety committees to assess compliance with safety standards, the accident rate was half the rate experienced when the committee did not meet. He also noted that, after being charged with a Cal/OSHA violation, the company would respond and correct the problem within a day or two, thereby improving workplace safety, where previously the company had refused to take action. A manager from a relatively new firm explained that a Cal/OSHA consultant had visited the firm’s plant and explained the requirements it was expected to meet. As a result, it set up systems and procedures, such as an injury and illness program, that improved workplace safety. Similarly, because firms are required to provide workers’ compensation, a firm manager said that representatives from the insurance company inspect the plant and assess how safety conditions can be improved. Regarding unemployment insurance, one manager complimented California’s workshare program, which allows an employee to receive partial unemployment benefits when the employee’s work hours have been reduced. This program allows the company to retain an employee for a part-time schedule whereas, without it, the company would have lost the employee. The manager believed that retaining the employee resulted in benefits that outweighed unemployment insurance costs. We requested comments on a draft of this report from Labor, EPA, IRS, and SBA. Labor, EPA, and IRS provided technical comments to improve the clarity and accuracy of certain information. We have incorporated those suggestions into the report as appropriate. SBA responded that it had no comments. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days from its issue date. At that time, we will send copies of this report to the Secretary of Labor, the Administrator of the Environmental Protection Agency, the Commissioner of the Internal Revenue Service, and the Administrator of the Small Business Administration. We will make copies available to others on request. Please contact me on (202) 512-7014 if you or your staff have any questions. This report was prepared under the direction of Charles A. Jeszeck, Assistant Director. Other major contributors to this report are listed in appendix V. To address the objectives of this review, we identified the legal provisions of federal and California state laws that we believed to be significant to the operations of California manufacturing firms, including employment, tax, and environmental issues. Also as agreed with the requester’s office, we excluded local laws and requirements from our analysis, although we recognize that they can also affect firms. To help identify the relevant laws, we spoke with officials at several federal agencies, including the Small Business Administration (SBA), Department of Labor, Environmental Protection Agency (EPA), and Treasury’s Internal Revenue Service (IRS). We also spoke with officials at several California state agencies, including the California Franchise Tax Board, California Department of Fair Employment and Housing, California Department of Industrial Relations, California Trade and Commerce Agency, and California Environmental Protection Agency. To verify the accuracy of our presentation, a draft of this report was reviewed for technical accuracy by staff at Labor, EPA, IRS, SBA, and selected state agencies. Because individual laws are of varying lengths and detail, are codified, and are sometimes amended or replaced, we did not attempt to provide exact counts of laws that affect companies. In addition to speaking with federal and state agencies to identify laws, we also spoke with them about their efforts to inform businesses of their legal responsibilities, and we reviewed their publications and electronic information sources, such as web sites. We also visited seven firms to determine the implications laws have for their human resource operations. With the help of trade associations and business advocacy agencies, we selected firms in two leading manufacturing industries in California—aerospace and electronics—and chose firms with an array of different characteristics, as shown in table I.1. We note the important limitations of this information. First, these firms are not necessarily representative of other employers in these industries, either in California or the nation. Second, individual firms’ performance and the vibrant California and national economies may have affected the responses we received. For example, laws and regulations related to layoffs, health insurance coverage for separated employees, and unemployment insurance probably have less impact on firms in this environment, whereas requirements concerning the hiring of foreign workers probably have more impact. However, the firms did provide us a snapshot of strategies that firms of various sizes currently use to comply with these legal requirements. To create these tables, we reviewed various materials related to the statutes noted herein. The resulting list of “requirements” includes descriptions of significant provisions of these statutes but is not an exhaustive list of the provisions. The Fair Labor Standards Act (FLSA) (29 U.S.C. 201 et seq.), Walsh-Healey Act (41 U.S.C. 35 et seq.), and Contract Work Hours and Safety Standards Act (40 U.S.C. 327 et seq.) establish the minimum wage rate to be paid to employees, the standards of overtime compensation, and restrictions on the use of child labor. Size limitations: None; these laws apply to all employers engaged in interstate commerce or the production of goods for interstate commerce. Comparable state law: The California Labor Code, Industrial Wage Order No. 1-98, applies to the extent that it is stricter than the federal law. Employers must pay each nonexempt employee subject to FLSA at least (1) the hourly minimum wage rate set by law for all hours worked in a work week and (2) one and one-half times the employee’s regular rate of pay for all hours over 40 worked in a week. —Employers may pay employees other than an hourly rate (for example, salary, piece rate, and so on) as long as the wages paid equal or exceed the statutory minimum ($5.15 per hour). —Youths under 20 may be paid a lower minimum wage of $4.25 per hour for the first 90 days after hire. —Full-time students, handicapped workers, learners, apprentices, and messengers may be paid at less than minimum wage if employed in accordance with regulations of the Department of Labor. —For overtime compensation, the “regular rate of pay” is the actual rate of pay received by the employee. —Employers cannot retaliate against an employee who files a complaint under FLSA. —California requires employers to pay a minimum wage of $5.75 per hour. —Employers must provide meal periods and rest periods to employees who have worked a specified number of hours. —Employers must pay learners 18 years and over no less than 85 percent of the minimum wage. (continued) If manufacturing work is being conducted for a federal contract of more than $10,000, the Walsh-Healey Act requires employers to pay the “prevailing wage rate” as determined by the Secretary of Labor, which may be higher than the FLSA statutory minimum wage rate. Even if the federal contract is not covered by the Walsh-Healey Act, employers may have to pay “laborers or mechanics” the overtime wage rate under the Contract Work Hours and Safety Standards Act, which is one and one-half times the employee’s base rate of pay. —The “prevailing wage rate” under the Walsh-Healey Act has for many years been determined to be the FLSA statutory minimum wage rate and is the wage generally paid to workers in the same industry in the same locale. —The prevailing wage rates are generally set by geographic areas. Employers must comply with applicable restrictions in the wage-hour laws on the use of child labor. —Children below the age of 16 may not be employed in manufacturing. —If a business involves an occupation that the Secretary of Labor has determined to be “hazardous,” employers may not hire children below the age of 18. Employers must determine whether each worker is subject to the federal wage-hour laws: that is, whether there is an employment relationship and whether the employee is not specifically “exempt” under the provisions of the statute. —According to the “economic reality” test, an employment relationship exists if the person is dependent on the employer’s business as a means of livelihood. —Employees employed in a “bona fide executive, administrative or professional capacity” (“white collar” employees) are exempt from the federal wage-hour laws. —Administrative, executive, and professional employees are defined as either (1) employees engaged in work “primarily intellectual, managerial, or creative ... requires exercise of discretion and independent judgment” for which pay is at least $1,150 per month or (2) employees in a “recognized” profession. —All supplemental “payroll” records, wage-related agreements, and sales records must be kept for 3 years, although worker attendance records, such as daily time cards, need only be kept for 2 years. —Walsh-Healey requires, in addition to payroll records, records of occupational illness and injury. Some additional state requirements may apply. Title VII of the Civil Rights Act of 1964 (42 U.S.C. 2000e et seq.), the Equal Pay Act under FLSA (29 U.S.C. 206d), the Age Discrimination in Employment Act (ADEA) (20 U.S.C. 621 et seq.), Executive Order 11246, the Immigration and Nationality Act (8 U.S.C. 1101 et seq.), the Vietnam-Era Veterans’ Readjustment Assistance Act (VEVRAA) (38 U.S.C. 4212 et seq.), and the Uniformed Services’ Employment and Reemployment Rights Act (USERRA) (38 U.S.C. 4301 et seq.) prohibit discrimination in employment on the basis of race, color, religion, sex, national origin, age, Vietnam-era veterans’ status, and military service. Size limitations: Title VII applies to employers with 15 or more employees; the Equal Pay Act applies to all employers; ADEA applies to employers with 20 or more employees in 20 weeks in the current or preceding year; Executive Order 11246 and VEVRAA apply to all federal contractors and subcontractors with a covered contract or subcontract of $10,000 or more, and provisions requiring affirmative action programs apply only to federal contractors and subcontractors with a covered contract or subcontract of $50,000 or more and 50 or more employees; and USERRA applies to all employers. Comparable state law: The Fair Employment and Housing Act (FEHA) applies to employers with 5 or more employees, except that provisions related to sexual harassment apply to all employers. California labor code also applies. Table II.2: Civil Rights—Race, Color, Religion, Sex, National Origin, Age, and Vietnam-Era Veterans’ Status Employers with 15 or more employees cannot discriminate in employment practices (hiring, firing, compensation, and so on) against people on the basis of race, color, religion, sex, or national origin. Employers with 20 or more employees cannot discriminate against people on the basis of age. Employers of any size may not discriminate in employment practices because of past, present, or intended service in the uniformed services. —Employers cannot treat people less favorably than others because of race, color, religion, sex, age, or national origin. —Employers must not allow sexual harassment in the workplace. —Under the Equal Pay Act, all employers must pay men and women equal pay for equal work on jobs requiring equal skill, effort, and responsibility unless factors other than gender (for example, seniority or merit) are involved. —Employers cannot retaliate against any employee because the employee filed a charge or participated in an investigation or proceeding under Title VII, USERRA, Executive Order 11246, or VEVRAA. —Antidiscrimination laws apply to all California employers with five or more employees and protect against discrimination based on sexual orientation. —Sexual harassment provisions apply to all California employers. —Employers must post notice of employee rights under antidiscrimination laws. —Employers must ensure that applicants and employees are treated without regard to race, color, religion, sex, national origin, or Vietnam-era veteran status in all aspects of employment. —Employers are subject to review by the Department of Labor. If an employer has a nonexempt federal contract of $50,000 or more and employs 50 or more employees, the employer must establish an affirmative action program. —Employers must post notice of employee rights under antidiscrimination laws. —Employers must develop and adopt a written affirmative action program. —Employers must update the program annually. —Employers must annually file form 100 (Employer Information Report, EEO-1). Employers must post notice of antidiscrimination minimum wage and maximum hours laws in the workplace, and employers with 100 or more employees must file workforce statistics on form 100 with the Equal Employment Opportunity Commission. —Employers must compile statistics of employment practices and workforce composition (including job applicants) by geographic area. —Employers must distribute copies of the state information sheet on sexual harassment to all employees. Some additional state requirements may apply. The Americans With Disabilities Act (ADA) (42 U.S.C. 12101 et seq.); the Rehabilitation Act, Section 503 (29 U.S.C. 793); VEVRAA (38 U.S.C. 4212 et seq.); and USERRA (38 U.S.C. 4301 et seq.) prohibit employment discrimination on the basis of disability. Size limitations: ADA applies to businesses with 15 or more employees for 20 weeks in the current or preceding year; the Rehabilitation Act, Section 503, and VEVRAA apply to all federal contractors and subcontractors with a contract or subcontract of $10,000 or more, and provisions requiring affirmative action programs apply only to federal contractors with a covered contract or subcontract of $50,000 or more and 50 or more employees; and USERRA applies to all employers. Comparable state law: FEHA applies to employers with 5 or more employees regarding physical disabilities, but coverage of provisions regarding mental disabilities is restricted to employers with 15 or more employees. Employers with 15 or more employees are prohibited from discriminating in employment practices (hiring, firing, compensation, and so on) because of physical or mental disability (ADA). —To be protected under federal law, people with disabilities must have a “physical or mental impairment” that “substantially limits” one or more “major life functions.” —To be protected, a person with a disability must also have the requisite skill, experience, education, and other related requirements for the job. —Employers cannot require a medical examination until after a job offer has been made, but the job offer can be contingent on passing a medical examination, which must be required of all applicants for a job, not just the applicant with a disability. —Employers must post notice of employee rights under antidiscrimination laws. —Employers cannot retaliate against any employee because the employee filed a charge or participated in an investigation or proceeding under ADA. —Provisions apply to California employers with 5 or more employees, except for disabilities relating to mental impairments, which apply only to businesses with 15 or more employees. Employers must provide “reasonable accommodation” to enable applicants and employees with disabilities who are “otherwise qualified” to perform the job unless to do so would cause “undue hardship.” —Employers may have to modify or adjust workplace or work practices to enable a person with a disability to do the job. —In the case of an employee returning to a job disabled as a result of military service, the employer must assign the employee to an “equivalent” position if the disability prevents the employee from performing his or her old job. If, with reasonable accommodation, the employee cannot perform in an equivalent position, the employer must place the employee in a position with the nearest approximation of status and pay, with full seniority (USERRA). (continued) If the employer has a covered federal contract or subcontract of $10,000 or more, the employer must take affirmative action to hire qualified individuals with disabilities and Vietnam-era veterans under the Rehabilitation Act, Section 503, and VEVRAA. —Employers are subject to review by the Department of Labor. —Employers must maintain records for 1 year on complaints received and action taken under the law. —Employers must report annually to the Department of Labor on the number of employees who are veterans and “special disabled veterans.” —Employers must invite employees and job applicants to identify whether they believe themselves to be covered by VEVRAA or the Rehabilitation Act, Section 503. If the employer has 50 or more employees, and a covered federal contract or subcontract of $50,000 or more, the employer must establish a written affirmative action program for special disabled veterans, individuals with disabilities, and Vietnam-era veterans. —The affirmative action program shall be available for inspection to any employee or applicant upon request. —Employers must post notice at each facility the location of the affirmative action program and the hours during which a copy of the program may be obtained. Some additional state requirements may apply. The National Labor Relations Act (NLRA) (29 U.S.C. 151 et seq.) and the Labor-Management Reporting and Disclosure Act (29 U.S.C. 401 et seq.) create the framework for the relationship among employer, employees, and labor unions, providing employees with the right to organize and bargain collectively through representation of their own choice. Size limitations: None; these laws apply to all employers. Comparable state law: None; the NLRA preempts state regulation of labor-management relations. Specific requirements (federal only) Employers cannot interfere with employees in the exercise of their rights guaranteed by the NLRA. —Employees have the right to organize, bargain collectively, and engage in collective activities. —Employers cannot discriminate against any employee because of activities protected by the NLRA. —If an employer violates any of the guarantees under the NLRA, employees may complain about an “unfair labor practice” to the National Labor Relations Board. Employers must bargain in good faith with the union selected by employees. —Employees may select, by secret ballot, a labor organization to act as their exclusive representative for the purpose of collective bargaining. Employers are prohibited from forming a “company union” to deal with labor disputes and work conditions. —Employers must restrict jurisdiction of management-employee committees to activities not covered by the NLRA. Employers must disclose certain payments or dealings with employees, unions, union officers, and labor relations consultants, and any expenditures to interfere with or restrain union activity, to the Secretary of Labor under the Labor-Management Reporting and Disclosure Act . —The report to the Secretary of Labor must include the terms and conditions of such payment. —Any person who is engaged by the employer to persuade employees not to organize or to supply information about union activities must also report to the Secretary of Labor. The Employee Retirement Income Security Act (ERISA) (29 U.S.C. 1001 et seq.) requires employers that maintain pension plans for their employees to generally ensure that rights in such plans are equitably offered to their employees, that funds held for such purposes are adequately protected, and that employees are fully informed about the status of these funds. Size limitations: None; ERISA applies to all employers with pension plans; however, there are reduced reporting requirements for certain pension plans with fewer than 100 participants. Comparable state law: None; ERISA preempts state regulation of pension plans. Specific requirements (federal only) Employers offering pension plans must allow employees to participate in pension plans in accordance with ERISA requirements. —Employers may set up various types of plans, generally classified as either “defined benefit” or “defined contribution” plans. —All employees who have reached a specified minimum age and completed a minimum amount of service with the employer must be eligible to participate. —Pension plans cannot discriminate in favor of an employer’s more highly paid employees. Employers must give employees nonforfeitable (vested) rights in pension plans in accordance with ERISA requirements. —Employers generally must follow one of three vesting schedules set out in ERISA. —Once fully vested, employees must be guaranteed a percentage of benefits even if they leave their job before retirement. Employers must fund defined benefit pension plans annually to meet the minimum standards set forth in ERISA. —Employers must fund annually all benefits earned in a defined benefit plan that year by employees and pay installments on the cost of benefit increases not previously funded. —Employers who do not meet minimum funding standards must pay an excise tax or obtain a waiver from the Secretary of the Treasury. Employers must ensure that people who manage pension plans do so in a prudent manner, solely for the benefit of the participants and beneficiaries. —Pension plans must be established under a written plan, with a named fiduciary. —People handling funds must be bonded for protection against fraud or dishonesty. —Certain types of transactions are specifically prohibited. Employers must report detailed financial data to the Department of the Treasury and disclose to employees understandable data on the financing and operation of the pension plans. —Form 5500 must be filed with the IRS annually, setting out assets and liabilities, income and expenses, as well as numerous other data. —Pension plans with fewer than 100 participants may have reduced reporting requirements. —Other reports must be filed to federal agencies when specified events occur, such as failure to meet minimum funding standards or bankruptcy. —Summaries of annual financial reports and notification of major modifications to the plan must be provided to all employee participants. —Plan administrators must retain records that verify, explain, or clarify reported information for 6 years. The Health Insurance Portability and Accountability Act (HIPAA), the Newborns’ and Mothers’ Health Protection Act (NMHPA), the Mental Health Parity Act (MHPA), USERRA, and the Consolidated Omnibus Budget Reconciliation Act (COBRA) require that employers providing employees with group health plans (both insured and self-insured) must comply with federal requirements on health coverage. Size limitations: HIPAA and NMHPA apply to employers with 2 or more employees; COBRA provisions apply to employers with 20 or more employees; and MHPA provisions apply to employers with over 50 employees. Comparable state law: HIPAA permits state insurance law to vary from federal law only in certain enumerated ways for certain requirements, and only as long as it does not prevent the application of federal law for other requirements. NMHPA permits state insurance law to supersede federal law if state law contains certain specified requirements. Specific requirements (federal only) Any employer electing to sponsor a group health plan covering two or more employees must limit the effects of a “preexisting condition” exclusion for employees, spouses, and dependents and cannot discriminate against employees, spouses, and dependents because of health status and related factors (HIPAA). —An employer’s group health plan may include a period of up to 12 months for a regular enrollee, or 18 months for a late enrollee, during which there is restricted coverage of a participant’s or beneficiary’s preexisting medical condition. —An employer’s group health plan must reduce an individual’s preexisting condition exclusion period by the number of days of “credible coverage” (generally, prior health coverage without a break in coverage of 63 days or more). —An employer’s group health plan may not exclude individuals from coverage under the terms of the plan or charge an individual more for benefits offered by the plan (that is, discriminate on the basis of specific factors related to health status). If an employer has two or more employees who are participating in a group health plan that provides coverage for childbirth, the plan must provide for a hospital stay for the mother and child of not less than 48 hours following a normal vaginal delivery and not less than 96 hours following a cesarean section (NMHPA). If an employer has over 50 employees and has a group health plan that provides both medical/surgical and mental health benefits, any aggregate lifetime or annual dollar limits on benefits for mental health services may not be lower than any such limits for medical/surgical benefits unless changing the dollar limits would increase costs for the plan by 1 percent or more (MHPA). All employers must offer continued group health coverage to employees and qualified beneficiaries after employees leave to perform military service (USERRA). Employers with 20 or more employees and a group health plan must offer continued group health coverage to employees and their spouses and dependents after a qualifying event (job termination, employer bankruptcy, divorce, death, reduced hours, and so on) unless terminated for “gross misconduct” (COBRA). —Employers must give notice of COBRA rights to an employee and other qualified beneficiaries at the time coverage begins and after a “qualifying event,” such as termination of job, death, or divorce. —Employees and qualified beneficiaries have 60 days to elect continued health coverage from the date they will lose coverage or the date of notice, whichever is later. —COBRA coverage must be available for a child born to, or adopted by, a former employee covered by COBRA during the COBRA coverage period. Specific requirements are the same as general employer duties. The Family and Medical Leave Act (FMLA) (29 U.S.C. 2601 et seq.) requires covered employers to allow employees to take leave for birth or adoption of a child, or a serious health condition of the employee or the employee’s immediate family. Size limitations: FMLA applies to employers with 50 or more employees on the payroll for 20 calendar weeks in the current or previous year. Comparable state law: The California Family Rights Act (CFRA) and FEHA, which include additional provisions for pregnancy disability leave for all employers with five or more employees, apply. Employers with 50 or more employees must allow eligible employees to take up to 12 weeks’ unpaid leave each year for medical or family-related reasons. —To be eligible, employees must have been employed with the business for at least 1 year, with at least 1,250 hours of service in the prior year. —Leave can be taken for the adoption or birth of a child by either husband or wife. —Leave can be taken for the care of the serious health condition of the employee’s spouse, child, or parent or for the employee’s own serious health condition. —Leave may be taken intermittently, on a reduced schedule basis, all at once, or in full-day increments. —California includes the same size limitations on its family leave provisions under CFRA; however California, also provides that employers with five or more employees must allow female employees up to 4 months for pregnancy disability leave. —An eligible employee can take up to 4 months for pregnancy disability leave and can also take additional leave under CFRA to “bond” with the child (or for whatever health or family reason allowed under CFRA). At the employee’s or employer’s option, certain types of paid leave may be substituted for unpaid leave during the employee’s absence, and the employer must continue the employee’s coverage in group health insurance. —Employees may choose to substitute accrued paid leave for unpaid FMLA leave, or an employer may require the employee to substitute accrued paid leave for the FMLA leave.(29 U.S.C. 2612 (d)(2)(A)) —Employers must maintain an employee’s coverage under a group health plan at the same level as would have been provided had the employee remained at work. Employers must reinstate all the employees taking such leave unless the employee’s job is eliminated or the employee is determined to be “key” to the operations of the business. —Reinstatement is generally required to be to the same or equivalent position, unless the employee’s job is eliminated and the employer can prove that the job would have been eliminated whether or not the employee had taken FMLA leave. —“Key” employees are those who are salaried, in the top 10 percent of pay at the business, and whose job restoration would cause “substantial and grievous economic injury” to the business. —If a female employee takes leave for pregnancy disability, the employer must reinstate her to her same or a comparable position with the same seniority and benefits as when leave began, unless employment would have ceased during the disability period. —In addition to posting notice of FMLA, employers must provide a general notice to all employees of rights and obligations under FMLA. —In the event an employee needs to take FMLA leave, the employer must provide specific notice to the employee of FMLA rights and obligations within 2 days after the employer learns of the need for leave. —Pay records must distinguish FMLA leave and non-FMLA leave. —Records should include notices provided to the employee, and records of any disputes. —Records must be maintained for 3 years. Some additional state requirements may apply. California Disability Insurance and California Workers’ Compensation require employers to collect employees’ contributions to the state disability insurance fund (for use of disabled workers not receiving unemployment insurance or workers’ compensation) and to compensate workers in part for the loss of pay because of a workplace injury or sickness. Size limitations: None; these requirements apply to all employers paying over $100 in wages in a calendar year. Independent contractors are not covered by workers’ compensation laws. Employers with workers considered to be employees under the California law must collect employee contributions to disability insurance. —All workers considered employees for purposes of unemployment insurance must contribute to disability insurance. Employers contribute toward disability insurance on the basis of wages recognized for this purpose by state law. —Employees must pay 1.0 percent on the first $31,767 of wages paid by the employer. —All compensation that is considered wages for purposes of unemployment insurance is also considered wages for disability insurance, unless specifically exempted. Employers must maintain insurance to pay workers’ compensation for workplace injuries. —Insurance rates can vary with the employer’s safety and accident record. —Employers can challenge the eligibility of claimants for workers’ compensation in a hearing before a state agency. —Employers with the worst state safety records must make an annual payment to the state fund. Employers must notify employees of rights to disability insurance and workers’ compensation. —Employers must give new employees and employees leaving work because of pregnancy or nonoccupational sickness or injury a notice of their rights under the disability law. —Employers must post notices of employees’ rights to disability insurance benefits. —Employers must provide injured workers with a California form notifying injured workers of their rights under the workers’ compensation program. —Employers must post notice of employees’ rights to workers’ compensation for job-related injuries. —Worker contributions are deposited with income taxes withheld, and reported on the same form required for unemployment insurance. Not applicable. The Occupational Safety and Health Act (29 U.S.C. 651 et seq.) requires employers to keep the place of employment free from recognized hazards that could cause death or serious physical harm to employees and to comply with workplace safety standards established by the Department of Labor. Size limitations: None; the act applies to all employers. However, employers with 10 or fewer employees have reduced record-keeping requirements and are exempt from programmed inspection if in a low-hazard industry. Comparable state law: The California Occupational Safety and Health Act applies to all California employers but reduces some record-keeping requirements for employers with 20 or fewer employees. —Employers must follow Occupational Safety and Health Administration (OSHA) instructions on how to keep work areas safe. —Employers must provide adequate supervision of employees. —Depending on the particular standard, employers may also have to provide employee safety training and education and adopt prescribed safety procedures or modify machinery to include safety devices. —California has its own set of standards comparable to the federal requirements. In addition, California has state-specific requirements. Employers using hazardous substances (in an amount over thresholds specified by regulation) or whose workplace presents high-risk situations (for example, confined spaces with oxygen-deficient atmosphere) must protect employees from exposure to health hazards. —Employers must conduct periodic tests to determine the presence and concentration of hazardous substances. —Employers must develop safe operating procedures and an emergency response plan. —Employees must be trained in safe operating procedures. —Employers must develop a “hazardous communication program”—that is, prepare “material safety data sheets” identifying the nature of the health hazard and notifying employees of hazards associated with substances. —All health hazard emergencies must be reported to OSHA. —Depending on the particular standard, the employer may also have to provide periodic medical examinations for each employee and obtain special work permits. —California has its own standards comparable to the federal requirements. Specific requirements may differ. (continued) Employers must maintain records on safety at the workplace, post notice of the protection due to employees under OSHA, and report certain serious injuries to OSHA. —Employers with 10 or fewer employees have reduced record-keeping requirements. —Employers in low-hazard industries with 10 or fewer employees are exempt from programmed safety inspections. —Employers must keep a continuing log of occupational injuries and illnesses (on OSHA form 200). —Employers must maintain records on employee exposure to hazards. —Employers must maintain environmental monitoring logs and “material safety data sheets.” —Employers must report any job-related fatality or accident requiring the hospitalization of three or more employees to OSHA within 8 hours of occurrence. —Employers in high-hazard industries with more than 60 employees must submit illness and injury data to OSHA’s annual survey. —Employers must establish, implement, and maintain a written injury and illness prevention program with certain specified sets of records. —Employers with 10 or fewer employees and employers with 20 or fewer employees that have a good safety program have reduced record-keeping requirements. The Immigration and Nationality Act (8 U.S.C. 1101 et seq.), Employee Polygraph Protection Act (29 U.S.C. 2001 et seq.), USERRA (38 U.S.C. 4301 et seq.), Drug Free Workplace Act (41 U.S.C. 701 et seq.), Personal Responsibility and Work Opportunities Act (42 U.S.C. 654), and Workers’ Adjustment and Retraining Notification Act (WARN) (29 U.S.C. 2101 et seq.) regulate employers when hiring new workers and provide rights to certain workers with respect to job termination. Size limitations: WARN applies to employers of 100 or more employees. Comparable state law: The relevant California Labor Code provisions apply, as well as a provision requiring employers with 25 or more employees to allow employee participation in a drug or alcohol rehabilitation program. Requires all employers to hire only those people who may legally work in the United States (that is, citizens and nationals of the United States and aliens authorized to work in the United States) (Immigration and Nationality Act). —Employers must ensure that employees fill out form I-9, with evidence of identity and employment eligibility. —Employers must physically examine documentation and complete form I-9. —Employers must retain forms I-9 for 3 years. To hire foreign workers in certain specialized professions to work in the United States, employers must meet the requirements of the H-1B temporary worker program. —Employers must pay the foreign worker wages as least as high as they pay a U.S. citizen performing the same type job in the same area. —The foreign worker must qualify as a member of a “specialized occupation” not only on the basis of academic degree but also by license, experience, or training. Employers may not use polygraphs to screen job applicants or during the course of employment, except in certain circumstances, such as those related to national security (Employee Polygraph Protection Act). —All employers must post notice of protection against the use of the polygraph test. —If employers use polygraph tests, the employers must maintain records of such tests for 3 years. —Employers may not discharge or retaliate against an employee for refusing to take a polygraph test. All employers must provide reemployment to employees who leave their jobs to serve in the “uniformed services” (USERRA). —Employers must reinstate uniformed service members who report back to their jobs in a timely manner to a position of like seniority, status, and pay. —Employers must guarantee reinstated uniformed service members pension plan benefits accruing during military service. —Employers must continue to provide health benefits for uniformed service members and their families for up to 18 months during military service. If an employer works on federal contracts of over $25,000, the employer must maintain a drug-free workplace (Drug Free Workplace Act). —Employers must publish a notice to employees that drugs are prohibited in the workplace and that action will be taken against employees who violate the prohibition. —Employers must offer drug-free awareness programs to employees. —Employers must notify the federal agency with which they are contracting of an employee’s drug conviction within 10 days of learning of such conviction. —Employers with 25 or more employees must accommodate any employee who wants to participate in a drug or alcohol rehabilitation program. —Employers must make reasonable efforts to safeguard the privacy of an employee who has enrolled in a rehabilitation program. Employers must report information on newly hired personnel to a designated state agency for the purposes of enforcing child support agreements (Personal Responsibility and Work Opportunities Act). —After October 1, 1998, employers must submit information to the responsible state agency within 20 days after hiring a new employee. Employers of 100 or more employees must provide 60 days’ notice to employees of a plant closing or mass layoff (WARN). —Employers must provide notice in writing to employees or their union representative and to local and state authorities. (Table notes on next page) Some additional state requirements may apply. The tax law requirements compiled in these tables are summaries of significant provisions in the federal Internal Revenue Code and the California Revenue and Taxation Code. As with other legal requirements outlined in this report, this is not an exhaustive list of tax provisions. The federal tax code requires employers to withhold a portion of employees’ wages and remit the withheld portion to federal authorities as payment toward the employees’ income taxes. Size limitations: None. All employers are liable for withholding taxes of employees; however, there are less frequent deposit and filing requirements for employers with smaller payrolls. Comparable state laws: State income tax code. Employers must withhold appropriate amounts if the worker is an “employee,” not an “independent contractor.” —If the worker is an “employee” under the common law test or meets other requirements of the Internal Revenue Code, the employer must withhold federal income taxes. —Even if the worker is an “employee,” income taxes may not have to be withheld if there is a “safe harbor” (that is, industry practice treats the worker as an independent contractor) and if the worker meets the other requirements of section 530 of the Revenue Act of 1978. —Specific federal tax code provisions might exempt certain workers from withholding requirements. —If a worker is an employee under common law, the employer must withhold state income taxes unless the state tax code provisions specifically exempt the worker from this requirement. —Specific state tax code provisions might require the employer to withhold state income tax even if the worker is not a common law employee. —There are no “safe harbor” provisions recognized for the purposes of California income tax withholding. Employers must withhold tax from payments subject to the income tax. —There is no withholding for payments specifically exempt from federal income tax (such as nontaxable fringe benefits and qualified moving expenses). —There is no withholding if the employee files form W-4 validly claiming an exemption from withholding. —All compensation for work done is included in wages for the purposes of state income tax withholding unless the employee is specifically exempt by state law. (continued) —Employers must withhold each pay period. —Employers must refer to the employee statement of filing status on form W-4; if there is no W-4, the employee is treated as if single with no dependents. —Employers must calculate the tax in a method approved by IRS—either by “wage bracket” tables, by percentage, or by another approved method. —Employers must withhold each pay period. —Employees can use either federal W-4 or state DE-4 to identify filing status; if no form is filed, the employee is treated as if single with no dependents. —For California income tax withholding, the employer can use only one of two methods: either the wage bracket tables or exact calculation. —Employers accumulating withheld income tax and Social Security and Medicare taxes greater than $1,000 in a calendar quarter must remit withheld taxes periodically with a form 8109; if employers withhold $50,000 or less during a 1-year period, they must deposit monthly; if over $50,000, they must deposit semiweekly; if employers accumulate over $100,000 in 1 day, that amount must be deposited by the close of the next banking day. —Employers accumulating less than $1,000 in a calendar quarter must remit withheld taxes quarterly, with a form 941. —Employers that deposited over $50,000 in withheld federal income taxes and Social Security and Medicare taxes in 1996 must make electronic deposits of all federal depository taxes in 1998 and thereafter. —For California income tax withholding, all employers collecting more than $400 a month in state income taxes must remit the taxes on the same schedule required for federal withholding; withheld taxes are deposited with a state form DE-88. Employers must report on amounts withheld and deposited. —Quarterly, employers must report on amounts withheld, filing a form 941 with IRS. —Annually, employers must file a form W-3 with the Social Security Administration, reporting on total wages paid and taxes withheld during the year, along with copies of employees’ forms W-2; in addition, employers must send each employee a copy of form W-2. —Employers submitting over 250 forms W-2 must file on magnetic media. —Quarterly, employers must report on amounts of state income tax withheld and wages paid, filing state form DE-6. —Annually, all employers must file state form DE-7, reconciling the total tax amounts withheld during the year. —Employers with more than 250 employees must use magnetic media to file quarterly wage report DE-6. Employers must report payments made to workers classified as “independent contractors.” —Annually, employers must file an information return, a form 1099, with the IRS showing payments to independent contractors who received more than $600. —For each worker named in a federal information return, an employer must provide an annual written statement showing the employer’s name, address, and identification number and the amount paid to the worker. The Federal Insurance Contributions Act (FICA) requires employers both to withhold the employee’s share and to pay the employer’s share of Social Security and Medicare taxes. Size limitations: None. Comparable state law: None. Specific requirements (federal only) Employers must withhold the employee share and pay the employer share of FICA taxes if the worker is an “employee,” not an “independent contractor.” —If the worker is an “employee” under the common law test or meets other requirements of the Internal Revenue Code, the employer must comply with FICA requirements. —Even if the worker is an employee under common law, the employee may not be subject to FICA if the employee meets the requirements of section 530 of the Revenue Act of 1978, or the employee is specifically exempted under federal law. Taxes must be withheld and paid on all employee “wages” under FICA. —Social Security taxes are not paid on wages over $68,400 for 1998; there is no limit on wages subject to Medicare tax. —Certain payments are specifically exempt from FICA tax by federal law. Employers must properly calculate taxes. —Social Security taxes withheld from an employee are currently 6.2 percent of employee wages—the employer pays an equal amount. —Medicare taxes withheld from an employee are currently 1.45 percent of employee wages—the employer pays an equal amount. Employers must remit taxes and report on taxes withheld and paid. —Employers must deposit FICA taxes with form 8109 at the same time as the employers deposit federal income tax withheld. —Employers must report quarterly on amounts paid and withheld under FICA on form 941. The Federal Unemployment Tax Act (FUTA) requires employers to pay amounts for employee unemployment insurance to federal authorities. Size limitations: None, although small payrolls may be exempted from payments or have fewer filing requirements. Comparable state law: State unemployment insurance and the state Employment Training Fund. —If the worker is an “employee” under the common law test or meets other requirements of the Internal Revenue Code, the employer must pay unemployment tax unless the employer meets the requirements of section 530 of the Revenue Act of 1978. —All workers recognized under the common law test are employees for the purposes of unemployment insurance unless there is a specific state exemption for that type of employee. —Even if a worker is not a common law employee, state tax provisions might require unemployment insurance coverage. —All wages over $7,000 are exempt. —Certain compensation is specifically exempt under federal law. —All wages over $7,000 are exempt. —Certain compensation is specifically exempt under state law. Employers must properly calculate tax. —There is no tax if total wages paid to all employees are less than $1,500 per quarter. —FUTA tax is 6.2 percent; however, employers get credit up to 5.4 percent for the amount of state unemployment tax paid. —There is no tax if total wages paid to all employees are less than $100 per quarter. —The maximum contribution rate for California employers is 5.4 percent, and new employers pay 3.4 percent for a 3-year period. Thereafter, the rate may vary depending on the individual employer’s experience. —Most employers must also pay 0.1 percent to the state Employment Training Fund. —If employers pay FUTA taxes of over $100 per year, employers remit the taxes with the form 8109 on the last day of the month following the end of the quarter. —Annually, all employers file either a form 940 or 940EZ to the IRS, reporting unemployment insurance paid during the year; in addition, employers paying FUTA taxes of less than $100 per year remit annual taxes with a form 940. —Employers remit tax payments quarterly with state form DE-88. —Employers must file state form DE-6 quarterly, reporting on unemployment contributions; annually, employers must file state form DE-7, reconciling total contribution amounts. —Employers must post general notices in the workplace. —When an employee is laid off, fired, or placed on a leave of absence, the employer must provide the employee with a form DE-2320 detailing information on benefits. Not applicable. The federal income tax code requires corporate entities to pay taxes on corporate income. Size limitations: None. Comparable state law: State income tax code. —Employers must file a corporate income tax return on form 1120 with IRS; employers may be able to use the shorter form 1120-A if gross receipts, total income, and total assets are less than $500,000. —Employers must file a return by the 15th day of the 3rd month after the end of the corporation’s tax year. —Employers doing business in California must pay an annual “franchise tax” at a rate of 8.84 percent of net income attributable to California. —Out-of-state corporations that are deriving income from sources in California but not “doing business” in the state must pay an annual “corporation income tax” at a rate of 8.84 percent of net income attributable to California. —Corporate returns and tax payments are due to the California Franchise Tax Board 2-1/2 months after the end of the corporation’s tax year. In this set of tables, we focus on legal provisions related to the electronic/computer industry, as identified in a study conducted by EPA. Since currently no similar study of provisions dealing with the aerospace industry exists, we have restricted our review to those provisions identified by EPA. As with the other tables on legal requirements, the environmental provisions listed are not intended as an exhaustive list of those related to this industry. The Clean Air Act regulates air pollution by means of air quality control standards and emission control of certain pollutants. Size limitations: None; the law applies to all employers. Comparable state law: The California Clean Air Act, the Air Toxics “Hot Spots” Information and Assessment Act, and the Tanner Act apply; state law is applied if it is stricter than federal law. If employers construct or modify certain types of equipment determined to “contribute significantly” to air pollution, they must comply with EPA New Source Performance Standards; there are specific standards for small industrial boilers, large industrial boilers, incinerators, petroleum storage tanks, volatile organic tanks, appliance surface coating, and magnetic tape coating. —Employers must notify EPA in the event of start-up, shutdown, or malfunction of such equipment. —Within 180 days of start-up or up to 60 days of full production, employers must test for performance. —Employers may have to continue to monitor equipment emissions. —Employers must report emissions in excess of EPA threshold quantities either quarterly or semiannually. —For specified types of equipment, additional special tests are required. —Local air pollution control districts may establish permit systems for any “article, machine, equipment, or other contrivance which may cause the issuance of air contamination.” If an employer’s facilities emit specified pollutants that are known to cause health hazards, the employer must comply with EPA National Emission Standards for Hazardous Air Pollutants; there are specific standards for chromium electroplating, halogenated solvent, and magnetic tape. —Employers must notify EPA of new construction of a facility that has hazardous emissions; notification should be before start-up of the facility. —Employers must prepare start-up/shutdown plans before the completion date of the facility. —Employers may have to install compliance controls. —Employers may have to conduct a performance test of the new facility. —Once the new facility is operational, employers may have to continually monitor emissions. —Employers may have to report emissions in excess of EPA threshold quantities semiannually. —For facilities using specified chemical processes, special tests are required. —Toxic air contaminants include not only those recognized by EPA but also those determined to be hazardous to health by California’s Department of Health Services. —Employers owning facilities emitting 10 tons or more of certain designated pollutants must submit an “emission inventory plan” to the local district; those facilities identified as “high priority” must then submit a risk assessment plan to the district. —Employers must prepare and submit risk management plans. —Employers must conduct compliance audits every 3 years. —Employers must report on accidents immediately after occurrence. If an employer’s facilities are considered a “major” source of hazardous emissions, the employer must apply for an EPA permit. —Employers must submit an application to a state agency. (40 C.F.R. 70.5(c)) —Employers must monitor the facility. —Employers must report monitoring results semiannually. Some additional state requirements may apply. The Federal Water Pollution Control Act (FWCPA) and the Safe Drinking Water Act (SDWA) regulate the amount and type of pollutants discharged into U.S. waters. Size limitations: None; the laws apply to all employers that discharge pollutants into U.S. waters. Comparable state law: The Porter-Cologne Water Quality Control Act, California Safe Drinking Water Act, Toxic Injection Well Control Act, and Safe Drinking Water and Toxic Enforcement Act (which applies to employers of 10 or more people) are applied to the extent they are stricter than federal law. —Employers must limit pollutant discharge to the amount specified in the permit; the limitations are based on the employer’s use of the “best” technology. —At periodic intervals, employers must measure and analyze pollutant discharges; records must be kept 3 years. —Employers must report any discharge in excess of permit limits within 24 hours. —Regional Water Quality Control Boards under the California State Water Resources Control Board issue permits and set discharge requirements. —Regional boards have power to compel cleanup to prevent “substantial pollution” of state waters. —Pretreatment requirements are specified for chemicals in operations involving metal-finishing, electroplating, and semiconductors. —Employers must obtain an engineer’s certification that the well is properly closed. —Employers must report any contamination that may endanger the drinking water supply. —Employers must establish a plan for plugging and abandoning the well. —Employers must report any changes made to the well. —Employers must maintain a record of the nature and volume of fluids injected into the well for 3 years after closure. —California has stricter standards for issuing permits for injection wells and prohibits injection “into or above drinking water.” —Employers must also file a detailed statement with the California Department of Toxic Substances Control giving information about the well and the discharged wastes. —Employers of 10 or more people are prohibited from knowingly releasing any chemical known to the state to cause cancer or reproductive toxicity where it may pass into any source of drinking water. Some additional state requirements may apply. The Toxic Substances Control Act (TSCA); Resource Conservation and Recovery Act (RCRA); Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) and Emergency Planning and Community Right-to-Know Act regulate the production, use, and disposal of certain substances deemed to be hazardous to human health or living organisms. Size limitations: Regulations apply generally to all employers that deal with hazardous substances over certain volumes; however, annual reporting of Toxic Release Inventory is required only for employers of more than 10 employees. Comparable state laws: Hazardous Substances Act; Occupational Carcinogens Control Act; Hazardous Waste Control Law; Hazardous Waste Haulers Act; Storage of Hazardous Substances; Toxic Pits Cleanup Act; Hazardous Waste Reduction; Recycling, and Treatment Research and Demonstration Act; Hazardous Waste Management Plans; Hazardous Waste Source Reduction and Management Review Act; Carpenter-Presley-Tanner Hazardous Substance Act; Hazardous Waste Enforcement Coordinator and Strike Force; Information Reward Program; Hazardous Substance Cleanup Arbitration Panel; Hazardous Substances Information and Training Act (Worker Right-to-Know Law); and Hazardous Materials Release Response Plans and Inventory (Community Right-to-Know Law). Table IV.3: Hazardous Substance Control —Manufacturers or importers of more than 10,000 lbs. of toxic chemicals per year must report their chemical inventory to EPA every 4 years; if less than 10,000 lbs. per year, they must maintain records to verify low volume. —All employers must submit to EPA any health and safety studies they have conducted on the toxic chemicals. —Employers must maintain records of allegations of significant adverse reactions caused by chemicals they use or produce; if an adverse reaction is found to have occurred to an employee, records must be maintained 30 years; otherwise, 5 years. —If an employer is producing a new chemical or using a toxic chemical for a new purpose, the employer must notify EPA at least 90 days before use. —Employers that handle any of EPA’s “extremely hazardous substances” in quantities in excess of state levels must complete a registration form; employers may be required to develop a risk management and prevention program. (continued) Any employer that produces “hazardous waste” as identified by EPA must dispose of it as required by regulation, unless the employer produces less than 100 kilograms of hazardous waste (RCRA). —Employers must obtain an EPA identification number before they transport, store, treat, or dispose of hazardous waste. —Employers must prepare a Uniform Hazardous Waste Manifest to accompany the waste at all times; after final disposal, a copy of the manifest must be returned to the employer and maintained for 3 years. —Unless the employer has a permit for a storage facility, wastes must be removed from the site within 90 days of accumulation. —Waste spills that cause a fire or explosion must be reported immediately to EPA. —Every 2 years, the employer must report to EPA on the volumes of waste generated. —“Infectious” wastes are considered hazardous wastes. —Employers that produce 12,000 kilograms of hazardous waste per year must review their operations every 4 years to develop a plan for how they could reduce wastes exceeding 5 percent of the total yearly volume at the site; failure to act on the plan can lead to monetary penalties. Any employer that treats, stores, or disposes of hazardous waste must obtain proper permits for facility operation (RCRA). —To operate a facility (such as a landfill, container, or surface impoundment) for treatment, storage, or disposal of hazardous waste, the employer must have an EPA identification number, periodically monitor and inspect the facility, and meet the certification requirements for the particular type of facility. —Any employer that owns an underground storage tank containing hazardous wastes must notify the state within 30 days of its use, monitor leaks, notify EPA of a release of hazardous material within 24 hours, and maintain records on monitoring for 1 year. —Employers operating hazardous waste facilities must provide financial assurance adequate to meet damage claims arising from operation of the facility and costs of its closure. —Regional Water Quality Control Boards must inspect all surface impoundments and require all businesses discharging liquid hazardous wastes into them to provide hydrogeological assessment reports. —Owners of underground storage tanks must obtain a permit to operate from local authorities. —In the event that an employer’s releases exceed the reportable quantities in a 24-hour period, the employer must immediately notify EPA’s National Response Center. —Employers using an extremely hazardous substance in quantities above the threshold amounts must establish an emergency plan. —Employers must file “material safety data sheets” with local authorities for chemicals used in operations. —If an employer releases an “extremely hazardous substance” in quantities above specified amounts, the employer must report the release to local authorities. —Notification of a release must include information on the nature and risks attributed to the substance. —Employers with more than 10 employees must report annually to EPA on their Toxic Release Inventory identifying chemical releases, transfers, and treatment recycling. —Employers dealing with chemicals known to the state to cause cancer or reproductive toxicity cannot expose any individual to such chemicals without giving “clear and reasonable” warning to that individual. Some additional state requirements may apply. In addition to those named above, the following individuals made important contributions to this report: J. William Hansbury, Senior Evaluator, who performed case study work at companies and analyzed agencies’ efforts to inform companies of their legal requirements; Nancy M. Peters, Senior Evaluator, who identified, analyzed, and summarized the laws that affect firms and participated in case study visits; and Mary W. Reich, Senior Attorney, Office of General Counsel, who reviewed the study’s legal analysis. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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Pursuant to a congressional request, GAO compiled a list of the federal and state laws that apply to California businesses of different sizes, and selected two industries within that state to illustrate compliance with selected laws, focusing on the: (1) requirements of federal and state laws affecting the workplace, tax-related, and environmental practices of California manufacturing firms of different sizes; (2) assistance available to firms to help identify applicable laws and understand their implications on operations; and (3) impact workplace and tax laws have had on the human resource operations at firms in the high-tech electronics and aerospace industries. GAO noted that: (1) both federal and state laws impose a number of requirements affecting the workplace, tax-related, and environmental practices of California manufacturing firms; (2) as employers, firms must comply with federal and state laws; (3) firms also must report income resulting from their operations and pay taxes to the federal and California state governments; (4) in addition, as firms manufacture goods and dispose of their waste, they must comply with state and federal environmental laws regulating use, storage, and disposal of hazardous substances and releases into the air; (5) although a number of laws take effect as firms hire more employees, particularly those laws that are workplace-related, most laws have at least some requirements for all firms, regardless of the number of employees; (6) the interrelationships between federal and state laws in the different areas of regulation vary; (7) in many cases, California law sets more comprehensive standards with which businesses must comply than federal law does; (8) many sources of information are available to help firms identify and meet the legal requirements imposed on them; (9) although no one public agency--either federal or state--coordinates or produces a complete resource guide identifying all legal requirements that apply to California manufacturers, many California and federal agencies have individually sponsored activities to assist firms in complying with legal requirements; (10) however, company managers GAO spoke with seemed unwilling to rely on information provided by state or federal agency staff or to invest the time required to access, research, and understand the available information; (11) instead, these managers rely on trade or business organizations and outside experts to help them understand and remain abreast of new developments in federal and state laws and regulations; (12) managers overseeing human resource operations at the seven California manufacturing firms GAO visited have implemented a variety of approaches to meet their regulatory obligations; (13) while each of the firms had developed strategies to comply with the laws, each was concerned that certain requirements involved excessive complexity, paperwork, or cost, although there was little pattern in the firms' areas of complaint; (14) in general, managers expressed frustration with never being sure they were in complete compliance with all applicable requirements; and (15) notwithstanding these concerns, managers also cited areas in which they believed regulations helped to improve the workplace.

You are an expert at summarizing long articles. Proceed to summarize the following text: USDA is, by law, charged with leading and coordinating federal rural development assistance. USDA Rural Development administers the greatest number of development programs for rural communities and directs the highest average amount of federal program funds to these communities. Most of Rural Development’s programs and activities provide assistance in the form of loans, loan guarantees, and grants. Three offices are primarily responsible for carrying out this mission: the Rural Business-Cooperative Service (RBS), Rural Housing Service (RHS), and Rural Utilities Service (RUS). RBS administers programs that provide financial, business planning, and technical assistance to rural businesses and cooperatives that receive Rural Development financial assistance. It also helps fund projects that create or preserve jobs in rural areas. RHS administers community facilities and housing programs that help finance new or improved housing for moderate-, low-, and very low-income families. RUS administers electric, telecommunications, and water programs that help finance the infrastructure necessary to improve the quality of life and promote economic development in rural areas. Since its beginning in 1953, SBA has steadily increased the amount of total assistance it provides to small businesses, including those in rural areas, and expanded its array of programs for these businesses. SBA’s programs now include business and disaster relief loans, loan guarantees, investment capital, contract procurement and management assistance, and specialized outreach. SBA’s loan programs include its 7(a) loan guarantee program, which guarantees loans made by commercial lenders to small businesses for working capital and other general business purposes, and its 504 loan program, which provides long-term, fixed-rate financing for major fixed assets, such as land and buildings. These loans are generally provided through participating lenders, up to a maximum loan amount of $2 million. SBA also administers the Small Business Investment Company (SBIC) program—a program that provides long-term loans and venture capital to small firms. In September 2007, SBA announced a new loan initiative designed to stimulate economic growth in rural areas. The Rural Lender Advantage program, a part of SBA’s 7 (a) loan program, is aimed at encouraging rural lenders to finance small businesses. It is part of a broader initiative to boost economies in regions that face unique challenges due to factors such as declining population or high unemployment. Generally speaking, collaboration involves any joint activity that is intended to produce more public value than could be produced when the agencies act alone. Collaboration efforts are often aimed at establishing approaches to working together; clarifying priorities, roles and responsibilities; and aligning resources to accomplish common outcomes. On the federal level, collaboration efforts tend to occur through interagency agreements, partnerships with state and local governments and communities, and informal methods (e.g. networking activities, meetings, conferences, or other discussions on specific projects or initiatives). Agencies use a number of different mechanisms to collaborate with each other, including MOUs, procurement and other contractual agreements, and various legal authorities. Both SBA and USDA have used the authority provided by the Economy Act to facilitate collaboration. The Economy Act is a general statutory provision that permits federal agencies to enter into mutual agreements with other federal agencies to purchase goods or services and take advantage of specialized experience or expertise. It is the most commonly used authority for interagency agreements, allowing agencies to work together to obtain items or services from each other that cannot be obtained as conveniently or economically from a private source. SBA has also used contractual work agreements to collaborate with other federal agencies. For example, SBA has an agreement with the Farm Credit Administration (FCA) to examine SBA’s Small Business Lending Companies (SBLC). SBA oversees SBLCs, which are nondepository lending institutions that it licenses and that play a significant role in SBA’s 7(a) Loan Guaranty Program. However, SBLCs are not generally regulated or examined by financial institution regulators. SBA entered into a contractual agreement with the FCA in 1999 that tasked FCA with conducting safety and soundness examinations of SBA’s SBLCs. Under the agreement, FCA examined 14 SBLCs during a 1-year period. The exams were conducted on a full cost recovery basis and gave both agencies the option to terminate or extend the agreement after a year. The agreement allowed SBA to take advantage of FCA’s expertise in examining specialized financial institutions and offered FCA the opportunity to broaden its experience through exposure to a different lending environment. Additionally, using the disaster provisions under its traditional multifamily and single- family rural housing programs, Rural Development collaborated with FEMA in providing assistance to hurricane victims. Through this collaborative effort, Rural Development assisted victims of Katrina by (1) making multifamily rental units available nationwide; (2) providing grants and loans for home repair and replacement; and (3) providing mortgage relief through a foreclosure moratorium and mortgage payment forbearance. Rural Development also shared information with FEMA on USDA-owned homes for lease, developed an Internet presence to inform victims of available housing, and made resources available at Rural Development state offices to assist in these efforts. While SBA and Rural Development are not currently involved in a collaborative working relationship, both agencies have some experience collaborating with each other on issues involving rural development. Specifically, on February 22, 1977, SBA and Rural Development established an MOU for the purpose of coordinating and cooperating in the use of their respective loan-making authorities. Under the general guidelines of the agreement, appropriate SBA and Rural Development officials were to establish a liaison and periodically coordinate their activities to (1) define areas of cooperation, (2) assure that intended recipients received assistance, (3) enable both agencies to provide expeditious service, and (4) provide maximum utilization of resources. Again on March 30, 1988, SBA and Rural Development agreed to enter into a cooperative relationship designed to encourage and maximize effectiveness in promoting rural development. The MOU outlined each agency’s responsibilities to (1) coordinate program delivery services and (2) cooperate with other private sector and federal, state, and local agencies to ensure that all available resources worked together to promote rural development. SBA and Rural Development officials told us that the 1977 and 1988 agreements had elapsed and had not been renewed. Finally, in creating the RBIP in 2002, Congress authorized Rural Development and SBA to enter into an interagency agreement to create rural business investment companies. Under the program, the investment companies would leverage capital raised from private investors, including rural residents, into investments in rural small businesses. The legislation recommended that Rural Development manage the RBIP with the assistance of SBA because of SBA’s investment expertise and experience and because the program was modeled after SBA’s SBIC program. The legislation provided funding to cover SBA’s costs of providing such assistance. A total of $10 million was available for the RBIP in fiscal years 2005 and 2006. Rural Development and SBA conditionally elected to fund three rural business investment companies. However, according to SBA officials only one of these companies has been formed because of challenges in finding investment companies that can undertake such investments. Section 1403 of the Deficit Reduction Act of 2005 rescinded funding for the program at the end of fiscal year 2006. In March 2007, Rural Development began the process of exploring ways to continue the RBIP, despite the rescission. Both SBA and Rural Development have field offices in locations across the United States. However, Rural Development has more state and local field offices and is a more recognized presence in rural areas than SBA. Prior to its 1994 reorganization, which resulted in a more centralized structure, USDA had field staff in almost every rural county. Consistent with its reorganization, and as we reported in September 2000, USDA closed or consolidated about 1,500 county offices into USDA service centers and transferred over 600 Rural Development field positions to the St. Louis Centralized Servicing Center. What resulted was a Rural Development field office structure that consisted of about 50 state offices, 145 area offices, and 670 local offices. As part of the reorganization, state Rural Development offices were given the authority to develop their own program delivery systems. Some states did not change, believing that they needed to maintain a county-based structure with a fixed local presence to deliver one-on-one services to rural areas. Other states consolidated their local offices to form district offices. For example, when we performed our audit work in 2000 we found that Mississippi, which maintains a county- based field structure, had more staff and field offices than any other state. Today, Mississippi still maintains that structure and has a large number of field offices, including 2 area offices, 24 local offices and 3 sub-area offices. The Maine Rural Development office changed its operational structure, moving from 28 offices before the reorganization to 15 afterward. In 2000, it operated out of 3 district offices and currently has 4 area offices. SBA currently has 68 district offices, many of which are not located in rural communities or are not readily accessible to rural small businesses. For several years, SBA has been centralizing some of the functions of its district offices to improve efficiency and consistency in approving, servicing, and liquidating loans. Concurrently, SBA has also been moving more toward partnering with outside entities such as private sector lenders to provide services. SBA’s district offices were initially created to be the local delivery system for SBA’s programs, but as SBA has centralized functions and placed more responsibilities on its lending partners, the district offices’ responsibilities have changed. For example, the processing and servicing of a majority of SBA’s loans—work once handled largely by district office staff—have been moved from district offices to service centers. Moreover, as we reported in October 2001, there has been confusion over the mission of the district offices, with SBA headquarters officials believing the district office’s key customers are small businesses and district office staff believing that their key customers are the lenders who make the loans. Currently, SBA is continuing its workforce transformation efforts to, among other things, better define the district office role to focus on marketing and outreach to small businesses. We plan to evaluate the extent to which Rural Development offices may be able to help market SBA programs and services by making information available through their district offices. It appears that Rural Development has an extensive physical infrastructure in rural areas and expertise in working with rural lenders and small businesses. Our ongoing work will explore these issues in more depth, including looking at any incentives that exist for Rural Development and SBA to collaborate with each other. You requested that we conduct a review of the potential for increased collaboration between SBA and Rural Development, and we have recently begun this work. In general, the major objectives of our review are to determine: 1. The differences and similarities between SBA loan programs and Rural 2. The kind of cooperation that is already taking place between SBA and Rural Development offices, and 3. Any opportunities or barriers that may exist to cooperation and collaboration between SBA and Rural Development. To assess the differences and similarities between SBA loan programs and Rural Development business programs, we will review relevant SBA and Rural Development documents describing their loan and business programs. We will examine relevant laws, regulations, policies, and program rules, including eligibility requirements and types of assistance, funding levels, and eligible use of program funds. We will obtain data on both agencies’ loan processes and procedures, including any agency goals for awarding loans, documentation requirements, and loan processing times. To determine what cooperation has taken place between SBA and Rural Development, we will examine previous collaboration efforts and cooperation between the agencies in providing programs and services. We will also review documents such as MOUs, informal interagency agreements, and other documentation and will conduct interviews with SBA and Rural Development staff at headquarters and field offices to obtain a fuller understanding of these initiatives. To determine what opportunities or barriers exist to cooperation and collaboration between SBA and Rural Development, we will review relevant laws, regulations, and policies. We will review data from SBA and Rural Development on each agency’s field structure, including office space and personnel, and interview relevant parties on the advantages and disadvantages to co-locating offices. We plan to interview headquarters and field office staff at each agency about past collaboration efforts and any plans to work collaboratively in the future. We also plan to obtain the perspectives of select lenders that participate in SBA loan programs and Rural Development business programs. We reported previously in March 2007 and October 2005 that effective collaboration can occur between agencies if they take a more systematic approach to agreeing on roles and responsibilities and establishing compatible goals, policies, and procedures on how to use available resources as efficiently as possible. In doing so, we identified certain key practices that agencies such as SBA and USDA could use to help enhance and sustain their efforts to work collaboratively. These practices include (1) defining and articulating a common outcome; (2) establishing mutually reinforcing or joint strategies; (3) identifying and addressing needs by leveraging resources; (4) agreeing on roles and responsibilities; (5) establishing compatible policies, procedures, and other means of operating across agency boundaries; (6) developing mechanisms to monitor, evaluate, and report on results; (7) reinforcing agency accountability for collaborative efforts; and (8) reinforcing individual accountability for collaborative efforts. As part of our ongoing work, we plan to review the extent to which the eight key practices relate to possible opportunities for SBA to increase collaboration with Rural Development. For example, we plan to explore the extent to which these practices are necessary elements for SBA to have a collaborative relationship with Rural Development. We are continuing to design the scope and methodology for our work, and we expect to complete this design phase by February 2008. At that time, we will provide details of our approach as well as a committed issuance date for our final report. Mr. Chairman, Ranking Member Fortenberry, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions that you may have. For additional information about this testimony, please contact William B. Shear at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Affairs and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony included Paul Schmidt, Assistant Director; Michelle Bowsky; Tania Calhoun; Emily Chalmers; and Ronald Ito. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The Small Business Administration (SBA) and Department of Agriculture (USDA) Rural Development offices share a mission of attending to underserved markets, promoting economic development, and improving the quality of life in America through the promotion of entrepreneurship and community development. In the past, these agencies have had cooperative working relationships to help manage their respective rural loan and economic development programs. At this subcommittee's request, GAO has undertaken a review of potential opportunities for SBA to seek increased collaboration and cooperation with USDA Rural Development (Rural Development), particularly given Rural Development's large and recognizable presence in rural communities. In this testimony, GAO provides preliminary views on (1) mechanisms that SBA and USDA have used to facilitate collaboration with other federal agencies and with each other; (2) the organization of SBA and USDA Rural Development field offices; and (3) the planned approach for GAO's recently initiated evaluation on collaboration between SBA and Rural Development. GAO discussed the contents of this testimony with SBA and USDA officials. While SBA and Rural Development are not currently involved in a collaborative working relationship, SBA and Rural Development have used a number of different mechanisms, both formal and informal, to collaborate with other agencies and each other. For example, both agencies have used the Economy Act--a general statutory provision that permits federal agencies, under certain circumstances, to enter into mutual agreements with other federal agencies to purchase goods or services and take advantage of specialized experience or expertise. SBA and USDA used the act to enter into an interagency agreement to create rural business investment companies to provide equity investments to rural small businesses. For this initiative, Congress also authorized USDA and SBA to administer the Rural Business Investment Program to create these investment companies. However, funding for this program was rescinded at the end of fiscal year 2006. SBA and Rural Development have also used other mechanisms to collaborate, including memorandums of understanding (MOU), contractual agreements, and other legal authorities. For instance, Rural Development has collaborated with the Federal Emergency Management Agency in providing assistance to the victims of Hurricane Katrina using the disaster provisions under its multifamily and single-family rural housing programs. To collaborate with each other, in the past SBA and Rural Development have established MOUs to ensure coordination of programs and activities between the two agencies and improve effectiveness in promoting rural development. Both SBA and Rural Development have undergone restructuring that has resulted in downsizing and greater centralization of each agency's field operations. Currently, SBA's 68 field offices--many of them in urban centers--are still undergoing the transformation to a more centralized structure. Rural Development has largely completed the transformation and continues to have a large presence in rural areas through a network of hundreds of field offices. The program's recognized presence in rural areas and expertise in the issues and challenges facing rural lenders and small businesses may make these offices appropriate partners to help deliver SBA services. GAO has recently begun a review of the potential for increased collaboration between SBA and Rural Development. In general, the major objectives are to examine the differences and similarities between SBA loan programs and Rural Development business programs, any cooperation that is already taking place between SBA and Rural Development, and any opportunities for or barriers to collaboration.

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

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

You are an expert at summarizing long articles. Proceed to summarize the following text: According to CBP documentation, throughout the travel process, OFO’s NTC analyzes traveler information and uses it to provide CBP officers at CBP’s predeparture locations with relevant and timely information about an individual. According to CBP documentation, these efforts provide CBP officers stationed overseas and within the United States the ability to address risks or prevent the movement of identified threats toward the United States at the earliest possible point in the travel process. CBP’s predeparture programs use the results of NTC’s efforts to identify and interdict high-risk individuals destined for the United States while they are still overseas. Specifically, CBP operates three air predeparture programs that are responsible for all U.S.-bound air travelers—Preclearance; the Immigration Advisory Program (IAP) and Joint Security Program (JSP); and the regional carrier liaison groups (RCLG). In fiscal year 2015, CBP’s predeparture programs consisted of more than 670 CBP officers at 29 locations worldwide as outlined in figure 1 below. Preclearance. Preclearance locations operate at foreign airports and serve as U.S. POEs. Preclearance operations began in 1952 in Toronto to facilitate trade and travel between the United States and Canada. As of April 2016, CBP operates 15 air Preclearance locations in six countries. Through the Preclearance program, uniformed CBP officers at a foreign airport exercise U.S. legal authorities to inspect travelers and luggage and make admissibility determinations prior to an individual boarding a plane to the United States. According to CBP officials, an inspection at a Preclearance location is the same inspection an individual would undergo at a domestic POE, and officers conducting Preclearance inspections exercise the same authority as officers at domestic POEs to approve or deny admission into the United States. As a result, travelers arriving at domestic air POEs from Preclearance locations do not have to be re- inspected upon entry or if they are connecting to a domestic flight. In fiscal year 2015, CBP had about 600 staff located in Preclearance facilities around the world. Immigration Advisory Program (IAP) and Joint Security Program (JSP). IAP and JSP operate at foreign airports. According to CBP officials, under this program, unarmed, plain clothes CBP officers posted at foreign airports partner with air carriers and host country government officials to help prevent terrorists and other high-risk individuals from boarding U.S.-bound flights by vetting and interviewing them before travel. According to CBP program documentation, CBP established IAP in 2004 to prevent terrorists, high-risk, and improperly documented travelers from boarding airlines destined to the United States. Building on the IAP concept, CBP established JSP in 2009 to partner with host country law enforcement officials to identify high-risk travelers. CBP officers at IAP and JSP locations have the ability to question travelers and review their travel documents. They are to act in an advisory manner to the air carriers and host governments and do not have authority to deny boarding to individuals on U.S.-bound flights or fully inspect travelers or their belongings. IAP and JSP officers are authorized by CBP to make recommendations to airlines as to whether to board or deny boarding (known as a no-board recommendation) to selected travelers based on their likely admissibility status upon arrival to the United States. The final decision to board travelers, however, lies with the carriers. Regional Carrier Liaison Groups (RCLG). RCLGs are located and operate at domestic airports. CBP established RCLGs in 2006 to assist air carriers with questions regarding U.S. admissibility requirements and travel document authenticity. RCLGs are located in New York, Miami, and Honolulu. According to CBP officials, RCLGs are responsible for coordinating with air carriers on all actionable referrals from NTC on U.S. bound travelers departing from an airport without an IAP, JSP, or Preclearance presence. Each RCLG is assigned responsibility for travelers departing out of a specific geographic location. Similar to IAP and JSP, CBP officers in RCLGs also make no-board recommendations as appropriate to air carriers. CBP officers at RCLGs do not have authority to make admissibility determinations about U.S.-bound air travelers, and the final decision to board or not board a traveler lies with the carrier. CBP electronically vets all travelers before they board U.S.-bound flights and continues to do so until they land at a U.S. port of entry. Through these vetting efforts, CBP seeks to identify high-risk travelers from the millions of individuals who travel to the United States each year. CBP’s vetting and targeting efforts are primarily conducted by NTC and entail (1) traveler data matching and analysis, (2) rules-based targeting, and (3) recurrent vetting. CBP’s primary method of identifying high-risk individuals is through the comparison of travelers’ information (such as name, date of birth, and gender) against records extracted from U.S. government databases, including the Terrorist Screening Database (TSDB)—the U.S. government’s consolidated terrorist watch list. Traveler data matching focuses on identifying known high-risk individuals—that is, individuals who may be inadmissible to the United States under U.S. immigration law or who may otherwise pose a threat to homeland or national security. According to senior NTC officials, CBP devotes significant resources to traveler data matching and analysis. CBP’s primary tool for vetting and targeting travelers is the Automated Targeting System (ATS), which is a computer based-enforcement and support system that compares traveler information against intelligence and law enforcement data to identify high- risk travelers. Traveler data matching occurs throughout the travel process and, upon a positive or possible match, CBP officers can select these individuals for further vetting, interviewing, and inspection. CBP’s rules-based targeting efforts seek to identify unknown high-risk travelers—that is, travelers for whom U.S. government entities do not have available derogatory information directly linking them to terrorist activities or any other actions that would make them potentially inadmissible to the United States but who may present a threat and thus warrant additional scrutiny. According to NTC officials responsible for the rules-based targeting program, unknown high-risk travelers pose the greatest threat to the United States because their information is not contained in lists of known high-risk individuals and are therefore more difficult to detect. CBP identifies unknown high-risk individuals by comparing their information against a set of targeting rules based on intelligence, law enforcement, and other information. NTC officials stated that these rules have identified potential foreign fighters or other high-risk travelers. Within CBP, the NTC develops, modifies, and implements the targeting rules in ATS. On the basis of our interviews and reviews of CBP documentation, we found that when designing or implementing any new rules, NTC, in coordination with other partners at CBP, engages in a multiple-step assessment and review process to ensure that the proposed rule will meet its intended purpose and not impose an unjustifiable impact on legitimate travelers. Rules-based targeting evaluates travelers during the travel process and in some cases in advance of the travel process. If a traveler is a rule “hit”, this individual can be selected for further vetting, interviewing, and inspection. CBP supports its traveler data matching and rules-based targeting efforts through the use of recurrent vetting. NTC’s vetting, targeting, and traveler data matching activities in ATS run 24 hours a day and seven days a week and automatically scan through updated traveler information, when available. This process, known as recurrent vetting, is to ensure that new information that affects a traveler’s admissibility is identified in near real time. Recurrent vetting occurs throughout the travel process and continues until a traveler arrives at a domestic port of entry. For example, after checking into a foreign airport, a traveler may have his or her U.S. visa revoked for a security or immigration-related violation. Due to recurrent vetting, CBP would be alerted to this through ATS and could take action as appropriate. Information on individuals who the NTC identifies through traveler data matching or rules-based targeting, including recurrent vetting, is compiled automatically through ATS into a daily high-priority list, or traveler referral list. CBP officers at the NTC review the traveler referral list for accuracy and to remove, if possible, any automatically generated matches determined to not be potential high-risk individuals. After this review, CBP officers at the NTC use ATS to send the traveler referral list to officers at each Preclearance, IAP, JSP, and RCLG location, as shown in figure 2. According to CBP officials responsible for managing CBP’s predeparture programs, these traveler referral lists represent their daily, high-priority requirements. According to CBP officials, officers at each of these locations are required to assess each individual on the traveler referral list and verify travel and identity documents, as appropriate. CBP officers stationed overseas and at RCLGs communicate with the NTC regarding the authenticity and completeness of traveler documents and may send additional information to have the NTC verify that the documents are legitimate. Additionally, NTC coordinates its traveler data matching and rules-based targeting for international air travelers with TSA’s Secure Flight Program. In April 2014, NTC and TSA developed an electronic common operating picture, which displays a master CBP and TSA traveler referral list of high-risk travelers in both the NTC and TSA operations center. According to CBP and TSA officials responsible for these programs, joint display of high-risk traveler information permits both TSA and CBP to identify and resolve discrepancies in vetting travelers, coordinate their efforts, and functions as a security redundancy. In addition, NTC officials stated that CBP and TSA’s coordination efforts have allowed them to identify more high-risk travelers than they would have if they had been working separately. According to officials from NTC and DHS’s Offices of General Counsel, Privacy, and Civil Rights and Civil Liberties, CBP has internal and external processes in place to ensure that its vetting and targeting efforts—particularly the use of targeting rules—are relevant, manageable, and in compliance with privacy requirements. These officials reported that CBP reviews the targeting rules on a periodic basis to assess whether the rules remain relevant in light of evolving threats. In addition, CBP also conducts constant rule maintenance and development as needed in response to new or changing threats. According to CBP documentation, DHS’s Offices of General Counsel, Privacy, and Civil Rights and Civil Liberties also review the targeting rules on a periodic basis to ensure that the rules do not excessively affect the traveling public. According to NTC officials, to date there have been no disagreements about the validity or utility of the rules between NTC and the external review groups. Through its predeparture programs—Preclearance, IAP and JSP, and RCLGs—CBP identifies and interdicts high-risk travelers before they board U.S.-bound flights. Specifically, CBP data indicate that CBP’s predeparture programs identified and ultimately interdicted approximately 22,000 high-risk air travelers in fiscal year 2015. Preclearance. In fiscal year 2015, CBP officers at Preclearance locations determined that 10,648 air travelers were inadmissible out of the approximately 16 million air travelers seeking admission to the United States through a Preclearance location (see fig. 3). In addition to requiring that all travelers undergo a primary inspection, CBP officers in these locations also referred almost 290,000 individuals for secondary inspection. Because all precleared travelers are inspected at a foreign airport, CBP officials told us that Preclearance presents the best opportunity to prevent high-risk individuals from boarding a flight to the United States because the opportunity to conduct a secondary inspection or interview could result in information linking a person to terrorism or a crime that may render them inadmissible to the United States. CBP officers at the three Preclearance locations we visited—Montreal and Toronto, Canada, and Abu Dhabi, United Arab Emirates—noted that being able to conduct an inspection on travelers has allowed them to identify high-risk individuals. During our site visits to Preclearance locations, CBP officers stated that they conduct their own targeting activities, in addition to coordinated targeting activities with NTC. IAP and JSP. CBP officers at IAP and JSP locations made 3,925 no- board recommendations in fiscal year 2015 for the approximately 29 million air travelers bound for the United States from such locations (see fig. 4). During this same time period, CBP data indicated 1,154 confirmed encounters with individuals on the TSDB, including 106 on the No-Fly List. According to CBP officials, IAP and JSP officers receive the majority of their daily targets from the NTC and they work closely with the NTC to address high-risk targets and identify trends in high-risk travel. According to our observations and in-person discussions with IAP and JSP officials, on a daily basis, IAP and JSP officers resolve NTC targets, observe travelers, and issue no-board recommendations to carriers regarding persons scheduled to travel on U.S.-bound flights who will likely not be admitted into the United States upon arrival. IAP and JSP officers also conduct their own targeting initiatives and have access to the host airports’ sterile and boarding areas to question travelers and review their travel documents. According to CBP officials and IAP and JSP officers (and supported by our in-person observations), air carriers almost always follow IAP and JSP no-board recommendations. RCLG. CBP officers working at the three RCLGs made 7,664 no-board recommendations in fiscal year 2015 for the approximately 59 million travelers bound for the United States from locations within the RCLGs’ spheres of responsibility (see fig. 5). During this time period, CBP data indicate that RCLGs also reported 1,634 confirmed encounters with individuals in the TSDB, including 119 on the No-Fly List. On the basis of our site visit to the New York RCLG, as well as phone interviews with the Miami, Florida, and Honolulu, Hawaii, RCLGs, we found that RCLG officers regularly resolve NTC targets, respond to questions from air carriers, conduct research on long-term targeting initiatives, and issue no- board recommendations. According to CBP officials, in the event that RCLGs issue a no-board recommendation, airlines generally follow it. CBP officials from all three RCLGs could not recall any examples over the last 5 years of an airline not following a no-board recommendation from an RCLG location. In addition to preventing high-risk or other inadmissible travelers from boarding U.S.-bound flights, CBP’s predeparture programs have resulted in other benefits by, for example, (1) assisting air carriers, (2) enhancing coordination with host country law enforcement agencies, (3) gathering additional information on travelers to improve U.S. targeting activities, or (4) facilitating travel. CBP’s predeparture programs provide regular assistance to air carriers on relevant U.S. admissibility requirements and U.S. travel documents. During our site visits, we observed that IAP and JSP officers regularly interacted with air carriers, and provided a point of contact at foreign airports for air carriers and airport security employees who may have difficulties assessing the validity of travel documents or understanding U.S. immigration requirements. For example, during our site visit to one IAP location in Europe, officers reported keeping a separate telephone line for air carriers to use when requesting assistance regarding document validity. In addition, several airline representatives we spoke with reported that CBP officers from IAP and JSP locations have provided helpful training to staff. Further, according to RCLG officials we spoke with, the relationships that the RCLGs have established with air carriers allows RCLG officers to provide them with early information on potential traveler admissibility determinations, which ultimately help the air carrier avoid the costs associated with transporting inadmissible travelers back to their point of departure as well as fines that could be imposed. According to CBP documentation, one of the key advantages of its predeparture programs is the ability to improve coordination overseas between CBP and host country law enforcement agencies. As part of their daily duties, IAP and JSP officers are responsible for establishing positive working relationships with numerous foreign entities, including airlines and their security organizations, foreign border control authorities, and other law enforcement agencies. For example, during our site visits to the two JSP locations, host government law enforcement and security representatives emphasized that their coordination with and training from CBP was invaluable, and that it allowed them to better identify and target high-risk individuals. Host government officials told us that the expanded targeting efforts in their countries due to CBP’s presence at JSP locations also have a strong impact on regional security. Moreover, according to CBP officials, information sharing through the JSP program has led to enhanced coordination and targeting efforts to include taking action against international drug, currency, and human smugglers, and known or possible suspected terrorists. Similarly, during our site visits to three IAP locations in Europe, foreign law enforcement officials we spoke with told us that information sharing generally occurs informally between IAP officers and host government officials rather than through formal channels due to host country privacy concerns about formal information sharing arrangements with other governments. According to senior CBP officials, all of CBP’s predeparture programs provide key information that helps to improve NTC’s targeting efforts and also supports larger U.S. government information gathering efforts on high-risk individuals and threats to the United States (see fig. 6). For example, according to CBP data, in fiscal year 2015, CBP’s predeparture programs allowed CBP to identify thousands of previously unknown high- risk individuals and of these, CBP nominated more than 1,500 for inclusion in the TSDB. According to senior CBP officials, CBP officers stationed overseas in Preclearance, IAP, or JSP locations have the opportunity to collect information about travelers, their travel history, and any other pertinent information while engaging with these individuals in conversation as part of interviewing or inspecting them. Officials told us that the information collected can be maintained and used for future targeting efforts if these individuals travel to the United States again. Air carrier and airport authority representatives, foreign government officials, and CBP officials we interviewed reported that CBP predeparture operations help to facilitate travel into the United States. For example, CBP officials, as well as air carrier and airport authority representatives told us that Preclearance operations ensure that all individuals aboard a given plane have already been inspected and have been cleared for entry into the United States. As a result, officials told us that this provides airports with more domestic airport arrival gate options by allowing international flights to arrive at domestic terminals that may not otherwise be equipped to properly inspect international travelers. IAP and JSP also provide travel facilitation benefits, according to IAP and JSP officers we spoke with. For example, IAP and JSP officers assist U.S. citizens and lawful permanent residents who have lost, stolen, or expired documentation. Although U.S. citizens and lawful permanent residents can generally not be denied entry to the United States under U.S. immigration law, air carriers will typically deny boarding to travelers without proper documentation because the air carrier cannot verify documentation and the legal status of the individual as admissible to the United States. According to IAP and JSP officers, having a physical presence at the airport enables them to reconcile an individual’s identity by accessing CBP databases and recommending to the air carriers that they board the traveler. Further, U.S. embassy officials we interviewed in Europe stated that IAP officers routinely assist embassy staff in verifying travelers’ identities and, because of their access to CBP databases, IAP officers are able to facilitate travel for U.S. citizens and lawful permanent residents even when the embassy is closed. For example, embassy officials in Western Europe reported that IAP officers were instrumental in facilitating the travel of the parents of the American students who thwarted a terrorist attack on the Thalys train from Amsterdam to Paris in July 2015. Not all of the families had the required travel documentation for entry into France, and IAP officers worked with the Western European government and air carriers to ensure their arrival and departure. CBP has not evaluated the effectiveness of its predeparture programs as a whole, including implementing a system of performance measures and baselines to assess whether the programs are achieving their stated goals. In a January 2016 white paper, CBP states that its strategic goal for its predeparture programs is to achieve comprehensive and highest level coverage at all high-risk air transit points to the United States with a focus on using the programs to push the U.S. borders outward to intercept and address potential threats at the earliest possible opportunity. Other program-specific documentation that we reviewed articulates similar, high-level predeparture program objectives, which are primarily focused on enhancing national security, counterterrorism, and travel facilitation. CBP has taken some initial steps to measure the performance of its air predeparture programs by collecting data on program activities. For example, CBP tracks a variety of data on the activities across Preclearance, IAP, JSP, and RCLG locations, including data on the numbers of travelers issued no-board recommendations or deemed inadmissible; invalid travel documents seized; and No-Fly List and TSDB encounters. According to CBP officials, on occasion, CBP has used these data, among other inputs, to support adjustments to its operations, including closing two IAP former locations where CBP determined that high-risk traveler volume did not merit having a location. On the basis of our analysis of CBP documentation and interviews with program officials, CBP has not assessed the performance of these programs on a regular basis, in part because it has not established baselines for these measures. Therefore, CBP does not have anything against which to compare the data to determine whether the programs are achieving stated goals. Solely tracking increases or decreases in program data, such as traveler volume or the number of invalid travel documents seized, does not allow CBP to fully evaluate its predeparture programs as such changes in the data may not be an indicator of program success or increased efficacy. CBP officials told us that they have collected a large quantity of data and statistics regarding the actions of their predeparture programs and have done so since program inception for all programs. However, due to changes in operational focus, technology updates, and the use of separate data systems at predeparture program locations, CBP has not collected consistent data across all of its predeparture programs. As a result, CBP does not have baseline data on which to measure program performance. However, CBP officials stated that they now have updated and uniform data collection systems that are consistent across all predeparture programs. As a result, CBP officials stated that they should be able to identify performance baselines from fiscal year 2015 onward. According to senior CBP officials, some of the results of CBP’s predeparture programs are not easily measured. For example, some benefits, such as coordination and information sharing with host governments, are invaluable but difficult to measure. Officials also noted that relying on data alone may not always present the most accurate picture of the true impact of predeparture programs because changes to the travel process or other factors may impact the predeparture programs in ways that are not fully captured by the data. However, on the basis of our analysis of CBP’s documentation, including official hearing statements, and interviews with predeparture program officials, CBP uses these data as indicators of the programs’ success. According to GAO’s Program Evaluation Guide, which articulates best practices for program evaluation, a program evaluation is a systematic study using research methods to collect and analyze data to assess how well a program is working and why. Program evaluation is closely related to performance measurement and analyzes performance measures to assess the achievement of performance objectives or goals. Evaluations answer specific questions about program performance and may focus on assessing program operations or results. Evaluation can play a key role in strategic planning and in program management, providing feedback on both program design and execution. Moreover, in accordance with GPRA, as updated by the GPRA Modernization Act of 2010, performance measurement is the ongoing monitoring and reporting of program accomplishments, particularly towards pre-established goals, and agencies are to establish performance measures to assess progress towards goals. Agencies can use performance measurement to make various types of management decisions to improve programs and results, such as developing strategies and allocating resources, and identify problems and take corrective action. Developing and implementing a system of performance measures and baselines for each program would help ensure that these programs are achieving their intended goals. By using data from fiscal year 2015, for example, to develop initial baselines, CBP could better measure program performance towards meeting stated goals. CBP has plans underway to expand its predeparture programs, particularly Preclearance operations. According to CBP, Preclearance expansion is a significant homeland security priority. CBP has reported that it aims to preclear 33 percent of all U.S.-bound air travelers by 2024. Accordingly, in September 2014, CBP invited foreign airport authorities interested in having the United States expand Preclearance operations to their location to submit letters of interest. CBP received 25 letters of interest from foreign airport authorities. Of the 25 airports, CBP selected 18 to rank, prioritize, and score for potential new air Preclearance locations. CBP, in conjunction with TSA and considering input from Department of State, conducted technical site visits and evaluations of these airports. In particular, CBP and TSA assessed these airports based on a variety of factors related to national security, travel facilitation, and feasibility of operations, among other things. In May 2015, DHS announced plans to enter into formal negotiations to expand Preclearance to 10 airports in 9 countries. According to CBP Preclearance officials, all 10 priority airports are valuable in supporting CBP’s predeparture mission. Opening a new Preclearance location requires the entry into force of an international agreement between the United States and a foreign government and requires the resolution of various diplomatic issues such as the extent of the law enforcement capability of CBP officers within the host country to include the carriage of service weapons, CBP officer immunity or legal status within the host country, and other complex issues. After reaching an agreement with the host country, expansion timelines may change due to competitive pressures, facility readiness, and other factors, according to CBP Preclearance officials. The Director of Preclearance noted that, in accordance with the Trade Facilitation and Trade Enforcement Act of 2015, CBP will provide any requisite information and certifications to the appropriate Congressional committees before entering an agreement into force with the government of a foreign country to establish Preclearance operations. In May 2016, CBP again invited interested airport authorities to submit a letter of interest to participate in the Preclearance program by August 1, 2016. CBP officials told us that they also aim to expand IAP or JSP operations to other airports where CBP has determined there is a potential threat to the United States but Preclearance may not always be feasible. According to CBP officials, host countries and airport authorities must express interest in the program, coordinate with CBP so that CBP may determine if airports are suitable for participating in the program, and host countries must agree to bilateral arrangements before CBP will expand the program. Because CBP depends on the willingness of host country governments and airport authorities to establish overseas predeparture program locations, there are challenges to expanding Preclearance, IAP, and JSP. For example, not all of the airports that responded to CBP’s expansion solicitation may be able to secure the necessary support of their governments to enter into negotiations with the United States for Preclearance operations. Multiple senior CBP Preclearance officials stated that the willingness and readiness of the host government and airport authority are key factors impacting the timeline of expansion. As a result, CBP’s negotiation and planning efforts are furthest along with two countries that currently have willing governments and airport authorities, according to CBP officials. However, CBP did not select these two locations solely based on their score among the 10 priority locations that CBP selected for potential expansion. CBP officials stated that expanding to these locations does not preclude CBP from establishing Preclearance operations at some of the other airports where the benefits to the United States might be greater, as long as these other eight locations can meet CBP’s requirements. According to CBP’s Preclearance evaluation report, some high-priority airports that are interested in Preclearance may face challenges in meeting such requirements. For example, airports that provide service to the United States on multiple U.S. air carriers, such as London Heathrow, will need to ensure that all U.S. carriers have access to Preclearance services by, for example, reconfiguring terminals, according to CBP Preclearance officials. Further, airport authorities and host country governments in many locations are not interested and do not support establishing a CBP Preclearance operation. Moreover, CBP plans to expand Preclearance to locations where airport authorities agree to reimburse CBP for certain costs. For the first 14 Preclearance locations, CBP assumed all of the costs of Preclearance operations—including officer pay, travel costs, and other operational costs. Beginning with Abu Dhabi, CBP determined that its model for new Preclearance locations would include a requirement for costs to be shared with the host airport authority. CBP’s expenses for Preclearance inspections in Abu Dhabi are reimbursed to about 85 percent of all expenses. According to CBP officials, under this model, CBP is able to extend its borders without having to pay the full costs of operations. Airport authority officials we spoke with in Canada stated that they valued having CBP Preclearance operations at their facilities, but noted that high up-front development and implementation costs could be potential impediments for other airport authorities. Because of the cost-sharing model CBP has implemented, not all airport authorities may be willing or able to accept Preclearance operations in their facilities. According to CBP officials and documentation, airport authorities’ and host countries’ willingness to participate also affects CBP’s efforts to expand IAP and JSP operations, particularly concerns related to sovereignty, such as CBP officer presence in the country and airport. These officials also raised concerns about airside access, such as access to areas within the airport, freedom of movement, and ability to interview travelers. These officials stated that JSP and IAP expansion efforts are also impacted by officer safety and security concerns, particularly in potential expansion locations in Central and South America as well as the Middle East and Southeast Asia. CBP is taking some steps to address staffing and funding needed for the expansion of its predeparture programs, but because CBP’s efforts are still in the early stages and negotiations with host governments about planned expansion locations have not yet been finalized, it is too soon to determine whether CBP’s efforts will fully address its needs. According to CBP’s Assistant Commissioner for Human Resources Management, staffing is one of the most prominent challenges the agency faces. CBP data indicate that, as of February 2016, OFO was more than 800 officers below its congressionally authorized staffing level, which includes all POEs—OFO had 23,775 officer positions authorized and 22,937 officers on-board. In addition, according to CBP hiring and attrition data, as of February 2016, about one percent of initial applicants for a CBP OFO officer qualify. This means that CBP needs approximately 78,000 new applicants in fiscal year 2016 to meet its current officer gap. Further, in April 2016, CBP officials testified that OFO’s staffing model estimates that the agency will need to hire an additional 2,107 officers through fiscal year 2017 to account for growing volumes of trade and travel. CBP’s stakeholders, including several air carriers and air carrier associations we met with, also raised concerns about the impact of expanding Preclearance operations on domestic POEs because CBP plans to initially staff new locations with officers from domestic POEs. CBP’s Office of Human Resources Management has taken several steps to address the agency’s broader staffing gaps. In addition, in April 2016, CBP officials testified that CBP has begun initiatives aimed at decreasing the amount of time it takes for an applicant to complete the hiring process, increased the number of recruiting events, and coordinated with the Department of Defense to recruit qualified veterans and individuals separating from military service. Further, senior Preclearance officials stated that when staffing Preclearance locations for start-up operations, CBP selects temporary duty staff from various ports so as not to deplete the capacity of any one domestic POE. IAP and JSP also use temporary duty staff from multiple POEs for start-up and to augment core staff during seasonal peak travel. Further, a senior Preclearance official stated that new Preclearance locations will not be operational until sometime in fiscal year 2017 at the earliest and that, similar to the process in Abu Dhabi, CBP will initially staff a new operation with a smaller number of temporary duty officers and then gradually increase the number of permanent staff at these locations. Moreover, according to a CBP budget official, since the costs of new Preclearance positions will be mostly reimbursed by the foreign airport authorities, CBP will be able to backfill positions at domestic POEs that were vacated as a result of moving staff to Preclearance locations. In addition, CBP has reported that implementing additional Preclearance locations will reduce wait times at domestic air POEs and lead to more efficient inspections. Specifically, CBP’s 2016 white paper notes that Preclearance operations will reduce wait times at some of the busiest air POEs in the United States. In addition, CBP officials also stated that Preclearance operations have led to increased airport traveler processing capacity. However, according to CBP officials responsible for data collection and analysis across OFO programs, CBP does not have generalizable data or analyses on the effect of Preclearance expansion on domestic wait times, so they could not provide us with data to corroborate this statement. Further, according to CBP officials and an airline official we met with, reductions in wait times may be short-term because airlines and airports may add new international routes in place of precleared flights. On the basis of our review of CBP documentation, we could not determine the extent to which there is a causal relationship between Preclearance operations and long-term, reduced wait times at domestic POEs. As of May 2016, CBP officials stated that they are in the process of surveying all U.S. airports to gain insights on the full extent of the impact of Preclearance operations, particularly traveler wait times and processing capacity. CBP has also taken steps to model anticipated Preclearance, IAP, and JSP expansion staffing needs. However, CBP’s estimates are preliminary and senior officials noted that CBP will be in a better position to determine staffing needs once CBP is further along in the negotiation process with host governments. According to CBP officials, the total staff required for each new predeparture location depends on the negotiated CBP presence at each location, which has not been finalized. As a result, it is too early in CBP’s efforts to accurately estimate staffing needs of expanding CBP’s air predeparture programs, and to determine if CBP’S current and planned actions will address staffing needs. CBP has taken some steps to identify and address funding needs for the expansion of its predeparture programs, though it is too soon for us to determine if these actions will fully address CBP’s funding needs. As previously mentioned, CBP plans to expand Preclearance to locations where airport authorities agree to reimburse CBP for certain costs. Specifically, CBP intends to require the host airport authority to reimburse CBP for all of the agricultural and immigration inspection-related costs associated with Preclearance operations. Further, CBP officials stated that new Preclearance locations will generally be expected to provide the facilities and equipment necessary for Preclearance operations. Moreover, Preclearance officials stated that they are planning to use authority provided to CBP under the Trade Facilitation and Trade Enforcement Act of 2015, enacted in February 2016, to collect Preclearance payments for start-up costs in advance of opening new Preclearance facilities, and to collect reimbursement in advance of incurring the costs for the provision of certain activities, such as immigration or agricultural inspection activities. By using these two strategies, Preclearance officials stated that they should be able to secure airport authority funding for almost all activities associated with the planning and operations of future Preclearance locations. Although CBP prefers that the airport authority pay the majority of Preclearance costs, CBP officials stated that its expansion decisions are not solely driven by the costs CBP would have to incur to set up and maintain a Preclearance location. These officials stated that CBP would still consider expanding Preclearance to a desirable location even if the country or airport authority did not support the reimbursement model; however, CBP’s current expansion plans and white paper strategy indicate that they are primarily pursuing the reimbursement model. In contrast to Preclearance, CBP officials stated that CBP will continue to fund all of the costs associated with additional JSP and IAP locations. Officials told us that CBP has developed cost estimates for several potential JSP locations. Further, CBP has taken steps to model anticipated Preclearance and IAP and JSP expansion costs. CBP has incorporated Preclearance staffing estimates into a cost model, which includes costs for salaries, benefits, relocation, and office space. According to CBP budget officials, the total cost incurred by CBP depends on the total number of officers stationed at each location, which has not been finalized. Similarly, funding required for IAP and JSP locations is also dependent on the number of staff at each location. As a result, it is too early in CBP’s efforts to accurately estimate the cost of expanding CBP’s predeparture programs, and to determine if CBP’S current and planned actions will address funding needs. Through its predeparture programs, CBP seeks to prevent high-risk individuals from boarding U.S.-bound flights—a key aspect of the agency’s mission to secure the U.S. border. In support of this mission, CBP has implemented a layered security approach aimed at identifying and preventing the travel to the United States of such individuals as early in the travel process as possible. CBP’s approach uses information from across the government and leverages CBP officer’s physical presence at predeparture program locations around the world. As a result of CBP’s efforts to vet, interview, and inspect travelers, CBP interdicts thousands of high-risk travelers each year. Moreover, CBP’s predeparture programs have provided additional benefits that improve global safety and security and facilitate lawful travel. However, CBP has not evaluated the effectiveness of its predeparture programs as a whole, including using a system of performance measures and baselines by which to assess whether the programs are achieving their stated goals. By developing and implementing a system of performance measures and baselines to evaluate the effectiveness of its predeparture programs, CBP will be better positioned to measure predeparture program performance and to determine what these data indicate about whether the programs are achieving their stated goals. To better ensure the effectiveness of CBP’s predeparture programs, we recommend that the Commissioner of U.S. Customs and Border Protection develop and implement a system of performance measures and baselines to evaluate the effectiveness of CBP’s predeparture programs and assess whether the programs are achieving their stated goals. We provided a draft of this report to the Departments of Homeland Security, State, and Transportation for their review and comment. The Department of Transportation indicated that it did not have any comments on the draft report via e-mail. The Department of State provided technical comments via e-mail, which we incorporated as appropriate. DHS provided written comments, which are noted below and reproduced in full in appendix I, and technical comments, which we incorporated as appropriate. DHS concurred with our recommendation and described the actions it plans to take in response. Specifically, DHS stated that it plans to create a working group to develop and implement a system of performance measures and establish baselines to evaluate the effectiveness of CBP’s predeparture programs and to assess whether the programs are achieving their stated goals. If implemented effectively, these planned actions should address the intent of our recommendation. If you or your staff have any questions about this report, please contact me at (202) 512-8777 or [email protected]. Key contributors to this report are listed in appendix II. Rebecca Gambler, (202) 512-8777 or [email protected]. In addition to the contact named above, Kathryn Bernet (Assistant Director), Chuck Bausell, Jose Cardenas, Eric Hauswirth, Paul Hobart, Susan Hsu, Richard Hung, Benjamin Licht, Thomas Lombardi, Sara Margraf, Michael Silver, and Martin Wilson made key contributions to this report.

DHS seeks to identify and interdict international air travelers who are potential security threats to the United States, such as foreign fighters and potential terrorists, human traffickers, and otherwise inadmissible persons, at the earliest possible point in time. In fiscal year 2015, CBP processed more than 104 million U.S.-bound air travelers. CBP operates various predeparture programs domestically and overseas that are designed to identify and interdict high-risk travelers before they board U.S.-bound flights. GAO was asked to review CBP's predeparture programs. This report addresses (1) how CBP identifies high-risk travelers before they board U.S.-bound flights; (2) the results of CBP's predeparture programs and the extent to which CBP has measures to assess program performance; and (3) how CBP plans to expand its predeparture programs. GAO reviewed CBP policies and procedures and fiscal year 2015 data across these programs. GAO also visited nine foreign and one domestic airport, selected based on location and traveler volume, among other factors. Information from these visits was not generalizable but provided valuable insights into program operations. The Department of Homeland Security's (DHS) U.S. Customs and Border Protection (CBP) analyzes traveler data and threat information to identify high-risk travelers before they board U.S.-bound flights. CBP's National Targeting Center (NTC), the primary entity responsible for these analyses, conducts traveler data matching which assesses whether travelers are high-risk by matching their information against U.S. government databases and lists, and rules-based targeting, which enables CBP to identify unknown high-risk individuals. CBP operates multiple predeparture programs that use the results of NTC's analyses to help identify and interdict high-risk travelers before they board U.S.-bound flights. CBP officers inspect all U.S. bound travelers on precleared flights at the 15 Preclearance locations and, if deemed inadmissible, a traveler will not be permitted to board the aircraft. CBP also operates nine Immigration Advisory Program (IAP) and two Joint Security Program (JSP) locations as well as three Regional Carrier Liaison Groups (RCLG) that allow CBP to work with foreign government and air carrier officials to identify and interdict high-risk travelers. Through these programs, CBP may recommend that air carriers not permit such travelers to board U.S.-bound flights. CBP data show that it identified and interdicted over 22,000 high-risk air travelers in fiscal year 2015 through its predeparture programs. CBP officers at Preclearance locations determined that 10,648 of the approximately 16 million air travelers seeking admission to the United States through such locations were inadmissible. Similarly, CBP, through its IAP, JSP, and RCLG locations, made 11,589 no-board recommendations to air carriers for the approximately 88 million air travelers bound for the United States from such locations. While CBP's predeparture programs have helped identify and interdict high-risk travelers, CBP has not fully evaluated the overall effectiveness of these programs using performance measures and baselines. CBP tracks some data, such as the number of travelers deemed inadmissible, but has not set baselines to determine if predeparture programs are achieving goals, consistent with best practices for performance measurement. By developing and implementing a system of performance measures and baselines, CBP would be better positioned to assess if the programs are achieving their goals. CBP plans to expand its predeparture programs where possible, though several factors limit its ability to expand to all priority locations. In May 2015—after soliciting interest among foreign airport authorities and scoring interested airports using risk and other factors—CBP stated it would begin Preclearance expansion negotiations with 10 priority airports in 9 countries. As of November 2016, CBP had not completed the process required to begin operations in any locations prioritized for expansion, but had reached agreement with one location at which Preclearance operations could begin as early as 2019. According to senior CBP officials, Preclearance expansions are lengthy and complex processes because host governments and airports must be willing to allow for a Preclearance location, and CBP's Preclearance expansion strategy relies on partnering with airports that are willing to pay for the majority of operational costs. GAO recommends that CBP develop and implement a system of performance measures and baselines to evaluate the effectiveness of its predeparture programs and assess whether the programs are achieving their stated goals. CBP concurred with the recommendation and identified planned actions to address the recommendation.

You are an expert at summarizing long articles. Proceed to summarize the following text: The terminal area is the area around an airport extending from the airfield or surface to about 10,000 feet vertically and out to about 40 miles in any direction. The terminal area includes airport surface areas such as runways, taxiways, and ramps, as well as the airspace covered by air traffic control towers—typically within 5 miles of a towered airport—and by terminal radar approach control (TRACON) facilities, which typically handle air traffic to within about 40 miles of an airport (see fig. 1). Terminal area safety incidents can occur on the surface at airports or in the airspace around them. Surface incidents may threaten the safety of aircraft, passengers, and airport workers, among others. Terminal area safety incidents that happen on runways and taxiways include incursions and excursions. Runway incursions typically involve the incorrect presence of an aircraft, vehicle, or person on a runway, and runway excursions generally occur when an aircraft veers off or overruns a runway (see fig. 2). Ramp incidents can involve aircraft or airport vehicles, such as baggage carts or ground handling vehicles, as well as airline and airport employees and others. Airborne safety incidents in the terminal area often involve a loss of the minimum required distance between aircraft—as airplanes fly too close to each other—or as individual aircraft fly too close to terrain or obstructions. These incidents are called “losses of separation,” because there is a violation of FAA separation standards that ensure established distances are maintained between aircraft or other obstacles while under the con of air traffic controllers. Generally, air traffic controllers must maintain either vertical or horizontal separation between aircraft (see fig. 3), and losses of separation occur when both of these measures are violated, based on phase of flight and size of the aircraft. Safety in the terminal area is a shared responsibility among FAA, airlines, pilots, and airports. FAA air traffic controllers oversee activity on runways and taxiways, and airlines and airports provide primary safety oversight in ramp areas. Several FAA offices have a role in terminal area safety including:  The Office of Runway Safety (Runway Safety) within the Air Traffic Organization (ATO) Safety Office was established in 1999 and le and coordinates the agency’s runway safety efforts. Its primary mission is to improve runway safety by decreasing the number a severity of runway incursions. Runway Safety is responsible for nd developing a national runway safety plan and performance measures for runway safety and evaluating the effectiveness of runway safety activities. The office currently has an acting director. Other FAA offices, including the Office of Aviation Safety, the Office of Airports, other components of ATO, and regional offices sup port Runway Safety’s work to identify hazards and analyze risk.  ATO manages air tr affic control and develops and maintains runway safety technology.  The Office of Aviation Safety and Flight Standards Service (Flight Standards) within it conduct safety inspections of airlines, audit air traffic safety issues, and administer a program to obtain information about safety incidents involving pilots.  The Office of Airports oversees airport-related safety, including airpo infrastructure. This includes issuing airport operating certificates to commercial service airports, establishing airport design and safety standards, and inspecting certificated airports. The Office of Airports also provides Airport Improvement Program (AIP) grants to airports to help support safety improvements. Airlines and airports typically oversee the safety of operations in ra areas. Ramp areas are typically small, congested areas in which departing and arriving aircraft are serviced by ramp workers, who include baggage, catering, and fueling personnel. These areas can be dange for ground workers and passengers. As noted in our 2007 report on runway and ramp safety, FAA’s oversight of ramp areas is generally provided indirectly through its certification of airlines and airports. Bot NTSB and OSHA investigate accidents in the ramp area. Thus, NTSB investigates ramp accidents—and other accidents involving aircraft—that occur from the time any person boards an aircraft with the intention t o fly until the time the last person disembarks the aircraft, if the accident h results in serious or fatal injury or substantial aircraft damage. OSHA can conduct an inspection in response to a fatality, injuries, or a complaint, unless it is preempted by an exercise of statutory authority by FAA. FAA collects and analyzes information about various safety incidents in the terminal area in order to track incidents, identify their causes, and assign severity levels. Currently data are collected at towered airports for runway incursions, some other surface incidents, and for airborne incidents. By contrast, no complete data are collected for incidents in ramp areas. FAA categorizes incidents according to the actions or inactions of air traffic controllers, pilots, or others, such as pedestrians or vehicle operators. Table 1 provides hypothetical examples of each type of incident. Depending on the type of incident identified—air traffic control surface event, operational error or deviation, pilot deviation, or pedestrian/vehicle deviation—different offices within FAA are responsible for investigating individual incidents. FAA is in the process of implementing a data-driven, risk-based approach to safety oversight that FAA expects will help it continuously improve safety by identifying hazards, assessing and mitigating risk, and measuring performance. For decades, the aviation industry and FAA have used data reactively to identify the causes of aviation accidents and incidents and take actions to prevent their recurrence. Using a safety management system approach, the agency plans to use aviation safety data to identify conditions that could lead to incidents, allowing it to address risks proactively. FAA’s current approach for analyzing information about safety in the terminal area includes separate approaches for surface and airborne incidents.  Surface incidents. For runway incursions, Runway Safety collects information from the Administrator’s Daily Bulletin and the Air Traffic Quality Assurance database (ATQA)—a mandatory reporting system with incident information recorded by FAA air traffic controller supervisors, support specialists, and managers—and other sources such as incident investigations. Runway Safety determines how an event will be categorized (e.g., air traffic control, pilot, or vehicle/pedestrian deviation, etc.), and the runway incursion severity classification team, which consists of representatives from the Office of Airports, Flight Standards, and ATO Terminal Services, determines the severity of the incursion.  Airborne incidents. For terminal area incidents that occur in the air, the primary source of information is ATQA. FAA recently adopted a new process for analyzing these incident data and has taken steps to increase the amount and quality of information collected. FAA officials stated that, prior to this change, data were limited to the information collected in ATQA from FAA managers and supervisors, with limited input from individual controllers through controller statements gathered during incident investigations. We will discuss the new system in more detail in the following section. FAA has taken several steps since 2007 to further improve surface safety at airports, focusing most notably on efforts to reduce the number and severity of runway incursions—the agency’s key performance measures for this area. (See fig. 4.) As part of its 2007 Call to Action Plan, the agency implemented new safety approaches and developed milestones for the implementation of various mid- and long-term initiatives, such as conducting safety reviews of 20 airports where incursions were of greatest concern, upgrading airport markings at airports, and reviewing cockpit and air traffic procedures. Additionally, FAA’s 2009–2011 National Runway Safety Plan establishes priorities for each FAA office involved in reducing incursion risks and identifies performance targets for reducing the risk of runway incursions, including an overall goal to reduce total runway incursions by 10 percent from 1,009 in fiscal year 2008 to 908 incursions by the end of fiscal year 2013. In 2010, FAA issued an order that further strengthened the role of Runway Safety as the agency’s focus for addressing incursions and improving runway safety. FAA has also proposed new rules related to airport safety management systems that address ramp areas. Additionally, FAA established local and regional runway safety action teams that assess runway safety issues at particular airports, formulate runway safety action plans to address these concerns, and execute their runway safety programs. FAA also established the Runway Safety Council (Council) with aviation industry stakeholders to develop a systemic approach to improving runway safety. The Council’s Root Cause Analysis Team—comprised of representatives from FAA and airlines—investigates severe runway incursions to determine root causes in order to identify systemic risks. The Root Cause Analysis Team presents recommendations to the Council, which in turn, assigns accepted recommendations to FAA or the aviation industry, based on which is best able to address root causes and prevent further incursions. The Council is responsible for tracking recommendations and ensuring that they get implemented. FAA’s layered approach to addressing runway safety includes a range of actions, such as encouraging airport improvements, including improving runway safety areas; changes to airport layout and runway markings, signage, and lighting; providing training for pilots and air traffic controllers; mitigating wildlife hazards; and researching, testing, and deploying new technology. According to its 2009–2011 National Runway Safety Pla annual safety reports, FAA’s efforts to decrease the risk of surface incidents include: Improving runway safety areas. In order to reduce fatalities and injuries from runway excursions, the Office of Airports has provide between $200 and $300 million annually since 2000 through AIP grants to improve runway safety areas, which are unobstructed areas surrounding runways.  Outreach to general aviation pilots. Regional runway safety action team meetings, briefings, and clinics for general aviation pilots and flight instructors discuss the importance of runway safety and how to avoid incursions. FAA also provided training, printed materials, and electronic media such as DVDs explaining runway safety.  New terminology. FAA adopted international air traffic co terminology for taxi clearance instructions to help avoid miscommunication between pilots on the taxiway and runway a traffic controllers. These included new mandatory detailed taxi instructions, including directional turns, fo taxiing to and from ramps and runways. r all aircraft and vehicles  Upgraded markings. Markings—such as enhanced centerlines drawn on taxiways and runways—wer commercial airports in 2010. e installed at all 549 FAA-certificated  Hot spot identification. Hot spots—locations on runways or taxiways with a history of collisions or incursions or the heightened potentia such incidents—have been identified on airport diagrams to alert pilots of complex locations on runways and taxiways.  Airport layout. Some airports have relocated taxiways, allowing pilots to avoid crossing active runways during the taxi phase. These “end around taxiways” facilitate ground movement and minimize conflict with aircraft operating on runways. The Office of Airports has alsoreleased guidance on the design of taxiways and aprons to help prevent runway incursions.  Training. FAA has developed video programs, training modules, and best practices for pilots, controllers, and airport personnel aimed at heightening awareness of situations that could lead to incursions. F now also requires that runway incursion prevention be included in ning for controllers, pilots, and all certificated airport refresher trai employees.  Research and development of best practices and other useful information. Runway Safety’s Web site has resources, best prac and statistics on runway safety. Moreover, Runway Safety has produced DVDs and Pilot’s Guide brochures, as well as runway incursion safety alerts for airport operators.  Wildlife Hazard Mitigation. In addition to an active research program for developing practical techniques for mitigating bird strikes, F encouraged all certificated airports to conduct wildlife hazard assessments and is pursuing rulemaking to make it mandatory for certificated airports to do so. FAA currently provides AIP funds to hire qualified wildlife biologists to develop assessments and mitigation plans, as needed. A number of available technological systems are intended to help re the number and severity of runway incursions, and FAA has made progress installing several of these systems since 2007. For example order to prevent collisions, FAA completed installation of the Airport Surface Detection Equipment, Model X (ASDE-X) system at 35 major airports, which provides air traffic controllers a visual representation of traffic on runways and taxiways (see fig. 5). Other systems that will provide safety information directly to pilots are being installed or tested. For example, runway status lights, an automatic series of lights that giv pilots a visible warning when runways are not clear to enter, cross, or depart on, are planned to be installed at 23 airports by August 2016. See appendix II for more information on safety. To date, runway excursions have not received the same level of attention from FAA as incursions. However, excursions can be as dangerous as incursions; according to research by the Flight Safety Foundation, excursions have resulted in more fatalities than incursions globally. FAA is now planning efforts to track and assess excursions as well. According to FAA officials, in response to recommendations that we and others hav made, Runway Safety will begin overseeing runway excursions on October 1, 2011. Specific responsibilities include collecting and analyzing data to develop steps to reduce the risk of such incidents. According to FAA officials, the office plans to develop an official definition of an excursion, develop a data collection instrument and performance metrics e that would enable it to collect and evaluate excursion data, and develop training and steps to help mitigate excursions. According to a timeline from Runway Safety, it will be several years before this program is totally implemented and FAA has detailed information about excursions. FAA recently issued two proposed rules for airports under the agency’s authority to issue airport operating certificates. The first proposed rule, issued in October 2010, would require airports to establish safety management systems for ramps areas, as well as other parts of the airfield, including runways and taxiways. As previously noted, FAA historically has not primarily overseen safety in ramp areas, which are typically controlled by airlines or—to a lesser extent—airports using their own practices. FAA’s proposal would require airports to establish safety management systems for the entire airfield environment in order to ensure that individuals are trained on the surface of the terminal area; safety implications of working on the  hazards are identified proactively, and analysis systems are in place;  data analysis, tracking, and reporting syste ms are available for trend analysis and to gain lessons learned; and there is timely communication of safety issues to all stakeholders. A second proposed rule, issued in February 2011, would establish minimum training standards for all personnel who access ramp areas. Required training would occur at least yearly and include familiarization with airport markings, signs, and lighting, as well as procedures for operating in the nonmovement (ramp) area. The public comment period for these proposed rules closed during July 2011. FAA has not indicated when the rules would be finalized. We reported in 2007 that FAA lacked ground handling standards for ramp areas. In the absence of agency standards, other organizations have developed tools to improve ramp safety. For example, the Flight Safety Foundation has collected best practices and developed a template of standard operating procedures to assist ramp supervisors in developing their own procedures. The guidelines are wide ranging and include the reporting of safety information, ramp safety rules, the positioning of equipment and safety cones, refueling, and caring for passengers, among other areas. In addition to the Flight Safety Foundation guidelines, the International Air Transport Association, an international airline association, has developed a safety audit program for ground handling companies aimed at improving safety and cutting airline costs by drastically reducing ground accidents and injuries. The program is available to all ground service providers, who, after successfully completing the audit, are placed on a registry. As of August 2011, Seattle- Tacoma International Airport is the only domestic airport participating in the program. Controllers are required to report any occurrence that may be an operational deviation, operational error, proximity event, or air traffic incident if the reported issue is known only to the employee and occurs while the employee is directly providing air traffic services to aircraft or vehicles or first level watch supervision. concerns have been addressed through informal discussions between ATSAP officials and FAA facilities. In other efforts to obtain more safety data, FAA has taken other steps to make incident reporting less punitive. For example, in July 2009, FAA changed its incident reporting policy such that individually identifying information, such as air traffic controller names and performance records, is no longer associated with specific incidents in ATQA, the central FAA database used by air traffic control managers or supervisors to report incidents. In addition, in July 2010, FAA also stopped issuing incident “not to exceed” targets to individual air traffic control facilities (e.g., towers, TRACONS, or en route facilities). According to officials, these targets created an incentive for underreporting of less serious incidents by supervisors at the facility level, and the targets were discontinued in order to encourage increased reporting at the agency. FAA is also implementing new technologies, specifically, the Traffic Analysis and Review Program (TARP), an error detection system that can be used to automatically capture losses of separation that occur while aircraft are under the control of air traffic control towers and TRACONs. Historically, FAA relied on air traffic controllers and their supervisors to manually report on operational errors, something we have noted in the past may negatively impact data quality and completeness. TARP automatically captures data on all airborne losses of separation, which, according to officials, will increase the volume of data FAA gathers on air traffic safety incidents and enable FAA to obtain a more complete picture of potential safety hazards. According to the fiscal year 2010 FAA Performance and Accountability Report, FAA has deployed TARP at 150 air traffic control tower and TRACON facilities. According to FAA officials, TARP is currently being used as an audit tool for approximately 2 hours per month at some facilities—in lieu of full-time use at all facilities—but further implementation of the system has been delayed as the agency evaluates the impact of the system on controllers and determines how the system will be used and how to handle the additional workload that will be created as more incidents are captured and require investigation. Following the completion of these steps, FAA will take 210 days to fully deploy TARP. Currently, incidents identified through TARP are being included in official incident counts. FAA is also shifting to a new, risk-based process for assessing a select category of airborne losses of separation. FAA began using the Risk Analysis Process (RAP)—which is adapted from a similar process used by the European Organization for the Safety of Air Navigation (Eurocontrol)—in fiscal year 2010. While the new process is being established, RAP will be used in tandem with the existing system. RAP is currently limited to Losses of Standard Separation (LoSS). This subset of airborne incidents includes those in which the separation maintained is less than 66 percent of the minimum separation standard for the planes involved. Under RAP, FAA determines both the severity and the repeatability of selected LoSS events (that is, how likely a certain LoSS event will occur again at any airport under similar circumstances based on a number of factors). These factors include proximity of planes to one another at the time of the event, rate of closure between planes, controller and pilot recovery, and whether or not Traffic Collision Avoidance System (TCAS) technology is triggered by the incident. Prior to the development of RAP, FAA categorized losses of separation based on proximity alone: the greater the loss of separation between two planes, the greater the severity of the incident in question. Operational errors were then rated on an A–C scale, with those that retained more than 90 percent of required minimum separation categorized as proximity events. (Fig. 7 compares the threshold for review of incidents in each system.) Officials stated that RAP is more robust than the previous system because it is able to take numerous factors into account when determining event severity, as well as overall risk to air traffic safety. In addition, the RAP will assess risk for LoSS events that were not assigned a severity category under the old system. As a result, they said the agency will be better equipped to identify systemic issues in air traffic safety and to issue related corrective action requests. Based on analysis of systemic issues identified across incidents, RAP released its first five corrective action requests on July 19, 2011, which were developed to mitigate specific hazards that contribute to what RAP has identified as the highest risk events. We, the Department of Transportation Inspector General (IG), and NTSB have raised concerns about terminal area safety. For example, we recommended, in 2007, that FAA take several steps to enhance runway and ramp safety, such as updating its national runway safety plan, collecting data on runway excursions, and working with OSHA and industry to collect and analyze better information on ramp accidents. In 2007, FAA put in place a Director for Runway Safety and issued a Call to Action aimed at reducing the risk of incursions following several high- profile incidents (see table 2 for select recommendations to FAA). The IG also made recommendations to FAA about runway safety issues and recommended that FAA take several steps to reduce the risk of airborne incidents and improve oversight of this area. For example, the IG recommended that FAA clearly document the severity ratings used by FAA for runway incursions, revise the national plan for runway safety, and realign the Office of Runway Safety. With regard to airborne incidents, the IG recommended establishing a process to rate the severity of pilot deviations and corresponding performance goals, developing milestones for implementing TARP, and assuring that Flight Standards works with ATO Safety Services to determine whether losses of separation are pilot or controller errors, among other recommendations. Further, NTSB continues to include runway safety, safety management systems, and pilot and air traffic controller professionalism issues on its list of most wanted safety improvements. In fiscal years 2009 and 2010, the agency met its interim goals toward reducing the total number of runway incursions at towered airports, but the rate of incursions per million operations continued to increase (see fig. 8). As noted in our 2007 report, both the number and rate of incursions reached a peak in fiscal year 2001, prompting FAA to focus on runway safety. The number and rate of incursions at towered airports decreased dramatically for a few years thereafter, though the impact of FAA’s efforts on these outcomes is uncertain. Beginning in 2004, however, both the number and rate of incursions began increasing again. For example, in fiscal year 2004, there were 733 incursions at a rate of 11.4 incursions per 1 million tower operations, compared with fiscal year 2010, when there were 966 incursions at a rate of 17.8 incursions per 1 million such operations. Although the rate of incursions at towered airports continues to increase, the number of incursions at these airports peaked in fiscal year 2008. The most serious runway incursions at towered airports—where collisions are narrowly avoided—decreased by a large amount from fiscal year 2001 to 2010, and FAA met or exceeded its goals for reducing the rate of these incidents. FAA classifies the severity of runway incursions into four categories—A through D—and its performance targets call for the reduction of the most severe incursions (category A and B) to a rate of no more than 0.45 per million air traffic control tower operations by fiscal year 2010 and for the rate to remain at or below that level through fiscal year 2013. The number of the most severe incidents at towered airports also dropped from fiscal year 2001 to 2010. Thus, category A and B incursions at these airports decreased from 53 to just 6 during that time, with category A incursions decreasing from 20 to 4, and category B incursions decreasing from 33 to 2 (see fig. 9). In fiscal year 2010, the majority of incursions at towered airports were classified as pilot deviations (65 percent), followed by vehicle/pedestrian deviations (19 percent), and operational errors and deviations by air traffic controllers (16 percent) (see fig. 10). Further, for every year since 2001, pilot deviations comprised the majority of runway incursions at these airports, and the proportion involving these errors steadily increased from about 55 percent of all incursions in fiscal year 2001 to 65 percent in fiscal year 2010. We previously reported that most runway incursions at towered airports involved general aviation aircraft and that trend continues. General aviation aircraft make up nearly a third of total operations at towered airports but have consistently accounted for about 60 percent of incidents each year since 2001. More specifically, the rate of incursions per million tower operations involving at least one general aviation aircraft is higher than the rate of incursions not involving general aviation aircraft, and the rate has increased every year since fiscal year 2004 (see fig. 11). Further, general aviation aircraft were involved in over 70 percent of the most serious—category A and B—incursions from fiscal year 2001 through the second quarter of fiscal year 2011. According to FAA officials, general aviation pilots may be more susceptible to incursions and other incidents because of their varying degrees of experience and frequency of flying. Furthermore, general aviation pilots do not generally undergo the same training as commercial airline pilots do. With regard to runway excursions, our review of NTSB data found that general aviation aircraft are also involved in most runway excursions. Although FAA does not yet formally collect information on runway excursions, NTSB provided us with accident investigation reports on 493 accidents that involved runway overruns or excursions since 2008. Seven of these accidents were fatal, resulting in 14 fatalities. Our review of these reports found that 97 percent of the accidents involving excursions referred to the involvement of at least one general aviation aircraft. In our 2007 report, we found that efforts to address the occurrence of safety incidents in ramp areas were hindered by the lack of data on the nature, extent, and cost of ramp incidents and accidents and by the absence of industrywide ground handling standards. As discussed above, FAA collects no comprehensive data on incidents in the ramp area, and NTSB does not routinely collect data on ramp incidents that do not result in injury or aircraft damage. Likewise, as mentioned above, OSHA, the primary source of ramp fatality data, does not collect data on incidents that do not result in at least three serious injuries or fatalities. In the ramp area, OSHA data on worker fatalities show the number of deaths in the ramp area to have varied between 3 and 11 from 2000 to 2010. The rate remained constant—between 4 and 6 deaths per year—from 2008 to 2010. The rate of reported airborne operational errors in the terminal area increased considerably in recent years. From the second quarter of fiscal year 2008 to the second quarter of fiscal year 2011, the rate and number of reported airborne operational errors increased significantly. During this time period, the rate of reported airborne operational errors in the terminal area nearly doubled, increasing 97 percent, and the number of reported airborne operational errors increased from 220 to 378. The rate of incidents began a notable climb in the fourth quarter of fiscal year 2009, peaked in the second quarter of fiscal year 2010, and remained at rates higher than the historical average through the second quarter of 2011 (see fig. 12). FAA officials attributed at least some portion of the spike in reported incidents during the second quarter of fiscal year 2010 to approximately 150 events that occurred as the result of the misinterpretation of an arrival waiver at one TRACON facility. While the rate of airborne operational errors has increased over time in both the TRACON and tower environments, the rate of errors in the TRACON environment has increased more. Between the second quarters of fiscal years 2008 and 2011, the rate of operational errors in the TRACON environment increased from 8.5 to 22.6 operational errors per million air traffic control operations—a 166 percent increase (see fig. 13). In comparison, operational errors increased by 53 percent in the tower environment. Overall, the rate of the most severe airborne operational errors more than doubled between the second quarter of fiscal year 2008 and the second quarter of 2011. While the least severe (category C) incidents are more numerous than the most severe, the most severe (category A) incidents increased from 5 in the second quarter of 2008 to 14 in the second quarter of 2011. In comparison, category C operational errors increased by 135 percent, and category B operational errors decreased by 5 percent. These incident rates do not meet FAA goals under both the prior severity system and using new risk assessment measures. In fiscal year 2010, FAA reported 3.32 category A and B operational errors per million air traffic control operations, significantly exceeding its targeted rate for fiscal year 2010 of 2.05 per million operations. In fiscal year 2011, FAA replaced its operational error measure with a new measure—the System Risk Event Rate (SRER)—a 12-month rolling rate of the most serious LoSS events per thousand such events. The rate of high-risk events also increased using this measure. According to data provided by FAA, the number of the most serious LoSS events—called high-risk events in the new risk assessment process—spiked from 9 events in December 2010 to 16 events in January 2011 but has since decreased. However, the overall SRER increased significantly between December 2010 and February 2011 (from 21.9 to 29.9 high-risk LoSS events per 1000 LoSS events) and remains significantly elevated above FAA’s target of 20 serious LoSS events for every thousand such events. The SRER for the 12-month period ending in April 2011 was 28.97. According to FAA officials, the agency’s target of 20 LoSS events per thousand LoSS incidents represents the system performance baseline gathered using human reporting and may therefore be an unrealistic target as the agency moves to gathering data electronically. FAA plans to continue to collect data on and categorize events using both the old and new systems. Once FAA has completed a 2-year baseline period, it has committed to conduct an independent review of both metrics to determine whether any improvements are needed. Several factors have likely contributed to recent trends in runway incursions and airborne operational errors. The agency has noted that recent increases in runway incursions and airborne operational errors are primarily attributable to changes in FAA’s reporting practices, which encourage increased reporting of incidents. We found evidence to suggest that changes to reporting policies and processes have likely contributed to the increased number of incidents reported—both into ATQA, the official database for incidents—and into ATSAP, the nonpunitive reporting system for air traffic controllers. In addition, the implementation of new technologies and procedures in the terminal area also likely contributed to an increase in the number of reported airborne incidents and runway incursions. FAA has carried out changes aimed at increasing reporting, and each of these factors may have contributed to an increase in the number of reported incidents. That said, it is possible that the increase in safety incidents in the terminal area may also reflect some real increase in the occurrence of safety incidents. As a comparison, we looked at the rate of en route operational errors, which are captured automatically by airplane tracking technology and would therefore not be expected to substantially increase by a change in reporting practices or procedures at the agency. We found that the average rate of en route operational errors in fiscal year 2010 was 38 percent higher than the year before, and that the overall rate increased 13 percent from the second quarter of fiscal year 2008 to the same quarter in 2011. According to FAA officials, some of the increase in reported en route errors may be attributable to increased confidence in the nonpunitive nature of the system—reflected by a decrease in the number of requests for reclassification of incidents from en route facilities. Changes to reporting processes and policies at FAA may explain in part the recent upward trend in reported runway incursions and airborne operational errors. Since operational errors and other losses of separation in both the tower and TRACON environments are currently reported manually by FAA supervisors and quality assurance staff into ATQA, changes in reported error rates may be partially attributable to changes made to encourage more comprehensive reporting of incidents. Most notably, as previously discussed, FAA changed its incident reporting policy in July 2009 such that individually identifying information, such as air traffic controller names and performance records, are no longer associated with specific events in the ATQA database. According to officials, this change may encourage controllers to share more information about incidents with supervisors and quality assurance officers. In addition, in fiscal year 2010, FAA stopped issuing incident “not to exceed” targets to individual facilities. According to officials, these targets may have led supervisors in the past to underreport less serious incidents in order to meet these targets. These policy changes may have increased reporting to an extent that these effects are apparent in incident rates. (See fig. 15 for recent FAA changes to reporting practices overlaid on report operational errors.) Implementation of a nonpunitive, confidential, system of reporting for air traffic controllers may have also contributed to the real increase in the occurrence of operational errors, according to FAA officials. While the implementation of ATSAP may affect reporting rates—either by increasing reporting or by lowering the number of reports to supervisors given that the system satisfies reporting requirements—officials told us that it could also inadvertently lead to an actual increase in the occurrence of operational errors or deviations. According to these officials, the reduced personal accountability ATSAP provides may make some air traffic controllers less risk averse in certain situations. In addition, officials also noted that ATSAP may present a barrier to managerial efforts to directly manage controller performance. For example, if a report is filed into ATSAP, a supervisor may have limited options to assign training or take other corrective actions in response to an incident, even if he or she is aware that an error was made by an individual air traffic controller, presuming the incident did not involve alcohol or drug use or other such violations. The implementation of ATSAP may have resulted in increased reporting of incidents, although reporting into this system does not directly affect official trends in operational errors. According to FAA officials, the confidential, nonpunitive nature of ATSAP has contributed to a positive change in the reporting at FAA. As a result, errors that previously may have gone unreported by air traffic controllers are now being reported to ATSAP. However, data entered into ATSAP are not directly available to FAA and do not feed into ATQA (see fig. 16). In addition, it is possible that some incidents that would have previously been reported to FAA are now being reported only to ATSAP, thus decreasing the number of incidents reported to FAA. According to ATSAP data, approximately 35 percent of all incidents reported to ATSAP in 2010 were “known” to FAA—meaning that the incident was reported into ATQA by a supervisor or manager, as well as into ATSAP by an air traffic controller—while the other 65 percent were not official reported to FAA. Implementation of new technologies in the terminal area may also impact recent trends in surface incidents and airborne losses of separation. For example, since FAA’s ongoing implementation of TARP will allow FAA to automatically capture losses of separation in the tower and TRACON environments, it will also likely increase the number of reported losses of separation. According to officials, during its limited testing at facilities, TARP has already captured errors that were not being reported by air traffic controllers. For surface incidents, the ASDE-X system alerts controllers when aircraft or vehicles are at risk of colliding on runways, resulting in the identification of incidents that controllers might otherwise not be aware of. Designed as a surface surveillance system, ASDE-X helps to prevent collisions by raising alarms when aircraft appear to be at risk of colliding. As these alerts draw attention to near misses or potential collisions, they also serve to notify personnel of possible incursions and thus may have contributed to an increase in reported events, even as they may have prevented accidents. We analyzed the number of reported incursions at airports with ASDE-X and found that, at many of these airports, the number of reported incursions actually increased after their ASDE-X systems became operational. (For more information about our analysis of how the number of runway incursions changed after the installation of ASDE-X, see app. III.) Officials with the Sensis Corporation, the developer of ASDE-X, acknowledged to us that this may be a side effect of the deployment of the system. FAA has taken steps to improve safety in the terminal area since 2007 and has both reduced the number of serious incursions and undertaken successful efforts to increase reporting of incidents, but we identified two areas in which FAA could further improve management of data and technology in order to take a more proactive, systemic approach to improving terminal area safety. These areas include: (1) enhanced oversight of terminal area safety, including the management of runway excursions and ramp areas, and (2) assurance that data for risk assessments are complete, meaningful, and available to decision makers. Stakeholders we spoke with generally lauded Runway Safety’s efforts on incursions, but FAA could do more to expand to other aspects of runway safety—notably runway excursions—as well as playing a more active oversight role in ramp areas. As we noted earlier, FAA is rolling out a new program to gather and analyze data on excursions, which should allow the agency to better understand why excursions happen and develop programs to mitigate risk. FAA is exercising some additional authority over ramps by proposing rules to address airport safety management systems and training for personnel accessing ramp areas, but these efforts are limited and involve requiring airports to develop and implement their own safety guidelines. In 2007, we reported that the lack of standards for ramp operations hindered safety, and an upcoming report by the Airport Cooperative Research Program (ACRP) continues to find that no comprehensive standards exist with regard to ramp area markings, ground operations, or safety training. The two proposed rules by FAA on airport safety management systems and training establish some standards for the ramp area, but proposed federal oversight would still be limited. The proposed rule implementing safety management systems for airports would require airports to develop plans to identify and address hazards in the ramp area and on the airfield, in addition to ensuring that all employees with access to runways, taxiways, and ramps receive training on operational safety and on the airport’s safety management system. Other aspects of ground handling, such as surface marking and ground operations, would continue to largely be overseen by airlines and the ground handling companies that are contracted by them. The placement of the Runway Safety within the ATO Safety Office may limit its ability to serve as an effective focal point for runway and terminal area safety, given that aspects of runway and terminal area safety fall under the purview of several parts of FAA, including ATO, the Office of Airports, and the Office of Aviation Safety. In 2010, the IG recommended that the placement of Runway Safety within ATO be reconsidered, because the office may be limited in its ability to carry out cross-agency risk management efforts. Subsequently, the IG determined that Runway Safety had demonstrated effectiveness within ATO, but pointed to a need to periodically review organizational structures and processes to ensure that it continues to be effective. Runway Safety oversees data, assessments, and performance measures across a number of safety areas—air traffic control, pilot actions and training, outreach to general aviation, airport infrastructure, and technologies, among others—which are under the purview of different offices within FAA. As a result, Runway Safety has the potential to serve as the focal point for risk management in the terminal area. Multiple changes to reporting policies and processes in recent years make it difficult to know the extent to which the recent increases in some terminal area incidents are due to more accurate reporting or an increase in the occurrence of safety incidents or both. For example, FAA officials have specifically attributed the increase in airborne operational errors to changes in reporting practices following the implementation of ATSAP, but, as previously mentioned, the relationship between the implementation of ATSAP and an increase in errors is uncertain. Likewise, other changes to performance measures and internal reporting policies, such as removal of individually identifying information from ATQA, further obscure the source of recent trends. Without accurate and consistent measures of safety outcomes, FAA cannot assess the risks posed to aircraft or passengers over time or the impacts of its efforts to improve safety. As we noted in a 2010 report, FAA has embarked on a data-driven, risk- based safety oversight approach. As part of this effort, FAA has established a new, risk-based measure to track losses of separation, but measures for runway incursions are not risk based, reflecting instead a simple count of incidents. Thus, FAA currently rates the severity of incursions based on proximity and the response time to avoid a collision and does not differentiate between types of aircraft—or the number of lives put at risk—as part of its severity calculation. While any loss of life is catastrophic, the impact of an accident involving a commercial aircraft carrying hundreds of passengers can have different implications than an accident involving smaller aircraft. According to industry stakeholders, the use of proximity as the main criterion for severity of incursions is overly simplistic. As a result, FAA may be unable to use incursion data to identify the most serious systemic safety issues. Similarly, the application of risk assessment to measures of runway safety could allow FAA to focus individually on the risk posed by incursions by large commercial aircraft, as well as the risk posed by an ever-increasing incursion rate among general aviation operations. Additional attention to the root causes of incidents involving general aviation could potentially identify strategies addressing this ongoing challenge, which may include the installation of low-cost ground surveillance systems. While FAA officials did not detail immediate plans to alter the measure for incursions, officials did state that the agency plans to introduce surface incidents into RAP at the beginning of fiscal year 2012. The joint FAA-aviation industry Runway Safety Council is a first step toward the effort to reduce incursion risks. By identifying causes and making recommendations that could help determine what changes would be needed to make measures more risk- based, the Council’s Root Cause Analysis Team can help reduce incursion risks. Further, according to FAA officials, the new measure being developed for excursions will be risk-based; however, this measure will not be fully in use until 2014. By contrast, FAA has taken steps to improve its ability to assess the risk of airborne operational errors and to collect more information. However, under the new risk assessment system, far fewer incidents are subject to analysis than were included in previous, nonrisk-based iterations, and the measure may therefore not account for all potential risk. For instance, RAP does not yet have procedures to assess losses of separation with terrain and with airspace boundaries. Currently, LoSS events in which at least 66 percent of minimum separation is maintained between aircraft are not assessed through FAA’s recently launched RAP. According to FAA officials, the 66 percent threshold for inclusion in RAP was adopted in recognition of the resources required for the enhanced risk-analysis process. This initial threshold is not based on specific risk-based criteria. Furthermore, losses of separation eligible for inclusion in RAP are currently limited to those that occur between two or more radar-tracked aircraft. As a result, many incidents—such as those that occur between aircraft and terrain or aircraft and protected airspace—are currently excluded from FAA’s process for assessing systemic risk. According to FAA officials, this exclusion is in part because there is no system in place through which the current RAP proximity inclusion threshold could be applied to these types of incidents, although FAA officials stated that an effort is under way to expand RAP to include these areas. In addition, FAA’s new measure for assessing air traffic risk levels—the SRER—does not include many losses of separation that were tracked under the old measure, although it does expand the assessment process to include some errors caused by pilots. Further, while the technology has been developed to collect data automatically for potential operational errors involving losses of separation, FAA has delayed the full implementation of TARP in air traffic control towers and TRACONS. According to FAA officials, the implementation of TARP may create workload challenges for quality assurance staff, as the technology is likely to capture hundreds of potential losses of separation that were not previously being reported through existing channels. In 2009, the IG recommended that FAA establish firm timelines for the full implementation of TARP. Data collected through ATSAP, the nonpunitive reporting system, have limitations. There is the potential for serious events to be reported only to ATSAP and to therefore not be included in the official ATQA database or in RAP. Such events are referred to as “unknown” events. In 2010, 65 percent of incidents reported to ATSAP were unknown to FAA. (See fig. 17.) FAA officials acknowledged that there are a large proportion of unknown incidents but stated that these incidents are likely to be minor. In addition, some information about incidents reported to ATSAP is available for analysis by FAA and the aviation industry via the Aviation Safety Information Analysis and Sharing (ASIAS) program, as de-identified ATSAP data are shared with ASIAS. Further, they noted, ATSAP reports may be procedural, rather than reports of incidents or operational errors. Available data from the ATSAP program office indicates, however, that some of the “unknown” reports in the system were potentially serious events. For example, between the program’s launch in July 2008 and June 2011, 74 out of 253 ATSAP reports that were classified as potentially hazardous did not appear in ATQA, accounting for 29 percent of these reports. In June 2011—the most recent month for which data are available—approximately one third of all ATSAP reports classified as potentially major events, and 42 percent of those classified as hazardous, did not appear in ATQA. According to officials, ATSAP allows controllers to report incidents that may have otherwise gone unreported, and the program facilitates early detection and improved awareness of operational deficiencies and adverse trends. These unknown events, FAA officials point out, would not likely have been reported into ATQA before the implementation of ATSAP. Information sharing challenges may impact the ability of FAA to analyze safety data and understand safety trends. Multiple FAA programs and data systems assign contributing factors to incidents, but factors are not coordinated across programs. For instance, both ATSAP and RAP have developed sets of factors that are identified as contributing to incidents during the incident investigation process. However, despite the fact that these two programs look at some of the same type of incidents (airborne losses of separation), program officials have not coordinated their development of the categories used to describe incidents. As a result, officials we interviewed stated that it is difficult to compare data across systems. For example, both ATSAP and RAP issued internal reports identifying top factors contributing to reported incidents, but there is no apparent overlap between the two lists. In addition, while the ATQA database contains more than 50 contributing factors for operational errors, FAA and the ATSAP program office do not use these data to identify systemic safety issues (see table 3). According to FAA officials, FAA is currently developing a common set of contributing factors for ATSAP and RAP, as well as a translation capability that will allow for the inclusion of historical data on contributing factors in future analyses. The IG raised concerns about the quality of ATQA data on contributing factors in a 2009 report, noting that FAA does not consistently include fatigue issues in contributing factor data it collects on operational errors. FAA has added contributing factors related to fatigue to ATSAP and is exploring ways to gather objective shift, schedule, and related resource management data to support enhanced fatigue analysis. Regional and local access to and awareness of data related to both individual incidents and incident trends may be limited. According to FAA officials we interviewed at the regional level, it is difficult for supervisors at the regional and facility levels to obtain information on incident trends specific to their area of supervision in part because key databases, such as ATQA, do not have the capability to allow regional supervisors to run region- or facility-specific data queries. In addition, while multiple data resources may be available, officials stated that information on incidents is scattered, and no central source exists where employees can identify available data resources. While FAA has made advances in the quantity and comprehensiveness of the data it collects on incidents in the terminal area, officials stated that the agency faces difficulty in developing sophisticated databases with which to perform queries and modeling of the data. According to FAA officials, the full implementation of CEDAR will address many of the deficiencies identified by regional and local offices. The nature and scope of ramp accidents are still unknown, just as they were when we reported in 2007, and we were told by officials with Airports Council International that it can be difficult to for airports to get data on incidents in the ramp area—areas typically overseen by airlines. This will pose a challenge as airports move to implement safety management systems and seek to identify and mitigate hazards. As one aviation expert explained, even if data are available locally—which they may not be—the number of incidents at individual airports can be too few to allow for the identification of root causes or the proactive identification of risk. The Office of Runway Safety focuses on improving safety by reducing the number and severity of runway incursions. However, risk management in terminal areas involves more than just incursions—notably runway excursions and incidents in ramp areas. Runway Safety plans to start tracking runway excursions in October 2011, but it will take several years to develop processes for identifying and tracking incidents, identifying and mitigating risks, and measuring outcomes. Likewise, FAA does not track incidents in ramp areas, although we previously recommended that FAA work with the aviation industry and OSHA to develop a mechanism to collect and analyze data on ramp accidents. Airports implementing plans for safety management systems under FAA’s proposed rule will need data that are useful, complete, and meaningful in order to accurately assess risk and plan for safety, but FAA cannot yet provide meaningful data for the assessment and management of risks posed by runway excursions or ramp areas. Without information on incidents in these areas, FAA and its safety partners are hampered in their ability to identify risk, develop mitigation strategies, and track outcomes. FAA addresses runway incursions as a specific type of incident and does not distinguish between commercial and general aviation in its performance measures. However, risks posed by runway safety incidents to passengers and aircraft in the national airspace system are different for commercial aircraft and general aviation. FAA performance measures for runway incursions—including the number, rate, and severity—do not reflect differences between commercial and general aviation and are not risk-based. The agency has installed risk-reduction technologies at larger commercial service airports, for example, but in the absence of risk-based performance measures, it lacks the ability to prioritize projects or measure effectiveness. With regard to general aviation, this traffic currently accounts for about a third of total tower operations, but 60 percent of runway incursions involve these aircraft. While Runway Safety has acknowledged that general aviation has caused more runway incursions, without performance measures that reflect risk, FAA may not be able identify appropriate mitigation strategies to address the large—and growing—proportion of runway incidents—including both incursions and excursions—involving general aviation aircraft. Strategies to decrease the risk posed by safety incidents involving general aviation could include additional outreach to these pilots, increased remediation following pilot errors, or the installation of technologies such as low-cost ground surveillance at airports serving general aviation traffic. Safety in the terminal area is a shared responsibility among FAA, airlines, pilots, and airports, and there are a number of FAA offices that either collect or analyze terminal area incident data, but useful access to complete and meaningful data is limited. The agency currently does not have comprehensive risk-based data, sophisticated databases to perform queries and model data, methods of reporting that capture all incidents, or a level of coordination that would facilitate the comparison of incidents across systems. Technologies aimed at improving reporting have not been fully implemented. As a result, aviation officials managing risk using safety management systems, including local and regional decision makers, have limited—if any—access to FAA incident data. For example, FAA’s official database for air traffic safety does not allow local or regional FAA safety officials to run region- or facility-specific data queries. Further, under the new risk assessment process used for losses of separation, fewer incidents are assessed and accounted for in performance measures—such as losses of separation between aircraft and terrain or aircraft and protected airspace—which may distort risk assessment processes. Finally, according to FAA officials, one reason the agency has not fully implemented TARP is that implementation of TARP may create workload challenges for FAA quality assurance staff, as the technology is likely to capture hundreds of potential losses of separation that were not previously being reported through existing channels. FAA offices and others using a safety management system approach to manage risk should have access to complete and meaningful data to allow for hazard identification and risk management. The ability of FAA and airport officials—and the local Runway Safety Action Teams that they serve on— to identify safety risks, develop mitigation strategies, and measure outcomes is hindered by limited access to complete and meaningful data. To enhance oversight of terminal area safety to include the range of incidents that pose risks to aircraft and passengers, we recommend that the Secretary of Transportation direct the FAA Administrator to take the following three actions:  develop and implement plans to track and assess runway excursions and extend oversight to ramp safety;  develop separate risk-based assessment processes, measures, and performance goals for runway safety incidents (including both incursions and excursions) involving commercial aircraft and general aviation and expand the existing risk-based process for assessing airborne losses of separation to include incidents beyond those that occur between two or more radar-tracked aircraft; and  develop plans to ensure that information about terminal area safety incidents, causes, and risk assessment is meaningful, complete, and available to appropriate decision makers. We provided the Departments of Transportation and Labor, NTSB, and the National Aeronautics and Space Administration (NASA) with a draft of this report for review and comment. The Department of Transportation agreed to consider our recommendations and provided clarifying information about efforts made to improve runway safety, which we incorporated. The Department of Labor, NTSB, and NASA provided technical corrections, which we also incorporated. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 7 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretaries of Transportation and Labor, NTSB, the Administrator of NASA, and interested parties. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me on (202) 512-2834 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. Key contributors to this report are listed in appendix IV. Gerald L. Dillingham, P Director, Physical Infrastructure Issues h.D. Our objective was to review aviation safety and update our 2007 report on runway and ramp safety. To do so, we addressed the following questions: (1) What actions has the Federal Aviation Administration (FAA) taken to improve safety in the terminal area since 2007? (2) What are the trends in terminal area safety and the factors contributing to these trends? and (3) What additional actions could FAA take to improve terminal area safety? To identify actions FAA has taken since 2007 to improve safety in the terminal area and to identify additional actions FAA could take to improve safety, we reviewed our prior reports, as well as documents and reports from FAA, the Department of Transportation Inspector General (IG), the National Transportation Safety Board (NTSB), the International Civil Aviation Organization (ICAO), and others; FAA orders, advisory circulars, and regulations; and applicable laws. We also determined the roles and responsibilities of FAA, NTSB, the Occupational Safety and Health Administration (OSHA), the National Aeronautics and Space Administration (NASA), airports, and airlines involving runway, terminal airborne, and ramp safety. In addition to interviewing officials from FAA, IG, and NTSB, we interviewed aviation experts affiliated with the Air Line Pilots Association, Airports Council International, Air Transportation Association, the Flight Safety Foundation, and the National Air Traffic Controllers Association about terminal area safety practices and technologies. We also interviewed researchers from the Air Cooperative Research Program (ACRP) of the Transportation Research Board and experts affiliated with various aviation technology companies. To obtain information about air traffic control operations, observe the application of key technologies, and interview facility managers, we visited four FAA facilities that were near our GAO offices: the Potomac Consolidated Terminal Radar Approach Control facility, the Washington Air Route Traffic Control Center, and the air traffic control towers at Ronald Reagan Washington National Airport and the Seattle-Tacoma International Airport. We also interviewed airport officials with the Port of Seattle at Seattle- Tacoma International Airport. To obtain information about the Air Traffic Safety Action Program (ATSAP), we interviewed officials with the ATSAP program office and attended an Event Review Committee meeting in Renton, Washington. We also reviewed FAA’s progress in addressing recommendations that we, IG, and NTSB have made in previous years and reviewed the processes that FAA uses to collect and assess runway and air traffic safety data. To identify and describe recent trends in terminal area safety and the factors contributing to these trends, we obtained and analyzed data from FAA, NTSB, and OSHA on safety incidents in the terminal area. We analyzed FAA runway incursion data collected from fiscal year 2001 through the second quarter of fiscal year 2011, as well as FAA data on airborne operational errors from the Air Traffic Quality Assurance database (ATQA) from the third quarter of fiscal year 2007 through the second quarter of fiscal year 2011. We limited our analysis to airborne operational errors in order to avoid double counting of surface operationa errors that are included in our counts of runway incursions. We used Operations Network data from FAA to determine rates of incursions and airborne operational errors per million operations. Rates of incursions were calculated per million tower operations, and rates of airborne operational errors were calculated per million operations perfo traffic control towers, terminal radar approach control (TRACON) facilitie s, and en route facilities on a quarterly basis. We also reviewed NTSB data involving runway incursions and excursions from 2008 through June 2011 and summarized OSHA data on fatalities in the ramp area from 2001 through 2010. We used statistical models to assess the association between safety incidents and the concentration of general aviatio operations and the implementation of the Airport Surface Detection Equipment, Model X (ASDE-X) surface surveillance system from fiscal year 2001 through April 2011. These models estimated how the number of incursions changed after airports installed ASDE-X or increased the proportion of operations involving general aviation. The models accoun for other factors that may contribute to incursions, such as long-term weather patterns, runway layouts, as well as controller and pilot experience. See appendix III for more information about the methods and results of these analyses. To assess the reliability of FAA data, we (1) reviewed internal FAA documents about its collection, entry, and maintenance of the data and (2) interviewed FAA officials who were knowledgeable about the content and limitations of these data. Both NTSB and OSHA provided information about the reliability of their excursion and fatality data, respectively. We determined that these data t were sufficiently reliable for the descriptive and comparative analyses used in this report. We conducted this performance audit from February 2011 to October 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the aud it to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Researching, testing, and deploying new technology is a major part of FAA’s risk-reduction strategy. A number of available technological systems are intended to help reduce the number and severity of runway incursions. For example, to give air traffic controllers better visibility of activity on the airfield and help prevent collisions, FAA has installed the ASDE-X system at 35 major airports, while the Airport Surface Detection Equipment, Model 3 (ASDE-3) radar and the Airport Movement Area Safety System (AMASS) provide surface surveillance at 9 additional airports. Runway status lights, which will be installed at 23 airports, are a fully automatic series of lights that give pilots a visible warning when runways are not clear to enter, cross, or depart on. To mitigate the risks posed by runway excursions, FAA conducted research that led to the development of the Engineered Materials Arresting System (EMAS), a bed of crushable concrete designed to stop aircraft from overrunning runway areas. As of July 2011, EMAS has been installed at 52 runways at 36 airports, and there are plans to install 11 EMAS systems at 7 others. According to FAA officials, EMAS has successfully arrested seven overrunning aircraft with no fatalities or serious injuries and little damage to the aircraft to date. (See table 4 for a brief description of technologies designed to improve runway safety.) This appendix summarizes our statistical analysis of the between the ASDE-X airfield surface surveillance system and runway ine focused on ASDE-X, among many other runway safety cursions. W programs, because of its potential for persuasive impact evaluation. We describe how the process FAA used to install ASDE-X created a “quasi- experiment,” which allows u as to compare how incursions changed at sirports that received the technology relative to airports that kept the cursions. W rograms, because of its potential for persuasive impact evaluation. We escribe how the process FAA used to install ASDE-X created a “quasi- xperiment,” which allows u s to compare how incursions changed at irports that received the technology relative to airports that kept the tatus quo. A a s lo c m p th key goal of ASDE-X is to make air traffic controllers more aware of ctivities on taxiways and runways in order to avoid collisions. The ystem consists of airfield radar and sensors that collect data on the cation of aircraft and vehicles. Computers transform these data in ontinuously updated maps of the airfield, which are displayed on color onitors in air traffic control towers. The system warns controllers of otential collisions—which may draw attention to possible incursions— rough visual and audible alarms. AA used a selective and staggered process to install ASDE-X at 34 irports from 2003 through 2011 (of 35 airports slated to receive this ystem). The variation among airports receiving the technology, as well F a s as the times when they received i evaluation. This type of analysis compares the change in incursions over time at airports that installed ASDE- nX with the change at airports that did t, allows for a quasi-experimental valuation. This type of analysis compares the change in incursions over me at airports that installed ASDE- X with the change at airports that did ot receive the technology, also known as a “difference-in-difference.” alysis of site-specific safety and efficiency benefits as compared to site-specific costs. airports provide a plausible comparison group for analysis, but we use variety of other comparison groups to ensure that our findings are robu st. Many factors that may contribute to incursions are controlled in our analysis here. We control for variation among airports in runway and taxiway layouts, markings, and lighting, in addition to long-term variati in weather, air traffic, and pilot and controller skills. The staggered installation of ASDE-X makes bias due to short-term weather conditions or pilot and controller experience unlikely, because these factors would need to be correlated with 34 installation times throughout the country. In addition, the staggered installation lets us control for factors that affect all airports equally, such as changes in training and procedures made throughout the country at the same time. The time period of our analysis spans fiscal years 2001 through April 2011. We assembled data on the number of incursions that occurred pe month at each FAA-towered airport in this period, along with data on air traffic control tower operations. The latter data included the number of monthly tower operations at each airport, as well as the mixture of commercial and general aviation operations. The operations data ide the population of interest, including the many smaller airports with no incursions that do not appear in the incursion data. FAA provided the installation dates and locations for the ASDE-X, runway status lights, FAROS, and low-cost ground surveillance systems. We used these data to identify whether each technology was installed for each airport and month between fiscal year 2001 and April 2011. We used a statistical model to estimate the association between ASDE-X and the number of incursions for airport i and month t. The model took the form of E(Yit | a,p,tit,xit) = a exp(δp + atit + xitβ), where Yit randomly varies according to the Poisson distribution, a is vector of airport fixed effects, p is a vector of year-month fixed effects, tit indicates whether ASDE-X was operational at airport i in month t, xit are other time-varying covariates, and δ, α, and β are vectors of parameters. We estimated the change in incursions after the installation of ASDE-X using one contemporaneous, before-and-after parameter, α, becaus ASDE-X likely has an immediate effect on incursions once it has been installed that does not change over time. ,4 The covariates xit included the number of air traffic control tower operations (to measure exposure and variation in the nature of activity across airports), indicators for having 25 to 60 percent and greater than 60 percent of operations involving general aviation (excluding 0 to 25 percent), and indicators for having the runway status lights, FAROS, or low-cost ground surveillance systems installed at airport i and time t. T airport. The 485 airports in the panel ensure that these estimates will be accurate approximations, even if incursions are not Poisson-distributed. As Wooldridge 2003 (674- 675) notes, conditional ML estimators consistently estimate the parameters of a fixed effects model, even with arbitrary forms of over- and under-dispersion, heteroskedasticity, and serial correlation. As a result, we can safely use the Poisson conditional likelihood to estimate the parameters while using cluster-robust standard errors. The models used several groups to compare the change in incursions before and after ASDE-X was installed, in order to assess the sensitivity of our results to plausible alternatives. The groups included 1. all FAA-towered airports; 2. airports that were included in the FAA benefit-cost analysis above b did not receive ASDE-X; 3. the top 100 airports in tower operations from fiscal year 2001 through 4. airports that had a similar ground surveillance system, ASDE- 3/AMASS, installed prior to the first installation of ASDE-X (baseline 5. airports that did not have ASDE-3/AMASS installed at baseline; and 6. airports that did not have ASDE-3/AMASS installed at baseline and that were among the top 100 airports in tower operations from fiscal year 2001 through April 2011. Figure 18 plots the average monthly incursion rate for airports that did and did not receive ASDE-X, rescaled to a ratio of the over-time mean to better express the trends. The smooth lines summarize the average incursion rate for each group and month using nonparametric locally weighted regression models. The vertical lines show the ASDE-X installation times for each airport. Prior to the first installation of ASDE-X, the incursion rate changed in roughly the same ways for the ASDE-X and comparison airports. As FAA began to install the system in late 2003, and the incursion rate began to increase for the ASDE-X airports, but it decreased and then increased at a slower rate for the comparison airports. Substituting the other comparison groups in these plots produces similar patterns. Consequently, the raw data suggest that reported incursions increased at airports that received ASDE-X, as compared to the change at airports t did not receive the system. In addition to the individual named above, Heather MacLeod, Assistant Director; Russ Burnett; Martha Chow; Dave Hooper; Delwen Jones; Molly Laster; Brooke Leary; Josh Ormond; and Jeff Tessin made key contributions to this report.

Takeoffs, landings, and movement around the surface areas of airports (the terminal area) are critical to the safe and efficient movement of air traffic. The nation's aviation system is arguably the safest in the world, but close calls involving aircraft or other vehicles at or near airports are common, occurring almost daily. The Federal Aviation Administration (FAA) provides oversight of the terminal area and has taken action to improve safety, but has been called upon by the National Transportation Safety Board (NTSB) and others to take additional steps to improve its oversight. As requested, this report addresses (1) recent actions FAA has taken to improve safety in the terminal area, (2) recent trends in terminal area safety and factors contributing to those trends, and (3) any additional actions FAA could take to improve safety in the terminal area. To address these issues, GAO analyzed data from FAA data; reviewed reports and FAA documents; and interviewed federal and industry officials. Since 2007, FAA has taken several steps to further improve safety at and around airports, including implementing procedural and technological changes to improve runway safety, proposing a rule that would require airports to establish risk-management plans that include the ramp areas where aircraft are serviced, collecting more data on safety incidents, and shifting toward risk-based analysis of airborne aviation safety information. Several of these initiatives are intended to better identify systemic issues in air traffic safety. Rates of reported safety incidents in the terminal area continue to increase. FAA met its interim goals toward reducing the total number of runway incursions--the unauthorized presence of an airplane, vehicle, or person on the runway--in 2009 and 2010, but the overall rate of incursions at towered airports has trended steadily upward. In fiscal year 2004, there were 11 incursions per million operations at these airports; by fiscal year 2010, the rate increased to 18 incursions per million operations. The rate and number of airborne operational errors--errors made by air traffic controllers--have increased considerably in recent years, with the rate nearly doubling from the second quarter of fiscal 2008 to the same period of 2011. FAA has not met its related performance goals. Comprehensive data are not available for some safety incidents, including runway overruns or incidents in ramp areas. Recent increases in reported runway incursions and airborne operational errors can be somewhat attributed to several changes in reporting policies and procedures at FAA; however, trends may also indicate an increase in the actual occurrence of incidents. Enhanced oversight and additional information about surface and airborne incidents could help improve safety in the terminal area. FAA oversight in the terminal area is currently limited to certain types of incidents, notably runway incursions and certain airborne incidents, and does not include runway overruns or incidents in ramp areas. In addition, the agency lacks data collection processes, risk-based metrics, and assessment frameworks for analyzing other safety incidents such as runway overruns, incidents in ramp areas, or a wider range of airborne errors. Further, changes to reporting processes and procedures make it difficult to assess safety trends, and existing data may not be readily available to decision makers, including those at the regional and local levels. As a result, FAA may have difficulty assessing recent trends in safety incidents, the risks posed to aircraft or passengers in the terminal area, and the impact of the agency's efforts to improve safety. GAO recommends that FAA (1) extend oversight of terminal area safety to include runway overruns and ramp areas, (2) develop risk-based measures for runway safety incidents, and (3) improve information sharing about incidents. The Department of Transportation agreed to consider the recommendations and provided clarifying information about efforts made to improve runway safety, which GAO incorporated.

You are an expert at summarizing long articles. Proceed to summarize the following text: Created in 1961, Peace Corps is mandated by statute to help meet developing countries’ needs for trained manpower while promoting mutual understanding between Americans and other peoples. Volunteers commit to 2-year assignments in host communities, where they work on projects such as teaching English, strengthening farmer cooperatives, or building sanitation systems. By developing relationships with members of the communities in which they live and work, volunteers contribute to greater intercultural understanding between Americans and host country nationals. Volunteers are expected to maintain a standard of living similar to that of their host community colleagues and co-workers. They are provided with stipends that are based on local living costs and housing similar to their hosts. Volunteers are not supplied with vehicles. Although the Peace Corps accepts older volunteers and has made a conscious effort to recruit minorities, the current volunteer population has a median age of 25 years and is 85 percent white. More than 60 percent of the volunteers are women. Volunteer health, safety, and security is Peace Corps’ highest priority, according to the agency. To address this commitment, the agency has adopted policies for monitoring and disseminating information on the security environments in which the agency operates, training volunteers, developing safe and secure volunteer housing and work sites, monitoring volunteers, and planning for emergencies such as evacuations. Headquarters is responsible for providing guidance, supervision, and oversight to ensure that agency policies are implemented effectively. Peace Corps relies heavily on country directors—the heads of agency posts in foreign capitals—to develop and implement practices that are appropriate for specific countries. Country directors, in turn, rely on program managers to develop and oversee volunteer programs. Volunteers are expected to follow agency policies and exercise some responsibility for their own safety and security. Peace Corps emphasizes community acceptance as the key to maintaining volunteer safety and security. The agency has found that volunteer safety is best ensured when volunteers are well integrated into their host communities and treated as extended family and contributors to development. Reported incidence rates of crime against volunteers have remained essentially unchanged since we completed our report in 2002. Reported incidence rates for most types of assaults have increased since Peace Corps began collecting data in 1990, but have stabilized in recent years. The reported incidence rate for major physical assaults has nearly doubled, averaging about 9 assaults per 1,000 volunteer years in 1991-1993 and averaging about 17 assaults in 1998-2000. Reported incidence rates for major assaults remained unchanged over the next 2 years. Reported incidence rates of major sexual assaults have decreased slightly, averaging about 10 per 1,000 female volunteer years in 1991-1993 and about 8 per 1,000 female volunteer years in 1998-2000. Reported incidence rates for major sexual assaults averaged about 9 per 1,000 female volunteer years in 2001-2002. Peace Corps’ system for gathering and analyzing data on crime against volunteers has produced useful insights, but we reported in 2002 that steps could be taken to enhance the system. Peace Corps officials agreed that reported increases are difficult to interpret; the data could reflect actual increases in assaults, better efforts to ensure that agency staff report all assaults, and/or an increased willingness among volunteers to report incidents. The full extent of crime against volunteers, however, is unknown because of significant underreporting. Through its volunteer satisfaction surveys, Peace Corps is aware that a significant number of volunteers do not report incidents, thus reducing the agency’s ability to state crime rates with certainty. For example, according to the agency’s 1998 survey, volunteers did not report 60 percent of rapes and 20 percent of nonrape sexual assaults. Reasons cited for not reporting include embarrassment, fear of repercussions, confidentiality concerns, and a belief that Peace Corps could not help. In 2002, we observed that opportunities for additional analyses existed that could help Peace Corps develop better-informed intervention and prevention strategies. For example, our analysis showed that about a third of reported assaults after 1993 occurred from the fourth to the eighth month of service—shortly after volunteers completed training, arrived at sites, and began their jobs. We observed that this finding could be explored further and used to develop additional training. Since we issued our report, Peace Corps has taken steps to strengthen its efforts for gathering and analyzing crime data. The agency has hired an analyst responsible for maintaining the agency’s crime data collection system, analyzing the information collected, and publishing the results for the purpose of influencing volunteer safety and security policies. Since joining the agency a year ago, the analyst has focused on redesigning the agency’s incident reporting form to provide better information on victims, assailants, and incidents and preparing a new data management system that will ease access to and analysis of crime information. However, these new systems have not yet been put into operation. The analyst stated that the reporting protocol and data management system are to be introduced this summer, and responsibility for crime data collection and analysis will be transferred from the medical office to the safety and security office. According to the analyst, she has not yet performed any new data analyses because her focus to date has been on upgrading the system. We reported that Peace Corps’ headquarters had developed a safety and security framework but that the field’s implementation of this framework was uneven. The agency has taken steps to improve the field’s compliance with the framework, but recent Inspector General reports indicate that this has not been uniformly achieved. We previously reported that volunteers were generally satisfied with the agency’s training programs. However, some volunteers had housing that did not meet the agency’s standards, there was great variation in the frequency of staff contact with volunteers, and posts had emergency action plans with shortcomings. To increase the field’s compliance with the framework, in 2002, the agency hired a compliance officer at headquarters, increased the number of field- based safety and security officer positions, and created a safety and security position at each post. However, recent Inspector General reports continued to find significant shortcomings at some posts, including difficulties in developing safe and secure sites and preparing adequate emergency action plans. In 2002, we found that volunteers were generally satisfied with the safety training that the agency provided, but we found a number of instances of uneven performance in developing safe and secure housing. Posts have considerable latitude in the design of their safety training programs, but all provide volunteers with 3 months of preservice training that includes information on safety and security. Posts also provide periodic in-service training sessions that cover technical issues. Many of the volunteers we interviewed said that the safety training they received before they began service was useful and cited testimonials by current volunteers as one of the more valuable instructional methods. In both the 1998 and 1999 volunteer satisfaction surveys, over 90 percent of volunteers rated safety and security training as adequate or better; only about 5 percent said that the training was not effective. Some regional safety and security officer reports have found that improvements were needed in post training practices. The Inspector General has reported that volunteers at some posts said cross-cultural training and presentations by the U.S. embassy’s security officer did not prepare them adequately for safety-related challenges they faced during service. Some volunteers stated that Peace Corps did not fully prepare them for the racial and sexual harassment they experienced during their service. Some female volunteers at posts we visited stated that they would like to receive self-protection training. Peace Corps’ policies call for posts to ensure that housing is inspected and meets post safety and security criteria before the volunteers arrive to take up residence. Nonetheless, at each of the five posts we visited, we found instances of volunteers who began their service in housing that had not been inspected and had various shortcomings. For example, one volunteer spent her first 3 weeks at her site living in her counterpart’s office. She later found her own house; however, post staff had not inspected this house, even though she had lived in it for several months. Poorly defined work assignments and unsupportive counterparts may also increase volunteers’ risk by limiting their ability to build a support network in their host communities. At the posts we visited, we met volunteers whose counterparts had no plans for the volunteers when they arrived at their sites, and only after several months and much frustration did the volunteers find productive activities. We found variations in the frequency of staff contact with volunteers, although many of the volunteers at the posts we visited said they were satisfied with the frequency of staff visits to their sites, and a 1998 volunteer satisfaction survey reported that about two-thirds of volunteers said the frequency of visits was adequate or better. However, volunteers had mixed views about Peace Corps’ responsiveness to safety and security concerns and criminal incidents. The few volunteers we spoke with who said they were victims of assault expressed satisfaction with staff response when they reported the incidents. However, at four of the five posts we visited, some volunteers described instances in which staff were unsupportive when the volunteers reported safety concerns. For example, one volunteer said she informed Peace Corps several times that she needed a new housing arrangement because her doorman repeatedly locked her in or out of her dormitory. The volunteer said staff were unresponsive, and she had to find new housing without the Peace Corps’ assistance. In 2002, we reported that, while all posts had tested their emergency action plan, many of the plans had shortcomings, and tests of the plans varied in quality and comprehensiveness. Posts must be well prepared in case an evacuation becomes necessary. In fact, evacuating volunteers from posts is not an uncommon event. In the last two years Peace Corps has conducted six country evacuations involving nearly 600 volunteers. We also reported that many posts did not include all expected elements of a plan, such as maps demarcating volunteer assembly points and alternate transportation plans. In fact, none of the plans contained all of the dimensions listed in the agency’s Emergency Action Plan checklist, and many lacked key information. In addition, we found that in 2002 Peace Corps had not defined the criteria for a successful test of a post plan. Peace Corps has initiated a number of efforts to improve the field’s implementation of its safety and security framework, but Inspector General reports continued to find significant shortcomings at some posts. However, there has been improvement in post communications with volunteers during emergency action plan tests. We reviewed 10 Inspector General reports conducted during 2002 and 2003. Some of these reports were generally positive—one congratulated a post for operating an “excellent” program and maintaining high volunteer morale. However, a variety of weaknesses were also identified. For example, the Inspector General found multiple safety and security weaknesses at one post, including incoherent project plans and a failure to regularly monitor volunteer housing. The Inspector General also reported that several posts employed inadequate site development procedures; some volunteers did not have meaningful work assignments, and their counterparts were not prepared for their arrival at site. In response to a recommendation from a prior Inspector General report, one post had prepared a plan to provide staff with rape response training and identify a local lawyer to advise the post of legal procedures in case a volunteer was raped. However, the post had not implemented these plans and was unprepared when a rape actually occurred. Our review of recent Inspector General reports identified emergency action planning weaknesses at some posts. For example, the Inspector General found that at one post over half of first year volunteers did not know the location of their emergency assembly points. However, we analyzed the results of the most recent tests of post emergency action plans and found improvement since our last report. About 40 percent of posts reported contacting almost all volunteers within 24 hours, compared with 33 percent in 2001. Also, our analysis showed improvement in the quality of information forwarded to headquarters. Less than 10 percent of the emergency action plans did not contain information on the time it took to contact volunteers, compared with 40 percent in 2001. In our 2002 report, we identified a number of factors that hampered Peace Corps efforts to ensure that this framework produced high-quality performance for the agency as a whole. These included high staff turnover, uneven application of supervision and oversight mechanisms, and unclear guidance. We also noted that Peace Corps had identified a number of initiatives that could, if effectively implemented, help to address these factors. The agency has made some progress but has not completed implementation of these initiatives. High staff turnover hindered high quality performance for the agency. According to a June 2001 Peace Corps workforce analysis, turnover among U.S. direct hires was extremely high, ranging from 25 percent to 37 percent in recent years. This report found that the average tenure of these employees was 2 years, that the agency spent an inordinate amount of time selecting and orienting new employees, and that frequent turnover produced a situation in which agency staff are continually “reinventing the wheel.” Much of the problem was attributed to the 5-year employment rule, which statutorily restricts the tenure of U.S. direct hires, including regional directors, country desk officers, country directors and assistant country directors, and Inspector General and safety and security staff. Several Peace Corps officials stated that turnover affected the agency’s ability to maintain continuity in oversight of post operations. In 2002, we also found that informal supervisory mechanisms and a limited number of staff hampered Peace Corps efforts to ensure even application of supervision and oversight. The agency had some formal mechanisms for documenting and assessing post practices, including the annual evaluation and testing of post emergency action plans and regional safety and security officer reports on post practices. Nonetheless, regional directors and country directors relied primarily on informal supervisory mechanisms, such as staff meetings, conversations with volunteers, and e-mail to ensure that staff were doing an adequate job of implementing the safety and security framework. One country director observed that it was difficult to oversee program managers’ site development or monitoring activities because the post did not have a formal system for performing these tasks. We also reported that Peace Corps’ capacity to monitor and provide feedback to posts on their safety and security performance was limited by the small number of staff available to perform relevant tasks. We noted that the agency had hired three field-based safety and security specialists to examine and help improve post practices, and that the Inspector General also played an important role in helping posts implement the agency’s safety and security framework. However, we reported that between October 2000 and May 2002 the safety and security specialists had been able to provide input to only about one-third of Peace Corps’ posts while the Inspector General had issued findings on safety and security practices at only 12 posts over 2 years. In addition, we noted that Peace Corps had no system for tracking post compliance with Inspector General recommendations. We reported that the agency’s guidance was not always clear. The agency’s safety and security framework outlines requirements that posts are expected to comply with but did not often specify required activities, documentation, or criteria for judging actual practices—making it difficult for staff to understand what was expected of them. Many posts had not developed clear reporting and response procedures for incidents, such as responding to sexual harassment. The agency’s coordinator for volunteer safety and security stated that unclear procedures made it difficult for senior staff, including regional directors, to establish a basis for judging the quality of post practices. The coordinator also observed that, at some posts, field-based safety and security officers had found that staff members did not understand what had to be done to ensure compliance with agency policies. The agency has taken steps to reduce staff turnover, improve supervision and oversight mechanisms, and clarify its guidance. In February 2003, Congress passed a law to allow U.S. direct hires whose assignments involve the safety of Peace Corps volunteers to serve for more than 5 years. The Peace Corps Director has employed his authority under this law to designate 23 positions as exempt from the 5-year rule. These positions include nine field-based safety and security officers, the three regional safety and security desk officers working at agency headquarters, as well as the crime data analyst and other staff in the headquarters office of safety and security. They do not include the associate director for safety and security, the compliance officer, or staff from the office of the Inspector General. Peace Corps officials stated that they are about to hire a consultant who will conduct a study to provide recommendations about adding additional positions to the current list. To strengthen supervision and oversight, Peace Corps has increased the number of staff tasked with safety and security responsibilities and created the office of safety and security that centralizes all security- related activities under the direction of a newly created associate directorate for safety and security. The agency’s new crime data analyst is a part of this directorate. In addition, Peace Corps has appointed six additional field-based safety and security officers, bringing the number of such individuals on duty to nine (with three more positions to be added by the end of 2004); authorized each post to appoint a safety and security coordinator to provide a point of contact for the field-based safety and security officers and to assist country directors in ensuring their post’s compliance with agency policies, including policies pertaining to monitoring volunteers and responding to their safety and security concerns (all but one post have filled this position); appointed safety and security desk officers in each of Peace Corps’ three regional directorates in Washington, D.C., to monitor post compliance in conjunction with each region’s country desk officers; and appointed a compliance officer, reporting to the Peace Corps Director, to independently examine post practices and to follow up on Inspector General recommendations on safety and security. In response to our recommendation that the Peace Corps Director develop indicators to assess the effectiveness of the new initiatives and include these in the agency’s annual Government Performance and Results Act reports, Peace Corps has expanded its reports to include 10 quantifiable indicators of safety and security performance. To clarify agency guidance, Peace Corps has created a “compliance tool” or checklist that provides a fairly detailed and explicit framework for headquarters staff to employ in monitoring post efforts to put Peace Corps’ safety and security guidance into practice in their countries, strengthened guidance on volunteer site selection and development, developed standard operating procedures for post emergency action plans, concluded a protocol clarifying that the Inspector General’s staff has responsibility for coordinating the agency’s response to crimes against volunteers. These efforts have enhanced Peace Corps’ ability to improve safety and security practices in the field. The threefold expansion in the field-based safety and security officer staff has increased the agency’s capacity to support posts in developing and applying effective safety and security policies. Regional safety and security officers at headquarters and the agency’s compliance officer monitor the quality of post practices. All posts were required to certify that they were in compliance with agency expectations by the end of June 2003. Since that time, a quarterly reporting system has gone into effect wherein posts communicate with regional headquarters regarding the status of their safety and security systems and practices. The country desks and the regional safety and security officers, along with the compliance officer, have been reviewing the emergency action plans of the posts and providing them with feedback and suggestions for improvement. The compliance officer has created and is applying a matrix to track post performance in addressing issues deriving from a variety of sources, including application of the agency’s safety and security compliance tool and Inspector General reports. The compliance officer and staff from one regional office described their efforts, along with field- based safety and security staff and program experts from headquarters, to ensure an adequate response from one post where the Inspector General had found multiple safety and security weaknesses. However, efforts to put the new system in place are incomplete. As already noted, the agency has developed, but not yet introduced, an improved system for collecting and analyzing crime data. The new associate director of safety and security observes that the agency’s field-based safety and security officers come from diverse backgrounds and that some have been in their positions for only a few months. All have received training via the State Department’s bureau of diplomatic security. However, they are still employing different approaches to their work. Peace Corps is preparing guidance for these officers that would provide them with a uniform approach to conducting their work and reporting the results of their analyses, but the guidance is still in draft form. The Compliance Officer has completed detailed guidance for crafting emergency action plans, but this guidance was distributed to the field only at the beginning of this month. Moreover, following up on our 2002 recommendation, the agency’s Deputy Director is heading up an initiative to revise and strengthen the indicators that the agency uses to judge the quality of all aspects of its operations, including ensuring volunteer safety and security, under the Government Performance and Results Act. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information regarding this statement, please contact Phyllis Anderson, Assistant Director, International Affairs and Trade, at (202) 512-7364 or [email protected]. Individuals making key contributions to this statement were Michael McAtee, Suzanne Dove, Christina Werth, Richard Riskie, Bruce Kutnick, Lynn Cothern, and Martin de Alteriis. 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.

About 7,500 Peace Corps volunteers currently serve in 70 countries. The administration intends to increase this number to about 14,000. Volunteers often live in areas with limited access to reliable communications, police, or medical services. As Americans, they may be viewed as relatively wealthy and, hence, good targets for crime. In this testimony, GAO summarizes findings from its 2002 report Peace Corps: Initiatives for Addressing Safety and Security Challenges Hold Promise, but Progress Should be Assessed, GAO-02-818 , on (1) trends in crime against volunteers and Peace Corps' system for generating information, (2) the agency's field implementation of its safety and security framework, and (3) the underlying factors contributing to the quality of these practices. The full extent of crime against Peace Corps volunteers is unclear due to significant under-reporting. However, Peace Corps' reported rates for most types of assaults have increased since the agency began collecting data in 1990. The agency's data analysis has produced useful insights, but additional analyses could help improve anti-crime strategies. Peace Corps has hired an analyst to enhance data collection and analysis to help the agency develop better-informed intervention and prevention strategies. In 2002, we reported that Peace Corps had developed safety and security policies but that efforts to implement these policies in the field had produced varying results. Some posts complied, but others fell short. Volunteers were generally satisfied with training. However, some housing did not meet standards and, while all posts had prepared and tested emergency action plans, many plans had shortcomings. Evidence suggests that agency initiatives have not yet eliminated this unevenness. The inspector general continues to find shortcomings at some posts. However, recent emergency action plan tests show an improved ability to contact volunteers in a timely manner. In 2002, we found that uneven supervision and oversight, staff turnover, and unclear guidance hindered efforts to ensure quality practices. The agency has taken action to address these problems. To strengthen supervision and oversight, it established an office of safety and security, supported by three senior staff at headquarters, nine field-based safety and security officers, and a compliance officer. In response to our recommendations, Peace Corps was granted authority to exempt 23 safety and security positions from the "5-year rule"--a statutory restriction on tenure. It also adopted a framework for monitoring post compliance and quantifiable performance indicators. However, the agency is still clarifying guidance, revising indicators, and establishing a performance baseline.

You are an expert at summarizing long articles. Proceed to summarize the following text: The President’s budget request is proposing to maintain taxpayer service levels with fewer staff by realizing efficiency gains; it also proposes to increase enforcement by adding staff. The President’s FY 2009 budget request of $11.4 billion for IRS is 4.3 percent more than the FY 2008 enacted budget and represents an increase of less than 1 percent for taxpayer service and 7 percent for enforcement, as shown in table 1. The budget request increases IRS-wide staff levels, measured in full-time equivalents (FTEs), by 2 percent, with a 1.4 percent decrease in taxpayer service FTEs and a 5.2 percent increase in enforcement FTEs, as shown in table 2. The President’s budget proposal is consistent with longer-term trends for IRS. Compared to actual spending in FY 2006, the proposed FY 2009 budget increases taxpayer service funding by 3.7 percent, a real decrease after inflation, while increasing IRS’s enforcement funding by 10 percent. The budget request proposes to maintain taxpayer service at recent levels. As an example, the key taxpayer service measures shown in table 3 are projected to remain relatively stable through FY 2009. In order to maintain taxpayer service at recent levels despite a decrease in real spending and staffing, IRS expects to realize efficiency gains. For instance, IRS expects to devote 207 fewer FTEs to the labor-intensive processing of paper returns because of expected increases in electronic filing. These expected efficiency gains are consistent with past trends— between 1999 and 2007, IRS reduced staff devoted to processing paper returns by about 1,800 FTEs. IRS’s ability to maintain or improve taxpayer service beyond 2009 will likely depend on its ability to continue to improve efficiency. To this end, in recent reports, we made recommendations to further increase electronic filing. We recommended that IRS determine the actions needed to require software vendors to include bar codes on printed returns, and we suggested that the Congress mandate electronic filing by certain paid tax preparers. IRS agreed with our bar code recommendation and outlined the actions it would take. Some of the real spending decrease proposed for FY 2009 is because of one-time investments made in FY 2008 or carryovers in funds from FY 2008. For instance, the budget request proposes a $31 million reduction in funding for taxpayer assistance centers and outreach. However, IRS officials told us that this reduction includes funding used for long-term investments in FY 2008 that would not need to be duplicated in FY 2009. IRS officials also told us that a $7.7 million decrease in funding for the Taxpayer Advocate offsets a funding increase in FY 2008 that is being used to lower the Advocate’s outstanding caseload. Finally, an $8 million reduction in the Volunteer Income Tax Assistance (VITA) program reflects FY 2008 funding that was not spent and carried over into FY 2009. The budget request for IRS’s enforcement programs includes nonlegislative and legislative initiatives. According to the proposal, the five nonlegislative enforcement initiatives would cost about $338 million in FY 2009 and are expected to raise about $2 billion of direct revenue annually starting in FY 2011. In addition, the budget request estimates that the enforcement initiatives would generate at least another $6 billion annually in indirect revenue. The indirect revenue results from improved voluntary compliance induced by taxpayers’ awareness of expanded IRS enforcement. The budget request also proposes increases in examination coverage for corporations with assets of $10 million or more from a planned 6.6 percent for FY 2008 to 6.8 percent for FY 2009. The coverage rate would increase to 7.6 percent in FY 2010 as new enforcement staff hired in FY 2009 complete training and can audit more returns. The budget request includes 16 legislative initiatives budgeted at $23 million for FY 2009 that it says would raise about $36 billion in revenue over 10 years; if none were enacted, IRS would not need the $23 million. We have reported on three of the proposals. In 2006, we suggested that the Congress consider an idea for reducing securities capital gains noncompliance. In 1991, we supported the notion that payments to corporations be reported on information returns. Finally, in 2007, we described ways to mitigate the compliance costs related to these information returns and to other information returns associated with credit and debit card payments. The revenue expected from IRS’s enforcement initiatives is modest compared to the net tax gap, which was last estimated at $290 billion for tax year 2001. As we noted in our statement to this Committee last year, no single approach, such as IRS enforcement, is likely to fully and effectively address noncompliance. Multiple approaches are needed because noncompliance has multiple causes and spans different types of taxes and taxpayers. Hiring needed staff for the nonlegislative initiatives will be challenging for IRS’s Large and Mid-Size Business (LMSB) and Small Business/Self- Employed (SB/SE) divisions. For instance, the initiatives call for adding 1,431 revenue agents in addition to those who must be replaced from attrition, a high number relative to past years. IRS divisions have previously hired large numbers of staff in a short time because of specific budget initiatives, but officials reported that hiring gradually over time would reduce challenges. If IRS were to fall behind in its hiring efforts, it would not need all $226 million of the funding for staff for FY 2009 initiatives. Responding to our recommendations from last year, IRS included more information on initiatives in the FY 2009 proposed budget, including ROI information for all nonlegislative initiatives. Last year, we recommended that IRS have available basic descriptive, cost, and expected performance information on all new initiatives and include such information in future budget submissions. This year, the budget request has sections explicitly entitled, for instance, “Initiative Summary,” “Implementation Plan,” “Expected Benefits,” and “ROI.” Four of the five nonlegislative enforcement initiatives for FY 2009 were revisions of FY 2008 initiatives, but with more total funds requested and generally more informative justifications than for FY 2008. However, IRS’s ROI calculations have limitations that reflect the challenges of estimating ROIs. For example, the calculations do not account for benefits that are harder to measure, such as improved voluntary compliance. Another example showing ROI limitations is the $51 million National Research Project (NRP) initiative for which IRS estimates the ROI to be $0.40 per $1.00 invested. NRP funds research audits in order to develop more effective enforcement programs. The ROI calculation only includes direct revenue resulting from the research audits, not the potential for increased revenue from improved enforcement programs; nor does the calculation include the benefits of the Department of the Treasury’s use of NRP data to provide the basis for legislative recommendations. Although the budget request for IRS provides performance measure data, it does not provide ROI analyses for programs or activities other than the new initiatives. As we noted in our recent report, analytic data such as ROI can be helpful to managers and the Congress when making resource allocation decisions. ROI analyses, even with their limitations, can help answer questions such as the following: What are the implications for IRS’s resource allocation of the lower costs per taxpayer contact for some services compared to others as shown in table 4? Are there extra benefits that offset the higher costs of some services, or could costs be reduced by promoting increased reliance on the lower- cost options? Similar questions can be asked about enforcement based on table 5: Is IRS appropriately allocating resources between field audits, often conducted at a taxpayer’s business, and correspondence audits, which are simpler and conducted by mail? For the rows in table 5 with average recommended additional tax per return greater for correspondence audits than for field audits, could resources be reallocated from field audits to correspondence audits in order to help close the tax gap? Are there other benefits to field audits, such as a greater impact on voluntary compliance, that are not captured in IRS’s data? We recognize that developing ROI estimates for IRS’s ongoing programs such as examinations and taxpayer service will be a challenge. However, because of the potential benefits of ROI analyses, we recommended in our previous report on the FY 2009 budget request that the Commissioner of Internal Revenue extend the use of ROI in future budget proposals to cover major enforcement programs. At that time, IRS officials said that because of the short time frame for our report, they did not have time to fully analyze its recommendations, and, therefore, were unable to respond. We have agreed to meet with IRS to further discuss the ROI recommendation. IRS’s BSM program, initiated in 1999, involves the development and delivery of a number of modernized tax administration, internal management, and core infrastructure projects that are intended to provide improved and expanded service to taxpayers as well as IRS internal business efficiencies. Key tax administration projects include CADE, which is intended to provide the modernized database foundation to replace the existing Individual Master File processing system that contains the repository of individual taxpayer information; AMS, which is intended to enhance CADE by providing applications for IRS employees and taxpayers to access, validate, and update accounts on demand; and MeF, which is to provide a single standard for filing electronic tax returns. We recently reported that while IRS has continued to make progress in implementing BSM projects and improving modernization management controls and capabilities, challenges and risks remain, and further improvements are needed. As shown in table 6, the FY 2009 budget request for the BSM program is less than the enacted FY 2008 budget by over $44 million and about $185 million less than the amount the IRS Oversight Board is proposing. When we asked about the impact of this reduction on its operations, IRS told us that the proposed funding level will allow it to continue developing and delivering its primary modernization projects but did not provide details on how plans to deliver specific projects or benefits to taxpayers would be affected. MeF is the project with the largest difference between the requested budget and the FY 2008 enacted amount. IRS has made progress in implementing BSM projects and meeting cost and schedule commitments for most deliverables, but three project milestones experienced significant cost or schedule delays. During 2007, IRS completed milestones of the Filing and Payment Compliance (F&PC), a tax collection case analysis support system; MeF; CADE; and AMS. Our analysis of reported project costs and completion dates showed that 13 of the 14 associated project milestones that were scheduled for completion during this time were completed within 10 percent of cost estimates, and 11 of the 14 milestones were completed within 10 percent of schedule estimates. However, a milestone for CADE exceeded its planned schedule by 66 percent and experienced a 15 percent cost increase; another milestone for the same project incurred a 153 percent schedule delay, and a milestone for MeF experienced a 41 percent schedule delay (see fig. 1). IRS has taken steps to address our prior recommendations to improve its modernization management controls and capabilities. However, work remains to fully implement them. For example, in July 2005, we recommended that IRS fully revisit the vision and strategy for the BSM program and develop a new set of long-term goals, strategies, and plans consistent with the budgetary outlook and IRS’s management capabilities. We also noted that the vision and strategy should include time frames for consolidating and retiring legacy systems. In response, IRS has developed a Modernization Vision and Strategy framework and supporting 5-year Enterprise Transition Plan. However, the agency has yet to develop long-term plans for completing BSM and consolidating and retiring legacy systems. We also recommended in February 2007 that IRS ensure that future BSM expenditure plans include a quantitative measure of progress in meeting scope expectations. We further recommended that, in developing this measure, IRS consider using earned value management since this is a proven technique required by the Office of Management and Budget for measuring cost, schedule, and functional performance against plans. While IRS has developed an approach to address our recommendation, it has not yet fully implemented it. Future BSM project releases continue to face significant risks and issues, which IRS is addressing. Specifically, the agency recently identified significant risks and issues with planned system deliveries of CADE and AMS and reported that maintaining alignment between the two systems will be a significant challenge and source of risk for the BSM program. IRS recognizes the potential impact of identified risks and issues on its ability to deliver projects within cost and schedule estimates and has developed mitigation strategies to address them. While mitigation strategies have been developed, the risks and challenges confronting future releases of CADE and AMS are nevertheless significant, and we will continue to monitor them and actions to address them. IRS also made further progress in addressing high-priority BSM program improvement initiatives during the past year. In September 2007, IRS completed another cycle of initiatives and initiated a new cycle, which was scheduled to be completed at the end of March 2008. Initiatives that were addressed in the 6-month cycle ending in September 2007 included IT human capital, information security, and process improvements (e.g., developing and implementing standardized earned value management practices for major projects). IRS’s program improvement process continues to be an effective means of regularly assessing, prioritizing, and incrementally addressing BSM issues and challenges. However, more work remains for the agency to fully address these issues and challenges. Finally, we recently reported that efforts to address human capital challenges continue, but more work remains. IRS developed an IT human capital strategy that addresses hiring critical personnel, employee training, leadership development, and workforce retention, and agency officials stated that they plan to undertake a number of human capital initiatives to support their human capital strategy, including conducting analyses of turnover rates and continuing efforts to replace key leaders lost to retirement. However, a specific plan with time frames for implementing these initiatives has not been developed. We recommended that IRS complete such a plan to help guide the agency’s efforts in addressing its IT human capital gaps and measure progress in implementing them. IRS agreed with our recommendation and stated that it intends to develop a plan to implement its IT human capital strategy. The Economic Stimulus Act of 2008 is resulting in a significant workload increase not anticipated in the FY 2008 budget. As part of the legislation, IRS received $202 million in a supplemental appropriation. However, because IRS could not find an alternative according to responsible officials, it has reallocated resources from enforcement to taxpayer service and is allowing some deterioration in telephone service. IRS will begin sending economic stimulus payments to more than 130 million households in early May, after the current tax filing season, and is scheduled to be done by mid-July. These include an estimated 20 million retirees and disabled veterans, and low-wage workers who usually are exempt from filing a tax return but will be eligible for stimulus payments. Taxpayers required to file a tax return must do so by April 15 in order to receive a stimulus payment by mid-July. People who are not required to file a tax return, but are doing so to receive a stimulus payment, are required to file an IRS Form 1040A by October 15, 2008. As part of the legislation, IRS received a supplemental appropriation of $202 million to help fund its costs for implementing the stimulus package. This funding will remain available until September 30, 2009. As shown in table 7, IRS plans to spend the bulk of the funding—$151.4 million—for Operations Support, most of it on postage for two mass mailings and on IT support. IRS also expects to spend $50.7 million for Taxpayer Services, including $26.2 million for staffing and overtime for telephone assistors. IRS is expecting 2.4 million additional telephone calls in March and April with questions for IRS assistors about the economic stimulus legislation. These calls are in addition to the more than 14 million calls typically answered by IRS assistors between January and mid-April. To help meet the increased telephone demand, IRS is shifting about half of its over 2,000 Automated Collection System (ACS) telephone staff from collecting delinquent taxes to answering economic stimulus telephone calls from March through May. To accommodate this shift, IRS stopped sending out some ACS-generated notices, such as notices of levy, several weeks ago. According to IRS officials, it takes about 3 to 4 weeks before this adjustment in ACS-generated notices affects the ACS workload. IRS originally estimated that the revenue foregone by shifting ACS staff to be up to $681 million. However, according to IRS officials, in early April, IRS revised its foregone revenue estimate down to $565 million, shown in table 7, largely because of lower-than-expected demand for telephone assistance in March. According to IRS officials, IRS’s priority is to respond to taxpayers’ questions about the stimulus program; therefore, the officials are monitoring call volume and adjusting the number of ACS staff answering telephones accordingly. When call volume is low, ACS staff work on outstanding ACS collection cases. However, IRS officials stated that this work does not produce the same revenue as the ACS-generated notices, particularly revenue generated from notices of levy. When IRS adjusts the volume of ACS-generated notices, it takes several weeks before that adjustment affects ACS workload. IRS officials do not want to resume sending ACS-generated notices until they are sure ACS staffers are available to handle the resulting workload. Should the lower-than-expected call volume continue, IRS may have an opportunity to shift the ACS staff back to their most productive collection work. This could further reduce the revenue foregone from using ACS staff to answer stimulus-related telephone calls. To date, IRS has not reduced its projections for future stimulus-related call volume. If the projections are reduced, IRS may be able to resume sending out at least some ACS-generated notices. According to IRS officials, IRS considered alternatives to shifting ACS staff, including contracting out, using other IRS staff, or using Social Security Administration or other federal staff, but decided the alternatives were not feasible. For example, contracting out was not deemed feasible because of insufficient time to negotiate the contract and conduct background checks and training. Another cost—although not measured in dollars—is the decline in telephone service shown in table 7. Because of the increased call volume, IRS expects its assistor level of service to drop from 82 percent (the 2008 goal) to as low as 74 percent—the lowest level since 2002. IRS is already experiencing some declines in telephone service. As of March 29, the level of service had dropped to 80 percent, taxpayers were waiting a minute and a half longer than last year, and they were hanging up 43 percent more often while waiting to speak to an assistor. Between March 3 and March 29, IRS assistors answered over 572,000 stimulus-related calls. IRS expects call volume to increase rapidly in upcoming weeks as taxpayers receive their stimulus notices in the mail. Because IRS is in the early stages of implementing the stimulus legislation, IRS officials do not have much information about the actual costs. Through March, IRS estimates that it has spent almost $103 million, mostly for postage. In commenting on a draft of our earlier report on the FY 2009 budget request and 2008 tax filing season, IRS officials said that, because of the short time frame for our report, they did not have time to fully analyze our recommendation and, therefore, were unable to respond at the time. They provided technical comments at that time and again for this statement, and we made those changes where appropriate. We have agreed to meet with IRS to further discuss the ROI recommendation. Mr. Chairman, this concludes my prepared statement. Mr. Powner and I would be happy to respond to questions that you or other Members of the Subcommittee may have at this time. For further information regarding this testimony, please contact James R. White, Director, Strategic Issues, on (202) 512-9110 or [email protected] or David A. Powner, Director, Information Technology Management Issues, on (202) 512-9296 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 Joanna Stamatiades, Assistant Director; Carlos E. Diz; Sarah A. Farkas; Charles R. Fox; Leon H. Green; Carol M. Henn; Lawrence M. Korb; Paul B. Middleton; Karen V. O’Conor; Sabine R. Paul; Cheryl M. Peterson; and Neil A. Pinney. 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. 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The fiscal year 2009 budget request for the Internal Revenue Service (IRS) is a road map for how IRS plans to allocate resources and achieve ambitious goals for improving enforcement, improving taxpayer service, increasing research, and continuing to invest in modernized information systems. One complicating factor in implementing IRS's plans in the immediate future is the recent passage of the Economic Stimulus Act of 2008, which creates additional, unanticipated workload for IRS. GAO was asked to (1) assess how the President's budget request for IRS allocates resources and justifies proposed initiatives; (2) determine the status of IRS's efforts to develop and implement its Business Systems Modernization (BSM) program; and (3) determine the total costs of administering the economic stimulus legislation. To meet these objectives, GAO drew upon and updated recently issued reports. The President's fiscal year 2009 budget request for IRS is $11.4 billion, 4.3 percent more than last year's enacted amount. The request proposes to maintain taxpayer service at recent levels, in part by realizing efficiency gains from electronic filing, despite a decrease in staffing. It also proposes a 7 percent increase in enforcement spending, including spending for 21 legislative and nonlegislative initiatives. The legislative proposals are projected to cost $23 million in fiscal year 2009, funding that IRS would not need if the proposals are not enacted. Similarly, if IRS were to fall behind in its proposed enforcement hiring efforts, it would not need all $226 million of the associated funding. IRS justified its nonlegislative enforcement initiatives with return on investment (ROI) analyses, which are useful, despite limitations, for making resource allocation decisions. The budget request does not provide ROI information for activities that constitute a large part of the budget request--activities other than the proposed initiatives. The request for BSM is over $44 million lower than the fiscal year 2008 enacted amount. IRS said this funding level will allow it to continue its primary modernization projects, but it did not describe how specific projects or benefits to taxpayers would be affected. IRS has continued to make progress in implementing BSM projects and improving modernization management controls and capabilities. However, further improvements are needed. For example, the agency has yet to develop long-term plans for completing BSM and consolidating and retiring legacy systems. IRS estimated that the costs of implementing the economic stimulus legislation may be up to a total of $767 million--including a $202 million supplemental appropriation. In addition to the supplemental appropriation, IRS is reallocating hundreds of collections staff to answering taxpayer telephone calls, resulting in up to $565 million in foregone enforcement revenue. In addition, IRS expects some deterioration in telephone service because of the increased call volume. For example, IRS is expecting its assistor level of service to drop to as low as 74 percent compared to its goal of 82 percent.

You are an expert at summarizing long articles. Proceed to summarize the following text: Medical devices include items used for the diagnosis, cure, mitigation, treatment, or prevention of a disease. These devices range from simple tools like bandages and surgical clamps to complicated devices like pacemakers; unless exempt by FDA regulations, devices are generally subject to FDA premarket review. Pediatric patients may be among those a device is intended to treat and generally are defined as those age 21 years or younger. FDAAA included provisions to support and track pediatric device development. Unless exempt by regulation, medical devices are generally subject to FDA premarket review before they may be legally marketed in the United States. The extent of the premarket review is generally correlated with the level of risk the device poses. Applications to market medical devices are primarily submitted to and reviewed by FDA’s Center for Devices and Radiological Health (CDRH). Under the PMA premarket review process, FDA reviews and makes approval decisions on applications for class III devices. Among other things, PMA applications must include the indication for use—including the disease and population the medical device is intended to treat—and evidence (typically clinical data) providing reasonable assurance that the device is safe and effective. After an initial screening of an application and determination that the review should proceed, FDA’s reviewers conduct a scientific review of the application and may refer applications to an external advisory committee composed of individuals with expertise in a particular medical specialty, such as cardiovascular or neurology— known as a medical specialty panel. FDA charges manufacturers a fee to review PMA applications, but PMA applications for devices intended solely for pediatric use are exempt from any fees. For devices that have been approved through the PMA process, a manufacturer that wants to add a pediatric population (or otherwise significantly change the approved indication for use) must submit and receive FDA approval for a PMA panel-track supplement. manufacturers a fee to review PMA panel-track supplements, but those intended solely for pediatric use are exempt. In 1990, Congress authorized FDA to exempt from the premarket review requirement to demonstrate effectiveness certain medical devices in order to provide an incentive for the development of devices that treat or diagnose rare diseases or conditions, including those in children. Manufacturers of such devices still must show that the probable benefit outweighs the risk of using the device and that the device will not expose patients to unreasonable or significant risk of illness or injury. These devices, called HUDs, are intended to treat or diagnose a disease or condition that affects fewer than 4,000 individuals in the United States. In order to market an HUD in the United States, an HDE application must be submitted to and approved by FDA. Although FDA reviews and approves other types of PMA supplements, a panel-track supplement is required if the manufacturer wants to change the indication for use of an approved PMA device to add a pediatric population, according to FDA officials. must also provide a description of the device and scientific rationale for the use of the device for the rare disease or condition. Once the HUD designation is granted, the manufacturer can then seek device approval by submitting an HDE application. In addition to including the indication for use, the HDE application must include a detailed description of the device, along with evidence demonstrating device safety, and data and a rationale supporting the probable benefit of the device. Device labeling is also reviewed and must include a statement indicating that the device is a humanitarian device. According to FDA guidance, criteria for HDE approval are focused on safety, probable benefit, and lack of a comparable device. FDA does not charge manufacturers a fee to review HDE applications. Manufacturers of HDE devices are allowed to recover certain development and production costs but are generally prohibited from making a profit on their device. Unless exempt, HDE applications must include a cost assessment to demonstrate that the amount charged for the HDE device does not exceed the cost of research and development, fabrication, and distribution. After FDA approval, in order for an HDE device to be used in patient care, it must be reviewed and approved by an institutional review board (IRB) to assess the safety of the device. If FDA review results in premarket approval, FDA issues an approval order to the manufacturer, which includes the approved indication for use statement. FDA also approves all printed material accompanying the device—known as the device labeling. The approval order, labeling, and a summary of safety and effectiveness data are available on FDA’s website; all three documents contain the approved indication for use statement. Although the upper age limit experts use to define the pediatric population varies, for purposes of certain statutory provisions for PMA and HDE device applications, FDA considers pediatric patients as those who are age 21 years or younger at the time of diagnosis or treatment. FDA issued guidance in 2004 that specifies age ranges for four main pediatric subpopulations: neonate, infant, child, and adolescent (see table 1). According to FDA officials, the agency defined an additional subpopulation, transitional adolescents, for its internal application review purposes. These officials noted that in some cases patients in this age range may not require special considerations compared to adults. A pediatric medical device may be indicated for use in more than one pediatric subpopulation. According to FDA officials, some pediatric devices are indicated for use in both pediatric and adult patients, such as devices with an indication for all patients with a given condition above a certain age. Additionally, a device’s indication for use statement might not specify the age of the intended population, but based on additional clinical information that may be included in the approval documents, FDA might consider a device labeled for pediatric use. For example, the indication for use statement for an influenza diagnostic test might not specify a pediatric population, but FDA could consider the device labeled for patients of all ages. In addition, a device’s indication for use statement might specify a minimum blood vessel size or body weight rather than a certain patient age, and if pediatric patients meet the criteria, the device could be considered labeled for pediatric use. To stimulate pediatric medical device development, FDAAA exempted HDE devices labeled for use in pediatric patients (including those for both pediatric and adult patients) from the HDE profit prohibition for applications approved on or after September 27, 2007, when FDAAA was signed into law.prohibition, HDE applications must include data to prove that the device In order to receive the exemption from the profit can safely be used in a pediatric population and to support the number of individuals likely to use the device each year. Based on this information, FDA determines an upper limit on the number of devices that can be distributed or sold each year—to treat both pediatric and adult patients— known as the annual distribution number (ADN). Manufacturers may only receive profits from the sale of HDE devices exempt from the profit prohibition and indicated for pediatric or pediatric and adult use up to the ADN. In addition, FDAAA requires that FDA’s Pediatric Advisory Committee annually review all HDE devices granted exemption from the profit prohibition to ensure that the exemption remains appropriate for the pediatric populations for which it is granted. FDAAA also required PMA and HDE applications to include, if readily available, a description of any pediatric population or subpopulation(s) that suffer from the disease or condition that the device is intended to treat, diagnose, or cure and the number of affected pediatric patients. FDAAA further required FDA to annually report to congressional committees on the number of PMA and HDE devices approved in the preceding year (1) for which there is a pediatric subpopulation that suffers from the disease or condition that the device is intended to treat, diagnose, or cure; (2) labeled for use in pediatric patients; and (3) exempt from user fees because the device was intended solely for pediatric use. To help connect individuals with ideas for pediatric medical devices with experienced professionals to assist them through the medical device development process, FDAAA also authorized demonstration grants for pediatric device consortia to promote pediatric device development. Pediatric device consortia receive 2-year grants, administered by FDA, to conduct certain activities for device projects, such as mentoring and managing the development process, assessing the scientific merit of a proposed device, and providing assistance and advice as needed on business development and navigating the regulatory process. In their demonstration grant applications, consortia were not only required to demonstrate their capability to develop pediatric devices—by having members with medical and scientific expertise in device development and relationships with manufacturers—but they were also required to identify two to five device projects that the consortia would directly support under the demonstration grant. Grantees must submit quarterly and annual reports to FDA describing how they have used grant funds to support innovation and the phase of development for the devices for which they provided assistance. Phases of development include, for example, concept, prototype (during which a model is developed), clinical (during which the device is tested), and marketing (during which the device goes through the regulatory process). Certain characteristics unique to pediatric populations—including physiological differences in pediatric patients and challenges with recruiting pediatric participants for clinical trials—are barriers to developing pediatric medical devices that were cited by stakeholders. Pediatric patients are composed of different subpopulations with differences in size, growth rate, metabolism, heart rate, activity level, and other differences. For example, younger pediatric patients— neonates, infants, and children—have higher heart rates or respiratory rates than adults. This difference, as cited by some stakeholders, makes some devices used for adults, such as certain heart valves, not appropriate for use in young children; thus a device that has already been developed for an adult may have to be redesigned for a pediatric population. Another unique characteristic cited is the range of pediatric subpopulations and the difficulty in developing potentially different devices for each of these subpopulations. For example, a device that is developed for a toddler may not be appropriate for use in an adolescent, even if they have the same disease or condition. As a result, manufacturers may have to develop and test a different device for each subpopulation although the disease or condition may be the same. Recruiting pediatric patients to participate in clinical trials has also been cited as a challenge for manufacturers. Performing experimental procedures on children naturally raises concern for their safety, and it may be difficult to obtain parental consent on behalf of the child to conduct experimental procedures. This issue is compounded because the pediatric population is not just one population but rather many subpopulations. Therefore, manufacturers find it difficult to recruit enough children for each pediatric subpopulation over a reasonable time frame and within a manageable number of investigational sites to ensure enough test subjects to meet clinical trial requirements. Given these unique characteristics of the pediatric population, as well as the fact that the market for pediatric devices is generally smaller than the market for adult devices, there are limited economic incentives for manufacturers to develop pediatric medical devices. Stakeholders indicated that the cost of developing pediatric medical devices relative to the potential revenue generated by sales in a small market is a significant barrier to the development of new pediatric medical devices. Stakeholders also noted that the cost of research and development for pediatric medical devices can be the same as for adult devices while the market size is often smaller. Given these factors, stakeholders report that the return on the investment to develop and test pediatric medical devices usually falls below the profit goals of most medical device manufacturers. Stakeholders noted that the FDAAA provision allowing pediatric HDE devices to earn a profit is one helpful step to encourage pediatric medical device development; however, they indicated that this provision is not enough to address the small market for pediatric devices and the resources necessary to study a device in a pediatric population. An official from one device manufacturer that had a pediatric HDE device approved since FDAAA was enacted told us that the ability to earn a profit for the HDE device, while helpful, was not part of this manufacturer’s decision to develop and market it. Stakeholders noted that the maximum number of 4,000 individuals for HDEs limited the effectiveness of this incentive for development of devices for larger pediatric populations. Stakeholders also noted that incentives used for pediatric drug development would not necessarily work for pediatric medical device development. For example, patent protection for medical devices is not as meaningful an incentive as it is for the development of pediatric drugs because the typical life cycle for medical devices (about 18 months) is significantly shorter than the typical life cycle for a drug. Other barriers identified by stakeholders included an incomplete understanding of unmet pediatric device needs and issues related to the medical device regulatory process. Several stakeholders commented that there is no consistent inventory of the devices that need to be developed for pediatric populations. Although it is unclear who should maintain this inventory, FDAAA did require FDA to annually report on the number of devices approved in the preceding year that were labeled for use in pediatric patients or for which there is a pediatric subpopulation that suffers from the disease or condition that the device is intended to treat, diagnose, or cure. FDA has reported to Congress that the pediatric device data contained in these reports may help identify areas of pediatric device research and development that need to be addressed. However, FDA has issued only one of these reports to date. Furthermore, some of the information from which FDA would develop these reports may not be as useful as possible in determining unmet need. Specifically, manufacturers are to include the information on pediatric subpopulations in their premarket approval applications if readily available; however, one manufacturer organization stated that it was unclear about the specific information requirements, and thus manufacturers may not be submitting useful information for tracking unmet pediatric device needs. Stakeholders also cited as barriers to pediatric device development certain issues related to the medical device regulatory process in general. For instance, it was reported that the amount of time that it will take to get through the regulatory process cannot always be predicted, which limits the ability to appropriately budget for development. One manufacturer organization also noted that FDAAA authorized FDA to consider published data from adult studies and studies in different age groups when determining effectiveness for pediatric device approvals; this manufacturer organization commented that where appropriate, FDA should also use scientific evidence other than randomized controlled studies, such as well-documented case histories, to show probable benefit or demonstrate effectiveness. Recognizing the need to discuss the ways scientific research data can be used for pediatric medical device applications, FDA announced in November 2011 that it would hold a public workshop to discuss the use of scientific research data, including published scientific literature, to support and establish pediatric indications for medical devices. Stakeholders also noted barriers that were unique to HDE devices, including pediatric HDE devices. One manufacturer organization stated that FDA has provided no general guidance to manufacturers regarding the type or level of evidence that must be developed to demonstrate that an HDE device meets the probable benefit standard. According to the organization, this lack of guidance ultimately hinders the use of the HDE program as a pathway to market devices that treat or diagnose diseases and conditions that affect fewer than 4,000 patients, including pediatric patients. According to stakeholders, difficulties in obtaining insurance coverage for HDE devices are also a barrier to development because HDE devices are approved by demonstrating safety but not effectiveness. Although the two manufacturers’ representatives we spoke with reported experiencing frustration with the HDE approval process, they noted that overall, their interaction with FDA reviewers was positive in that FDA responded to their questions in a timely manner and provided specific guidance where necessary. Finally, stakeholders stated that individuals with innovative ideas for new pediatric medical devices do not necessarily know what steps to take to bring their ideas for pediatric medical devices to the market, and it would be helpful to connect these individuals with manufacturers and to help them navigate the device development and regulatory process. Individuals with ideas for medical devices range from engineers to clinicians, who often need to work together to develop and manufacture a pediatric medical device. In addition, it is necessary to have funds to sustain development and an understanding of how to navigate the regulatory process. A commonly cited example of the challenges faced by pediatric device innovators is the experience developing the titanium rib, which took about 14 years to develop before it was approved for the market in part because its inventor, a physician who saw the need for such a device, did not have the information or resources to navigate the development and regulatory process. FDA officials and other stakeholders reported that the pediatric device consortia have helped to address this barrier. In addition, FDA officials reported that other efforts by FDA to organize early meetings before device manufacturers submit applications to clarify required clinical information and meetings with groups such as the pediatric orthopedic surgeons have also helped device innovators navigate the device development and regulatory process. The pediatric device consortia reported assisting 107 pediatric device projects—that is, projects to develop new pediatric devices—in the first 2 years of the demonstration grant program. In order to facilitate the development and approval of pediatric medical devices, FDA awarded grants totaling about $5 million to four pediatric device consortia in fiscal years 2009 and 2010 (see table 2). The consortia receiving these grants provided assistance that included review of projects by clinical experts to evaluate the devices’ usefulness in a clinical environment and help connecting innovators with manufacturers as well as potential sources of additional federal grant funding. The consortia also conducted other activities to support pediatric medical device development and connect individuals who have ideas for medical devices with information and resources, such as lectures, forums, and relevant conferences. For the device projects assisted by the consortia, the phase of development varied. Although the consortia assisted a total of 107 device projects, 34 were inactive or were device projects that the consortia were no longer assisting at the time of our review. Of the 73 active device projects, about half (36) were in the prototype phase (see table 3). In order to monitor the progress of the device projects the pediatric consortia assisted, FDA requires each consortium to report on the development phase of each device project—including the directly supported device projects included in the grantees’ applications as well as other device projects that received consortia assistance—on a quarterly and annual basis. Throughout the grant period, device projects were presented to the consortia and consortia members determined the kind of assistance to provide for development of these devices. The assistance provided depended on the device’s phase of development. For example, for a device in the concept phase a consortium could assess its scientific merit to see if there is a need for the device or if it makes sense to develop it; for devices that were further along, a consortium could help produce prototypes. For devices in the marketing phase, the consortia could consult on next steps, including working with FDA, a step which the developer needs to take to market a device. As of the most recent grantee reports available in September 2011, 3 of the 107 devices that were assisted by the consortia were commercially available and 1 had received HUD designation. Of the 107 device projects assisted by the consortia, 13 were directly supported—that is, they were identified in the grant awards to receive a portion of the grantee’s demonstration grant funding. Table 4 lists these directly supported device projects, which were identified by the grantees in their applications and selected by FDA to receive support through the consortia grants. FDA’s evaluation criteria included (1) the significance of the device to address pediatric needs, (2) how well the project was designed, (3) the likelihood for marketing success, (4) the expertise and training of project leaders, and (5) evidence that the institution where the consortium was located supported the project. Although FDAAA required FDA to annually report to congressional committees on the number of PMA and HDE devices approved in the preceding year that were labeled for use in pediatric patients, the agency lacks reliable information to readily identify all such pediatric devices. Under standards for internal control in the federal government, relevant, reliable, and timely information should be available for external reporting purposes; however, FDA has not consistently collected reliable and timely information needed to report on pediatric devices. In response to FDAAA, FDA developed an electronic flag within its Center Tracking System (CTS) in 2008, to help CDRH internally identify PMA and HDE devices that were labeled for use in pediatric patients.officials, the agency’s medical device reviewers should check the pediatric flags during the PMA and HDE process based on all of the information available in the application. However, FDA officials reported that these electronic flags are not consistently applied, and that the agency does not provide formal training or guidance to its device reviewers regarding proper implementation of the pediatric flags. Therefore, information from FDA’s tracking system is not sufficiently reliable to identify PMA and HDE devices labeled for use in pediatric patients. According to FDA In the absence of reliable information from its internal tracking system that could be retrieved in a timely manner to identify approved PMA and HDE devices labeled for use in pediatric patients, FDA reported that staff completed labor-intensive file reviews—which included examining voluminous application files as well as discussion with FDA reviewers—to complete its first annual report. This report, which covered devices approved in fiscal year 2008, did not specify the criteria FDA used to identify devices labeled for use in pediatric patients in its manual data collection process. An FDA official involved in the preparation of the fiscal year 2008 report told us that FDA staff considered devices to be labeled for pediatric patients if FDA officials determined that the devices were for patients younger than 18 years of age; however, this criterion was not explicit in the report. Instead, FDA’s report noted that a committee report described pediatric medical devices as those used to treat or diagnose Further, in diseases or conditions in patients from birth through age 21.the absence of documented criteria used to prepare the fiscal year 2008 report, FDA officials involved in preparing the combined fiscal years 2009- 2010 report at the time of our review were not aware of the specific criteria used for the fiscal year 2008 report and, as a result, created their own criteria and labor-intensive file review for identifying and reporting on approved PMA and HDE devices labeled for use in pediatric patients. As of October 2011, the combined fiscal years 2009-2010 report had not been issued; FDA officials reported that it was in the agency’s internal review and clearance process. In addition, FDA does not have readily available, reliable information to identify other pediatric information that FDAAA required the agency to report annually. Specifically, FDA officials said that the agency does not have reliable information to readily identify and report on the number of PMA and HDE devices approved each year for which there is a pediatric subpopulation that suffers from the disease or condition that the device is intended to treat, diagnose, or cure.to annually report the number of PMA devices exempt from a user fee because they were solely intended for pediatric use. Although the agency reported that none of the devices approved in fiscal year 2008 were exempt from a user fee for this reason, FDA officials stated that as a result of our inquiry they reevaluated some of the PMA applications for which user fees were paid and identified certain PMA applications from other years that may not have properly received the user fee exemption. FDA officials said they were in the process of providing refunds to applicants that should have been exempt from the user fee. Furthermore, FDAAA required FDA Without readily available information on the approved PMA and HDE devices labeled for use in pediatric patients or the number of approved devices for which a pediatric subpopulation might be indicated, FDA cannot easily identify and aggregate data to complete statutorily required reporting in a consistent and timely manner. The inconsistent information presented in these reports makes it more difficult for policymakers, industry stakeholders, and innovators to identify what opportunities and needs exist for devices to diagnose and treat pediatric patients. While the indication for use statement for most approved PMA and HDE devices did not identify the age of the intended population, our review identified 18 devices approved since FDAAA was enacted that were explicitly indicated for use in pediatric patients.found that 15 PMA and 3 HDE devices approved since FDAAA was enacted have indication for use statements explicitly stating that the devices are for patients that include patients age 21 or younger, pediatric patients, or skeletally immature patients. However, the approved indication for use statements for most of the 118 PMA and HDE devices approved since FDAAA was enacted do not specify the age of the intended patient population. Specifically, the indication for use statement Specifically, our review was silent on the age of the intended patient population for 75 percent of PMA devices and 38 percent of HDE devices approved during that time (see fig. 1). Given that a device’s indication for use statement may not explicitly state the age of the intended patient population or specify if it is for pediatric patients, additional pediatric devices could exist because other labeling and clinical information can be used to determine if the device can be used in pediatric patients. Of the 18 PMA and HDE devices explicitly indicated for use in pediatric patients since FDAAA was enacted, most were explicitly indicated for adolescents. The majority of those indicated for adolescents were indicated for patients age 18 and older. Nine devices (50 percent) were indicated solely for patients age 18 or older—the age group FDA considers to be transitional adolescents for internal application review purposes—and 2 of those were indicated solely for patients age 21 or older. Two devices were explicitly indicated for children and none were explicitly indicated for neonates or infants (see table 5). In addition, the most common medical specialties of devices explicitly indicated for use in pediatric patients were microbiology (39 percent); cardiovascular (22 percent); anesthesiology and ear, nose, and throat (11 percent each); and clinical chemistry, ophthalmology, and gastroenterology (6 percent each). Although three HDE devices approved since FDAAA was enacted were explicitly indicated for use in pediatric patients, the number per year may increase in the future, as the number of HUD requests and designations per year for devices intended to treat diseases that occur in pediatric patients increased after FDAAA was enacted. Because HUD designation is the first step to obtaining HDE approval, increasing HUD designations indicate potential for future pediatric HDE devices.According to FDA, the agency received about one HUD request per year on average for devices intended to treat a disease that occurs in pediatric patients before FDAAA was enacted and about five requests per year on average in the years after the law was enacted. Likewise, FDA granted about one HUD designation for devices intended to treat a disease that occurs in pediatric patients per year prior to FDAAA and almost five such HUD designations per year in the years after (see fig. 2). Since FDAAA was enacted, two of the three HDE devices explicitly indicated for use in pediatric patients (patients age 21 years or younger) were granted the exemption from the HDE profit prohibition. One of these two exempted devices, the Medtronic Melody® Transcatheter Pulmonary Valve and Ensemble® Transcatheter Valve Delivery System (Melody® TPV) was approved in January 2010 for use in treating pediatric and adult patients with a blocked or leaky pulmonary heart valve that has previously been replaced to correct congenital (birth) heart defects and with a vessel size above a certain threshold. In September 2011, FDA’s Pediatric Advisory Committee reviewed the Melody TPV and determined that the HDE profit prohibition exemption remained appropriate.Anastamosis) Surgical KitHUD was approved in March 2011 for use in neurosurgery during intracranial vascular bypass procedures in patients 13 years of age or older who meet certain criteria. (See app. I for more information on the two devices.) It is too early to determine if the FDAAA provisions authorizing demonstration grants for pediatric device consortia or allowing manufacturers to earn a profit on pediatric HDE devices have had a substantial impact on the number of approved pediatric devices; however, the provisions show potential for more pediatric devices in future years. Although stakeholders identified barriers to developing and receiving FDA approval to market pediatric medical devices, programs such as the pediatric device consortia can foster an environment for device innovators to share ideas and advance the development of pediatric medical devices. The number of devices that the pediatric device consortia have supported through the early phases of development and the positive feedback from stakeholders indicate that pediatric devices are being developed. Further, the increase in the number of HUD requests and designations for devices that treat pediatric populations since FDAAA was enacted indicate potential for development of additional pediatric HDE devices in the near future. Over the past 10 years, it has taken a few years for a manufacturer to submit an HDE application and receive FDA market approval after receiving HUD designation; therefore the profit eligibility incentive for pediatric HDE devices may have induced an increase in the number of pediatric HUD requests. Although the future for pediatric device development may be promising, FDA lacks reliable and timely information on pediatric devices approved for the U.S. market. To meet statutory reporting requirements, FDA must have data systems in place to produce timely, reliable information to readily identify and track devices the agency has approved for use in pediatric patients. Without a systematic database to identify medical devices approved for use in pediatric patients, FDA cannot provide data so that policymakers, innovators, and physicians may understand the extent of medical device availability and needs for further development. We recommend that the Commissioner of FDA collect reliable information to report data related to pediatric medical devices. Specifically, FDA should take steps to consistently collect information using its existing pediatric electronic flag or otherwise develop internal controls to readily and reliably collect and report information on devices for pediatric use. We received comments on a draft of this report from HHS, which are reproduced in appendix IV. The department agreed with our recommendation that FDA collect reliable information related to pediatric medical devices and commented that FDA is in the process of modifying and updating its current tracking system, related data quality controls, and training program requirements for pediatric medical device premarket submissions. The department further stated that when this process is complete, FDA’s pediatric information collection efforts will satisfy the department’s pediatric device operations and oversight needs, including the development of the annual pediatric report. We are sending copies of this report to the Secretary of Health and Human Services, the Commissioner of FDA, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. The Food and Drug Administration Amendments Act of 2007 (FDAAA) also required that we describe the key characteristics of devices approved through the humanitarian device exemption (HDE) process that were granted exemptions from the HDE profit prohibition because they were labeled for use in pediatric patients. This appendix describes the conditions and the indicated patient populations of the two pediatric medical devices that were granted exemption from the HDE profit prohibition—Medtronic Melody® Transcatheter Pulmonary Valve and Ensemble® Transcatheter Valve Delivery System (Melody® TPV) and ELANA (Excimer Laser Assisted Non-Occlusive Anastamosis) Surgical KitHUD. We also describe when each device was approved for the U.S. market and what is known about profits made by the manufacturers of each device. In addition, we describe what is known about the costs and insurance coverage and off-label use of the Melody TPV device—the one HDE device exempt from the HDE profit prohibition that was sold and in use in the United States at the time of our review. To describe the key characteristics of each device, we interviewed officials from Medtronic, Inc., and Elana, Inc.—manufacturers of the Melody TPV and ELANA devices, respectively—and examined manufacturer-provided documentation, such as billing code information, related to the Melody TPV device. We also interviewed officials from the Food and Drug Administration (FDA) who manage the HDE process and examined FDA documents for each device, including approval documents and an annual report for the Melody TPV—which manufacturers granted exemption from the HDE profit prohibition are required to submit annually to FDA. (Table 6 provides key characteristics of the two pediatric HDE devices granted exemption from the HDE profit prohibition.) To obtain information regarding costs of the Melody TPV device as well as insurance coverage for and off-label use of the device, we surveyed 36 physicians at the 25 children’s hospitals and pediatric units of medical centers (which we collectively refer to as children’s hospitals) that according to the device’s manufacturer, had used the Melody TPV at least 10 times. We received complete responses from 27 physicians at 20 children’s hospitals for an overall response rate of 75 percent of physicians and 80 percent of hospitals in our sample. Almost all (93 percent) of the 27 respondents reported that their hospital purchased the Melody TPV at the manufacturer’s list price of $30,500. All but 2 physicians reported that their hospital purchased the two components—the valve and the delivery system—of the Melody TPV device separately. A physician that we spoke with said his hospital kept several valves and several of each size delivery system in stock and purchased more as needed. Twenty-four of the 25 physicians at children’s hospitals that purchased the components separately reported paying the list price for each component—$24,000 for each Melody Transcatheter Pulmonary Valve and $6,500 for each Ensemble Transcatheter Valve Delivery System. Many physicians we surveyed reported that they experienced at least some difficulty obtaining health insurance coverage for the Melody TPV device regardless of the type of insurance held by the patient (see table 7). Twenty-five of the 27 responding physicians reported experiencing difficulty obtaining coverage for patients with private health insurance at least some of the time, with 3 of those physicians reporting that it was always difficult. For Medicaid and Children’s Health Insurance Program (CHIP) coverage, 4 physicians reported that the device was not covered at all by this type of insurance. Additionally, 18 of the 22 responding physicians who reported receiving reimbursement for the device through Medicaid or CHIP also reported difficulty obtaining that coverage at least some of the time, with 4 of those reporting that it was always difficult. Most responding physicians (19 of 27) reported not treating any patients covered by Medicare, but 4 of those who did treat patients with Medicare coverage said that obtaining Medicare coverage Further, 7 of the 27 responding for the device was always difficult.physicians reported that health insurance coverage influenced their clinical decision to use the device. For example, 3 physicians reported that delay or denial of insurance coverage for the Melody TPV device has led them to conduct open heart surgery in patients for whom use of the device would otherwise have allowed them to delay this more invasive surgery. Consistent with what stakeholders reported about challenges to obtaining insurance coverage for HDE devices in general, physicians we surveyed reported challenges obtaining health insurance coverage for the Melody TPV device. These included comments about the time required to discuss coverage with the insurers to obtain reimbursement, insurers’ lack of familiarity with the medical device, challenges because insurers consider the medical device experimental, and problems because the Melody TPV procedure did not have a current procedural terminology (CPT) code at the time of our survey. About half (52 percent) of physician respondents reported that they have implanted the Melody TPV device in a pediatric or adult patient for an indication other than the indication on the label of the device—an off-label indication—since it was approved for the U.S. market in February 2010. However, all but 1 of those physicians said they used it off-label 20 percent of the time or less across instances when they implanted the device in pediatric patients. Further, 29 percent of responding physicians stated that they never used the device for an off-label indication in pediatric patients. In addition, each instance of off-label use should have been for an indication approved by the hospital’s institutional review board (IRB). For example, 1 physician reported that he routinely implanted the Melody TPV for one of three IRB-approved protocols, two of which were for an off-label indication but all were for pediatric patients. Of the 118 devices approved through FDA’s premarket approval (PMA) and HDE processes in the 4 years since FDAAA was enacted, 18 (15 percent) were explicitly indicated for use in only pediatric patients— those age 21 or younger—or both pediatric and adult patients. Of the 86 PMA and HDE devices approved in the 2 years before FDAAA was enacted, 21 were explicitly indicated for use in only pediatric patients or both pediatric and adult patients (see table 8). Of these, few devices were explicitly indicated for use in patients under age 18—that is, in each fiscal year, most devices that explicitly indicated a pediatric population were indicated for use in patients age 18 years and older. Pediatric subpopulation (if available) Indicated for use in patients 18 years of age or older following ethmoid sinus surgery to reduce the need for postoperative intervention. Indicated for the in vitro qualitative detection of antibodies to hepatitis B e antigen (anti- HBe) in human adult and pediatric (2 to 21 years old) serum from individuals who have symptoms of chronic hepatitis and those who have recovered from hepatitis B infection. Indicated for the treatment of fecal incontinence in patients 18 years and older who have failed conservative therapy (e.g., diet, fiber therapy, and antimotility medications). Indicated for the in vitro qualitative detection of hepatitis B e antigen (HBeAg) in human adult and pediatric (2 to 21 years old) serum from individuals who have symptoms of hepatitis or who may be at risk for hepatitis B virus infection. Indicated to screen patients 21 years and older with ASC-US (atypical squamous cells of undetermined significance) cervical cytology test results to determine the need for referral to colposcopy or to assess the presence or absence of high-risk Human Papillomavirus genotypes 16 and 18, and for other uses in women 30 years and older. Indicated for the qualitative detection of antibodies to hepatitis C virus in venipuncture whole blood specimens from individuals 15 years or older. Summary of indication for use Indicated for the treatment of severe persistent asthma in patient 18 years and older whose asthma is not well controlled with inhaled corticosteroids and long-acting beta agonists. Indicated for patients with hearing loss who meet the following criteria: (1) 18 years of age or older, (2) stable bilateral sensorineural hearing loss, (3) moderate to severe sensorineural hearing loss defined by Pure Tone Average, (4) unaided speech discrimination test score greater than or equal to 40 percent, (5) normally functioning eustachian tube, (6) normal middle ear anatomy, (7) normal tympanic membrane, (8) adequate space for Esteem implant determined via a high resolution computerized tomography (CT) scan, and (9) minimum 30 days of experience with appropriately fit hearing aids. Indicated for the qualitative detection of antibodies to hepatitis B core antigen in human adult and pediatric serum and plasma and neonatal serum. It is intended as an aid in the diagnosis of acute, chronic, or resolved hepatitis B virus infection in conjunction with other laboratory results and clinical information. (No age provided, indicated for pediatric and adult patients) Indicated for reducing the severity of postoperative cardiac adhesions in pediatric patients who are likely to require reoperation via sternotomy. (No age provided, indicated for pediatric patients) Indicated for continually recording interstitial fluid glucose levels in people ages 18 and older with diabetes mellitus for the purpose of improving diabetes management. Indicated for the qualitative detection of IgM antibodies to hepatitis B core antigen in human adult and pediatric serum and plasma and neonatal serum. It is intended as an aid in the diagnosis of acute, chronic, or resolved hepatitis B virus infection in conjunction with other laboratory results and clinical information. (No age provided, indicated for pediatric and adult patients) Pediatric subpopulation (if available) Indicated for primary lasik treatments for (1) the reduction or elimination of naturally occurring hyperopia, (2) in patients who are 21 years of age or older, and (3) with documentation of stable manifest refraction over the past year. A single-use immunoassay for the qualitative detection of antibodies to hepatitis C virus in fingerstick whole blood specimens and venipuncture whole blood specimens from individuals 15 years or older. Indicated for catheter-based cardiac electrophysiological mapping (stimulating and recording), for the treatment of (1) type I atrial flutter in patients age 18 or older, (2) recurrent drug/device refractory sustained monomorphic ventricular tachycardia due to prior myocardial infarction in adults, and (3) drug refractory recurrent symptomatic paroxysmal atrial fibrillation. Indicated for creating arteriotomies during an intracranial vascular bypass procedure in patients 13 years of age or older with an aneurysm or a skull base tumor affecting a large (> 2.5 mm), intracranial artery that failed balloon test occlusion, cannot be sacrificed, or cannot be treated with conventional means due to local anatomy or complexity. Indicated for use as an adjunct to surgery in the management of pediatric and adult patients with the following clinical conditions: Existence of a full (circumferential) Right Ventricular Outflow Tract (RVOT) conduit that was equal to or greater than 16 mm in diameter when originally implanted and Dysfunctional RVOT conduits with a clinical indication for intervention, and either Regurgitation: ≥ moderate regurgitation, or Stenosis: mean RVOT gradient ≥ 35 mmHg. (No age provided, indicated for pediatric and adult patients) Summary of indication for use Indicated for use in patients with stable, high spinal cord injuries with stimulatable diaphragms, but who lack control of their diaphragms. The device is indicated to allow the patients to breathe without the assistance of a mechanical ventilator for at least 4 continuous hours a day. For use only in patients 18 years of age or older. We identified each device’s medical specialty based on data from FDA’s product code classification database—which contains device names and product codes assigned based upon the medical device product classification designated under 21 C.F.R. Parts 862-892. Although the database indicated a medical specialty of cardiovascular for the ELANA Surgical KitHUD, FDA officials reported that upon further review they determined that the product code assigned for the device is technically inaccurate. To correct this technical inconsistency, FDA will issue a corrected product code for this product in the near future. The corrected medical specialty for the device should be neurology, according to FDA officials. In addition to the contact named above, Kim Yamane, Assistant Director; Rebecca Abela; Carolyn Fitzgerald; Cathleen Hamann; Shirin Hormozi; Lisa Motley; and Dan Ries made key contributions to this report. Medical Devices: FDA Should Enhance Its Oversight of Recalls. GAO-11-468. Washington, D.C.: June 14, 2011. Medical Devices: FDA’s Premarket Review and Postmarket Safety Efforts. GAO-11-556T. Washington, D.C.: April 13, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Food and Drug Administration: Overseas Offices Have Taken Steps to Help Ensure Import Safety, but More Long-Term Planning Is Needed. GAO-10-960. Washington, D.C.: September 30, 2010. Food and Drug Administration: Opportunities Exist to Better Address Management Challenges. GAO-10-279. Washington, D.C.: February 19, 2010. Food and Drug Administration: FDA Faces Challenges Meeting Its Growing Medical Product Responsibilities and Should Develop Complete Estimates of Its Resource Needs. GAO-09-581. Washington, D.C.: June 19, 2009. Medical Devices: Shortcomings in FDA’s Premarket Review, Postmarket Surveillance, and Inspections of Device Manufacturing Establishments. GAO-09-370T. Washington, D.C.: June 18, 2009. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 2009. Medical Devices: FDA Should Take Steps to Ensure That High-Risk Device Types Are Approved through the Most Stringent Premarket Review Process. GAO-09-190. Washington, D.C.: January 15, 2009. Health-Care-Associated Infections in Hospitals: Number Associated with Medical Devices Unknown, but Experts Report Provider Practices as a Significant Factor. GAO-08-1091R. Washington, D.C.: September 26, 2008. Medical Devices: FDA Faces Challenges in Conducting Inspections of Foreign Manufacturing Establishments. GAO-08-780T. Washington, D.C.: May 14, 2008. Reprocessed Single-Use Medical Devices: FDA Oversight Has Increased, and Available Information Does Not Indicate That Use Presents an Elevated Health Risk. GAO-08-147. Washington, D.C.: January 31, 2008. Medical Devices: Challenges for FDA in Conducting Manufacturer Inspections. GAO-08-428T. Washington, D.C.: January 29, 2008. Medical Devices: FDA’s Approval of Four Temporomandibular Joint Implants. GAO-07-996. Washington, D.C.: September 17, 2007. Food and Drug Administration: Methodologies for Identifying and Allocating Costs of Reviewing Medical Device Applications Are Consistent with Federal Cost Accounting Standards, and Staffing Levels for Reviews Have Generally Increased in Recent Years. GAO-07-882R. Washington, D.C.: June 25, 2007. Medical Devices: Status of FDA’s Program for Inspections by Accredited Organizations. GAO-07-157. Washington, D.C.: January 5, 2007.

Medical devices can significantly improve, and save, the lives of children. Yet according to the Department of Health and Human Services’ (HHS) Food and Drug Administration (FDA), the development of pediatric devices lags years behind the development of devices for adults. The FDA Amendments Act of 2007 (FDAAA) provided incentives to develop devices for children, particularly devices that receive FDA’s humanitarian device exemption (HDE), a process for devices that treat or diagnose rare diseases or conditions. FDAAA also authorized demonstration grants for nonprofit consortia to facilitate pediatric device development and required FDA to annually report the number of approved devices labeled for use in pediatric patients. Finally, FDAAA required GAO to report on pediatric device development. This report (1) describes barriers to developing pediatric devices, (2) describes how pediatric device consortia have contributed to the development of pediatric devices, and (3) examines FDA data on the number of pediatric devices approved since FDAAA was enacted. GAO examined FDA data and documents related to device approvals, reviewed relevant laws and regulations, and interviewed and reviewed documents from stakeholders and FDA officials. Certain characteristics unique to pediatric populations—including physiological differences from adult patients and challenges with recruiting pediatric participants for clinical trials—are barriers to developing medical devices for pediatric use cited by stakeholders. Given the unique characteristics of the pediatric population, and because the market for pediatric devices is smaller than the market for adult devices, there are limited economic incentives for manufacturers to develop pediatric medical devices. FDAAA provisions authorized demonstration grants for pediatric device consortia—these consortia reported assisting over 100 pediatric device projects in the first 2 years of the program, fiscal years 2009 and 2010. FDA awarded grants totaling about $5 million to four pediatric device consortia in these 2 years. Of the device projects assisted by the consortia, many projects were in early stages of development, such as the creation of a prototype and the preclinical testing of that prototype. Activities performed by the consortia included regularly scheduled forums where innovators could discuss new device ideas with a group of experts. FDA lacks reliable internal data with which to identify all pediatric devices. FDAAA required FDA to annually report to congressional committees on the number of devices approved in the preceding year that were labeled for use in pediatric patients. While FDA created an electronic flag in its internal tracking system to identify such devices, FDA has not consistently used this flag and therefore lacks reliable and timely information needed for reporting. GAO’s review of the indication for use statements of devices approved since FDAAA was enacted identified 18 devices—including 3 HDE devices and 15 premarket approval (PMA) devices—that were explicitly indicated for use in pediatric patients (patients age 21 or younger). However, the approved indication for use statements for most (72 percent) of the devices approved through the HDE or PMA processes did not specify the age of the intended patient population, so additional pediatric devices could exist. GAO recommends that FDA collect reliable information to report data on pediatric medical devices by consistently using its existing pediatric electronic flag in its tracking system or otherwise developing internal controls. HHS concurred with GAO’s recommendations.

You are an expert at summarizing long articles. Proceed to summarize the following text: The SES was established by the Civil Service Reform Act of 1978. As of September 30, 1999, the SES had 6,871 members. The majority (6,205) of the SES members were in the career SES as of that date; the remaining 666 were in the noncareer SES. Career SES members are individuals with civil service status who are appointed competitively to SES positions that are below the top political appointees in the federal executive branch. The noncareer SES members are individuals who receive noncompetitive appointments to SES positions that usually involve advocating, formulating, and directing the programs and policies of the administration. The Civil Service Reform Act of 1978 also states that the policy of the federal government is to ensure equal employment opportunity in the workforce. To carry out this policy, the act calls for implementation of agency action through a continuing minority recruitment program designed to “eliminate underrepresentation of minorities in the various categories of civil service employment.” It further requires that EEOC establish guidelines for use by executive agencies in complying with this statutory requirement. According to EEOC’s October 6, 1987, directive, issued under this provision to aid agencies in their affirmative employment activities, women and minorities are fully represented when their percentage representation in the workforce at an agency equals or exceeds their percentage representation in an RCLF. An RCLF consists of the pool of individuals in the CLF that have the necessary skills and qualifications to perform the duties of the particular job or occupation. According to EEOC, it advises agencies to first compare their workforces with established broad occupational categories, such as administrative, technical and clerical, within the CLF. Then, agencies are to compare specific significant occupations within their overall workforce with the same broad CLF occupational categories to identify areas of possible underrepresentation for further analysis. For professional occupations that require advanced degrees and/or licenses, such as engineers, doctors, or attorneys, EEOC advises agencies to compare each of the professional occupations in their agencies with the corresponding occupations in the CLF. EEOC also said it advises agencies, in determining whether underrepresentation of minorities exists in the various levels of the workforce, to follow the guidance contained in the Department of Justice’s February 29, 1996, memorandum on affirmative action in federal employment. Among other things, that memorandum gives examples of comparative labor forces that agencies can use to determine whether minority groups are underrepresented in particular jobs. For example, the memorandum states that an agency would determine whether minorities were underrepresented in its workforce by comparing minority representation in the job at issue to the relevant or qualified labor pool in the CLF, rather than to the national CLF. The memorandum also indicates that where the job at issue cannot be precisely matched to a job in the CLF, an agency should use the qualified labor force that most closely matches its qualifications for the job at issue. For example, the memorandum states that an agency would determine whether minorities were underrepresented in its SES workforce by comparing the number of minority GS-15 employees it employs, and others with similar qualifications, to the number of minority SES members it employs. Comparisons with other labor forces are an important part of determining what further actions agencies need to take. However, even if women and minorities are not as well represented in the career SES when compared with other selected labor forces, this information alone would not be sufficient evidence to conclude that discrimination had occurred. In addition, it should not be concluded that affirmative employment efforts are no longer needed to further improve the representation of women and minorities in the career SES if the comparisons show they are as well or better represented in the SES as in other selected labor forces. To assess change in the career SES composition during the 1990s, we analyzed data obtained from OPM’s CPDF on the female and minority makeup of the career SES from fiscal year-end 1990 through 1999. We analyzed the data, by race/ethnicity and gender, to identify trends in the percentages of women and minorities employed in the career SES governmentwide and in each of 24 CFO agencies over the 10-year period. We did not independently verify the CPDF data on the SES for the years we reviewed. However, we reported in 1998 that governmentwide data from the CPDF for the key variables in this study (gender, race/ethnicity, GS-grade, pay plan, occupation, career status, agency, and personnel action) were 97 percent or more accurate. For the first part of our second objective, to determine the proportion of women and minorities appointed to the career SES annually over this 10- year period, we obtained and analyzed data from the CPDF for each fiscal year from 1990 through 1999. We excluded career SES appointments that were reinstatements into the career SES and transfers of career SES individuals from one agency to another (about 1 percent combined). For the second part of our second objective, to determine whether career SES appointments reflected the SES pipeline from which most new SES members were generally appointed, we obtained and analyzed data from the CPDF for each of 3 years (1990, 1995, and 1999). The 3 years represented the beginning, middle, and end of our overall review period. We compared the diversity of the career SES appointees with the diversity of the pipeline. Because data were not readily available on who actually applied for SES vacancies and because we could not clearly determine the workforces from which all career SES appointees came, we limited the pipeline analysis to career SES appointments of career GS-15 and equivalent employees from within the appointing agency. Over 90 percent of those appointed to the career SES from within an agency were career GS-15 and equivalent employees the year prior to their appointment and about 83 percent of all career SES appointments were from within an agency. Although we recognized that all GS-15 employees were not in managerial or supervisory positions, we selected the GS-15 workforce and its equivalent as the SES pipeline because we found that 25 percent of the GS-15 workforce appointed to the SES in fiscal year 1999 were not managers or supervisors in fiscal year 1998. To look at representation in the career SES compared with other labor forces, we calculated the proportions of women and minorities in the career SES, as of September 30, 1999, and compared the result with similarly calculated proportions of women and minorities in the six labor forces. The labor forces, which varied in the extent to which they were similar to the career SES in terms of occupation and salary, were the national CLF, excluding federal employees; an RCLF, excluding federal employees, that we developed; the federal executive branch career workforce as a whole; career federal employees in professional and administrative occupations; the GS-15 career workforce; and the Postal Service career executive corps. To provide data on the composition of and appointments to the noncareer SES, we obtained and analyzed governmentwide and agency-specific data from OPM’s CPDF. Data were obtained for each fiscal year from 1990 through 1999. We did our work in Washington, D.C., from January 2000 through January 2001 in accordance with generally accepted government auditing standards. A more detailed description of the scope and methodology used to answer each of the objectives is provided in appendix II. The proportion of women and minorities in the career SES generally increased both governmentwide and in the 24 CFO agencies during the 1990 through 1999 period. The percentage of white women increased substantially while the percentage of white men declined. From fiscal years 1990 through 1999, the career SES varied in size from a high of 7,583 in 1992 to a low of 6,183 in 1998. While the number of career SES employees overall decreased, the number of women and minorities steadily increased over this 10-year period, as shown in figure 1. The number of women in the career SES governmentwide more than doubled from 626 in 1990 to 1,352 in 1999, while the number of men declined. The number of minorities increased from 487 as of September 30, 1990, to 807 by the end of fiscal year 1999. Figure 1 also shows that the number of white and male career SES members declined over the 10-year period but continued to make up the majority of the career SES workforce. Governmentwide, women and minorities became a greater proportion of the career SES workforce over the 1990 through 1999 period. The amount of growth that minorities experienced as a group was more modest than that of women. As shown in figure 2, the proportion of women in the career SES grew to 21.8 percent as of the end of fiscal year 1999, up 12 percentage points from the fiscal year-end 1990 rate of 9.5 percent. Minorities grew from 7.4 percent of the career SES as of September 30, 1990, to 13 percent as of September 30, 1999. The annual rate of increase for women and minorities in the career SES over the 10-year period was generally less than 1 percent. The highest annual rate of increase for women (2.4 percent) and minorities (1.1 percent) occurred between 1993 and 1994. The number of women and minorities in the career SES each fiscal year from 1990 through 1999 is shown in table III.1 of appendix III. Figure 3 shows the growth trends among the four minority groups— African Americans, Hispanics, Asian Americans, and Native Americans— over the 1990 through 1999 period. African Americans increased from 4.6 percent as of September 30, 1990, to 7.8 percent as of September 30, 1999—a 3.2 percentage point increase over the 10-year period. The proportion of Native Americans in the career SES was 0.6 percent as of September 30, 1990, and from fiscal year 1991 through fiscal year 1997, they consistently made up 0.8 percent of the career SES. By the end of fiscal year 1999, the proportion of Native Americans in the career SES had increased to 1.1 percent, resulting in a 0.5 percentage point increase over the 1990 through 1999 period. The proportion of Asian Americans and Hispanics in the career SES over the 1990 through 1999 period was slightly above the percentage of Native Americans. The extent of change in the composition of the career SES governmentwide varied when analyzed by gender and race/ethnicity combined. Governmentwide, white women experienced a higher percentage point change relative to each of the minority women groups over the 1990 through 1999 period. As figure 4 shows, the proportion of white women in the career SES increased more than 9 percentage points from 8.2 percent in 1990 to 17.6 percent in 1999. Although minority women also experienced some growth over the 1990 through 1999 period, the extent of change in their growth was substantially less than that of white women. African-American women increased about 2 percentage points over the 10-year period from nearly 1 percent in 1990 to 2.7 percent in 1999; Hispanic, Asian-American, and Native-American women each increased less than 1 percentage point. Minority women, as a group, made up 4 percent of the career SES workforce by the end of fiscal year 1999. The extent of change in the number of career SES women is shown by race and ethnicity in table III.2 of appendix III. Figure 4 also shows that over the 10-year period, differences existed between the proportion of white women and minority women in the career SES, and these differences became more pronounced in 1994 and continued to widen. As of September 30, 1990, the difference between white women and African-American women, the largest group of minority women, was 7 percentage points. By the end of fiscal year 1999, the difference had increased to about 15 percentage points. The proportion of white men, who made up the majority of the career SES workforce governmentwide over the 1990 through 1999 period, declined by 15 percentage points during this 10-year period from 84 percent in 1990 to 69 percent in 1999, as shown in figure 5. This decline in the percentage of white men can, in part, be attributed to their retirement and their replacement with more white women and minorities rather than with white men. African-American men increased 1.4 percentage points over the 10-year period from 3.7 percent in 1990 to 5.1 percent in 1999. Hispanic, Asian-American, and Native-American men each made up nearly 2 percent or less of the career SES workforce during the 1990 through 1999 period. The extent of change in the proportion of women and minorities in the career SES varied among the 24 CFO agencies over the 1990 through 1999 period. The proportion of women in the career SES increased over the 10- year period in each of the 24 agencies. The proportion of minorities in the career SES also increased over this 10-year period in all of the 24 agencies, except two—FEMA and State. As figure 6 shows, each of the 24 CFO agencies, and the federal government as a whole, had a higher proportion of women career SES members as of September 30, 1999, than in 1990. This figure also shows that OPM, which had a relatively small career SES workforce (38) as of the end of fiscal year 1999, had the highest proportion of women (42 percent) in its career SES workforce. Veterans Affairs, with 248 career SES members as of the end of fiscal year 1999, had the lowest proportion (13 percent) of women in its career SES. The number of career SES women in each of the 24 agencies from 1990 through 1999 is shown in table III.1 of appendix III. The percentage of women career SES members increased at each agency. There was a larger percentage-point increase at some agencies than at others, as figure 7 shows. The change ranged from 21-percentage points (Interior) to 5-percentage points (Veterans Affairs). There was even more variation across agencies when we examined trends in women by race and ethnicity. Details of that analysis are presented in table III.2 in appendix III. As shown in figure 8, the percentage of minority career SES employees increased over the 1990 through 1999 period at all of the 24 CFO agencies except two—FEMA and State. Figure 8 also shows that SBA, with 34 career SES members as of September 30, 1999, had the highest percentage of minorities in its career SES workforce. FEMA, which had 29 career SES members as of the end of fiscal year 1999, had the lowest percentage of minority career SES members. As with the change in the percentage of women, figure 9 shows that agencies differed in the extent of change in the percentage of minorities over this period. The amount of increase among minority career SES employees ranged from 0.2 percentage point at Veterans Affairs to 19 percentage points at SBA. The percentage of minorities declined by 0.8 percentage point and 1.8 percentage points at FEMA and State, respectively. For details on the number of career SES minorities at each of the 24 CFO agencies from 1990 through 1999 and on the extent of change in the number of minorities, see tables III.1 and III.3, respectively, in appendix III. The gender and racial/ethnic diversity of those appointed to the SES each year will, of course, affect the composition of the SES workforce. For fiscal years 1990 through 1999, annual appointments to the career SES included more women and minorities as the decade went on. The extent of diversity in SES appointments varied among the selected agencies. We also found that in comparing SES appointments to the GS-15 workforce, the pipeline from which almost all SES appointments came over the 3 years (1990, 1995, and 1999) that we reviewed, the percentage of women appointed to the SES was greater than the percentage of women in the GS-15 workforce for all 3 years. A higher percentage of minorities was appointed to the SES from the GS-15 workforce in 1 of 3 years, and the pattern of appointments compared with the pipeline was quite different across the minority groups. During the period from 1990 through 1999, the general pattern was an increase in women and minority SES appointments in the mid-1990s from a lower level in the early years of the decade. From 1990 through 1999, about 25 percent (1,298) of the 5,294 career SES appointments were women and 14.4 percent (763) were minorities. African Americans received 9 percent of the career SES appointments followed by Hispanics (2.6 percent), Asian Americans (1.7 percent), and Native Americans (1.2 percent). For details on the number of women, minorities as a whole, and minority groups appointed annually to the career SES over the 10-year period, see appendix IV. As shown in figure 10, the percentage of career SES appointees that were women increased from 17 percent in 1990 to 29 percent in 1999. Minority appointments to the career SES increased from 9.5 percent in 1990 to 14.9 percent in 1999. Figures 11 and 12 show trends in appointments for women and men by race and ethnicity. In each year, the largest percentages of appointments were white women and white men. Of all appointments during this period, 19.8 percent were white women; 65.5 percent were white men. Figures 13 and 14 below show the percentage of career SES appointments that were women and minorities for each CFO agency and the government as a whole from 1990 through 1999. For details on the number of women and minorities appointed annually to the career SES in each agency and governmentwide, see table IV.1 in appendix IV. As part of our analysis of diversity in appointments to the SES, we compared the composition of actual SES appointments to the composition of the pipeline—the feeder group from which new SES members were appointed. We compared the percentages of women and minorities in the group appointed from GS-15 and its equivalent to the SES in a given year to the percentages of women and minorities in the GS-15 workforce as a whole for the year before. We made this comparison for 3 fiscal years (1990, 1995, and 1999), which covered the beginning, middle, and end of our review period. In each of these 3 years, the percentage of women appointed to SES from GS-15 was greater than the percentage of women GS-15 employees in the previous year. A similar pattern occurred for minorities in 1 of the 3 years, and the percentage was slightly lower in the other 2 years. (See fig. 15.) When we analyzed the minority percentages shown in figure 15 by gender, we found that the percentage of minority women increased steadily both in the GS-15 workforce as a whole (2 percent in 1989, 4 percent in 1994, and 5 percent in 1998) and in the GS-15 SES appointments (2 percent in 1990, 5 percent in 1995, and 6 percent in 1999). For minority men, the percentage in GS-15 increased (8 percent in 1989, 9 percent in 1994, and 10 percent in 1998), and the percentage of GS-15 SES appointees went from 7 percent in 1990 to 12 percent in 1995 but was back at 7 percent in 1999. We also analyzed the minority appointment percentages by race and ethnicity (see fig. 16). The percentage of SES appointees was greater than or equal to the percentage in the feeder group, except for Hispanics in 1990 and for Asian Americans in all 3 years. We analyzed SES appointments of African Americans from GS-15 by gender during the 3 years (the smaller overall number of appointments makes such an analysis not meaningful for Asian Americans, Hispanics, and Native Americans). The appointee percentage for African-American women was consistently greater than the feeder group percentage, and both percentages increased later in the decade. The appointment percentage for African-American men was substantially less in 1999 (3.2 percent) than in 1995 (6.8 percent); the feeder group percentage for African-American men was 3.1 percent in 1994 and 3.4 percent in 1998. We compared the SES to six labor forces, as shown in table 1 (see p. 31). The labor force to use as a benchmark to assess representation depends on the skills, experience, and qualifications required for the job or workforce being examined. Our comparison to the entire CLF places the race and gender composition of the SES into the broadest possible labor force context. By comparing SES diversity with our RCLF, the comparison is being made to individuals outside the federal workforce who are in occupations and whose income is equivalent to that of the SES. An RCLF is the pool of people in the CLF with the requisite skills and experience to perform the duties of the positions in their agencies. Comparing the SES workforce with the entire federal workforce and with the federal workforce in professional and administrative job categories parallels the CLF and RCLF comparisons but uses the federal labor force rather than the civilian workforce outside the federal government. The GS-15 workforce provides a useful basis for comparison because it is the primary feeder group for the SES. In addition to these comparisons, the Postal Service provides a comparison with an executive workforce that has qualification, skill, and experience requirements comparable to those of the SES. While we recognize that other benchmarks could also be used to assess the level of representation of women and minorities in the SES, none of our comparisons are definitive or conclusive about the level of diversity achieved. In making our comparisons to these six labor forces, we compared an employee group’s proportion in the SES with its proportion in the comparison labor force to determine the extent of parity. The extent of parity describes by gender and race and ethnicity how well employees were represented in the career SES workforce as of September 30, 1999, when compared with their representation in each of the selected labor forces. For example, if the percentage of women is the same in the career SES workforce as in the comparison labor force, the representation of women in the SES would be at parity with the representation of women in the comparison labor force and would be shown without shading in table 1. If the percentage of women in the SES is less than in the comparison labor force, their representation would be less than parity and would be shaded either light or dark gray in table 1, depending on the extent to which the SES percentage is below the comparison labor force percentage. As shown in table 1, the proportion of women and minorities in the career SES exceeded their proportion in our RCLF. But women and minorities were represented at lower rates when compared with the CLF; the federal executive workforce, as a whole; the portion of these workers in professional and administrative occupations; and the GS-15 workforce. The proportion of women in the Postal Service career executive corps was about the same as the proportion of women in the career SES. Minorities were represented in the career SES at a lower rate than they were in the Postal Service career executive corps. African Americans and Native Americans exceeded their percentages in our RCLF; Asian Americans did not. For Hispanics, the difference between their percentage in the SES workforce and their percentage in our RCLF was not statistically significant because the difference was so small that it could be due to sampling error or chance. Table 1 shows the representation rates for minorities in the remaining five labor forces. The table also shows that the percentages of men and whites in the career SES were below their percentages in our RCLF but exceeded their percentages in the CLF, overall federal workforce, federal professional and administrative workforce, and GS-15 workforce. The percentage of men in the career SES were slightly below their percentage in the Postal Service career executive corps. Whites were represented in the career SES at a higher rate than they were in the Postal Service career executive corps. We also compared the career SES workforce at each of the 24 CFO agencies to the same six labor forces. To the extent that we could, we tailored each labor force, except the CLF and Postal Service, to be similar to the makeup of each agency’s career SES workforce, because the mission of each of the agencies is different with a different occupational mix (see app. II). Although our comparisons showed variation among the 24 CFO agencies, the results were similar to those for the SES as a whole. We found that the percentages of women and minorities in most agencies’ career SES were above the percentages of women and minorities in agency-specific RCLFs that we developed. But the percentages of women and minority career SES employees were generally either below the percentages in the five remaining labor forces—the national CLF, overall agency workforce, agency professional and administrative workforce, agency GS-15 workforce, and U.S. Postal Service career executive corps—or else not significantly different from them. In contrast, the pattern for men and whites was usually higher percentages in the SES than in the CLF or the federal workforce comparisons but lower percentages in our RCLF. Comparisons of specific minority groups showed substantial variations across agencies but because of the small numbers, most of the differences were not statistically significant. For more details, see appendix V. The noncareer SES, like the career service, became more diverse in terms of gender and race/ethnicity during the period from 1990 through 1999. In 1990, women constituted 26.3 percent of the noncareer SES; in 1999, 40.4 percent of the noncareer SES were women. Similarly, 10.9 percent of the noncareer SES were minorities in 1990 and in 1999, it was 23.1 percent. The percentage of each minority group in the SES increased during this period. Appendix VI contains more detailed information on the composition of the noncareer SES governmentwide and at each of the 24 agencies each fiscal year over the 1990 through 1999 period. The proportion of women and minorities appointed to the noncareer SES increased from 1990 through 1999. The percentage of noncareer SES appointees that were women ranged from 26 percent in 1990 to 40 percent in 1999. The minority percentage of appointments ranged from about 13 percent in 1990 to 22 percent in 1999. The percentage of appointments of each minority group increased, except for Native Americans. Appendix VII contains more detailed information on the noncareer SES appointments, showing appointments governmentwide and by agency each year over the 1990 through 1999 period. We provided a draft of this report to the Acting Director of OPM and the Chairwoman of EEOC for their review and comments. OPM and EEOC provided us written comments, which we reprinted in appendixes VIII and IX, respectively. OPM’s Acting Director said our assessment shows that diversity in the SES is moving in the right direction. He further commented that while our assessment shows improvement in SES diversity and indicates that OPM and agency initiatives in this area have been fruitful, OPM is convinced that continued improvement will require a commitment to reviewing and revising employment practices that foster diversity. OPM cited several initiatives that it believes have made a difference in fostering diversity in the SES. Details of these initiatives can be found in appendix VIII. EEOC’s Chairwoman expressed a variety of concerns about certain aspects of our methodology and possible interpretations of the report’s message. She said the SES analysis contained in this report ignores and rejects much of the traditional analysis that EEOC has used to assist agencies in their equal employment opportunity efforts. For example, she said we did not examine the potential barriers that may prevent qualified individuals in the pipeline from moving into the SES. Our objective was not to examine potential barriers that might limit equal access of women and minorities to the SES. As we pointed out in this report, our objective, among others, was to describe how the representation of women and minority employees in the career SES compared with other labor forces. EEOC said it advises agencies to use both the GS-14 and GS-15 labor forces when evaluating the representation of women and any particular minority groups in their SES workforces, because it believes the use of both grades is more appropriate since they are the feeder groups that eventually lead to the SES. However, we believe that our use of the GS-15 labor force only was appropriate because, as we pointed out in this report, we found it to be the primary feeder group into the SES in 1999 as well as in preceding years. The Chairwoman also said that of the six labor forces included in this report, EEOC finds our construction and use of an RCLF to be particularly problematic because of the manner in which we constructed it and the lack of recognition in this report of possible artificial barriers and discriminatory factors that may limit the presence of women and minorities in our RCLF. EEOC said it appears that we restricted our RCLF to occupations in the private sector that require particular expertise when the nature of the SES requires more broad-based leadership skills. As we explain in this report, our RCLF consists of the portion of nonfederal civilian workers in 1999 who were in occupations and earning salaries that corresponded as closely as possible to that of career SES employees. Our RCLF occupations include both management and professional/technical occupations because, as we stated in this report, 87 percent of the career SES workforce were in these types of occupations as of September 30, 1999. Furthermore, we are aware that discrimination and lack of opportunity would limit the number of women and minorities in top management positions in any benchmark labor force. We recognized in this report that our RCLF is not a perfect benchmark and that other benchmarks can be used to assess the representation of women and minorities in the SES. We also state that our RCLF was the closest match to the SES we could identify because data were not available to construct a direct comparison group. EEOC also opposes the use of representation indexes, which are the ratios that we calculated to present our comparison of the percentage of an employee group in the SES workforce to that same group’s percentage in the benchmark workforce (see table 1 and appendix V of this report). EEOC believes these indexes magnify the impact of imperfections and flaws in the benchmark used and imply conclusions that are misleading and inappropriate. As we explain in this report, we did statistical tests to determine whether the percentage comparisons were dissimilar enough to be unlikely due to imperfections and flaws in the benchmark data. We also noted in this report where differences in the compared percentages are not large enough to provide the confidence that they might not be due to imperfections and flaws in the benchmark data. We provide six different comparisons in this report, and because the results vary for each of them, we have drawn no conclusions. Furthermore, we have cautioned the reader about drawing conclusions from these results. The Chairwoman said EEOC is concerned that our use of aggregate data from 24 federal agencies may be statistically inappropriate and therefore result in misleading conclusions. She also said that appendix III of this report indicates that many of the 24 agencies have had problems in achieving diversity. We do not agree that aggregation of the data for the 24 agencies results in misleading conclusions, because we have clearly delineated our governmentwide and agency-specific findings. We provide full disclosure of governmentwide and agencywide numbers throughout this report. We also do not agree with EEOC’s statement that the data in appendix III of this report indicate many agencies have had problems achieving diversity if EEOC’s basis for saying this is the fact that some agencies had a smaller number of women and minorities than other agencies. The data in appendix III simply represent a statistical profile of the agencies’ SES workforces, and one should not conclude from these data alone that agencies with smaller numbers of women and minorities had problems achieving diversity in their SES workforces. In conclusion, EEOC stated that a reader of this report might get the impression that whites and men are underrepresented in the career SES and that women and minorities are overrepresented. We do not believe that a reader would get such an impression, as EEOC suggested, given that the results of the comparisons we present in table 1 of this report vary across the six different workforces. For example, the GS-15 workforce comparison, which is the primary feeder group into the SES, shows that whites and men are overrepresented and that women and minorities are underrepresented. Moreover, we caution the reader that none of the comparison labor forces, including our RCLF, can be seen as definitive or conclusive as to whether the level of diversity in the SES is sufficient. As agreed with your offices, unless you announce the contents of this report earlier, we plan no further distribution until 30 days after the date of the report. At that time we will send copies of this report to the Acting Director of OPM and the Chairwoman of EEOC. We will also send copies to Representative Dan Burton and Representative Henry A. Waxman, Chairman and Ranking Minority Member, respectively, Committee on Government Reform; Representative Joe Scarborough, Chairman, Subcommittee on Civil Service and Agency Organization, Committee on Government Reform; Senator Fred Thompson and Senator Joseph I. Lieberman, Chairman and Ranking Member, respectively, Committee on Governmental Affairs; Senator George Voinovich and Senator Richard Durbin, Chairman and Ranking Member, respectively, Subcommittee on Oversight, Government Management, and the District of Columbia, Committee on Governmental Affairs; and Senator Thad Cochran and Senator Daniel K. Akaka, Chairman and Ranking Member, respectively, Subcommittee on International Security, Proliferation and Federal Services, Committee on Governmental Affairs. We will make copies available to others upon request. The key contributors to this report are listed in appendix X. If you have any questions about this report, please call me on (202) 512-6806. Our first objective was to assess to what extent the composition of the career Senior Executive Service (SES) changed over the 1990 through 1999 period to include more women and minorities. We did so by obtaining data, by race/ethnicity and gender, on the number of career SES members employed governmentwide and at the 24 agencies covered by the Chief Financial Officer (CFO) Act as of September 30 of each year from 1990 through 1999. These data were obtained from the Central Personnel Data File (CPDF), the database of federal employees maintained by the Office of Personnel Management (OPM). We excluded from our study SES members who were either in limited-term or limited emergency appointments; 169 individuals were in such appointments as of September 30, 1999. We analyzed these data to identify the composition of the career SES as of the end of each fiscal year from 1990 through 1999. We also analyzed these data to identify trends in how much change occurred governmentwide and in the selected agencies in the percentages of women and minorities employed in the career SES over the 1990 through 1999 period. We did not independently verify the CPDF data on the SES for the years we reviewed. However, in a 1998 report, we found that governmentwide data from the CPDF for the key variables in this study— gender, race/ethnicity, general schedule (GS) grade, pay plan, occupation, career status, agency, and personnel action—were 97 percent or more accurate. For the first part of our second objective, to determine the proportion of women and minorities appointed to the career SES annually over this 10- year period, we obtained and analyzed data from the CPDF for each fiscal year from 1990 through 1999. We excluded career SES appointments that were reinstatements into the career SES and transfers of career SES individuals from one agency to another (about 11 percent combined). SES appointments in the Federal Bureau of Investigation (FBI), an agency within the Department of Justice, are not included because the FBI does not submit personnel action data to the CPDF. For the second part of our second objective, to determine whether career SES appointments reflected the SES pipeline from which most new SES members were generally appointed, we obtained and analyzed data from the CPDF for each of 3 years (1990, 1995, and 1999). The 3 years represented the beginning, middle and end of our overall review period. We compared the diversity of the career SES appointees with the diversity of the pipeline. Because data were not readily available on who actually applied for SES vacancies and because we could not clearly determine the workforces from which all career SES appointees came, we limited the pipeline analysis to career SES appointments of career GS-15 and equivalent employees from within the appointing agency. Over 90 percent of those appointed to the career SES from within an agency were career GS-15 employees the year prior to their appointment and about 83 percent of all career SES appointments were from within an agency. Because we could not clearly determine the labor force (pipeline) for career SES appointments of individuals from outside an agency, we excluded nonfederal employees (about 10 percent of appointees) and federal employees from other agencies (about 7 percent of appointees). Similarly, because we could not clearly determine the labor force for career SES appointments of nonGS-15 federal employees and noncareer GS-15 employees within an agency, we excluded these two groups (about 8 percent) of appointees. In our analysis of appointment and pipeline data, we did not distinguish between GS-15 employees who had supervisory or managerial experience and those who did not have such experience. We did not make this distinction because we found that 25 percent of the GS-15 employees appointed to the SES in fiscal year 1999 were not managers or supervisors in fiscal year 1998. Our third objective entailed identifying how the representation of women and minority employees in the career SES governmentwide and in the 24 CFO agencies as of September 30, 1999, compared with other labor forces. On the basis of agreements reached with your staff, we compared the career SES to six labor forces to provide some context for the extent of diversity in the career SES. The six labor forces varied in the extent to which they were similar to the SES in terms of occupation, salary, and size. Table II.1 shows the size of the six labor forces used in our governmentwide comparisons. Number of employees 123.8 million 1.2 million 1.6 million 888,000 51,000 812 We included only employees receiving wages or salaries and excluded federal employees from the CLF and the RCLF that we constructed. The CLF was derived from the March 1999 Current Population Survey (CPS). Our RCLF was constructed based on the CLF to correspond to the career SES workforce as closely as possible in terms of salary and occupation. Because salary data collected for the CPS are only in ranges of dollars, we used the salary range of $100,000 and over as that most comparable to SES salaries. In addition to governmentwide comparisons of the career SES to each of the labor forces, we also assessed the diversity of each of the CFO agency career SES workforces separately. Because the mission of each of the CFO agencies is different with a different occupational mix, we compared the diversity of each agency’s career SES workforce to the diversity of its own agency total career workforce, its own career professional and administrative workforce, and its own career GS-15 workforce. We also compared the diversity of each agency’s career SES occupations to the diversity of corresponding occupations in a RCLF that we developed. However, in comparing the diversity of each agency’s career SES to the CLF and Postal Service, we did not tailor these labor forces to correspond to the SES occupational mix of each of the 24 agencies. We used a proxy RCLF and the GS-15 workforce as comparative groups. The Equal Employment Opportunity Commission (EEOC) and the Department of Justice have provided agencies advice on assessing the extent of diversity in their SES workforces. EEOC said it has suggested that agencies look at their relevant feeder groups when assessing the level of representation of women and minorities in the SES or at any particular grade level, and in the case of the SES, it has suggested that agencies look at their GS-14 and GS-15 workforces. When an agency’s positions cannot be precisely matched to those in the CLF, Justice has advised agencies to compare their labor forces to those in other labor forces that have the qualifications to perform the duties of the positions in their agencies— such as comparing their SES with employees in their GS-15 workforce. We constructed an RCLF that consists of civilian workers employed in occupations and earning salaries similar to those in the SES. We recognize that our RCLF is not a perfect benchmark, and EEOC does not endorse it.However, our RCLF was the closest match to the SES we could identify in terms of occupations and salary level, because data were not available on level of responsibilities for those in the CLF. We also used the CLF as a comparative group, recognizing that it does not provide as comparable a workforce to the SES as one that includes workers with education, skills, experience, and age similar to the SES, because it includes workers with limited education, skills, and experience as well as workers as young as age 16. The Bureau of the Census conducts the CPS for the Bureau of Labor Statistics. Because of the age of the CLF data from the 1990 decennial census, we used CLF data from the March 1999 CPS, the most recent data available at the time of our analyses, when it was statistically feasible to do so. We found that the CLF data from the 1999 CPS were statistically feasible for all racial/ethnic groups except Asian Americans and Native Americans. CLF data were not statistically reliable for Asian Americans and Native Americans because the CPS does not cover enough households to provide statistically sound projections for these two groups. Although the 1999 data were not reliable for these two groups, we used the data because the results of the 1999 CPS RCLF comparisons for Asian Americans and Native Americans indicated the same findings as the 1990 CLF comparisons for Asian Americans and Native Americans. Based on these similar findings, we believe the 1999 CPS RCLF comparisons are not misleading. To construct our governmentwide and agency-specific RCLF, we identified the occupations that accounted for a large proportion of the entire career SES as of September 30, 1999, as well as occupations that were small relative to the entire career SES workforce but relatively large within an agency’s career SES workforce (such as Correctional Administrators in the Department of Justice). This resulted in a total of 34 SES occupations that accounted for 87 percent of the career SES workforce as of the end of fiscal year 1999. We then identified, using a crosswalk used by EEOC, occupations in the CLF that corresponded as closely as possible to these SES occupations. Because the CPDF and the CPS do not use the same occupational categories, some CPS occupations included more than one CPDF SES occupation. This resulted in a total of 28 occupations in the CPS that were comparable to the 34 SES occupations identified in the CPDF. We extracted data from the CLF only for those salaried civilian workers in the 28 occupations with salaries of $100,000 and over, which were comparable to the base salaries of career SES members in 1999. These data were weighted to reflect the occupational composition of each agency. For example, if 50 percent of an agency’s SES were attorneys, then our RCLF that they were compared to also included 50 percent attorneys. We then calculated a representation index to measure the extent of parity between an employee group’s proportion in the SES and its proportion in the comparison labor force by dividing the career SES percentage for each employee group by the percentage for the same employee group in each of the selected labor forces and multiplying by 100. The extent of parity for a particular group can vary widely from one comparative labor force to another. However, none of the comparisons of the SES to the other labor forces, governmentwide or by agency, can be seen as definitive as to whether the SES corps is sufficiently diverse. We used shading to describe the extent of parity between employee group representation in the SES and comparative labor forces. Using appropriate statistical tests, we tested whether the proportions of women and minorities in the SES were significantly over or under (two- tailed test) their proportions in the six labor forces to determine whether the proportional differences were statistically significant. We used the two-standard deviation difference between compared proportions, as recommended by the Justice Department, as our test of significance. A difference of two-standard deviations indicates that the difference in proportions is very unlikely to be due to sampling error or chance. Such a sizable difference provides a strong basis for concluding that the differences are noteworthy. The results of our comparisons are statistically significant unless otherwise noted. To provide data on the noncareer SES, we obtained data from the CPDF. Specifically, we obtained data for each fiscal year from 1990 through 1999, on the composition of and appointments to the noncareer SES governmentwide and for the 24 CFO agencies. Because noncareer SES appointments are made at the discretion of the administration and are not subject to merit selection or to OPM approval, we did not include the noncareer SES in our pipeline or comparative labor force analyses. The following tables provide data on the number of women and minorities in the career SES at each of the 24 CFO agencies and governmentwide. Table III.1 shows the total number of career SES each year over the 1990 through 1999 period and how many of the career SES members were women and minorities. Tables III.2 and III.3 show, by race and ethnicity, the extent of change in the number of women and minorities, respectively, between 1990 and 1999. The following tables provide data on the appointments of women and minorities to the career SES at each of the 24 CFO agencies and governmentwide. Table IV.1 shows the total number of appointments to the career SES each year over the 1990 through 1999 period at each of the 24 CFO agencies and how many of the career SES members appointed were women and minorities. Tables IV.2 shows, by race and ethnicity, the number of minority group members appointed from 1990 through 1999 at each of the 24 CFO agencies. In tables V.1 through V.6, we compare, by gender, minority group, race, and ethnicity, the percentage of employees in the career SES at each of the 24 CFO agencies as of September 30, 1999, to the percentage of employees in the following labor forces to determine the extent of parity: the national CLF ( see table V.1); our agency-specific RCLFs—the proportion of employees in the overall CLF who were in occupations and had incomes equivalent to that of the career SES at each of the 24 CFO agencies (see table V.2); each agency’s total workforce (see table V.3); each agency’s workforce in professional and administrative occupations (see table V.4); each agency’s GS-15 workforce (see table V.5); and the U.S. Postal Service career executive corps (see table V.6). We used shading to illustrate the extent of parity between the career SES employee group percentages and the percentages for the same employee group in the comparative labor forces. To measure the extent of parity, we calculated a representation index by dividing the career SES percentage for each employee group by the percentage for the same employee group in each of the comparative labor forces and multiplying by 100. The results of our comparisons are statistically significant unless otherwise noted. Appendix II describes the tests we performed to determine whether proportional differences between the SES and the comparative labor forces were statistically significant. Table V.1: Comparison of Career SES Employee Groups in the 24 CFO Agencies as of September 30, 1999, to the Same Employee Groups in the National CLF CLF data obtained from the 1999 CPS for Asian Americans and Native Americans were not statistically reliable because the CPS does not cover enough households to provide statistically sound projections for these two groups. However, our comparisons for Asian Americans and Native Americans using CLF data derived from the 1999 CPS and from the 1990 Census indicated similar results. Therefore, we believe that the comparisons using CLF data from the 1999 CPS are not misleading. Table V.2: Comparison of Career SES Employee Groups in the 24 CFO Agencies as of September 30, 1999, to the Same Employee Groups in Our Agency-Specific RCLFs CLF data obtained from the 1999 CPS for Asian Americans and Native Americans were not statistically reliable because the CPS does not cover enough households to provide statistically sound projections for these two groups. However, our comparisons for Asian Americans and Native Americans using CLF data derived from the 1999 CPS and from the 1990 Census indicated similar results. Therefore, we believe that the comparisons using CLF data from the 1999 CPS are not misleading. 5AA?JA@ 5-5 AFOAA CHKFI )AHE?=I 0EIF=E?I )AHE?=I 9DEJAI -@K?=JE -2) .-) /5) )5) 5. 5*) 55) SES employee group percentage met or exceeded the percentage for the same employee group in the selected labor force. SES employee group percentage was either above, below, or the same as the percentage for the same employee group in the selected labor force, but the difference between the percentages was not statistically significant. SES employee group percentage was below the percentage for the same employee group in the selected labor force. 5AA?JA@ 5-5 AFOAA CHKFI )AHE?=I 0EIF=E?I )AHE?=I 9DEJAI -@K?=JE -2) .-) /5) )5) 5. 5*) 55) SES employee group percentage met or exceeded the percentage for the same employee group in the selected labor force. SES employee group percentage was either above, below, or the same as the percentage for the same employee group in the selected labor force, but the difference between the percentages was not statistically significant. SES employee group percentage was below the percentage for the same employee group in the selected labor force. The following tables provide data on the composition of the noncareer SES governmentwide and at each of the 24 CFO agencies. Table VI.1 shows for each year over the 1990 through 1999 period the overall size of the noncareer SES as well as the number of women, men, minorities, and whites. Table VI.2 shows the number of women and minorities for each year from 1990 through 1999 at each of the 24 agencies. The following tables provide data on the composition of the noncareer SES governmentwide and at each of the 24 CFO agencies. Table VII.1 shows for each year over the 1990 through 1999 period the total number of noncareer SES appointments as well as the number of women, men, minorities, and whites. Table VII.2 shows the total number of appointments to the noncareer SES each year over the 1990 through 1999 period at each of the 24 agencies and how many of the noncareer SES members appointed were women and minorities. Tables VII.3 shows the number of minority group members, by race and ethnicity, appointed from 1990 through 1999 at each of the 24 agencies. The following is GAO’s comment on EEOC’s attachments to its letter dated March 6, 2001. The data presented in EEOC’s two attachments are virtually identical to the data we present in our report, except for its data on the GS-14 and GS- 15 white collar workforces. In our report, we have explained that we excluded GS-14s a feeder group for our comparison to the SES, because GS-14s constituted only 1 percent of appointments to the SES as of the end of fiscal year 1999. In addition to the individual named above, Richard W. Caradine, Mary Y. Martin, Gregory H. Wilmoth, Steven J. Berke, Ellen T. Grady, William Trancucci, Michael R. Volpe, Sylvia L. Shanks, Thomas G. Dowdal, Katharine M. Raheb, and Jena Y. Sinkfield made key contributions to this report.

This report analyzes the gender and racial/ethnic diversity in the career Senior Executive Service (SES) governmentwide. GAO examines (1) whether the composition of the career SES changed during the 10-year period ending in fiscal year 1999 to include more minorities and women, (2) what proportion of women and minorities were appointed to the career SES annually during this 10-year period and whether the appointments reflected the SES "pipeline"--the group from which new SES members were generally appointed, and (3) how the representation of women and minority employees in the career SES as of fiscal year 1999 compared with other labor forces. GAO found that the representation of women and minorities in the career SES steadily increased during the 1990's, with the proportion of women going from 10 percent in 1990 to 22 percent in 1999. Similarly, the percentage of minority members went from seven percent to about 13 percent. The vast majority of these appointments came from within the ranks of GS-15 employees. Women and minorities had a somewhat lower representation in the SES when compared to other labor forces.

You are an expert at summarizing long articles. Proceed to summarize the following text: The JASSM program began in 1995 and was to be an affordable, joint program between the Air Force and the Navy to meet an urgent need with a streamlined acquisition strategy. JASSM predecessor TSSAM was also planned to be a low-cost cruise missile able to deliver several different munitions. However, after several unsuccessful flight tests, the lead contractor for TSSAM initiated a reliability improvement program to address higher reliability requirements, but demonstration of whether problems had been resolved would have taken several years and cost more than $300 million. As costs for TSSAM increased, the Army ended its participation in the program and after a period of declining budgets and changes to threat scenarios, a cost and operational effectiveness analysis was completed, which showed that other options might be adequate to meet national security requirements. In 2004, the Navy left the JASSM program citing it as a redundant capability to other systems in its inventory. JASSM was expected to require minimal maintenance while in storage and life-cycle cost was to be controlled through improved reliability and supportability achieved during development. To execute the acquisition strategy and meet cost and schedule goals, the Air Force used Total System Performance Responsibility (TSPR). TSPR generally gives the contractor total responsibility for the entire weapon system and for meeting DOD requirements, with minimum government oversight. The Air Force made initial JASSM requirements flexible to allow Lockheed Martin to have clear control of the design and product baseline. Program officials stated this strategy was based on other successful programs, such as the Joint Direct Attack Munition program, and would allow the contractor flexibility to make changes to meet cost and schedule deadlines without having to consult with the government. An example of this flexibility was the mission missile effectiveness requirement. The effectiveness requirement is the minimum number of missiles required to kill specified targets and was named as a key performance parameter, allowing trades between reliability, survivability, and lethality. In other words, if the program was successful at achieving high levels of survivability and lethality, reliability could remain low, even fluctuate, and still meet the stated parameters. Quantities for JASSM were established by reviewing the threshold targets and determining the number of missiles necessary to meet operational damage criteria, based on missile performance using the effectiveness requirement. Therefore, changes to reliability would affect the quantities necessary to meet requirements. As part of the program’s 1995 acquisition strategy, the Air Force received five proposals for JASSM and in 1996 selected Lockheed Martin and McDonnell Douglas to begin a 24-month risk-reduction phase. Following the risk-reduction phase, the Air Force planned 32 months for development and a total of 56 months from program start to full-rate production in 2001. The program planned for concurrent developmental and operational testing and evaluation with four flight tests planned before initial production. The Air Force planned to have nine fixed-price production lots from 2001 through 2009 totaling 2,400 baseline missiles with an initial program cost estimate of $2.2 billion (fiscal year 2010 dollars). A former Air Force official who was an early JASSM program manager stated the Air Force accepted Lockheed Martin’s proposal, which included favorable fixed-price contract prices for production lots 1 through 5 with the understanding that the prices would increase after Lot 5. JASSM’s acquisition strategy planned for a 74 percent unit cost increase between Lots 5 and 6. The cost increase between Lots 5 and 6 was to occur at a time when quantities were increasing. Despite this planned cost increase, the production unit costs would have remained within the Air Force’s acceptable range established before the competition and at much less cost than TSSAM. Further, the prices offered by Lockheed Martin for the first five production lots were below the Air Force’s desired cost range for the system. Air Force officials said the low costs contributed to Lockheed Martin’s selection. However, to maintain the benefits of this pricing, the quantities purchased by the Air Force had to remain within a certain range for each of the first 5 years. While the Air Force planned for some cost growth in the original acquisition strategy, the program’s cost grew much more than expected. For the first four production lots, the Air Force benefited from the favorable prices in the original contract. However, because of funding limitations, it was not able to procure the minimum missile purchase in Lot 5 and had to renegotiate this lot with Lockheed Martin. In doing so, Lockheed Martin was able to renegotiate Lot 5 prices based on its actual production costs—at over $1 million per missile. Air Force documentation indicates that previously negotiated unit prices for Lot 1 through Lot 5 were as much as 45 percent less than Lockheed Martin’s actual costs. Subsequent lots that had not been negotiated under the original contract similarly reflected an increase in price. Most of this cost growth took place prior to 2006, culminating in a critical Nunn-McCurdy unit cost breach late in 2006. According to program documents, several causes have been cited for the critical Nunn-McCurdy unit cost breach: an unrealistic cost estimate resulting from a flawed acquisition strategy; the addition of 2,500 more expensive JASSM-ER variants; the costly efforts to overcome reliability problems; and reduced annual production rates for a longer period. Following the critical Nunn- McCurdy unit cost breach, the Air Force halted production of the missiles until DOD certified that the program should continue. The Under Secretary of Defense for Acquisition, Technology, and Logistics (USD/ATL) found no lower cost alternatives and certified the program in 2008, despite the missile’s higher than projected production costs. Since operational testing began in 2001, the reliability of the JASSM missile has been inconsistent. The Air Force flight-tested 62 baseline missiles from January 2001 through May 2007, resulting in 25 failures and 3 “no tests,” which was a 58 percent reliability success rate. However, because the program’s strategy allowed for the contractor to manage to mission effectiveness by combining reliability with other factors, the 58 percent reliability rate was sufficient to meet mission effectiveness criteria. The Air Force tracked reasons for flight test failures, but was not part of the failure review boards until production Lot 5, 5 years after the start of operational testing. Air Force officials stated that until 2006, Lockheed Martin handled all flight test failure review determinations and made corrective actions internally and the government was not heavily involved. During the Nunn-McCurdy certification process, USD/ATL directed the JASSM program to develop a reliability growth plan that would achieve 90 percent reliability for the baseline missile. The program set a goal of achieving this reliability rate by Lot 11, or fiscal year 2013. In addition, the JASSM-ER program set a reliability goal of 85 percent by Lot 4, or fiscal year 2014. In our 2000 report on JASSM, we recommended the Secretary of Defense revise its acquisition strategy for the JASSM program to be more closely linked to demonstrating that the missile design is stable and can meet performance requirements before making the production decision. DOD partially concurred with our recommendation stating that its acquisition strategy is directly linked to knowledge points, that it is linked to specific criteria established for making the low-rate initial production decision, and that the contractor is required to meet these criteria. We concluded that, while the Air Force had taken steps to link production decisions for JASSM to knowledge, we did not believe that the specific criteria established to support a production decision were sufficient to minimize cost and schedule risk. In June 2010, the Secretary of Defense announced an initiative to restore affordability and productivity in defense spending. He stated that there is a need to abandon inefficient practices accumulated in a period of budget growth and learn to manage defense dollars in a manner that is “respectful of the American taxpayer at a time of economic and fiscal stress.” He set a goal to save $100 billion over the course of the 5 year defense planning period. Subsequently, USD/ATL has issued guidance on delivering better value to the taxpayer and improving the way DOD does business. That guidance indicated that budget savings could be found by eliminating unneeded and costly programs and activities as well as by conducting needed programs and activities more efficiently, such as by stabilizing production rates. Subsequently, in a September 14, 2010, memorandum, USD/ATL provided specific guidance to acquisition professionals to achieve this mandate. That guidance included 23 principle actions to improve efficiency, including “Mandate affordability as a requirement” and “Drive productivity growth through Will Cost/Should Cost management.” Since 2007, the Air Force has enhanced its oversight of the JASSM program and made significant investments to improve its reliability as directed by USD/ATL. As a result of increased reliability testing and investments in reliability initiatives, the Air Force has identified many of the root causes for flight test failures. Since then, design changes and other corrective actions have improved JASSM baseline’s test results significantly—now demonstrating 85 percent success. The JASSM-ER variant has done well thus far, with no scored failures during the first seven flight tests. However, while JASSM baseline missile reliability has improved, it is not expected to achieve the USD/ATL-required level of 90 percent until 2013, and its operational effectiveness has not yet been demonstrated either through operational testing or use in a combat operation. In 2004, after two back-to-back flight test failures, the Air Force formed a reliability enhancement team to address what it considered the loss of confidence in JASSM’s performance, OSD’s concerns about the program, and budget reductions. The team’s report stated that while JASSM’s development and reliability were within acceptable ranges when compared to other cruise missiles, the JASSM program should increase testing to discover additional weaknesses in design or production as well as increase confidence in the level of reliability achieved and tie those results to contractor incentives. In 2007, after direction from USD/ATL and the Air Force during the Nunn-McCurdy certification process, the program office updated the Joint Reliability and Maintainability Evaluation Team and Test Data Scoring Board charters to significantly expand their role in management of system development, manufacturing, configuration changes, and testing. Since 2007, as a result of the Air Force’s increased attention to reliability testing and investments in reliability initiatives, the program has identified many of the root causes for reliability failures. While there is no single cause behind JASSM flight test failures, common failures occurred across JASSM subsystems including navigation, flight control, and propulsion. Most of the corrective actions to address the causes of the flight test failures affect missile hardware and many have been implemented in the current configuration for new production missiles. However, some flight test failure investigations are still ongoing. Those investigations are often difficult because of the lack of physical evidence after the flight test missile detonates on the White Sands missile range. As a result, identifying the root causes for failures were based on very extensive component testing at supplier facilities. Additionally, the root causes for several test failures were never conclusively determined as the failures may have resulted from aircraft or user malfunctions. Efforts to address significant reliability problems found during testing have contributed greatly to JASSM’s cost growth and schedule delays since the beginning of development. The Air Force has estimated that it may ultimately spend about $400 million through fiscal year 2025 on its reliability improvement initiatives. The Air Force has also increased lot acceptance testing of the fuses and implemented high-speed photography and screening improvements. In addition to forensic evaluation of the missile impact area, the Air Force also employs visual inspections and a built-in-test. The Air Force has also taken a variety of actions, in addition to flight testing, to improve JASSM’s reliability, including the following initiatives. Increased Oversight: The Air Force and Lockheed Martin have begun a process verification program to ensure suppliers follow prime contractor specifications. According to Air Force officials, the process verification program has allowed the Air Force to avoid unforeseen costs as some missile parts have become obsolete. Further, officials stated that it allows the JASSM program to catch problems earlier and plan on how to replace parts sooner. According to a program official, one process verification program team caught an obsolescence issue with a global positioning satellite receiver and was able to minimize the cost and production effect on the program. Missile Redesign: Program officials state that while wholesale missile redesign is not considered a cost-effective option, they are considering design changes and improvements at the component level. Increased Personnel: The program office has increased the number of government personnel supporting the process verification program and corrective action efforts. During Lot 1, the program had two staff members with production and manufacturing engineering expertise— by Lot 7, 22 staff members had such expertise. Improved Quality Assurance: In August 2006, the Air Force and Lockheed Martin implemented a quality assurance program. Lockheed Martin has implemented tests and improvement programs to increase user confidence in reliability and control costs. For example, Lockheed Martin officials stated that, to improve reliability, they have begun using a test that exposes electrical connections to higher voltages than they usually encounter during flight to make sure the wiring can handle a surge. Additionally, Lockheed Martin has increased the sample sizes of certain components they inspect and test. Recent tests of JASSM have demonstrated increased reliability. Since the Air Force’s reliability initiatives began in fiscal year 2007, the JASSM program has conducted 48 missile flight tests and 39 have been successful (2 were characterized as “no-test”) for a reliability rate of 85 percent. The current focus of JASSM baseline testing has been on improving the reliability of the missile. In the most recent tests of the JASSM baseline missiles produced in 2008, 15 of 16 flight tests were considered successful. In the one failure, the warhead did not detonate and the program is awaiting fuse recovery to make a determination of the root cause. The JASSM-ER is in developmental testing. Developmental testing of JASSM- ER is primarily addressing the differences of JASSM-ER from the baseline system (i.e., larger engine and fuel tanks) and will verify integration on the B-1 aircraft. All seven test flights of JASSM-ER have been successful. The program office is planning three additional integrated JASSM-ER tests to be flown before a production decision is made. In 2007, after USD/ATL’s decision to enhance JASSM reliability, the Air Force and Lockheed Martin agreed to focus on the inherent reliability of the missile and not take into account user error or platform malfunctions (i.e., carrier aircraft, aircrew instrumentation, range safety, etc.). Whereas operational testing is designed to evaluate the ability of JASSM to execute a mission, reliability testing is more narrowly focused on evaluating the missile’s performance during the mission. While mission failures were counted against the program during initial testing, more recent mission test failures have been declared “no tests.” For example, in early testing when a B-52 software issue resulted in an aborted mission and it was scored a test failure, this event would have been declared a no test under current missile reliability definitions. While recent flight testing of the baseline missile has shown improved missile reliability, the Air Force has not yet evaluated the operational effectiveness and suitability of the baseline JASSM with all corrective actions implemented. The JASSM program assesses operational effectiveness through operational testing, follow-on testing, and the weapon system evaluation program (routine tests of inventory assets). These flight test scenarios assess operational effectiveness in realistic combat scenarios against targets by determining reliability, evaluating capability and limitations by identifying deficiencies, and recommending corrective actions. In operational testing, the JASSM baseline program flight tested 38 missiles from June 2002 through May 2007 resulting in 19 failures and two no tests. While these tests identified issues with missile reliability, they also identified issues related to the B-52 aircraft, aircraft software, and fuse issues which negatively affected the operational effectiveness of the missile. This led to a 9-month suspension of testing in 2004 to address these issues. The improved JASSM baseline missile’s suitability was assessed by Air Force testers in 2008 and it was characterized as suitable and likely to meet reliability goals; however, operational testing of the effectiveness of the improved missile has not yet been scheduled. Current projections of JASSM costs have increased by over 7 percent since the Nunn-McCurdy certification in 2008. When taking into consideration the pre-2008 cost growth, which included the cost of adding the JASSM-ER variant, JASSM has grown from a $2.2 billion to a $7.1 billion program. In addition, while it has initiated several cost control measures, the Air Force appears to have limited options to reduce JASSM costs. Moreover, several areas of risk could add to those costs. First, the Air Force has not been able to provide enough annual funding to support the annual procurement levels used as the basis for its 2008 program cost estimate. That has led to a less efficient production process and a longer production period (most recently extended 5 years to 2025). Second, until the Air Force evaluates the effectiveness of the inventory JASSM baseline missiles with corrective actions for previously identified hardware and software issues, their viability and military utility is in question. If inventory missiles are found not to have utility, they may need to be replaced. If retrofitted missiles are found to be effective, the Air Force may still have to find additional funding to complete the retrofit process. Third, the Air Force plans to conduct many more flight tests to improve JASSM reliability from 85 to 90 percent. Finally, in comparing the capabilities and cost of JASSM to several domestic and international missile systems in 2008, the Air Force assumed that JASSM would cost about $1 million per unit, which is about 40 percent less than currently expected. Compared to original program estimates, JASSM’s currently projected costs are much higher because of (1) higher than anticipated production costs, (2) longer production period, (3) the addition of the JASSM-ER variant, and (4) reliability improvement efforts. Through fiscal year 2010, about 75 percent of the planned JASSM quantities have yet to be procured and, as a result, most of the program costs have yet to be incurred. Following the critical Nunn-McCurdy unit cost breach, the Air Force halted production of the missiles until USD/ATL certified that the program should continue. USD/ATL found no lower cost alternatives and certified the program in 2008, despite the missile’s higher than projected production costs. As a part of our review, we examined the cost estimates used by OSD to certify the program following the critical Nunn-McCurdy unit cost breach. This estimate used the actual costs of the missile since JASSM was well into the production phase at the time. Overall, the Air Force’s cost estimate substantially met our best practice standards in our Cost Guide. For a more in-depth discussion of our review of this JASSM cost estimate, see appendix III. Since the Nunn-McCurdy certification in 2008, the growth in JASSM’s projected program cost has moderated, rising about $500 million (from $6.6 billion to $7.1 billion) through 2025. Reliability enhancements to the JASSM missile instituted in 2007 and additional reliability testing have added the majority of the increase in program costs. These enhancements were implemented to meet USD/ATL’s 90 percent reliability goal which was set during the Nunn-McCurdy certification. Also, the Air Force decided to lengthen the program’s procurement schedule by another 5 years, buying the same number of missiles over a longer time period. That reduces the efficiency of the production processes and adds inflation to the cost estimate. Currently, on a per unit basis, the average procurement unit cost of a JASSM missile is projected to be about $1.2 million. JASSM- ER is expected to cost about $200,000 more than the average, about $1.4 million per unit. Since 2008, the Air Force has added several measures to control costs in the JASSM program, but the effect of these measures is not yet clear. Examples of these measures include the following. Contract Incentives: The Air Force has begun using fixed-price incentive (firm target) contracts for each lot to produce the missiles for less than projected. Greater Insight into Actual Costs: Air Force officials have increased insight into Lockheed Martin’s actual costs, which may make them more informed when negotiating new contracts. Program officials stated that, for example, they now know how many engineers are needed to perform a certain task and the number of hours it takes to assemble a missile. The Air Force can directly verify the costs charged by subcontractors. Increased Authority over Design: In recent contract negotiations, the Air Force gained approval authority over certain design changes that may affect current and future lots, including those that may increase cost, require retrofit, or affect safety. Previously, Lockheed Martin had full authority over most design changes. While the effectiveness of the cost control measures is not yet known, the Air Force appears to have limited options to actually reduce those costs. For example, annual production rates are expected to remain well below the levels projected at the start of the program. The 2008 Air Force cost estimate was based on an annual production rate of 280 missiles per year. However, that cost estimate may now be understated because the program has not produced that many missiles in a single year since 2005. For example, the Air Force’s procurement quantities for production Lot 7 and Lot 8 were 111 and 80 units, respectively, well below the economic order quantity of 175 missiles per year. Program officials stated that annual quantities below the economic order quantity will result in an increasingly inefficient production process and some key suppliers may shift from continuous to limited production. Further, Lockheed Martin officials stated that low production rates could cause skilled labor to look elsewhere for work and JASSM reliability could be adversely affected. The contractor has been able to maintain some level of production efficiency because of foreign military sales that make up for the reduced Air Force procurements. However, lower than projected annual procurement levels will increase production costs. A further challenge is the fact that JASSM’s design is mostly complete and there may be few opportunities to reduce production costs through redesign. As a result, average JASSM unit costs may remain in excess of $1.2 million indefinitely. The Air Force has plans to address the low reliability of missiles in its inventory by retrofitting some of its 942 missiles with hardware and software corrective actions. Program officials state the retrofit costs will be shared between Lockheed Martin and the Air Force, but the total cost to retrofit the missiles in inventory has not been calculated. However, previous efforts to retrofit JASSM missiles have proven to be problematic. An example of challenges associated with retrofitting missiles is adding telemetry instrumentation kits after the missiles have been produced and are in the inventory. Those kits are added to all missiles to be flight tested. This requires opening up the missile to insert telemetry after the stealth coating has been applied and increasing the number of electrical connections as compared to a production missile. Air Force officials stated the kit could add some reliability concerns when it is added to test missiles because the missiles were not designed to be opened after they were completed. Air Force officials also stated that workers have to reroute wires and remove the engine so that the self-destruct mechanism can be installed and all of this rework inside the missile has the potential to lead to more errors and cause additional reliability issues. The impact of retrofitting missiles has become evident in the weapon system evaluation program, which is operationally representative flight testing run by users of the system and focuses on the performance of missiles in the inventory. JASSM’s performance in this evaluation program has not been good, with 7 failures in 12 tests from 2006 through 2007, and with at least some of the failures attributable to the retrofit process. The addition of telemetry kits has also contributed to 3 no tests during other JASSM flight testing. The Air Force has not yet flight tested any of the JASSM inventory missiles that have been retrofitted with all of the corrective actions to address reliability issues. This type of test would be important in determining the viability of the current inventory of JASSM missiles and would be a key input in the Air Force deciding whether or not to retrofit the entire inventory of missiles. The Air Force plans more flight tests in the next few years of new production missiles to meet missile reliability goals. For the JASSM baseline missile to meet its reliability requirement, the Air Force is planning to conduct up to 48 additional flight tests, at a cost of about $120 million. In addition, most reliability issues with the baseline variant will directly affect the progress of the JASSM-ER variant as the missiles are at least 70 percent common in hardware and 95 percent common in software. Anything learned during these flight tests about the baseline applies to JASSM-ER. According to the Air Force, as many as 20 additional flight tests may be needed to fully demonstrate JASSM-ER’s reliability goal of 85 percent. The $190 million cost to achieve the final percentages of missile reliability reflects the fact that problems or weaknesses become harder to find and correct as the more obvious issues are corrected. Program officials are considering alternative means to meet user needs for a more reliable missile while reducing the cost of JASSM flight testing. As part of the Nunn-McCurdy certification process in fiscal years 2007 through 2008, DOD assessed whether there were readily available alternatives that provided as much or more capability as JASSM at lower cost. DOD assessed programs ranging from direct attack munitions to intercontinental range missiles. For the JASSM baseline missile, all of DOD’s existing programs were found to be less effective in terms of lethality, survivability, or capacity. The Navy’s Tomahawk missile was the closest alternative to meeting JASSM’s capability but it is not as lethal as JASSM. Also, the Tomahawk is launched from ships and not from aircraft, as the Air Force plans to use the capability. DOD also evaluated new or modified programs as possible alternatives to JASSM and JASSM-ER. The Air Force evaluated 12 domestic and international missile systems with projected unit production costs ranging from $600,000 to $2.8 million. JASSM-ER, estimated at the time of this evaluation to cost $1 million per unit, was more expensive than 5 alternative systems under consideration. In terms of performance, some alternatives were more capable than JASSM and some were not. All of the alternative systems were expected to require some up-front investment. Based on this analysis, no other alternative was found to provide greater or equal military capability at less cost than JASSM-ER. Later in the Nunn-McCurdy process, however, OSD cost analysts found that the costs of JASSM-ER would likely be at least $1.4 million per missile. That continues to be the projected unit cost of JASSM-ER and, as we discussed earlier in this report, there are cost risks that may drive that unit cost higher. Despite the higher production unit costs for JASSM-ER, the Air Force has not revisited the results of its assessment of alternatives. In light of the current cost projections, which are 40 percent higher than assumed in the previous assessment, JASSM-ER would be equal to the cost of an additional alternative. Further, the unit cost differential between JASSM-ER and the lower-priced alternatives may now be large enough to make those alternatives more competitive in terms of cost or capabilities. DOD’s 25-year history to acquire and field an affordable air-to-ground cruise missile has been a difficult one. After abandoning the expensive TSSAM program, the Air Force conceived the JASSM program using an acquisition strategy that minimized government oversight. After restructuring the program in 2008 and after considerable effort to improve reliability, the JASSM program as it exists today is much different than originally envisioned. A $2.2 billion, 11-year program to produce 2,400 missiles has become a $7.1 billion, 28-year program to produce 4,900 missiles. From a technical and capability standpoint, the program offers more now than the baseline missile did before 2008. Yet, the effectiveness of the new missiles remains to be demonstrated in operational testing, and low production rates, retrofit costs, and additional reliability testing could drive program costs higher. At this point, about 70 percent of the projected JASSM costs have not yet been incurred. In November 2011, DOD will decide whether to approve the Air Force’s request to start low-rate initial production of the JASSM-ER variant. Low-rate initial production is normally the last major milestone decision for an acquisition program. With the JASSM program now expected to extend through 2025 and about $5 billion yet to be spent, a reevaluation of its cost-effectiveness is warranted before such a commitment is made. This is particularly true given the Secretary of Defense’s recent initiative to improve the cost-efficiency of defense acquisition programs. At this juncture, the JASSM program would seem to be an excellent opportunity for DOD and Air Force leadership to take a hard look at the cost-effectiveness and efficiency of this important but costly defense program. We recommend that the Secretary of Defense defer the production decision for JASSM-ER until (1) the program’s likely costs and affordability are reassessed to take into account the feasibility and cost of retrofitting JASSM baseline missiles or replacing them, the cost of additional reliability testing against the likely improvement, and the effect of sustained low production rates; and (2) the results of the previous analysis of alternatives are reassessed in light of the likely costs of the JASSM program. In its comments on our draft report, DOD partially concurred with our recommendation. DOD stated that JASSM-ER is on track for a Milestone C low-rate initial production decision in November 2010. DOD also agreed that the rate of JASSM production has not been optimum and that it plans to address efficient production rates as part of the JASSM-ER Milestone C decision. DOD also stated that (1) there are no additional plans (nor is there a need) to retrofit fielded JASSMs above what has already been accomplished or is under way; (2) it has revisited various alternatives and reaffirms the continued validity of its 2008 conclusion that none of the alternative concepts provide comparable operational utility at or near a similar cost or schedule to JASSM; and (3) in the absence of viable alternatives, delaying the program further will increase costs and further postpone delivering a vital capability to the warfighter. DOD’s response is reprinted in appendix II. In concluding that retrofits to the inventory missiles may not be necessary, DOD does not address the viability of the current inventory of JASSM baseline missiles or the need to replace some or all of them. Until the Air Force evaluates the effectiveness of the inventory of JASSM baseline missiles with corrective actions for previously identified hardware and software issues, their viability and military utility will still be in question. In addition, DOD states that the Air Force has revisited its earlier assessment of alternatives to JASSM and again found that there are none with comparable utility, cost, or schedule. This is new information and DOD did not provide details for us to assess, including whether the Air Force factored in the higher current projections of JASSM costs. Finally, DOD did not address the part of our recommendation dealing with the cost of additional reliability testing against the likely improvement. To the extent DOD has made decisions on retrofits and reconsideration of alternatives, these are positive signs, as is its agreement to address the efficiency of production rates. At this point, it is not clear whether the reliability of the existing baseline inventory missiles is acceptable or whether additional reliability testing is warranted. These determinations are necessary to establish the full value and cost of the JASSM program. Beyond these steps, it is incumbent upon the department to reexamine JASSM before making the production decision to ensure that the program is structured as efficiently as possible and is still a good investment given the other demands DOD faces. DOD’s agreement to address the efficiency of JASSM production rates is a positive step. This is particularly important given the Secretary’s current efficiency and affordability initiative. DOD needs to ensure that it has the information available to fully assess the JASSM investment before making the production decision. If DOD needs more time, then we believe the decision could be delayed. We also received several technical comments from DOD and the Air Force and have made other changes to our report. We are sending copies of this report to the Secretary of Defense and interested congressional committees. In addition, this report will be made available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report or need additional information, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To determine Joint Air-to-Surface Standoff Missile’s (JASSM) current production unit costs and the extent they have grown, we analyzed JASSM’s contracts, budgets, and compared the program’s selected acquisition reports. We analyzed Nunn-McCurdy documentation and certification criteria as well as Air Force and Lockheed Martin data to determine the causes for the cost growth and critical breaches. We interviewed officials with the JASSM joint program office; Lockheed Martin; the Office of Secretary of Defense Cost Assessment and Program Evaluation; and a former program official. To determine the extent to which Department of Defense’s (DOD) cost estimating policies and guidance support the development of high-quality cost estimates, we analyzed the cost estimating practices of the Cost Analysis Improvement Group (CAIG), now known as the Cost Analysis and Process Evaluation (CAPE), in the development of life-cycle cost estimates for the Air Force’s Joint Air-to-Surface Standoff Missile Program (baseline and JASSM-ER variants), against the 12 best practices of a high- quality cost estimate as defined in our Cost Estimating and Assessment Guide. We assessed each cost estimate, used in support of the critical Nunn- McCurdy unit cost breach, against these 12 key practices associated with four characteristics of a reliable estimate. As defined in the guide, these four characteristics are comprehensive, well-documented, accurate, and credible, and the practices address, for example, the methodologies, assumptions, and source data used. We also interviewed program officials responsible for the cost estimate about the estimate’s derivation. We then characterized the extent to which each of the four characteristics was met; that is, we rated each characteristic as being either Not Met, Minimally Met, Partially Met, Substantially Met, or Fully Met. To do so, we scored each of the 12 individual key practices associated with the four characteristics on a scale of 1-5 (Not Met = 1, Minimally Met = 2, Partially Met = 3, Substantially Met = 4, and Fully Met = 5), and then averaged the individual practice scores associated with a given characteristic to determine the score for that characteristic. To determine the results of the most recent tests and if corrective actions have been implemented for previous test failures, we analyzed JASSM flight test results and failure review board findings to determine scoring criteria and results to determine what corrective actions were implemented. We determined whether recent flight test results are representative of the entire fleet by comparing and evaluating the lot-by- lot missile configuration changes and retrofit activities. We interviewed officials with the JASSM joint program office; Lockheed Martin; Office of Under Secretary of Defense for Acquisition, Technology, and Logistics; Director, Operational Test and Evaluation; Air Combat Command; Secretary of the Air Force for Acquisition; Office of Secretary of Defense Cost Assessment and Program Evaluation; Joint Staff; Air Force Directorate of Test and Evaluation; and a former Air Force official who was an early JASSM program manager to better understand the program’s objectives and original acquisition strategy. We discussed recent DOD reliability initiatives with Office of the Director, Operational Test and Evaluation officials. To determine what the Air Force has done to control and reduce production costs while improving reliability, we examined JASSM’s contracts to see what provisions have been added as well as Air Force and Lockheed Martin data. We interviewed officials with the JASSM joint program office; Lockheed Martin; and Office of Secretary of Defense (OSD) test organizations to determine if testing reflects the current effectiveness of the missile. We reviewed our prior work on best practices for a knowledge-based approach for acquisition programs in determining if the Air Force’s approach to beginning the JASSM-ER program meets best practices. We compared requirements and other documents to see if the JASSM-ER missile reflects lessons learned from the baseline variant as well as increased knowledge and oversight from the government. We compared the baseline design with JASSM-ER to determine commonality. We interviewed officials with the JASSM joint program office; Lockheed Martin; Office of Under Secretary of Defense for Acquisition, Technology, and Logistics; Office of Secretary of Defense Cost Assessment and Program Evaluation; Director of Operational Test and Evaluation; Air Combat Command; Secretary of the Air Force for Acquisition; Joint Staff; and a former program official to the determine acquisition planning leading up to JASSM-ER’s production decision and what initiatives have been taken to control costs. After reviewing documentation submitted by the JASSM program office, conducting interviews, and reviewing relevant sources, we determined the CAIG’s life-cycle cost estimate’s totaling $7.1 billion for both programs— the JASSM baseline cost estimate was $3.4 million while the JASSM-ER variant cost estimate of $3.7 million—Fully Met one and Substantially Met the other three characteristics of a reliable cost estimate, as shown in Table 3 below. We assessed 12 measures consistently applied by cost estimating organizations throughout the federal government and industry and considered best practices for the development of reliable cost estimates. We analyzed the cost estimating practices used by CAIG in developing the life-cycle cost estimates for both programs against these 12 best practices and the findings are documented in table 3 below. The following explains the definitions we used in assessing CAIG’s cost estimating methods used in support of the critical Nunn-McCurdy unit cost breach: Fully Met—JASSM program office provided complete evidence that satisfies the entire criterion; Substantially Met—JASSM program office provided evidence that satisfies a large portion of the criterion; Partially Met—JASSM program office provided evidence that satisfies about half of the criterion; Minimally Met—JASSM program office provided evidence that satisfies a small portion of the criterion; and Not Met—JASSM program office provided no evidence that satisfies any of the criterion. The sections that follow highlight the key findings of our assessment. Though the cost estimates accounted for all possible costs and were structured in such a manner that would ensure that cost elements were omitted or double-counted, neither the JASSM baseline nor JASSM-ER had a Work Break Down Structure (WBS) dictionary that defined each element. In addition, the JASSM baseline variant provided no evidence that risks associated with the ground rules and assumptions were traced back to specific cost elements. All applicable costs including government and contractor costs were included in the estimates—The cost estimates included sunk costs such as contractor program management, overhead, system design, and development and testing. In addition, the program office outlined the cost estimating methodology, basis of the costs, as well as development costs for JASSM-ER and other government costs. The cost estimates’ level of detail ensure that no costs were omitted or double-counted—The cost estimates are based on a product-oriented WBS which is in line with best practices. For example, the cost estimate is broken down into various components such as the propulsion, payload, airframe, and guidance and control and also includes supporting cost elements such as systems engineering, program management, and system test and evaluation. As a result, all of the system products are visible at lower levels of WBS providing us with confidence that no costs were omitted or double- counted. WBS has been updated as the JASSM baseline and JASSM-ER programs have evolved; however, there is not an accompanying dictionary that defines each element and how it relates to others in the hierarchy. Ground rules and assumptions were largely identified and documented—The JASSM baseline cost estimate documentation included a list of risk model inputs based on WBS elements. Although WBS elements such as engineering support, subcontractor, and warranty were identified, there was no discussion of risk upon assumptions that drive costs such as product reliability, sustainability of subcontractors, or schedule variability. Like the JASSM baseline cost estimate documentation, the JASSM-ER cost estimate documentation also included a list of ground rules and assumptions; however, there was evidence that risk associated with the fuel tank assumption was traceable to a specific WBS element. In separate documentation, we were able to identify where the program office considered risks for the JASSM baseline estimate. Both cost estimates were documented in enough detail that would allow an analyst unfamiliar with the program to recreate the estimate and get the same result. In addition, the briefing to management was detailed enough to show that the estimates were credible and well documented. The cost estimate is fully documented—For the JASSM baseline and JASSM-ER, the cost estimate documentation included a report documentation page identifying the report date, title, contract number, report authors, and other information. The documentation also included a table of contents, introduction, purpose, and structure of the document as well as the scope of the estimate, a list of team members, the cost methodology, and a system description. The documentation discussed a risk and sensitivity analysis, costs broken out by WBS elements including data sources and estimating method and rationale, and provided evidence that the estimates were updated using actual costs. In a separate briefing, the program office outlined the cost estimating methodology, basis of the costs, as well as development costs for JASSM-ER and other government costs. The program office also provided a copy of the cost sufficiency review of the estimate, which included the estimate’s purpose and scope, technical description and schedule, ground rules and assumptions, data sources and analysis, and methodology. For both programs, the estimate documentation and the cost analysis requirements document (CARD) addressed best practices and the 12 steps of a high-quality estimate. Contingency reserves and the associated level of confidence for the risk-adjusted cost estimate were also documented. Electronic versions of the cost estimates were also provided. The estimate documentation describes how the estimate was derived—The point estimate was developed primarily using actual costs, with a few cost elements estimated based on learning curves method. Actual sunk costs for prior years were presented and remaining production lot costs were based on a labor staffing assessment and the latest contractor labor rates. Cross-checks were performed and no instances of double-counting were visible. A separate document was provided that showed in detail how the cost estimate was developed, what data were used to create the cost estimate, and how risks were quantified to determine a level of confidence in the cost estimate. The estimates were reviewed and approved by management— The estimates were presented by OSD CAIG to the OSD overarching integrated product team for consideration as the new acquisition program baseline. In November 2009, the team provided a detailed overview of the JASSM program which addressed the major cost growth factors, such as the addition of the JASSM-ER variant, reliability enhancements, and the reduction in missile purchases. Both cost estimates were unbiased and represented most likely costs. For example, the estimates were adjusted to reflect risks and the program office also included requirements in the new Lot 8 contract that would allow them to update the cost estimates with actual data. The cost estimates were adjusted for inflation—The JASSM program office used the February 2009 version of the OSD inflation rates provided by the Secretary of the Air Force/Financial Management Cost and Economics. The estimates were developed and documented in base year 1995 dollars and inflated using the weighted rates applicable to the appropriations in the estimate. Base year 1995 is the program’s designated base year. The cost estimates included most likely costs—Per the Nunn- McCurdy certification process, the CAIG developed independent cost estimates for the JASSM baseline and JASSM-ER development and procurement costs as well as future-year resource requirements for the baseline and JASSM-ER variants. Operating and support costs as well as software costs were also included in the estimates. The JASSM baseline life-cycle cost estimate of $3.4 billion, which spans a period of time from 2001 through 2015, was estimated at the 77 percent confidence level, while the JASSM-ER life-cycle cost estimate of $3.7 billion spans the period from 2011 through 2025 and was estimated at the 73 percent confidence level. The cost estimates have not been updated to reflect current costs—Though the JASSM baseline estimate dated April 2008 was updated to reflect new program changes, the CARD has not been updated since May 2003. Examples of JASSM baseline changes include additional reliability enhancement team improvements and additional testing, which are not reflected in the 2003 CARD. However, when comparing the JASSM WBS dated January 1999 and the Lot 8 contract dated January 2010, it is evident that WBS has been updated as changes have occurred. On the other hand, the CARD for the JASSM-ER was updated as of August 2009. Updates to the JASSM-ER CARD include a new, more powerful engine than the baseline variant. As part of the Milestone C process, work is currently under way by CAPE to update the JASSM-ER cost estimate. The program office said that the JASSM- ER cost model will include updated costs based on the Lot 8 proposal data, updated quantity profiles, and January 2010 revised inflation rates. The program office is in the process of updating labor rates and overhead rates and is reexamining all component prices. While the cost estimates addressed risk and uncertainty as well as sensitivity, the estimates failed to address the risks regarding reliability and changes to the production schedule. By not doing so, the program office may not have a full understanding of the future effects to the overall cost position of these two programs. The estimates were assessed for risk and uncertainty—Both programs identified engineering and test support, subcontractors, and warranty as major risk elements. However, the analysis did not identify reliability or an increase in the production schedule as possible risk factors. During the Nunn-McCurdy certification process, the DOD’s analyses found that the cost breach was driven by four primary factors, two of which focused on reliability. As a result, the program office instituted a reliability enhancement program directed to address reliability concerns. An indirect effect of the enhancement program was an increase in the overall missile costs. The December 2009 selected acquisition report identified increases to the missile hardware cost due to reduced annual quantities, missile production breaks, and increased test requirements and reliability programs. The combined cost estimate, for the JASSM baseline and JASSM-ER variants, has grown significantly over time. By not including reliability and the extension of the production schedule as possible risk factors, cost growth could continue to occur in future production lots. As a result, the programs’ calculated point estimate confidence level of 77 percent for baseline and 73 percent for the JASSM and JASSM-ER variants may be overstated. The estimates were assessed for sensitivity—For both the JASSM baseline and JASSM-ER estimates, key cost drivers were identified. The cost estimators examined eight cost factors for the JASSM baseline estimate and 13 cost factors for the JASSM-ER estimate. For the JASSM analysis, engineering support, testing support, other subcontractors, and Teledyne propulsion had the greatest impact on the total variance in the estimate. Engineering support showed a 14 percent impact, followed by test support with a 13 percent impact, other subcontractors with a 12 percent impact, and Teledyne propulsion with a 9 percent impact. These four elements account for 68 percent of the total cost before risk was applied. For the JASSM-ER analysis, the Williams propulsion, other subcontractors, engineering support, and testing support showed the greatest impact on the total cost variance in the estimate. The Williams propulsion had a 15 percent impact, followed by a 15 percent impact for other subcontractors, an 11 percent impact for engineering support, and a 9 percent impact for test support. These four elements account for 76 percent of the total cost before risk was applied. The cost estimates were checked for errors—Cross-checks were performed and no instances of double-counting were visible. The Lot 5 and Lot 6 estimates were compared back to Lot 1 through Lot 4 for consistency and reasonableness. Also, multiple row and column summation cross- checks were performed to avoid duplication and omission errors. Upon review of the electronic cost model, GAO found no instances of double- counting and the spreadsheet calculations are accurate given the input parameters and assumptions. The cost estimates were validated against an independent cost estimate—The CAIG estimate is the independent cost estimate. As part of the Nunn-McCurdy certification process, the CAIG developed an independent cost estimate for the development and procurement costs as well as future-year resource requirements for the baseline and JASSM-ER variants. This new independent estimate was a joint effort by the OSD CAIG, the program office, and the Financial Management Center of Expertise, so there was no other estimate for comparison. Per the Nunn- McCurdy JASSM certification package dated April 30, 2008, the CAIG estimate of the acquisition costs for the restructured JASSM program is $7.1 billion, which is directly comparable to the $6 billion estimate reported in the quarterly selected acquisition report dated December 2007. Michael J. Sullivan, (202) 512-4841 or [email protected]. In addition to the contact name above, the following individuals made key contributions to this report: William Graveline (Assistant Director), John Crawford, Morgan DelaneyRamaker, Tisha Derricotte, Michael J. Hesse, Karen Richey, Hai Tran, and Alyssa Weir.

Over the past two and a half decades, the Department of Defense (DOD) has invested heavily to acquire a cruise missile capable of attacking ground targets stealthily, reliably, and affordably. After abandoning an earlier, more expensive missile and a joint service effort, the Air Force began producing the Joint Air-to-Surface Standoff Missile (JASSM) in 2001. After that, the program (1) encountered many flight test failures, (2) decided to develop an extended range version, and (3) recognized significant cost growth. The production decision for the JASSM-ER is planned for November 2010. Also, the Secretary of Defense has recently announced a major initiative to restore affordability and productivity in defense spending. This initiative is expected to, among other things, identify savings by conducting needed programs more efficiently. As DOD faces the initial production decision on JASSM-ER, GAO was asked to assess (1) most recent test results, correction of causes of previous flight test failures, and efforts to improve JASSM's reliability; and (2) JASSM cost changes, efforts to control costs, and additional cost risks for the program. Since 2007, design changes and other corrective actions by the Air Force have improved the baseline JASSM's test results significantly--the missile has now demonstrated 85 percent success versus 58 percent achieved previously and before the corrections. The JASSM-ER variant has done well thus far, with no failures during the first seven flight tests. These results reflect the Air Force's enhanced oversight of the program and significant investments made to improve reliability. These efforts also identified many of the root causes for flight test failures. While baseline JASSM missile reliability has improved, it is not expected to achieve the Under Secretary of Defense for Acquisition, Technology and Logistics' required level of 90 percent until 2013. Tests conducted thus far of the improved baseline JASSM and the JASSM-ER variants have been developmental--or controlled--in nature. Neither the improved JASSM baseline missile nor the JASSM-ER has been demonstrated in operationally realistic testing or in a combat operation. JASSM costs have increased by over seven percent since the program was restructured in 2008. As the table shows, since 1998, JASSM quantities have more than doubled and estimated program costs have grown from $2.2 billion to a $7.1 billion. The Air Force has taken several steps to control JASSM costs, but options to reduce costs at this point appear limited. In fact, several factors suggest additional cost growth is likely. First, the Air Force has not been able to provide enough funding to produce the missiles at planned rates. That has led to a less efficient production process, a longer production period, and higher costs that have not yet been reflected in the $7.1 billion estimate. Second, the Air Force's potential plans to retrofit existing missiles with the reliability improvements may not be feasible, given the missile's sensitivity to being reopened. If retrofits prove infeasible, new replacements may have to be purchased; if they are feasible, the Air Force may have to provide additional funding to retrofit all existing missiles. Finally, since the Air Force last compared JASSM to possible alternatives, the unit cost was assumed to be about 40 percent less than currently expected and that now could make alternatives more competitive in terms of cost and/or capabilities. A reevaluation of the JASSM program, given that most of its costs have yet to be incurred, is warranted before the decision to produce the JASSM-ER is made. GAO recommends that the Secretary of Defense reevaluate the JASSM program's affordability and cost-effectiveness before making the decision to produce the JASSM-ER. DOD partially concurred with GAO's assessment, but believes the JASSM-ER should begin production in November 2010. GAO believes that it is incumbent upon the department to reexamine JASSM before making the production decision to ensure that the program is structured as efficiently as possible and is still a good investment given the other demands DOD faces.

You are an expert at summarizing long articles. Proceed to summarize the following text: This section describes crude oil export restrictions, the SPR, and recent trends in U.S. crude oil production and the petroleum refining industry. The export of domestically produced crude oil has generally been restricted since the 1970s. In particular, the Energy Policy and Conservation Act of 1975 (EPCA) led the Department of Commerce’s Bureau of Industry and Security (BIS) to promulgate regulations which require crude oil exporters to obtain a license. These regulations provide that BIS will issue licenses for the following crude oil exports: exports from Alaska’s Cook Inlet, exports to Canada for consumption or use therein, exports in connection with refining or exchange of SPR crude oil, exports of certain California crude oil up to 25,000 barrels per day, exports consistent with certain international energy supply exports consistent with findings made by the President under certain exports of foreign origin crude oil that has not been commingled with crude oil of U.S. origin. Other than for these exceptions, BIS considers export license applications for exchanges involving crude oil on a case-by-case basis, and BIS can approve them if it determines that the proposed export is consistent with the national interest and purposes of EPCA. In addition to BIS’s export controls, other statutes control the export of domestically produced crude oil depending on where it was produced and how it is transported. In these cases, BIS can approve exports only if the President makes the necessary findings under applicable laws. Some of the authorized exceptions, outlined above, are the result of such Presidential findings. According to NERA, no other major oil producing country currently restricts crude oil exports. BIS approved about 30 to 40 licenses to export domestic crude oil per year from fiscal years 2008 through 2010. The number of BIS approved licenses increased to 103 in fiscal year 2013. Meanwhile, crude oil exports increased from less than 30 thousand barrels per day in 2008 to 396 thousand barrels per day in June 2014—the highest level of exports since 1957. Nearly all domestic crude oil exports have gone to Canada. To help protect the U.S. economy from damage caused by crude oil supply disruptions, Congress authorized the SPR in 1975. The SPR is owned by the federal government and operated by DOE. The SPR is authorized to hold up to 1 billion barrels of crude oil and has the capacity to store 727 million barrels of crude oil in salt caverns located at sites in Texas and Louisiana. According to DOE, the SPR held crude oil valuded at almost $73 billion dollars as of May, 2014. From fiscal year 2000 through 2013, the federal government spent about $0.5 billion to purchase crude oil, and spent $2.5 billion for operations and maintenance of the reserve. The United States is a member of the IEA and has agreed, along with 28 other member nations, to maintain reserves of crude oil or petroleum products equaling 90 days of net imports and to release these reserves and reduce demand during oil supply disruptions. The 90-day reserve requirement can be made up of government reserves, such as the SPR, and inventory reserves held by private industry. Under conditions prescribed by the Energy Policy and Conservation Act, as amended, the President and the Secretary of Energy have discretion to authorize the release of crude oil from the SPR to minimize significant supply disruptions. In the event of a crude oil supply disruption, the SPR can supply the market by selling stored crude oil or trading crude oil in exchange for an equal quantity of crude oil plus an additional amount as a premium to be returned to the SPR in the future. When crude oil is released from the SPR, it flows through commercial pipelines or on waterborne vessels to refineries, where it is converted into gasoline and other petroleum products, and then transported to distribution centers for sale to the public. Reversing a decades-long decline, U.S. crude oil production has increased in recent years. According to EIA data, U.S. production of crude oil reached its highest level in 1970 and generally declined through 2008, reaching a level of almost one-half of its peak. During this time, the United States increasingly relied on imported crude oil to meet growing domestic energy needs. However, recent improvements in technologies have allowed producers to extract crude oil from shale formations that were previously considered to be inaccessible because traditional techniques did not yield sufficient amounts for economically viable production. In particular, the application of horizontal drilling techniques and hydraulic fracturing—a process that injects a combination of water, sand, and chemical additives under high pressure to create and maintain fractures in underground rock formations that allow crude oil and natural gas to flow—have increased U.S. crude oil and natural gas production. Monthly domestic crude oil production has increased from an average of about 5 million barrels per day in 2008 to about 8.4 million barrels per day in April 2014, an increase of almost 68 percent. As we previously found, the growth in U.S. crude oil production has lowered the cost of some domestic crude oils. For example, prices for West Texas Intermediate (WTI) crude oil—a domestic crude oil used as a benchmark for pricing—was historically about the same price as Brent, an international benchmark crude oil from the North Sea between Great Britain and the European continent. However, from 2011 through June 13, 2014, the price of WTI averaged $14 per barrel lower than Brent (see fig. 1). In 2014, prices for these benchmark crude oils narrowed somewhat, and WTI averaged $101 through June 13, 2014, while Brent averaged $109. The development of U.S. crude oil production has created some challenges for crude oil transportation infrastructure because some production has been in areas with limited linkages to refining centers. According to EIA, these infrastructure constraints have contributed to discounted prices for some domestic crude oils. Much of the crude oil currently produced in the United States has characteristics that differ from historic domestic production. Crude oil is generally classified according to two parameters: density and sulfur content. Less dense crude oils are known as “light,” while denser crude oils are known as “heavy.” Crude oils with relatively low sulfur content are known as “sweet,” while crude oils with higher sulfur content are known as “sour.” As shown in figure 1, according to EIA, production of new domestic crude oil has tended to be light oils. Specifically, according to EIA estimates about all of the 1.8 million barrels per day growth in production between 2011 and 2013 consisted of lighter sweet crude oils. EIA also forecasts that lighter crude oils will make up a significant portion of production growth in 2014 and 2015—about 60 percent. Light crude oil differs from the crude oil that many U.S. refineries are designed to process. Refineries are configured to produce transportation fuels and other products (e.g., gasoline, diesel, jet fuel, and kerosene) from specific types of crude oil. Refineries use a distillation process that separates crude oil into different fractions, or interim products, based on their boiling points, which can then be further processed into final products. Many refineries in the United States are configured to refine heavier crude oils, and have therefore been able to take advantage of historically lower prices of heavier crude oils. For example, in 2013, the average density of crude oil used at domestic refineries was 30.8 while nearly all of the increase in production in recent years has been lighter crude oil with a density of 35 or above. According to EIA, additional production of light crude oil over the past several years has been absorbed into the market through several mechanisms, but the capacity of these mechanisms to absorb further increases in light crude oil production may be limited in the future as follows: Reduced imports of similar grade crude oils: According to EIA, additional production of light oil in the past several years has primarily been absorbed by reducing imports of similar grade crude oils. Light crude oil imports fell from 1.7 million barrels per day in 2011 to 1 million barrels per day in 2013. There may be dwindling amounts of light crude oil imports that can be reduced in the future, according to EIA. Increased crude oil exports: As discussed above, crude oil exports have increased recently, from less than 30 thousand barrels per day in 2008 to 396 thousand barrels per day in June 2014. Continued increases in crude oil exports will depend, in part, on the extent of any relaxation of current export restrictions, according to EIA. Increased use of light crude oils at domestic refineries: Domestic refineries have increased the average gravity of crude oils that they refine. The average API gravity of crude oil used in U.S. refineries increased from 30.2 degrees in 2008 to 30.8 degrees in 2013. Continued shifts to use additional lighter crude oils at domestic refineries can be enabled by investments to relieve constraints associated with refining lighter crude oils at refineries that were optimized to refine heavier crude oils. Increased use of domestic refineries: In recent years, domestic refineries have been run more intensively, allowing the use of more domestic crude oils. Utilization—a measure of how intensively refineries are used that is calculated by dividing total crude oil and other inputs used at refineries by the amount refineries can process under usual operating conditions—increased from 86 percent in 2011 to 88 percent in 2013. There may be limits to further increases in utilization of refineries that are already running at high rates. The studies we reviewed and stakeholders we interviewed generally suggest some domestic crude oil prices would increase if crude oil export restrictions were removed, while consumer fuel prices could decrease, although the extent of consumer fuel price changes are uncertain and may vary by region. Studies we reviewed and most of the stakeholders we interviewed suggest that some domestic crude oil prices would increase if crude oil export restrictions were removed. As discussed above, increasing domestic crude oil production has resulted in lower prices of some domestic crude oils compared with international benchmark crude oils. Three of the studies we reviewed also said that, absent changes in crude oil export restrictions, the expected growth in crude oil production may not be fully absorbed by domestic refineries or through exports (where allowed), contributing to even wider differences in prices between some domestic and international crude oils. By removing the export restrictions, these domestic crude oils could be sold at prices closer to international prices, reducing the price differential and aligning the price of domestic crude oil with international benchmarks. While the studies we reviewed and most of the stakeholders we interviewed agree that domestic crude oil prices would increase if crude oil export restrictions were removed, stakeholders highlighted several factors that could affect the extent of price increases. The studies we reviewed made assumptions about these factors, and actual price implications of removing crude oil export restrictions may differ from those estimated in the studies depending on how export restrictions and market conditions evolve. Specifically, stakeholders raised the following three key uncertainties: Extent of future increases in crude oil production. As we recently found, forecasts anticipate increases in domestic crude oil production in the future, but the projections are uncertain and vary widely. Two of the studies and two stakeholders told us that, in the absence of exports, higher production of domestic light sweet crude oil would tend to increase the mismatch between such crude oils and the refining industry. In turn, one study indicated that a greater increase in production would increase the price effects of removing crude oil export restrictions. On the other hand, lower than anticipated production of such crude oil would lower potential price effects as the additional crude oil could more easily be absorbed domestically. Extent to which crude oil production increases can be absorbed. The domestic refining industry and exports to Canada have absorbed the increases in domestic crude oil production thus far, and one stakeholder told us the domestic refining industry could provide sufficient capacity to absorb additional future crude oil production. This stakeholder said that refineries have the capacity to refine another 400,000 barrels a day of light crude oil, some of which is not being used because of infrastructure or logistics constraints. The industry is planning to develop or is in the process of developing the capacity to process an additional 500,000 barrels a day of light crude oil, according to this stakeholder. The current capacity that is not being utilized plus capacity that is planned or in development would constitute a total capacity to refine 900,000 barrels per day of light crude oil. To the extent that light crude oil production increases by less than this amount, the gap in prices between WTI and Brent could close in the future as increased crude oil supplies are absorbed. This would reduce the extent to which domestic crude oil prices increase if crude oil export restrictions are removed. On the other hand, some stakeholders suggested that the U.S. refining industry will not be able to keep pace with increasing U.S. light crude oil production. For example, IHS stated that refinery investments to process additional light crude oil face significant risks in the form of potentially stranded investments if export restrictions were to change, and this could result in investments not being made as quickly as anticipated. Extent to which export restrictions change. Aspects of the export restrictions could be further defined or interpreted in ways that could change the pricing dynamics of domestic crude oil markets. Recently, two companies received clarification from the Department of Commerce that condensate—a type of light crude oil—that has been processed through a distillation tower is not considered crude oil and so not subject to export restrictions. One stakeholder stated that this may lead to more condensate exports than expected. Within the context of these uncertainties, estimates of potential price effects vary in the four studies we reviewed, as shown in table 1. Specifically, estimates in these studies of the increase in domestic crude oil prices due to removing crude oil export restrictions range from about $2 to $8 per barrel. For comparison, at the beginning of June 2014, WTI was $103 per barrel, and these estimates represent 2 to 8 percent of that price. In addition, NERA found that removing export restrictions would have no measurable effect in a case that assumes a low future international oil price of $70 per barrel in 2015 rising to less than $75 by 2035. According to NERA, current production costs are close to these values, so that removing export restrictions would provide little incentive to produce more light crude oil. The studies we reviewed and most of the stakeholders we interviewed suggest that consumer fuel prices, such as gasoline, diesel, and jet fuel, could decrease as a result of removing crude oil export restrictions. A decrease in consumer fuel prices could occur because they tend to follow international crude oil prices rather than domestic crude oil prices, according to the studies and most of the stakeholders. If domestic crude oil exports caused international crude oil prices to decrease, consumer fuel prices could decrease as well. Table 2 shows that the estimates of the price effects on consumer fuels vary in the four studies we reviewed. Price estimates range from a decrease of 1.5 to 13 cents per gallon. These estimates represent 0.4 to 3.4 percent of the average U.S. retail gasoline price at the beginning of June 2014. In addition, NERA found that removing export restrictions has no measurable effect on consumer fuel prices in a case that assumes a low future world crude oil price. The effect of removing crude oil export restrictions on domestic consumer fuel prices depends on several uncertain factors. First, it depends on the extent to which domestic versus international crude oil prices determine the domestic price of consumer fuels. Recent research examining the relationship between domestic crude oil and gasoline prices concluded that low domestic crude oil prices in the Midwest during 2011 did not result in lower gasoline prices in that region. This research supports the assumption made in all of the studies we reviewed that to some extent higher prices of some domestic crude oils as a result of removing crude oil export restrictions would not be passed on to consumer fuel prices. However, some stakeholders told us that this may not always be the case and that more recent or detailed data could show that lower prices for some domestic crude oils have influenced consumer fuel prices. Second, the extent to which domestic consumer fuel prices could decline also depends on how the global crude oil market responds to the domestic crude oil entering the market. In this regard, stakeholders highlighted several uncertainties. In particular, the response of the Organization of the Petroleum Exporting Countries (OPEC) could have a large influence on any international crude oil price changes. The projections in the RFF, IHS, and ICF International studies assumed that OPEC would not respond by attempting to counterbalance the effect of increased U.S. exports by reducing its countries’ exports. However, OPEC could seek to maintain international crude oil prices by pulling crude oil from the global market. In this case, the international crude oil price would not be affected by removing export restrictions, and consumer fuel prices would not decline. On the other hand, OPEC could increase production to maintain its large market share, which would push international crude oil prices and consumer fuel prices downward. NERA examined two alternative OPEC response cases, and found that gasoline prices would not generally be affected if OPEC reduces production, and that consumer fuel prices would decrease further if OPEC maintains its production in the face of lower global crude oil prices. In addition, one stakeholder questioned whether international crude oil prices would be affected by U.S. crude oil exports. Given the size of the global crude oil market, this stakeholder suggested that U.S. exports would have little to no effect on international crude oil prices. Third, two of the stakeholders we interviewed suggested that there could be important regional differences in consumer fuel price implications, and that prices could increase in some regions—particularly the Midwest and the Northeast—due to changing transportation costs and potential refinery closures. For example, two stakeholders told us that because of requirements to use more expensive U.S.-built, -owned, and -operated ships to move crude oil between U.S. ports, allowing exports could enable some domestic crude oil producers to ship U.S. crude oil for less cost to refineries in foreign countries. Specifically, representatives of one refiner told us that, if exports restrictions were removed, they could ship oil to their refineries in Europe at a lower cost than delivering the same oil to a refinery on the U.S. East Coast. According to another stakeholder, this could negatively affect the ability of some domestic refineries to compete with foreign refineries. Additionally, because refineries are currently benefiting from low domestic crude oil prices, some studies and stakeholders noted that refinery margins could be reduced if removing export restrictions increased domestic crude oil prices. As a result, some refineries could face an increased risk of closure, especially those located in the Northeast. As EIA reported in 2012, refinery closures in the Northeast could be associated with higher consumer fuel prices and possibly higher price volatility. However, according to one stakeholder, domestic refiners still have a significant cost advantage in the form of less expensive natural gas, which is an important energy source for many refineries. For this and other reasons, one stakeholder told us they did not anticipate refinery closures as a result of removing export restrictions. The studies we reviewed and stakeholders we interviewed generally suggest that removing crude oil export restrictions would increase domestic crude oil production and may affect the environment and the economy. Studies we reviewed and stakeholders we interviewed generally agree that removing crude oil export restrictions would increase domestic crude oil production. Monthly domestic crude oil production has increased by almost 68 percent since 2008—from an average of about 5 million barrels per day in 2008 to 8.3 million barrels per day in April 2014. Even with current crude oil export restrictions, given various scenarios, EIA projects that domestic production will continue to increase and could reach 9.6 million barrels per day by 2019. If export restrictions were removed, according to the four studies we reviewed, the increased prices of domestic crude oil are projected to lead to further increases in crude oil production. Projections of this increase varied in the studies we reviewed—from a low of an additional 130,000 barrels per day on average between 2015 and 2035, according to the ICF International study, to a high of an additional 3.3 million barrels per day on average between 2015 and 2035 in NERA’s study. This is equivalent to 1.5 percent to almost 40 percent of production in April 2014. One stakeholder we spoke with told us that, although domestic demand for crude oil is not expected to change, production will rise as a result of increased international demand, primarily from Asia. For example, according to EIA, India was the fourth-largest consumer of crude oil and petroleum products in the world in 2013, and the country’s dependence on imported crude oil continues to grow. Another stakeholder stated that removing export restrictions could lead to increased local and regional opposition to crude oil production if the crude oil was primarily for export, which could affect domestic production. Two of the studies we reviewed and most stakeholders we spoke with stated that the increased crude oil production that would result from removing the restrictions on crude oil exports may affect the environment. In September 2012, we found that crude oil development may pose certain inherent environmental and public health risks; however, the extent of the risk is unknown, in part, because the severity of adverse effects depend on various location- and process-specific factors, including the location of future shale oil and gas development and the rate at which it occurs, as well as geology, climate, business practices, and regulatory and enforcement activities. The stakeholders who raised concerns identified the following risks related to crude oil production, about which GAO has reported in the past: Water quality and quantity: Increased crude oil production, particularly from shale, could affect the quality and quantity of surface and groundwater sources, but the magnitude of such effects is unknown. In October 2010, we found that water is needed for a number of oil shale development activities, including constructing facilities, drilling wells, generating electricity for operations, and reclamation of drill sites. In 2012, we found that shale oil and gas development may pose a risk to surface water and groundwater because withdrawing water from streams, lakes, and aquifers for drilling and hydraulic fracturing could adversely affect water resources. For example, we found that groundwater withdrawal could affect the amount of water available for other uses, including public and private water supplies. One of the stakeholders we interviewed suggested that water withdrawal is already an important consideration, particularly for areas experiencing drought. For example, the stakeholder noted that crude oil production and associated water usage already has implications for the Edwards Aquifer, a groundwater system serving the agricultural, industrial, recreational, and domestic needs of almost two million users in south central Texas. In addition, removing export restrictions may affect water quality. Another stakeholder told us that allowing crude oil exports would lead to more water pollution as a result of increased production through horizontal drilling. Air quality: Increased crude oil production may increase greenhouse gases and other air emissions because the use of consumer fuels would increase, and also because the crude oil production process often involves the direct release of pollutants into the atmosphere (venting) or burning fuels (flaring). Two stakeholders told us that venting and flaring has escalated in North Dakota, in part because regulatory oversight and infrastructure have not kept pace with the recent surge in crude oil production in the state. In January 2014, the North Dakota Industrial Commission reported that nearly 30 percent of all natural gas produced in the state is flared. According to a 2013 report from Ceres, flaring in North Dakota in 2012 resulted in greenhouse gas emissions equivalent to adding 1 million cars to the road. Another stakeholder told us that allowing crude oil exports would lead to more air pollution as a result of increased production through horizontal drilling and hydraulic fracturing. RFF estimated the potential environmental effect of removing export restrictions, estimating that increases in crude oil production and consumption would increase carbon dioxide emissions worldwide by almost 22 million metric tons per year. By comparison, U.S. emissions from energy consumption totaled 5,393 million metric tons in 2013 according to EIA. NERA estimated that increased crude oil production and use of fossil fuels would increase greenhouse gas emissions by about 12 million metric tons of carbon dioxide equivalents per year on average from 2015 through 2035. Transportation challenges: Increased crude oil production could exacerbate transportation challenges. In March 2014, we found that domestic and Canadian crude oil production has created some challenges for U.S. crude oil transportation infrastructure. Some of the growth in crude oil production has been in areas with limited transportation to refining centers. To address this challenge, refiners have relied on rail to transport crude oil. According to data from the Surface Transportation Board, rail moved about 236,000 carloads of crude oil in 2012, which is 24 times more than the roughly 9,700 carloads moved in 2008. As we recently found, as the movement of crude oil by rail has increased incidents such as spills and fires involving crude oil trains have also increased—from 8 incidents in 2008 to 119 incidents in 2013 according to Department of Transportation data. Some stakeholders told us that removing export restrictions would increase the risk for crude oil spills by rail and other modes of transportation such as tankers. On the other hand, one stakeholder suggested that removing export restrictions could reduce the amount of crude oil transported by rail, in some instances, since the most economic way to export crude oil is by pipeline to a tanker. As a result, the number of rail accidents involving crude oil spills could decrease. The studies we reviewed suggest that removing crude oil export restrictions would increase the size of the economy. Three of the studies project that removing export restrictions would lead to additional investment in crude oil production and increases in employment. This growth in the oil sector would—in turn—have additional positive effects in the rest of the economy. For example, NERA projects an average of 230,000 to 380,000 workers would be removed from unemployment through 2020 if export restrictions were eliminated in 2015. These employment benefits largely disappear if export restrictions are not removed until 2020 because by then the economy will have returned to full employment. Potential implications for investment, public revenue, and trade are as follows: Investments: According to one of the studies we reviewed, removing export restrictions may lead to more investment in crude oil exploration and production, but this investment could be somewhat offset by less investment in the refining industry. As discussed previously, removing export restrictions is expected to increase domestic crude oil production. Private investment in drilling rigs, engineering services, and transportation and logistics facilities, for example, is needed to increase domestic crude oil production. According to IHS, this will directly benefit industries such as machinery, fabricated metals, steel, chemicals, and engineering services. At the same time, removing export restrictions may decrease investment in the refining industry because the industry would not need extensive additional investment to accommodate lighter crude oils. For example, one stakeholder told us that, under current export restrictions, refining additional light crude oils may require capital investment to remove processing constraints at refineries that are designed to process heavier crude oils. Officials from one refining company told us that they had invested a significant amount of capital to refine lighter oils. For example, the refinery installed two new distillation towers to process lighter crude oils at a cost of $800 million. Such investments may not be necessary if export restrictions were removed. Public revenue: Two of the studies we reviewed suggest that removing export restrictions would increase government revenues, although the estimates of the increase vary. One study estimated that total government revenue would increase by a combined $1.4 trillion in additional revenue from 2016 through 2030 while another study estimated that U.S. federal, state, and local tax receipts combined with royalties from drilling on federal lands could increase by an annual average of $3.9 to $5.7 billion from 2015 through 2035. Trade: According to the studies we reviewed, removing export restrictions would contribute to further declines in net petroleum (i.e., crude oil, consumer fuels, and other petroleum products) imports and reduce the U.S. trade deficit. Three of the studies we reviewed estimated the effect of removing export restrictions on net petroleum imports, with ICF projecting a decline in net imports of about 100,000 to 300,000 barrels per day; IHS projecting a decline, but not providing a specific estimate; and NERA projecting a decline of about 0.6 to 3.2 million barrels per day. Further, according to one study, removing export restrictions could also improve the U.S. trade balance because the light sweet crude oils are usually priced higher than heavy, sour crude oils. One study estimated that removing export restrictions could improve the trade balance (narrow the U.S. trade deficit) by $8 to $15 billion per year on average from 2015 through 2035. Another study estimated that removing crude oil export restrictions would improve the trade balance by $72 to $101 billion per year from 2016 through 2030. Changing market conditions—most importantly the significant increase in domestic production of crude oil from shale—have implications for the role of the SPR, including its appropriate size, location, and composition. DOE has taken some steps to reexamine the location and composition of the SPR in light of these changes, but has not recently reexamined its size. Recent and expected changes in crude oil markets have important implications for the role of the SPR, including its size, location, and composition. DOE has recognized that recent increases in domestic crude oil production and correlating reductions in crude oil imports have changed how crude oil is transported around the United States, and that these changes carry potential implications for the operation and maintenance of the SPR. As discussed above, removing crude oil export restrictions would be expected to increase domestic crude oil production and contribute to further declines in net imports. Our review of DOE documents, prior GAO work, and discussions with stakeholders highlight three primary implications for the SPR. Size: Increased domestic crude oil production and falling net petroleum imports may affect the ideal size of the SPR—how much the SPR should hold to optimize the benefits of protecting the economy from damage with the costs of holding the reserves. One measure of the economy’s vulnerability to oil supply disruptions is to assess net petroleum imports— imports minus exports. Net petroleum imports have declined from a peak of 60 percent of consumption in 2005 to about 30 percent in the first half of 2014. In 2006, net imports were expected to increase in the future, increasing the country’s reliance on foreign crude oil. However, imports have declined and, according to EIA’s most recent forecast, are expected to remain well below 2005 import levels into the future. (See fig. 3.) As discussed above, removing crude oil export restrictions would be expected to contribute to additional decreases in net petroleum imports in the future. To the extent that changes in net imports reflect changes in vulnerability, these and other changes in the economy may have reduced the nation’s vulnerability to supply disruptions. For example, a recent report by the President’s Council of Economic Advisers suggests that decreased domestic petroleum demand, increased domestic crude oil production, more fuel efficient vehicles, and increased use of biofuels, have each contributed to reducing the vulnerability of the nation’s economy to international crude oil supply disruptions. Although international crude oil supply and price volatility remains a risk, the report suggests that additional reductions in net petroleum imports could reduce those risks in the future. In addition, the SPR currently holds oil in excess of international obligations. As a member of the IEA, the United States is required to maintain reserves of crude oil or petroleum products equaling at least 90 days of net imports, which it does with a combination of public and private reserves. According to IEA, as of May 2014, the SPR held 106 days of net imports, and private reserves held an additional 141 days of imports for a total of 247 days—well above the 90 days required by the IEA. In light of these factors, some of the stakeholders we interviewed raised questions about whether such a large SPR is needed in the future. For example, one stakeholder indicated that SPR crude oil is surplus and no longer needed to protect the economy. However, other stakeholders highlighted the importance of maintaining the SPR. For example, one stakeholder said that the SPR should be maintained at the current level, and another said that the SPR serves an important “energy insurance” service. DOE officials and one other stakeholder highlighted that, in addition to net imports, there are other factors that may affect the appropriate size of the SPR. Location: According to DOE, changes in how crude oil is transported throughout the United States and in the existing infrastructure surrounding SPR facilities have implications for the location of the SPR. Crude oil in the SPR is stored along the Gulf Coast, where it can take advantage of being in close proximity to a major refining center, as well as distribution points for tankers, barges, and pipelines that can carry crude oil from the SPR to refineries in other regions of the country. Most of the system of crude oil pipelines in the United States was constructed in the 1950s, 1960s, and 1970s to accommodate the needs of the refining sector and demand centers at the time. According to DOE officials, the existing infrastructure was designed primarily to move crude oil from the southern United States to the North. The SPR has historically been able to rely on this distribution system to reach a large portion of the nation’s refining capacity. But, with increases in crude oil production in the Northern U.S. and imports of crude oil from Canada, the distribution system has changed to increase crude oil flows south to the Gulf Coast. Such changes include new pipeline construction and expansions, flow reversals in existing pipelines, and increased utilization of terminals and marine facilities. Such changes may make it more difficult to move crude oil from the SPR to refineries in certain regions of the United States, such as the Midwest, where almost 20 percent of the nation’s refining capacity is located, according to EIA data. Some stakeholders raised questions about the location of the SPR. One stakeholder also suggested that holding SPR crude oil in the western United States may better ensure access to crude oil in the case of a disruption, since the West has no pipeline connectivity to the Gulf Coast. According to DOE, recent changes to crude oil distribution in the United States could have significant implications for the operation and maintenance of the SPR. Composition: In 2006, we reported that the type of crude oil in the SPR was not compatible with all U.S. refineries. We reported that some U.S. refineries processed crude oils heavier than those stored in the SPR. We found that in the event of a disruption in the supply of heavy crude oil, refineries configured to use heavy crude oil would not be able to efficiently refine crude oil from the SPR and would likely reduce production of some petroleum products. As we reported, in such instances, prices for heavy crude oil products could increase, reducing the SPR’s effectiveness to limit economic damage. Refinery officials we spoke with noted that the SPR should contain heavier crude oils that domestic refineries could refine in the event of a supply disruption. Since our 2006 report, domestic production of light sweet crude oil has increased. According to EIA, roughly 96 percent of the 1.8 million-barrel per day growth in production from 2011 to 2013 consisted of light sweet grades with API gravity of 40 or above. As a result, imports of light crude oils have declined, and U.S. reliance on imported heavy crude oil has increased from 37 percent of total imports in 2008 to 50 percent of total imports in 2013, as shown in figure 4. However, DOE officials raised concerns about the prospect of storing additional heavy crude oil in the SPR. According to DOE officials and a 2010 report by DOE, storing heavy crude oil in the SPR would limit the SPR’s ability to respond to nonheavy crude oil disruptions, such as a loss of Middle East medium sour crude oils. In addition, storing more heavy crude would require infrastructure improvements. At the same time, DOE officials also stated that, based on recent conversations with refinery officials, no U.S. refineries would have difficulty using SPR crude oils. Another issue raised by some stakeholders we interviewed is that the SPR holds primarily crude oil, and some stakeholders told us that holding additional consumer fuels could be beneficial. Many recent economic risks associated with supply disruptions have originated from the refining and distribution sectors rather than crude oil supplies. DOE has taken some steps to assess the appropriate location and composition of the SPR in view of changing market conditions, but has not recently re-examined its size. We previously found that federal programs should be re-examined if there have been significant changes in the country or the world that relate to the reason for initiating the program. In that report, we identified a set of reexamination criteria that, when taken together, illustrate the issues that can be addressed through a systematic reexamination process. We found that many federal programs and policies were designed decades ago to respond to trends and challenges that existed at the time of their creation. Given fiscal constraints that we are likely to face for years to come, reexamination may be essential to addressing newly emergent needs without unduly burdening future generations of taxpayers. DOE has taken some steps to reexamine how recent changing market conditions could affect the location and composition of the SPR as follows: In March 2014, DOE conducted a test sale of SPR crude oil to evaluate the SPR’s ability to draw down and distribute SPR crude oil through multiple pipeline and terminal delivery points within one of its distribution systems. DOE officials told us they were reviewing the results of the test sale including data on the movement of crude oil through the system. DOE officials also told us they are working to establish a Northeast Regional Refined Petroleum Product Reserve in New York Harbor and New England to store refined consumer fuels. Although the northeast reserve will not store crude oil, it will be considered part of the SPR and hold 1 million barrels of gasoline at a cost of $200 million. DOE officials told us that they are conducting a regional fuel resiliency study that will provide insights into whether there is a need for additional regional product reserves and, if so, where these reserves should be located and the capacity. We did not assess this effort because the study was ongoing at the time of our review. DOE finalized an assessment in 2010 of the compatibility of crude oil stored in the SPR with the U.S. petroleum refining industry. DOE decided against storing heavy crude oil in the SPR at the time, but committed to revisiting the option of storing heavy crude oil in the future. However, DOE has not recently reexamined the appropriate size of the SPR. DOE last issued a strategic plan for the SPR in May 2004. The plan outlined the mission, goals, and near-term and long-term objectives for the SPR. In 2006, we recommended that the Secretary of Energy reexamine the appropriate size of the SPR. In 2007, while DOE was planning to expand the SPR to its authorized size of 1 billion barrels, the Administration reevaluated the need for an SPR expansion and decided that the current level was adequate. In responding to our recommendation, DOE stated that its reexamination had taken the form of more “actionable items,” including not requesting expansion-funding in its 2011 budget and canceling and redirecting prior year’s expansion funding to general operations of the SPR. Officials from DOE’s Office of Petroleum Reserves told us that the last time they conducted a comprehensive re-examination of the size of the SPR was in 2005. At that time, DOE’s comprehensive study examined the costs and benefits of alternative SPR sizes. Officials told us that they have not conducted a comprehensive reexamination since 2005 because the SPR only recently met the IEA requirement to maintain 90 days of imports. However, the IEA requirement is for total reserves, including those held by the government and private reserves. As shown in figure 5, such reserves in the United States are currently in excess of the nation’s international obligations and, in some scenarios, are expected to be in excess in the future. In July 2014, DOE’s Office of Inspector General recommended that the Office of Fossil Energy perform a long-range strategic review of the SPR to ensure it is best configured to respond to the current and future needs of the United States. DOE concurred with the recommendation. DOE stated that it expected to determine the appropriate course of action by August 2014, and according to DOE, it has initiated a process to conduct such a review. The SPR currently holds oil valued at over $73 billion, and without a current reexamination of the SPR’s size, DOE cannot be assured that the SPR is sized appropriately. The SPR may therefore be at risk of holding excess crude oil. In addition, DOE officials told us that SPR infrastructure is aging and will need to be replaced soon. Conducting a reexamination of the size of the SPR could also help inform DOE’s decisions about how or whether to replace existing infrastructure. If DOE were to assess the appropriate size of the SPR and find that it held excess crude oil, the excess oil could be sold to fund other national priorities. For example, in 1996, SPR crude oil was sold to reduce the federal budget deficit and offset other appropriations. If, for example, DOE found that 90 days of imports was an appropriate size for the SPR, it could sell crude oil worth about $10 billion. Increasing domestic crude oil production, and declines in consumption and crude oil imports have profoundly affected U.S. crude oil markets over the last decade. These changes can have important implications for national energy policies and programs. The SPR is a significant national asset, and it is important for federal agencies tasked with overseeing such assets to examine how, if at all, changing conditions affect their programs. DOE has recently taken several steps to reexamine various aspects of the SPR in light of these changes, including its location and composition; however, DOE’s most recent comprehensive examination of the appropriate size of the SPR was conducted in 2005 when the general expectation was that the country would increasingly rely on foreign crude oil. At about that time, however, it began to become clear that this was not to be the case. Removing export restrictions would be expected to lead to further decreases in net imports that would further affect the role of the SPR. Without a reexamination of the SPR that considers whether a smaller or larger SPR is in the national interest in light of current and expected future changes in market conditions, DOE cannot be assured that the SPR is holding an appropriate amount of crude oil in the SPR, and its ability to make appropriate decisions regarding maintenance of the SPR could be compromised. In view of recent changes in market conditions and in tandem with DOE’s ongoing activities to assess the content, connectivity, and other aspects of the SPR, we recommend that the Secretary of Energy undertake a comprehensive reexamination of the appropriate size of the SPR in light of current and expected future market conditions. We provided a draft of this report to DOE and Commerce for their review and comment. The agencies provided technical comments, which we incorporated as appropriate. In its written comments, reproduced in appendix III, DOE concurred in principle with our recommendation. However, DOE stated that conducting a study of only the size of the SPR would be too narrow in scope and would not address other issues relevant to the SPR carrying out its mission of providing energy security to the United States. DOE stated that a broader, long-range review of the SPR is needed. We agree that such a review would be beneficial. We do not recommend that DOE undertake an isolated reexamination of the size of the SPR, but that such a reexamination be conducted in tandem with DOE’s other activities to assess the SPR and we clarified our recommendation accordingly. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretaries of Energy and Commerce, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. We identified four studies that examined the price and other implications of removing crude oil export restrictions. These four studies are as follows: Resources for the Future (RFF). Crude Behavior: How Lifting the Export Ban Reduces Gasoline Prices in the United States. Washington, D.C.: Resources for the Future, February 2014, revised March 2014. ICF International and EnSys Energy (ICF International). The Impacts of U.S. Crude Oil Exports on Domestic Crude Production, GDP, Employment, Trade, and Consumer Costs. Washington, D.C.: ICF Resources, March 31, 2014. IHS. US Crude Oil Export Decision: Assessing the impact of the export ban and free trade on the US economy. Englewood, Colorado: IHS, 2014. NERA Economic Consulting (NERA). Economic Benefits of Lifting the Crude Oil Export Ban. Washington, D.C.: NERA Economic Consulting, September 9, 2014. Table 3 describes these studies and several key assumptions, Table 4 summarizes their findings regarding prices, and Table 5 summarizes their findings regarding other implications of removing crude oil export restrictions. In addition to the individual named above, Christine Kehr (Assistant Director), Philip Farah, Quindi Franco, Cindy Gilbert, Taylor Kauffman, Celia Rosario Mendive, Alison O’Neill, and Barbara Timmerman made key contributions to this report. Petroleum Refining: Industry’s Outlook Depends on Market Changes and Key Environmental Regulations. GAO-14-249. Washington, D.C.: March 14, 2014. Oil and Gas: Information on Shale Resources, Development, and Environmental and Public Health Risks. GAO-12-732. Washington, D.C.: September 5, 2012. Energy Markets: Estimates of the Effects of Mergers and Market Concentration on Wholesale Gasoline Prices. GAO-09-659. Washington, D.C.: June 12, 2009. Strategic Petroleum Reserve: Issues Regarding the Inclusion of Refined Petroleum Products as Part of the Strategic Petroleum Reserve. GAO-09-695T. Washington, D.C.: May 12, 2009. Energy Markets: Refinery Outages Can Impact Petroleum Product Prices, but No Federal Requirements to Report Outages Exist. GAO-09-87. Washington, D.C.: October 7, 2008. Energy Markets: Increasing Globalization of Petroleum Products Markets, Tightening Refining Demand and Supply Balance, and Other Trends Have Implications for U.S. Energy Supply, Prices, and Price Volatility. GAO-08-14. Washington, D.C.: December 20, 2007. Strategic Petroleum Reserve: Available Oil Can Provide Significant Benefits, but Many Factors Should Influence Future Decisions about Fill, Use, and Expansion. GAO-06-872. Washington, D.C.: August 24, 2006. Motor Fuels: Understanding the Factors That Influence the Retail Price of Gasoline. GAO-05-525SP. Washington, D.C.: May 2, 2005. Alaskan North Slope Oil: Limited Effects of Lifting Export Ban on Oil and Shipping Industries and Consumers. GAO/RCED-99-191. Washington, D.C.: July 1, 1999.

Almost 4 decades ago, in response to the Arab oil embargo and recession it triggered, Congress passed legislation restricting crude oil exports and establishing the SPR to release oil to the market during supply disruptions and protect the U.S. economy from damage. After decades of generally falling U.S. crude oil production, technological advances have contributed to increasing U.S. production. Meanwhile, net crude oil imports—imports minus exports—have declined from a peak of about 60 percent of consumption in 2005 to 30 percent in the first 5 months of 2014. According to Energy Information Administration forecasts, net imports are expected to remain well below 2005 levels into the future. GAO was asked to provide information on the implications of removing crude oil export restrictions. This report examines what is known about (1) price implications of removing crude oil export restrictions; (2) other key potential implications; and (3) implications of recent changes in market conditions on the SPR. GAO reviewed four studies on crude oil exports, including two sponsored by industry, and summarized the literature and views of a nonprobability sample of stakeholders including academic, industry, and other experts. The studies GAO reviewed and stakeholders interviewed suggest that removing crude oil export restrictions is likely to increase domestic crude oil prices but decrease consumer fuel prices. Prices for some U.S. crude oils are lower than international prices—for example, one benchmark U.S. crude oil averaged $101 per barrel in 2014, while a comparable international crude oil averaged $109. Studies estimate that U.S. crude oil prices would increase by about $2 to $8 per barrel—bringing them closer to international prices. At the same time, studies and some stakeholders suggest that U.S. prices for gasoline, diesel, and other consumer fuels follow international prices, so allowing crude oil exports would increase world supplies of crude oil, which is expected to reduce international prices and, subsequently, lower consumer fuel prices. Some stakeholders told GAO that there could be important regional differences in the price implications of removing crude oil export restrictions. Some stakeholders cautioned that estimates of the implications of removing export restrictions are uncertain due to several factors such as the extent of U.S. crude oil production increases, how readily U.S. refiners are able to absorb such increases, and how the global crude oil market responds to increasing U.S. production. The studies GAO reviewed and stakeholders interviewed generally suggest that removing crude oil export restrictions may also have the following implications: Crude oil production. Removing export restrictions would increase domestic production—8 million barrels per day in April 2014—because of increasing domestic crude oil prices. Estimates range from an additional 130,000 to 3.3 million barrels per day on average from 2015 through 2035. Environment. Additional crude oil production may pose risks to the quality and quantity of surface groundwater sources; increase greenhouse gas and other emissions; and increase the risk of spills from crude oil transportation. The economy. Removing export restrictions is expected to increase the size of the economy, with implications for employment, investment, public revenue, and trade. For example, removing restrictions is expected to contribute to further declines in net crude oil imports, reducing the U.S. trade deficit. Changing market conditions have implications for the size, location, and composition of Department of Energy's (DOE) Strategic Petroleum Reserve (SPR). In particular, increased domestic crude oil production and falling net imports may affect the ideal size of the SPR. Removing export restrictions is expected to contribute to additional decreases in net imports in the future. As a member of the International Energy Agency, the United States is required to maintain public and private reserves of at least 90 days of net imports but, as of May 2014, the SPR held reserves of 106 days—worth about $73 billion—and private industry held reserves of 141 days. DOE has taken some steps to assess the implications of changing market conditions on the location and composition of the SPR but has not recently reexamined its size. GAO has found that agencies should reexamine their programs if conditions change. Without such a reexamination, DOE cannot be assured that the SPR is sized appropriately and risks holding excess crude oil that could be sold to fund other national priorities. In view of changing market conditions and in tandem with activities to assess other aspects of the SPR, GAO recommends that the Secretary of Energy reexamine the size of the SPR. In commenting on a draft of this report, DOE concurred with GAO's recommendation.

You are an expert at summarizing long articles. Proceed to summarize the following text: The nation’s interstate commercial motor carrier industry is extensive and includes a number of stakeholders, including carriers, shippers, receivers, and intermediaries. Motor carriers are companies or individuals that transport cargo using motor vehicles. According to FMCSA officials, there are about 737,000 interstate carriers registered with FMCSA. While the largest motor carriers operate upward of 50,000 vehicles, approximately 80 percent of carriers are small independent-owner operators or trucking companies, operating between 1 and 6 vehicles. Within the industry, there is a variety of types of carriers. For example, carriers are either for-hire, transporting cargo to the public on a fee basis, or private, running a vehicle fleet to transport only the company’s own products. There are also two principal classes of for-hire carriers: truckload carriers transport a single shipper’s cargo between two locations, while less-than-truckload carriers transport cargo for multiple customers that may require pick-up or delivery at multiple locations. In addition, some carriers primarily provide long-haul service—which is generally considered to be intercity service—while other carriers primarily provide service within a metropolitan region, referred to as short haul. Finally, carriers use vehicles that differ by body types—including dry trailers, refrigerated trailers, flat beds, and tank trailers—some of which can carry a variety of cargo, while others are used for only one type of cargo. (See fig. 1 for examples of vehicles.) Shippers are the cargo owners that hire the carriers to transport their cargo. For example, a shipper could be a product manufacturer that hires a carrier to transport its product from the manufacturing plant to the end customer, or a retail company that hires a carrier to pick up its finished products, such as clothing or electronics, from a seaport terminal or other location for transport to a distribution center. Receivers are those who are scheduled to receive and take ownership of the cargo. The receiver could be the customer of the shipper, such as a retail company or manufacturing plant, which takes ownership of the cargo to sell or use in a production process. Intermediaries arrange for the transportation of goods between the shippers and receivers. For example, a freight forwarder acts as an agent on the behalf of the shipper and will consolidate shipments from several shippers and then contract with carriers to transport these shipments. In addition, a freight broker will arrange the pick up and delivery of a shipper’s good by a carrier without having physical control of the cargo. Third-party logistical companies provide warehousing and supply chain services for the shippers and can arrange transportation of the shippers’ products. For example, carriers could transport cargo to a third-party distribution center, which can repackage the cargo for further distribution. Figure 2 provides a description of the steps typically involved in moving cargo through the system. The decisions of the various stakeholders—carriers, shippers, receivers, and others—direct the logistics (or operation) of the interstate commercial motor carrier industry, and consequently can affect the occurrence and amount of detention time. Each stakeholder plans and organizes its own activities within this large industry in an effort to meet its critical objectives. Carriers attempt to minimize their travel time and the miles they drive with no cargo, while at the same time meeting the needs of shippers. Shippers try to minimize the costs of their transportation needs while ensuring delivery in a timely manner. As each stakeholder makes its own logistical decisions, it faces tradeoffs in the costs and benefits of various options for how to schedule and manage resources. Given the numerous activities that need to be scheduled and coordinated within the industry on a daily basis, some level of trucker detention time is expected. If a shipper provides its own trucking services through a private fleet, one of the shipper’s goals will likely be to schedule shipments in a way that minimizes detention time and thus increases productivity. However, if, for example, an on-time pick up is a high priority for a particular shipment, then the shipper may choose to schedule a truck to arrive early, thus potentially increasing the likelihood or amount of detention time. Conversely, when a shipper uses a for-hire carrier, the shipper may be less inclined to fully take the extent of detention time into consideration when making its scheduling decisions because the shipper does not fully bear the costs of the detention time it may impose on truckers. Therefore, some detention time in the industry likely results because shippers’ and receivers’ decisions can affect the extent of detention time, but the costs of detention time are largely born by truckers. The federal role in regulating the interstate commercial motor carrier industry has changed over time, as shown in figure 3. Currently, the federal role in the industry is focused on regulating safety aspects of the trucking industry and funding transportation infrastructure, which are managed by two agencies within DOT. FMCSA’s primary mission is to prevent commercial motor-vehicle-related fatalities and injuries. It carries out this mission by issuing, administering, and enforcing federal motor carrier safety regulations—including hours of service requirements—and gathering and analyzing data on motor carriers, drivers, and vehicles, among other things. FMCSA also takes enforcement actions, and funds and oversees enforcement activities at the state level through Motor Carrier Safety Assistance Program grants. FHWA is responsible for overseeing the federal-aid highway program, which funds highway infrastructure. Within FHWA, the Office of Freight Management and Operations is tasked with promoting efficient, seamless, and secure freight flows—including freight transported by the interstate commercial motor carrier industry—on the U.S. transportation system and across the nation’s borders. The office advances its mission by building a greater understanding of freight transportation issues and trends, improving operations through advanced technologies, and educating and training freight transportation professionals. The office also conducts operational tests of intelligent transportation system technologies and promotes the development of standards for freight information exchange. Federal hours of service regulations place restrictions on operations of a property-carrying commercial motor vehicle driver by setting limits on duty periods. There are three hourly limitations for these drivers, including a 14-hour “driving window” after coming on duty following 10 consecutive hours off duty, 11 hours of which can be “driving time,” and a prohibition on driving after 60 or 70 hours of on duty time per week, with certain exceptions and exemptions. Specifically: 14-hour “driving window”: A driver is allowed a period of 14 consecutive hours after coming on duty, following 10 or more consecutive hours off duty, in which to drive. This 14-hour period begins when the driver starts any kind of work or is required to be in readiness to work, and once the driver has completed the 14-hour period, the driver cannot drive again without first being off duty for at least 10 consecutive hours. The 14-hour period covers both on duty and off duty time. 11-hour driving limit: During the 14-consecutive-hour driving window, the driver is limited to 11 total hours of actual driving time. The 11 hours can be consecutive or nonconsecutive within the 14-hour period. 60/70-hour on duty limit: A driver is required to adhere to one of two duty hours weekly limits, which is specified by the driver’s carrier. A driver may restart the 60- or 70-hour “week” by taking at least 34 consecutive hours off duty. If a driver’s carrier (employer) does not operate commercial motor vehicles every day of the week, the driver may not drive after being on duty 60 hours during any 7 consecutive days. If a driver’s carrier does operate commercial motor vehicles every day of the week, a 70-hour/8-day schedule is permitted. The driver may not drive after being on duty 70 hours in any 8 consecutive days.” A driver may restart the 60- or 70-hour “week” by taking at least 34 consecutive hours off duty. According to hours of service regulations, on duty time includes all of the time from when a driver begins work for a motor carrier or is required to be in readiness to work by that motor carrier, whether paid or not, until the time the driver is relieved from work and all responsibility for performing work. Some examples of on-duty time may include: driving time, to include all time spent at the driving controls of a commercial motor vehicle in operation; time at a plant, terminal, or other facility of a motor carrier or shipper, or on any public property, waiting to be dispatched; time loading, unloading, supervising, or attending the truck or handling receipts for shipments; and all other time in or upon a commercial motor vehicle unless the driver is resting in a sleeper berth. Federal hours of service regulations require drivers to maintain a “record of duty status”—commonly referred to as a driver’s log, daily log, or log book—either in written form or electronically using an automatic or electronic on-board recording device. Drivers must account for all hours of every day in their log, including days off, and must also have a log for each day of the last 8 days they were required to log. One means to ensure compliance with various safety requirements, including hours of service, is for authorized FMCSA and state officials to conduct driver and vehicle inspections of commercial vehicle motor carriers. During certain types of inspections, these inspectors check the drivers’ logs for compliance with hours of service regulations. If the inspector finds that a driver has not complied with the hours of service regulations, the violation can result in a driver being fined and/or being placed out of service. In addition, FMCSA ensures that motor carriers comply with safety requirements through compliance reviews of carriers already in the industry and safety audits of carriers that have recently started operations. Compliance reviews and safety audits help FMCSA determine whether carriers are complying with federal safety requirements—including hours of service regulations—and, if not, to take enforcement action against carriers, including placing carriers out of service. While there are no industry-wide data providing information on the occurrence of detention time, interviews with drivers, industry representatives, and motor carrier officials indicate that detention time occurs with some regularity. During our structured interviews with truck drivers, we found that the majority of these drivers had experienced detention time within the last month. Overall, 204 of the 302 drivers interviewed—about 68 percent—had reported experiencing detention time within the last month. Most of these drivers—178 of the 302, or about 59 percent—reported experiencing detention time within the last 2 weeks. About 11 percent of the drivers—32 drivers—reported they last experienced detention time more than 1 month ago. For those drivers that reported previously experiencing detention time, the amount of detention time ranged from less than 2 hours to over 8 hours, and occurred at a variety of different facilities, including production facilities and distribution centers. Finally, about 22 percent of drivers reported they had never experienced detention time. In addition, a number of motor carrier officials stated that their truck drivers experience detention time regularly enough to institute systems to track detention time for their individual companies. For example, officials from one company that tracks detention time noted that their drivers experienced detention time on 12 percent of deliveries over a 3-month time period. While detention time can happen to all types of carriers, several industry representatives noted that drivers of some vehicle types experience a higher degree of detention time, while drivers of other types do not typically experience as much detention time. For example, some industry representatives noted that refrigerated trailer drivers tend to experience detention time to a greater extent than others because refrigerated trailers can maintain cargo at the required temperature, and can therefore wait for cargo from other nonrefrigerated trailers to be unloaded. In some cases, drivers with refrigerated trailers have had to wait overnight in order to keep the product stored at the proper temperature until it could be unloaded the next morning. In contrast, while tanker trucks can experience detention time, some industry representatives noted that tanker truck drivers do not typically experience as much detention time as some other types of trailers. Truck drivers, industry representatives, and company officials identified several factors that can contribute to detention time. Based on our interviews, the 236 drivers that had reported previously experiencing detention time—either within the last month or more than 1 month ago— facility limitations, arriving for a scheduled pick-up and finding the product was not ready for shipment, poor service provided by facility staff, and facility scheduling practices were the most frequently cited contributing factors. Other stakeholders also cited these same factors as contributing to detention time. Facility limitations: About 43 percent of drivers reported they experienced detention time because the facilities were not adequately staffed, lacked sufficient loading and unloading equipment, or had an insufficient number of bays for loading and unloading trucks. These limitations can occur, for example, when facilities overschedule appointments for pickup or delivery or do not have enough staff or equipment to handle the number of trucks scheduled, thereby creating a backlog of vehicles that need to be loaded or unloaded. Product not ready for shipment: About 39 percent of drivers reported they experienced detention time because the product was not ready for shipment when they arrived at the facility for pick up. This could be due to a number of reasons, such as manufacturing problems that delayed the production of the finished product. Industry representatives and company officials also highlighted that fresh produce often is not ready for shipment when drivers arrive at the loading facility. For example, one reason fresh produce might not be ready for shipment is that weather, such as heavy rains, can delay harvesting and packaging of the produce for shipment before the drivers’ scheduled pick-up time. Poor service provided by facility staff: About 39 percent of drivers reported that poor service by the facility staff was the reason they experienced detention time. Some drivers stated that once they arrived at the facility, the facility staff were indifferent to the drivers’ schedules and would take their time before starting the loading or unloading process. Scheduling practices: About 34 percent of drivers reported that facility scheduling practices at some facilities led to detention time. One of these scheduling practices cited by industry representatives was a “first come, first serve” system, in which the facility loads the vehicles in the order of arrival at the facility. For example, some seaport terminals use this system, which results in drivers lining up at the gate to the terminal before the facility opens to make sure they can get their containers as quickly as possible. The time waiting at the gate is not considered detention time by the terminals. Other factors: Drivers, industry representatives, and company officials noted there are some other factors not under the control of the facility that can contribute to detention time. For example, about 6 percent of drivers we interviewed reported that the driver was responsible for the detention time due to the driver’s paperwork not being in order. In these cases, the facility would either have to push back its overall schedule, potentially impacting all truck drivers scheduled for loading and unloading at that facility that day, or have the delayed driver wait for an available opening. Some company officials also noted that loading or unloading could be delayed if the driver is not familiar with either the shipper’s facilities or its loading and unloading procedures. Two other factors cited by officials include shipping facility staff calling in sick and leaving the facility short of staff, and a breakdown in loading or unloading equipment, which can have a cascading effect on the facility’s schedule. Shippers may implement practices to reduce detention time at their facilities. Some shippers have established appointment systems, which allow the facility to better manage available bays, staff, and loading equipment. For example, one facility we visited schedules carriers to arrive every 30 minutes, with a goal of having the carrier either loaded or unloaded within 90 minutes. If a carrier misses an appointment, the facility will unload that carrier whenever possible, but will not bump another carrier that makes the scheduled appointment time. Another practice to reduce detention time is to use technology, such as improved communication and vehicle inspection technology, to improve the process. For example, some seaport terminal operators have installed video cameras at the gate to speed up the process for inspecting the cargo containers as trucks enter the facility. This practice reduces the wait time at the facility’s front gate. Detention time can impact drivers’ ability to make scheduled deliveries within the hours of service requirements by putting drivers behind schedule and reducing available driving time. For those drivers that reported previously experiencing detention time, 80 percent reported that detention time reduced their available driving time. For example, some drivers noted that since the federal hours of service regulations allow them a “driving window” of no more than 14 consecutive hours—limited to 11 hours of driving time—detention time can significantly reduce the available driving window and driving time. Therefore, if a driver experiences 6 hours of detention time, that driver can only drive for 8 hours, at most, before being required to rest for 10 hours. Some drivers noted that this could delay their next scheduled delivery and, in some cases, result in the receiver charging the driver a late delivery fee. According to industry representatives, drivers who experience detention time and lose available duty and driving time may sometimes be faced with a choice of not making their scheduled delivery time, violating the speed limit, or violating the hours of service requirements to make up for lost time. Detention time can in some cases lead drivers to operate their vehicles beyond the hours of service requirements and improperly log duty time in order to make scheduled deliveries on time. When asked how detention time impacts them, about 4 percent of drivers responded they have driven beyond the hours of service limits and misrepresented their hours in their log books. Although we did not specifically ask the question during the structured interviews, a number of drivers we spoke with stated they kept multiple log books in order to disguise incidents where they violate hours of service requirements due to detention time. Detention time can also result in lost revenue for drivers, as well as carrier companies. Based on our structured interviews, of those drivers that reported previously experiencing detention time, 65 percent reported that detention time had caused them to lose pay. According to industry representatives, the lost revenue can result from either missing an opportunity to secure another load or having to pay late fees to the receiver. Detention time has a greater potential to result in lost revenue for independent owner operators than drivers employed by carrier companies. In general, drivers that are employed by private companies are paid by the hour. Owner operators—including owner operators that are leased to carrier companies—are typically paid by the number of miles driven or by the number of loads delivered. Because the typical owner operator’s pay structure is based on actual driving time, these drivers do not get paid for time spent waiting to load or unload. In fact, drivers have an adage that says “when the wheels ain’t turning, you’re not earning.” Carrier companies have some ability to mitigate the economic effects of detention time through a variety of means, such as charging detention fees to shippers, developing relationships with customers, using efficient loading and unloading operations, and no longer providing service to customers with persistent detention time. First, according to vehicle safety association officials, larger carrier companies have the leverage to include detention fee clauses in their contracts with shippers. For example, a number of carrier companies we talked with charged detention time fees to the shippers for any time over 2 hours that their vehicle was at the facility. The detention time fee varied based on the specific contract; examples provided to us ranged from $40 to $80 per hour. Based on our structured interviews, 53 percent of drivers that reported previously experiencing detention time reported that their company collected detention fees. However, according to some carrier officials, not all carriers collect detention fees, even if provided for in the contract, due to their reluctance to charge their customers, particularly their larger customers with whom they conduct significant business. One carrier official explained that detention time is simply a cost of doing business in today’s freight environment. In addition, collecting detention time fees can sometimes be challenging if the shipper does not agree with the amount of detention time that occurred. For example, during a 3- month time period, one carrier billed over $4,300 in detention time fees but received less than $500. Second, some carriers work closely with their customers to reduce detention time. According to industry representatives, some carriers develop relationships with shippers and receivers as they make routine visits to their facilities and establish a familiarity with the process. For example, according to one motor carrier company, its work with customers to track and measure detention time information has, in many situations, resulted in some decrease in detention time. Third, some carriers use a more efficient loading and unloading operation called the “drop and hook” method, which limits detention time. Drop and hook operations prevent the driver from having to wait for a trailer to be loaded or unloaded at the shipper’s facility. The driver will arrive at the facility with an empty trailer, drop off the empty trailer, and hook up the loaded trailer. The shipper will load the cargo into the trailer prior to the scheduled pick-up time. According to company officials and industry researchers we spoke to, the drop and hook method does reduce detention time. However, according to carrier officials, drop and hook requires the carrier to invest in additional trailers. For example, one carrier that used the drop and hook method had 1.5 trailers for each tractor, resulting in additional costs to purchase and maintain the trailers. Finally, some motor carrier officials stated that if they experience significant occurrences of detention time at a particular facility, the carrier could stop providing transportation services for that client if it had sufficient business with other shippers. In addition, some larger carrier companies are better able to handle logistical challenges that could result from detention time. For example, a carrier may have one of its vehicles held up because of detention time; however, a larger carrier can adjust the schedule of other vehicles to ensure the carrier is able to meet its commitments, therefore limiting the impact of the detention time. Smaller carrier companies or independent owner operators with only a few vehicles may not be able to react in a similar manner. According to industry representatives, independent owner operators have limited ability to mitigate the economic effects of detention time. For example, some industry representatives stated that since independent owner operators that do not lease on a regular basis to carrier companies generally use intermediaries to arrange for cargo, those operators do not have established contracts with shippers and thus have less leverage to charge detention time fees. Depending on their contractual arrangements, independent owner operators that are leased by a large carrier also may not receive detention time fees, even if the motor carrier charges and collects those fees. In addition, even if an independent owner operator that is leased by a motor carrier receives detention fees from the motor carrier, the fees may not fully compensate the driver for the detention time. That is because detention time compensation typically falls short of the amount of compensation that drivers would receive when they are actually driving since most of their compensation is based on miles driven. Finally, according to an industry representative, some carrier companies opt to send drivers from leased independent owner operators—who, unlike some carrier companies’ own drivers, are not paid by the hour—to facilities that frequently cause detention time. In so doing, the motor carrier does not have to pay the driver for the time spent waiting to load and unload. Furthermore, in some cases, independent owner operators do not transport cargo to the same facilities as frequently as carrier companies, which limits a driver’s familiarly with the procedures of specific facilities and could lead to detention time. For example, according to one warehouse representative we talked with, the drivers that encounter the most detention time are associated with independent owner operators that are not familiar with the requirements and rules of the facility, which includes not having the proper paper work, enough fuel for their refrigerated trailer, or the trailer is not in the proper condition. That representative’s facility will not check in trucks that do not meet these core requirements. Finally, independent owner operators generally do not have the financial resources to purchase additional trailers to take advantage of the drop and hook method or to simply absorb the costs of detention time. Although FMCSA collects data from roadside inspections, which provides information on the number of hours of service violations, the agency currently does not collect—nor is it required to collect—information to assess the extent to which detention time contributed to these violations. In 2009, FMCSA and state officials conducted over 3.5 million roadside inspections of interstate and intrastate motor carriers and almost 6 percent of these inspections resulted in at least one out-of-service violation. As shown in table 1, according to FMCSA data, hours of service violations were among the top 10 cited out-of-service violations. Specifically, violations of all three types of hours of service requirements—the 14-hour “driving window” rule, 11-hour driving rule, and 60/70-hour weekly on-duty rule—ranked in the 10 most frequently cited types of violations. Further, according to FMCSA officials, 14-hour rule violations were the most common out-of-service violations from U.S. roadside inspections in 2009, as well as in 2007 and 2008. FMCSA officials stated that 14-hour rule violations are straightforward and easier to detect during roadside inspections compared to other types of violations, which partially explains the more common occurrence of this type of violation. While FMCSA does not collect information on what factors contribute to hours of service violations, officials and industry representatives stated that detention time could be one of many such factors. Other factors could include a driver needing to leave the property of a facility and drive to a parking or rest area a number of miles away, having already used up the available driving hours for that day. Because FMCSA does not currently collect and analyze data on the factors that contribute to hours of service violations, its ability to assess the impact of detention time on hours of service violations, which may affect driver safety, is limited. Agency officials stated that, while FMCSA does not identify the factors that contribute to out-of-service violations, including hours of service violations, during roadside inspections, inspectors may acquire some information on these factors during compliance reviews. However, agency officials also stated they do not currently have other data that would help them determine either how often detention time occurs or how often detention time contributes to drivers violating hours of service requirements. For example, driver log data that FMCSA reviews during inspections—either in hard copy or electronically—do not include or identify detention time. While drivers are not required to specifically note detention time in their log books, they must note the time they arrived and departed a facility. However, if the driver did experience some detention time with the recorded time at the facility, it does not necessarily mean that it was a contributing factor to a violation in hours of service. To make that determination, an inspector would have to ask the driver what happened. As a result, it may be difficult to link hours of service violations to detention time based solely on log book data. To date, research conducted by FMCSA has not specifically included efforts to determine the extent to which detention time occurs. Instead, FMCSA research has focused on an overview of freight movement, including identifying inefficiencies in freight transportation and evaluating safety and productivity improvements. For example, FMCSA’s Motor Carrier Efficiency Study, a 2007 Annual Report to Congress, examined the application of wireless technology to improve the safety and efficiency of trucking operations in the United States. The analysis estimated that the motor carrier industry incurs financial losses in the tens of billions of dollars per year because of operating inefficiencies, and noted that “time loading and unloading” was the most costly inefficiency identified by motor carriers. While “time loading and unloading” is a key determination for whether detention time has occurred, the study does not specifically address instances of detention time or differentiate between expected time loading and unloading, and detention time. Also, FMCSA has conducted research on hours of service and driver fatigue with many studies completed, ongoing, or planned for the future. For example, FMCSA recently completed a study examining whether additional sleep would more effectively restore driver performance compared to the current 34-hour restart provision. In addition, FMCSA officials noted that the agency has several ongoing hours of service studies. Although FMCSA does not currently have data on detention time, the agency plans to conduct three studies addressing driver fatigue, driver compensation, and detention time. First, agency officials stated that a driver fatigue study is planned for July 2011. FMCSA officials stated that as part of this study, they plan to conduct an annual driver survey on driver fatigue to obtain an understanding of the impact of changes in the commercial driver workforce to ensure safety and well-being of its members. The results will be used to develop and evaluate rules, regulations, policies, and enforcement activities for the motor carrier industry. However, while FMCSA has developed a problem statement, it has yet to finalize the details on this study’s scope and methodology. Second, FMCSA plans to conduct a study examining the impact of driver compensation, such as pay per mile, on driver safety. Finally, FMCSA has requested funding for a study on detention time, which it plans to conduct in 2012. While FMCSA officials said they plan to survey drivers on the amount of time they wait to load or unload shipments, FMCSA has to date only developed a problem statement. The purpose of the study will be to better understand the nature of the problem of detention or waiting time in the industry. Agency officials stated the study will also identify any changes in current regulations that would reduce driver wait times. In addition, officials stated they will use the prior two studies to develop the detention time study’s scope or methodology. Therefore, it is not clear whether the detention time study will address, among other things, the extent to which detention time contributes to drivers violating hours of service requirements. In addition to FMCSA’s planned studies on detention time, collecting information on the factors that contribute to detention time through driver and vehicle inspections or other means could help FMCSA determine whether detention time is a significant factor in contributing to drivers violating hours of service requirements and, consequently, whether additional federal action by DOT or Congress might be warranted to mitigate detention time as a potential safety issue. For example, FMCSA could collect this type of information through level IV special inspections, which are typically one-time examinations based on an existing or potential problem and administered for data collection purposes—such as investigating defects in brakes or intermodal equipment—typically conducted in support of a study or to verify or refute a suspected trend. In 2009, FMCSA conducted over 16,500 level IV special roadside inspections in the United States. According to agency officials, level IV inspections are effectively level I standard inspections plus some additional questions for data collection, and the actual work and resources remain the same. These types of inspections can be administered in a designated period of time, such as a 3-day period when many inspections would be scheduled to occur. In addition, FMCSA could use a study-specific data collection form to acquire information on factors contributing to hours of service violations during inspections, similar to the methodology used in an unpublished FHWA study examining the violation of hours of service requirements in relation to the origin of the load. The study used an inspection form and a data collection form to acquire additional information outside of the standard inspection. Hours of service requirements are designed to ensure that truck drivers get the necessary rest to perform safe operations, to help continue the downward trend in commercial motor vehicle fatalities, and to maintain motor carrier operational efficiencies. All three goals further FMCSA’s primary mission to prevent fatalities and injuries involving commercial motor vehicles. Therefore, information on the factors that contribute to hours of service violations could help FMCSA in developing any future policy, rules, regulations, or programs to improve commercial vehicle safety. Any federal action to address issues associated with detention time beyond hours of service requirements would require careful consideration. Since there is no current federal regulation of detention time, any potential federal action would need to be based on a full understanding of the complexities of the industry. For example, a standard definition of detention time would need to be established. However, as we have shown, there are often disagreements between shippers and carriers regarding how much detention time occurred in a particular case, so finding a commonly agreed to definition in the industry could be challenging. It would also need to be decided which stakeholders any new federal action would target since there is a wide variety of stakeholders involved. Finally, the federal government would need to evaluate whether any unintended consequences may flow from a new federal action, and if so, how to avoid or mitigate those consequences. Detention time is a complex issue involving many stakeholders. While it is not uncommon for drivers to experience detention time, there are no data available that can provide any definitive information on how often it occurs, how long detention time lasts, or what types of carriers or facilities experience the most detention time. In fact, detention time can be difficult to measure as there are different interpretations of what constitutes detention time. Detention time can be caused not by one predominant factor, but instead by a wide variety of factors, primarily related to facility operations. Furthermore, some detention time likely results because shippers’ decisions affect the extent of detention time, but the costs of detention time are largely born by truckers. While detention time can have an economic impact on drivers and carrier companies, the current federal role in the industry focuses on safety—including hours of service requirements—rather than economic regulation. FMCSA’s plans to look at detention time in upcoming studies may shed further light on the contributing factors and extent of detention time, but the agency is still in the initial planning stages and has not determined the scope of these studies. Without information on the extent to which detention time occurs and the extent to which detention time contributes to hours of service violations, FMCSA may not have key information to help reduce these types of violations. To support the primary mission of FMCSA in improving the safety of commercial motor vehicles, we recommend the Secretary of DOT direct the Administrator of FMCSA to examine the extent to which detention time contributes to drivers violating hours of service requirements in its future studies on driver fatigue and detention time, and through data collected from its driver and vehicle inspections. We provided a draft of this report to DOT for review and comment. DOT officials provided technical comments which we incorporated into 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. The report also will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. To determine how regularly truck drivers experience detention time, the factors that contribute to detention time, and how detention time affects the interstate commercial motor carrier industry, we reviewed hours of service regulations, legislation related to the regulation of the trucking industry, and relevant Federal Motor Carrier Safety Administration (FMCSA) regulations; agency reports such as motor carrier efficiency studies; Federal Highway Administration (FHWA) freight facts and figures; and an Office of Motor Carriers study on trucking operations and hours of service. We also reviewed information about the trucking industry and driver safety overviews such as trucking logistics overviews, and background information on warehouse and distribution centers. To capture the various perspectives of the diverse trucking industry, we interviewed officials and representatives from FMCSA and FHWA, port authorities, carrier companies, trucking associations, manufacturing associations, warehouse facilities, and research firms. To conduct these interviews, we contacted officials and representatives across the country by phone, and we conducted site visits to Chicago, Illinois; Newark, New Jersey; and Port Arthur, Texas. In addition, we conducted structured interviews with truck drivers to gain a general understanding of (1) the frequency truck drivers experience detention time, (2) what truck drivers perceive to be the factors that contribute to detention time, and (3) how detention time affects them. After initially developing, reviewing, and modifying the interview questions, we conducted two pretests with truck drivers at truck stops in North Bend, Washington, and Baltimore, Maryland. The two pretests were conducted by GAO team members who approached respondents asking if they would like to answer a short questionnaire on detention time. The GAO team members asked the respondents the structured questions and noted any questions, comments, and lack of clarity to the questions on the part of the pretest respondents. The final changes made to the structured interview questions were made on the basis of observations from the pretests. A copy of the structured interview questions and results of the closed-ended questions are included in appendix II. The targeted population for the structured interviews was truck drivers. We conducted the interviews at four truck stops: Baytown, Texas; Ashland, Virginia; Walcott, Iowa; and North Bend, Washington. We chose these sites to obtain geographic dispersion and based on input from industry stakeholders. The GAO team members stationed themselves on- site where the highest volume of drivers was located, such as the front entrance. The GAO team members self-selected the respondents and therefore the results from this nongeneralizable sample cannot be used to make inferences about the population. Of the 549 truck drivers approached, 247 drivers declined to be interviewed, yielding a 55 percent response rate. Of the 302 truck drivers we interviewed, 230 identified themselves as only long-haul drivers, 21 drivers identified themselves as only short-haul drivers, 40 identified themselves as providing both long- and short-haul service, and 11 drivers did not provide a response. The structured interview of truck drivers contained a mixture of closed- ended and open-ended questions. In order to analyze drivers’ verbal responses to the open-ended questions, two analysts independently coded the responses and resolved any discrepancies in the categorization. To determine what federal actions, if any, could be taken to address the issues associated with detention time, we reviewed existing research and studies conducted by the Department of Transportation, such as FMCSA’s Motor Carrier Efficiency Study and FHWA’s report that provided an overview of the volume and value of freight flows in the United States. Further, we reviewed FMCSA’s plans for future research studies on detention time, driver fatigue, and driver compensation. In addition, we reviewed hours of service requirements; documentation on FMCSA’s enforcement of safety regulations, such as the types of driver and vehicle inspections; relevant laws and regulations related to the federal government’s role in the trucking industry, such as the Motor Carrier Act of 1935, the Motor Carrier Act of 1980, and the ICC Termination Act of 1995; and other relevant trucking industry requirements and rules, such as 49 C.F.R. part 395, and the electronic on-board recorder rule. Furthermore, we relied on FMCSA North American Free Trade Agreement Safety Statistics on out-of-service violations from roadside inspections for information on the number of hours of service violations. We did not independently verify those statistics since we reported them for contextual purposes, and they do not materially affect our findings. As such, we did not conduct a data reliability assessment of these data. Finally, we interviewed officials and representatives from FMCSA and FHWA, port authorities, carrier companies, trucking associations, manufacturing associations, warehouse facilities, and research firms to get their perspective on potential federal actions that could be taken to address detention time issues. In the last 7 days 51.0% (154) In the last 2 weeks 7.9% (24) 8.6% (26) More than 1 month ago 10.6% (32) Does not experience detention time 21.9% (66) 2. Did you collect detention fees? 35.3% (83) 62.6% (147) 2.1% (5) 3. Does the company you work for collect detention fees? 53.4% (125) 18.4% (43) 2.1% (5) 26.1% (61) 4. During your last detention time, how long did you wait from gate to gate? 5. Did you have any wait time before you got to the gate? 21.2% (49) 78.8% (182) 6. If so, what were the reasons for the wait time before you got to the gate? 7. Did you have an appointment time? 79.5% (186) 20.5% (48) 8. For the last time you experienced detention time, what was the reason? 9. For the last time you experienced detention time, how did the detention time impact you, if at all? 10. What type of freight were you hauling? 11. What type of facility were you delivering to or picking up freight from? 12. In general, does detention time impact your ability to meet federal hours of service requirements? 87.2% (204) 12.8% (30) 13. If yes, in what way does it impact? 14. Besides the reason you mentioned previously, are there other reasons for why you have experienced detention time in the past? 15. Besides the impacts you mentioned, has detention time impacted you in other ways in the past? 16. Are you an owner operator, an owner operator leased, or a company driver? 30.4% (89) 10.2% (30) 59.0% (173) 17. Are you paid according to your mileage or by a percentage, hourly, or by some other method? 64.7% (189) 25.7% (75) 2.7% (8) 6.8% (20) 18. Are you a long-haul or short-haul driver? 79.0% (230) 7.2% (21) Both long haul and short haul 13.7% (40) 19. Are you an individual or team driver? 88.0% (257) 11.3% (33) 0.7% (2) - Submit to crrier within 1(ONE CALENDAR DAY - 24 HOURS) ORIGINAL DUPLICATE - Driver retin possssion for eight d(TOTAL MILES DRIVING TODAY) VEHICLE NUMBERS - (SHOW EACH UNIT) (NAME OF CARRIER OR CARRIERS) (DRIVER’S SIGNATURE IN FULL) (MAIN OFFICE ADDRESS) (NAME OF CO-DRIVER) According to FMCSA, the regulations do not say what a log form must look like. However, it must include a 24-hour graph grid, in accordance with regulations, and the following information on each page, according to the agency: Date: Drivers must write down the month, day, and year for the beginning of each 24-hour period. (Multiple consecutive days off duty may be combined on one log page, with an explanation in the “Remarks.”) Total miles driving today: Drivers must write down the total number of miles driven during the 24-hour period. Motor coach/bus number: Drivers must write down either the vehicle number(s) assigned by their company, or the license number and licensing state for each truck (and trailer, if any) driven during the 24-hour period. Name of carrier: Drivers must write down the name of the motor carrier(s) they are working for. If drivers work for more than one carrier in a 24-hour period, they must list the times they started and finished work for each carrier. Main office address: Drivers must write down their carrier’s main office address. Signature: Drivers must certify that all of their entries are true and correct by signing their log with their legal name or name of record. Name of co-driver: Drivers must write down the name of their co-driver, if they have one. Time base to be used: Drivers must use the time zone in effect at their home terminal. Even if they cross other time zones, they must record time as it is at their terminal. All drivers operating out of their home terminal must use the same starting time for the 24-hour period, as designated by their employer. Total hours: Drivers must add and write down the total hours for each duty status at the right side of the grid. The total of the entries must equal 24 hours (unless you are using one page to reflect several consecutive days off duty). Remarks: This is the area where drivers must list the city, town, or village, and state abbreviation when a change of duty status occurs. Drivers should also explain any unusual circumstances or log entries that may be unclear when reviewed later, such as encountering adverse driving conditions. Shipping document number(s), or name of shipper and commodity: For each shipment, drivers must write down a shipping document number (such as a charter order or a bus bill) or the name of the shipper and what they are hauling. Appendix IV: North American Standard Driver and Vehicle Inspection Levels An inspection that includes examination of driver’s license; medical examiner’s certificate and waiver, if applicable; alcohol and drugs; driver’s record of duty status as required; hours of service; seat belt; vehicle inspection report; brake system; coupling devices; exhaust system; frame; fuel system; turn signals; brake lamps; tail lamps; head lamps; lamps on projecting loads; safe loading; steering mechanism; suspension tires; van and open-top trailer bodies; wheels and rims; windshield wipers; and emergency exits on buses and hazardous materials requirements, as applicable. An examination that includes each of the items specified under the North American Standard Inspection. As a minimum, level II inspections must include examination of: driver’s license; medical examinees certificate and waiver, if applicable; alcohol and drugs; driver’s record of duty status as required; hours of service; seat belt; vehicle inspection report; brake system; coupling devices; exhaust system; frame; fuel system; turn signals; brake lamps; tail lamps; head lamps; lamps on projecting loads; safe loading; steering mechanism; suspension; tires; van and open-top trailer bodies; wheels and rims; windshield wipers; emergency exits on buses; and hazardous materials requirements, as applicable. It is contemplated that the walk-around driver/vehicle inspection will include only those items that can be inspected without physically getting under the vehicle. A roadside examination of the driver’s license, medical certification and waiver, if applicable; driver’s record of duty status as required; hours of service; seat belt; vehicle inspection report; and hazardous materials requirement, as applicable. Inspections under this heading typically include a one-time examination of a particular item. These examinations are normally made in support of a study or to verify or refute a suspected trend. An inspection that includes each of the vehicle inspection items specified under the North American Standard Inspection (level I), without a driver present, conducted at any location. An inspection for select radiological shipments, which include inspection procedures, enhancements to the level I inspection, radiological requirements, and the enhanced out-of-service criteria. Select radiological shipments include only highway route controlled quantities as defined by title 49 section 173.403 and all transuranics. In addition to the name above, key contributors to this report were Sara Vermillion (Assistant Director), Amy Abramowitz, Richard Bulman, Lauren Calhoun, Delwen Jones, Sara Ann Moessbauer, Joshua Ormond, Tim Schindler, Elizabeth Wood, and Adam Yu.

The interstate commercial motor carrier industry moves thousands of truckloads of goods every day, and any disruption in one truckload's delivery schedule can have a ripple effect on others. Some waiting time at shipping and receiving facilities--commonly referred to as detention time--is to be expected in this complex environment. However, excessive detention time could impact the ability of drivers to perform within federal hours of service safety regulations, which limit duty hours and are enforced by the Federal Motor Carrier Safety Administration (FMCSA). This report discusses: (1) How regularly do truck drivers experience detention time and what factors contribute to detention time? (2) How does detention time affect the commercial freight vehicle industry? (3) What federal actions, if any, could be taken to address detention time issues? GAO analyzed federal and industry studies and interviewed a nongeneralizable sample of truck drivers, as well as other industry stakeholders and FMCSA officials. While there are no industry-wide data on the occurrence of detention time, GAO interviews with over 300 truck drivers and a number of industry representatives and motor carrier officials indicate that detention time occurs with some regularity and for a variety of reasons. About 59 percent of interviewed drivers reported experiencing detention time in the past 2 weeks and over two-thirds reported experiencing detention time within the last month. Drivers cited several factors that contribute to detention time. About 43 percent of drivers identified limitations in facilities, such as the lack of sufficient loading and unloading equipment or staff. These limitations can occur when facilities overschedule appointments, creating a backlog of vehicles. Another factor cited by about 39 percent of drivers was the product not being ready for shipment. Other factors include poor service provided by facility staff, facility scheduling practices that may encourage drivers to line up hours before the facility opens, and factors not under the control of the facility, such as drivers filing paperwork incorrectly. Some facilities are taking steps to address these factors, such as using appointment times. Detention time can result in reduced driving time and lost revenue for drivers and carriers. For those drivers that reported previously experiencing detention time, about 80 percent reported that detention time impacts their ability to meet federal hours of service safety requirements--a maximum of 14 hours on duty each day, including up to 11 hours of driving--by reducing their available driving time. About 65 percent of drivers reported lost revenue as a result of detention time from either missing an opportunity to secure another load or paying late fees to the shipper. Some practices can mitigate these economic impacts, such as charging detention time fees and developing relationships with facilities so drivers become familiar with a facility's process. According to industry representatives, carrier companies are better positioned than independent owner operators to use such practices and are better able to handle logistical challenges that may result from detention time. While FMCSA collects data from drivers during roadside inspections, which provide information on the number of hours of service violations, the agency currently does not collect--nor is it required to collect--information to assess the extent to which detention time contributes to these violations. Agency officials stated that FMCSA does not identify the factors that contribute to hours of service violations, and detention time could be just one of many factors. To date, FMCSA research has focused on an overview of freight movement, but not the extent to which detention time occurs or how it may impact hours of service violations. FMCSA plans to conduct a 2012 study to better understand the extent to which detention time occurs. Obtaining a clearer industry-wide picture about how detention time contributes to hours of service violations could help FMCSA determine whether additional federal action might be warranted. However, any additional federal actions to address issues associated with detention time beyond hours of service would require careful consideration to determine if any unintended consequences may flow from federal action to regulate detention time. GAO recommends that FMCSA examine the extent to which detention time contributes to hours of service violations in its future studies on driver fatigue and detention time. We provided a draft of this report to DOT for review. DOT officials provided technical comments, which we incorporated into the report, as appropriate.

You are an expert at summarizing long articles. Proceed to summarize the following text: The FHLBank System was established in 1932 and consists of 12 FHLBanks (see fig. 1). Member financial institutions, which typically are commercial banks and thrifts (or savings and loans), cooperatively own each of the 12 FHLBanks. To become a member of its local FHLBank, a financial institution must maintain an investment in the capital stock of the FHLBank in an amount sufficient to satisfy the minimum investment required for that institution in accordance with the FHLBank’s capital plan. In addition to the ability to obtain advances, other benefits of FHLBank membership for financial institutions include earning dividends on their capital investments and access to various products and services, such as letters of credit and payment services. As of December 31, 2009, more than 8,000 financial institutions with approximately $13 trillion in assets were members of the FHLBank System. The FHLBank System’s total outstanding advances stood at more than $631 billion. As established by statute and FHFA regulations, the FHLBanks are required to develop and implement collateral standards and other policies to mitigate the risk that member institutions may default on outstanding advances. To help do so, the FHLBanks generally apply a blanket lien on all or specific categories of a member’s assets to secure the collateral underlying the advance. In general, a blanket lien agreement is intended to fully protect the FHLBank by securing its right to take and possibly sell any or all of a member’s assets in the event it fails or defaults on its outstanding advances. In limited circumstances, FHLBanks may permit or require their members to pledge collateral under (1) a listing (specific detail) lien agreement in which the members are to report detailed information, such as the loan amount, payments, maturity date, and interest rate for the loans pledged as collateral; or (2) a delivery lien agreement, in which members are required to deliver the collateral to the FHLBank or an approved safekeeping facility. From a member’s perspective, the benefits of listing collateral in lieu of a blanket lien agreement can include better pricing terms. Some FHLBanks may require members to list or deliver collateral to better protect their financial interests in instances in which a member is in danger of failure or its financial condition begins to deteriorate. FHLBanks also seek to manage risk and mitigate potential losses by applying varying haircuts, or discounts, to collateral pledged to secure advances. To illustrate: suppose that an FHLBank member sought to pledge a single-family residential mortgage loan portfolio with a value of $100 million to secure an advance from its district FHLBank. If the FHLBank applied a haircut of 25 percent to such collateral, the member would generally be able to secure advances of up to $75 million subject to other risk-management policies the FHLBank may have established. In general, the FHLBanks’ haircut levels tend to increase based on the perceived risks associated with the collateral being pledged. As described in this report, single-family mortgages and other forms of traditional collateral generally are perceived as representing less risk than alternative forms of collateral, such as agricultural and small business loans. Since FHLBanks generally issue advances under blanket lien agreements, they may calculate a member’s total borrowing capacity by applying varying haircuts to each form of eligible collateral on the member’s books and communicating this information to the member on a periodic basis. In the event that a member institution fails, FHLBanks have a “first lien” on its assets. That is, they have priority over all other creditors, including FDIC, to obtain the collateral necessary to protect against losses on their outstanding advances. In a typical bank or thrift failure, FDIC pays off outstanding FHLBank advances in full and takes possession of the collateral on the institution’s books to help offset its losses. According to the FHLBank Office of Finance, in the 78-year history of the FHLBank System, no FHLBank has ever suffered a credit loss on an advance. The FHLBanks’ haircuts and other risk management policies are intended to mitigate potential losses; however, they also may limit some members’ interest in obtaining advances. For example, an FHLBank member may perceive that the level of haircuts applied to the collateral it pledges may unduly restrict the amount of financing it would like to obtain through advances. Administrative and other costs associated with obtaining advances also may factor into an FHLBank member’s decision making process. For example, FHLBank officials conduct on-site inspections to assess members’ collateral management practices or require members to have such practices independently audited. For some FHLBank members, the costs of such administrative procedures may outweigh the potential benefits of obtaining advances, particularly if they view the haircuts applied to the collateral as unreasonable. While the FHLBank System’s primary mission over the years has been to promote housing finance generally through its advance business, it is also required by statute and regulation to meet other specific mission requirements. For example, FIRREA authorizes both the Affordable Housing Program (AHP) and the Community Investment Program (CIP) to assist the FHLBanks’ affordable housing mission. Under AHP, each FHLBank is required to set aside 10 percent of its previous year’s earnings to fund interest rate subsidies on advances to members engaged in lending for long-term, low- and moderate-income, owner-occupied, and affordable rental housing at subsidized interest rates. In using the advances, the FHLBank members are to give priority to qualified projects, such as the purchase of homes for low- or moderate-income families or to purchase or rehabilitate government-owned housing. FIRREA also established CIP, which requires FHLBanks to provide flexible advance terms for members to undertake community-oriented mortgage lending. CIP advances may be made at the FHLBank’s cost of funds (for advances with similar maturities) plus the cost of administrative fees. Moreover, FIRREA requires FHFB (now FHFA) to establish standards of community investment or service for members of FHLBanks to maintain continued access to long-term advances. These standards include the development of a Targeted Community Lending Plan (which is designed to help the FHLBanks assess the credit needs of the communities that they serve) and quantitative lending goals that address identified credit needs and marketing opportunities in each FHLBank’s district. FHFA has safety and soundness and mission oversight for the FHLBank System and Fannie Mae and Freddie Mac. For example, FHFA is responsible for ensuring that the FHLBanks establish appropriate collateral management policies and practices to mitigate the risks associated with their advance business. From a mission standpoint, FHFA also is responsible for ensuring that the FHLBanks are in compliance with statutes and regulations pertaining to the AHP and CIP programs. While GLBA does not establish specific requirements for alternative collateral, its legislative history suggests that the FHLBanks and FHFB, and by extension FHFA, should prioritize the FHLBank System’s economic development activities through the use of alternative collateral. To carry out its responsibilities, FHFA may issue regulations, establish capital standards, and conduct on-site safety and soundness or mission-related examinations. FHFA also may take enforcement actions, such as issuing cease and desist orders, and may place an FHLBank, Fannie Mae, or Freddie Mac into conservatorship or receivership if they become undercapitalized or critically undercapitalized. Officials from the 12 FHLBanks cited several factors to help explain the minimal use of alternative collateral to secure advances in the FHLBank System. These factors include a potential lack of interest among many CFI members; the view that many CFIs belong to the FHLBank System primarily to have access to letters of credit and other products or to obtain a backup source of liquidity; and that many CFIs may have sufficient holdings of traditional collateral to secure advances. Moreover, due to the potential risks associated with alternative collateral, the 10 FHLBanks that accept it have established risk-management strategies to mitigate potential losses, which also may limit its use. In particular, the FHLBanks generally have applied higher haircuts to alternative collateral than to any other type of collateral used to secure advances. Officials from many of the 30 CFIs we interviewed said that they valued their relationships with their local FHLBanks and the products and services provided. However, officials from half of these CFIs expressed concerns about the level of the haircuts applied to alternative collateral or other FHLBank risk-management strategies. In some cases, they said the haircuts or policies limited their willingness to pledge such collateral to obtain advances. According to representatives from the 12 FHLBanks, they have ongoing member outreach programs that are intended, in part, to address members’ credit and collateral needs and the various products available to them. The FHLBank officials said that outreach activities can include telephone calls or visits to members to discuss the availability of alternative collateral and its potential use by CFI members. Some FHLBanks also have annual meetings, online product tutorials, and electronic bulletins that provide information about alternative collateral. While officials from the 12 FHLBanks said they had outreach programs in place, some officials cited the significant differences in the membership characteristics across the FHLBank System as affecting the use of alternative collateral (see table 1). For example, CFIs represent more than 80 percent of the membership and about 30 percent of the assets of the FHLBanks in Dallas and Topeka, and many of these CFI members focus on agricultural lending due to its prominence in the regional economies. While CFI assets represented a relatively small proportion, or 13 percent, of the total assets of members in the Des Moines FHLBank district, officials said that alternative collateral was of significant interest to their members due to the prominence of agricultural-related businesses in the district. In contrast, CFI assets represented a relatively small portion, or less than 10 percent, of all membership assets in the FHLBank districts of Atlanta and New York, neither of which have submitted new business activity notices to FHFA requesting approval to accept alternative collateral; and the FHLBank of Cincinnati reported no alternative collateral activity at year-end 2008. Officials from these three FHLBanks said that their memberships had not expressed an interest in pledging alternative collateral. Similarly, although CFI membership and assets also were relatively significant in the Chicago FHLBank district, officials said that their membership had not expressed much interest in using alternative collateral to secure advances. One FHLBank official noted that, given the cooperative nature of the FHLBank System, membership interest often drove the decision to make certain products and services available. Officials from several FHLBanks also said that CFIs often do not take out advances from their local FHLBank and, therefore, have no reason to use alternative collateral. Rather than taking out advances, several FHLBank officials said many CFIs derive other benefits from their membership, particularly letters of credit, and other services. The officials added that CFIs also may belong to the FHLBank System to have a backup source of liquidity in case other sources, including customer deposits or the federal funds market become unavailable or prohibitively expensive. According to some FHLBank officials, many CFIs may have sufficient traditional collateral, such as single-family mortgages and investment- grade securities, to secure advances. Officials at the FHLBanks of Boston, Cincinnati, and Pittsburgh said that they reported no or low levels of alternative collateral securing advances at year-end 2008, in part, because their members had sufficient levels of other eligible collateral. Atlanta and New York FHLBank officials said that they conducted regular analyses to determine whether any banks in their membership were collaterally constrained and, therefore would need alternative collateral to obtain an advance. Officials at these banks said since 2000, their annual analyses have determined that alternative collateral was not needed among their membership. Our analysis of FHFA, FDIC, and SBA’s Office of Advocacy data found that while most CFIs may have sufficient traditional sources of collateral to secure advances, a considerable minority of CFIs with significant holdings of alternative collateral on their books may face challenges in doing so. For example, we identified 480 CFIs with $47.3 billion in assets, as of December 31, 2009, that met the FDIC’s definition of an agricultural bank (see table 2). The FHLBanks of Des Moines and Topeka had the most agricultural CFI members and the CFIs in these two districts had the greatest amount of total assets for such lenders. Using SBA’s Office of Advocacy data we also found 326 CFIs with $102.3 billion in assets, as of September 30, 2009, that were identified as the largest small business lenders (see table 3). The number and assets of small business CFIs appeared to be more evenly distributed across the FHLBank System than agricultural CFIs. We interviewed a limited sample of 30 representatives from these agricultural and small business CFIs and discuss their perspectives on FHLBank alternative collateral policies and practices later in this report. FHFA and some FHLBank officials said that alternative collateral generally has been viewed as representing greater risks than single-family mortgages and investment-grade securities. For example, FHFA officials said that it could be difficult to establish a value for agricultural and small business loans because they generally have not been actively traded in secondary markets. In the absence of secondary markets, alternative collateral may be relatively illiquid, which means an FHLBank might face difficulties in selling such underlying collateral if a CFI failed or defaulted on its advance. As described earlier, FDIC generally pays the FHLBank the principal balance of the outstanding advances of failed members and takes possession of the underlying collateral. However, FDIC may not always follow this procedure in future bank failures and the possibility of a CFI defaulting on a loan or failing would put the FHLBank at a risk of losses, as it might be unable to sell the alternative collateral in a timely manner. In contrast, FHLBanks generally can more easily estimate values for traditional collateral because mortgages often are pooled into securities and actively traded on secondary markets. In the event a member failed or defaulted on its outstanding advances, the FHLBanks generally would be able to sell the underlying collateral that secured the mortgages or securities. In a previous report, we commented on the challenges associated with establishing values for small business loans as compared with single- family mortgage loans. Unlike mortgage lending, small business loans exhibit greater heterogeneity and more complexity. For example, although mortgage lending has become more complicated in recent years, the type of financing that prospective homebuyers seek remains fairly standardized (two general categories—fixed- or variable-rate loans) and the collateral securing mortgages, generally single-family residences, is relatively easy to understand and market. In contrast, the types of financing that small businesses typically seek can range from revolving lines of credit to term loans, and the collateral pledged against such loans also may vary widely in risk and marketability (from relatively secure real estate to less secure inventory). The 10 FHLBanks that accept alternative collateral have adopted risk- management policies intended to mitigate the perceived risks of such collateral, but which also may limit its appeal to CFIs. These FHLBanks generally apply higher haircuts to alternative collateral than to any other type of collateral that may be used to secure advances. As shown in table 4, the haircuts, or range of haircuts, that the FHLBanks apply to alternative collateral generally have been higher than for traditional forms of collateral, such as single-family mortgages or commercial real estate loans. The maximum haircut applied by an FHLBank to alternative collateral is 80 percent under a blanket lien policy, which generally means that the member could take out an advance of up to 20 percent of the value of such collateral, whereas the maximum haircut applied to commercial real estate collateral is 67 percent. Over the years, commercial real estate has been viewed as a potentially risky type of asset that has resulted in significant bank losses and numerous bank failures. The haircuts that the FHLBanks apply to alternative collateral can vary significantly. For example, the haircut on small business loans ranges from 40 to 80 percent. In contrast, two FHLBanks apply a uniform 50 percent haircut to all three types of alternative collateral (see table 4). We discuss the extent to which the FHLBanks have an analytical basis for the haircuts applied to alternative collateral later in this report. Some FHLBanks also maintain other collateral policies designed to mitigate the perceived risks associated with alternative collateral. For example, the FHLBanks have established borrowing capacity limits to further minimize the risks associated with making advances and generally apply them to all members. However, some FHLBanks have established more stringent borrowing limits for members pledging alternative collateral. For example, in addition to applying haircuts of more than 50 percent, one FHLBank limits the amount of alternative collateral that a member may pledge to 20 percent of the member’s total assets. One FHLBank sets the limit at 10 percent, in addition to its 50 percent haircut. In contrast, most other FHLBanks’ policies set borrowing capacity rates from 30 to 55 percent for members. While many CFIs may have significant traditional collateral resources to pledge to secure advances, we conducted interviews with 30 CFIs that could be constrained in their ability to obtain FHLBank advances due to their significant involvement in agricultural or small business lending. Most of the CFIs in our sample said that they valued the products and services they received from their local FHLBank. Officials from many of the CFIs said that FHLBank membership provided their institutions with access to a stable and relatively low-cost source of liquidity or provided access to a key source of backup liquidity, among other things. Officials from several CFIs that have significant concentrations in agricultural loans said that their ability to pledge such loans as collateral helped them to obtain advances and thereby expand their lending activities, because the advances generally allowed CFIs to provide borrowers with long-term financing on favorable terms. To some degree, the results from our interviews with officials from the 30 CFIs were consistent with rationales offered by FHLBank and FHFA officials about the minimal use of alternative collateral in the FHLBank System. Officials from 15 of the 30 CFIs we interviewed said that they had pledged alternative collateral to help secure FHLBank advances and officials from all but one of these reported having advances outstanding (see table 5). Officials from the other 15 CFIs said they had not used alternative collateral to secure an advance because, for example, they generally had sufficient traditional collateral to secure advances or sufficient levels of other sources of liquidity, such as customer deposits, to finance their lending activities (see table 5). As discussed previously, FHLBank officials have stated that readily available traditional collateral is one reason that many CFIs have not pledged alternative collateral to obtain advances. However, officials from 15 of the 30 CFIs we interviewed expressed concern about the haircuts applied to alternative collateral or other FHLBank policies that may limit its appeal and use. Of these 15 CFIs, officials from 11 specifically expressed concern about the level of haircuts. These officials, some of whom had not yet pledged alternative collateral to secure an advance, said that their local FHLBank’s large haircuts were a factor in their banks’ decision not to pledge alternative collateral. Some of the officials also said that their local FHLBank’s haircuts were not consistent with historical losses on small business, small farm, or small agribusiness loans. Officials from 4 of the 15 CFIs expressed concern about other FHLBank policies unrelated to haircuts, which included limitations on the types of alternative collateral accepted by some FHLBanks and limits on borrowing that some FHLBanks apply to alternative collateral. For example, an official from an agricultural CFI with $56 million in total assets said that its local FHLBank has a policy that limits the amount of an advance a CFI member could obtain using alternative collateral to 10 percent of total assets. The official characterized the policy as highly restrictive, particularly for a small agricultural lender. The FHLBank to which this lender belongs permits non-CFI members using traditional collateral to secure an advance to borrow up to 35 percent of their total assets. While FHFB held a conference in 2005 on the use of alternative collateral which may have focused the FHLBanks’ attention on the issue, regulatory oversight of the FHLBanks’ policies and practices for such collateral, from a mission standpoint, has been limited. For example, FHFA examiners have not been routinely directed to assess the FHLBanks’ analytical basis for the haircuts on alternative collateral, although they are directed to do so for traditional forms of collateral. In the absence of regulatory oversight, the FHLBanks have exercised wide discretion in establishing policies and practices pertaining to alternative collateral over the years. Although the FHLBanks may view these policies and practices as necessary to protect their financial soundness, our review also indicates that many FHLBanks have not substantiated through documentation the analytical basis for such policies, including establishing the haircut levels. Available FHLBank documentation suggests that some haircuts applied to alternative collateral may need to be lowered and others raised. Moreover, a majority of the FHLBanks have not established quantitative performance goals for products, related to agricultural and small business lending in their strategic business plans, which could include alternative collateral, as required by agency regulations. Additionally, the FHLBanks are not required to identify and address agricultural and small business financing needs in their communities, including potential uses for alternative collateral, through a process of market analysis and consultations with stakeholders as they are required to do by FHFA regulations for their Targeted Community Development Plans, which agency officials said largely pertain to the AHP and CIP programs. FHFA officials said they have not focused oversight efforts on alternative collateral policies and practices because its minimal use within the FHLBank System does not represent a safety and soundness concern. But, without more proactive oversight by FHFA from a mission standpoint, the appropriateness of FHLBank alternative collateral policies may not be clear. While FHFA examination guidance does not require reviews of FHLBank alternative collateral policies and practices, it does include procedures related to general collateral management policies and practices. For example, examiners are expected to assess whether each FHLBank has addressed appropriate levels of collateralization, including valuation and collateral haircuts. According to FHFA officials, at every examination an examiner will review documentation of the FHLBanks’ general collateral valuation and haircut analyses, and any available underlying financial models. Our review of FHFB and FHFA examinations of each of the 12 FHLBanks over the past three examination cycles confirmed that examiners did not address the FHLBanks’ alternative collateral management policies and practices. However, consistent with the examination guidance, the examinations did include analysis of the FHLBanks’ general collateral policies and practices. For example, FHFA examiners noted that one FHLBank did not regularly review its collateral haircuts and that the current haircuts had not been validated by well-documented analyses. Examiners also found that another FHLBank disregarded the results of a collateral valuation model to establish haircuts for certain members without sufficient analysis to support the decision. FHFA officials we contacted said that due to mounting concerns about the FHLBanks’ safety and soundness in 2009, the agency conducted a focused review of the FHLBanks’ collateral management practices, including valuation and haircut methodologies. They also noted that they have been monitoring the FHLBanks’ progress in responding to examiners’ recommendations to improve documentation of their general collateral haircut policies. FHFA guidance also includes procedures for assessing the FHLBanks’ compliance with other mission-related programs. Specifically, the examination guidance includes procedures for assessing the FHLBanks’ implementation of the AHP and the CIP programs. As established by FHFA guidance, examiners should assess the effectiveness of these programs at each FHLBank and whether program operations were consistent with the laws and policies that govern them. For example, the examination guidance indicates that examiners should evaluate the reasonableness of fees associated with these programs, whether the FHLBank has met its established community lending goals, and the extent to which the projects funded by the programs benefited eligible targeted businesses or households. Our review found that the examinations generally included sections that assessed the FHLBanks’ implementation of AHP and CIP programs. FHFA officials cited several reasons why the agency’s examination procedures and practices did not specifically address alternative collateral. First, they said that the use of alternative collateral was minimal and did not represent a significant safety and soundness concern. Because single-family mortgages, investment-grade securities, and commercial real estate loans represent the vast majority of member assets that are pledged to secure advances, FHFA officials said that they have focused their examination resources on them. They wanted to ensure that the FHLBanks have established adequate policies and procedures for managing such collateral, including the analytical basis for the haircuts applied to it, and the mitigation of potential losses. Furthermore, FHFA officials said important differences between alternative collateral and other mission-related programs, such as the AHP program, explained the differences in the agency’s oversight approaches. They said that FIRREA establishes specific requirements for how the AHP program is to be funded and implemented. For example, the statute establishes the level of annual contribution from each FHLBank to fund their AHP programs as well as minimum requirements for the FHLBanks’ mandated AHP implementation plans. In contrast, FHFA officials said GLBA only authorizes the FHLBanks to accept alternative collateral to secure advances, and does not establish specific requirements for operating the program that could be assessed through examinations. While FHFA may prioritize FHLBank safety and soundness concerns and the structure of the AHP and CIP programs may facilitate their oversight from a mission standpoint, FHFA’s, as well as FHFB’s, limited oversight of alternative collateral may have limited its appeal within the FHLBank System. By not implementing examination procedures that are consistent with its general approaches to monitoring FHLBank collateral practices, FHFA has provided the FHLBanks with wide discretion in adopting policies and practices for alternative collateral. Although the FHLBanks may have adopted policies that they believe are necessary to protect their financial interests while complying with their missions, our work indicates that the analytical bases for these generally have not been fully documented. Although federal internal control standards established that key decisions need to be documented, one of the two FHLBanks that has not accepted alternative collateral provided a documented basis for its policy. Further, of the 10 FHLBanks that accept alternative collateral, 3 provided documentation of the basis of the haircuts that they applied to such collateral. Analysis from 2 FHLBanks suggested that their haircuts for all types of alternative collateral were too high and 1 FHLBank subsequently revised the haircuts downward by an average of about 11 percentage points. The other FHLBank’s analysis suggested that the haircuts it applied to agricultural collateral might be too high, while the haircuts for small business collateral might be too low. Of the 7 FHLBanks that did not provide any documentation of their alternative collateral haircuts, officials from 3 said they have not documented such analysis and the other 4 did not respond to our requests. An official from 1 of the FHLBanks that has not established documentation for its alternative haircuts said they had been set at a level to be “conservative.” As discussed previously, FHFA guidance directs examiners to assess the analytical basis for the haircuts applied to other forms of collateral. We also analyzed FDIC data on the estimated losses on various loan categories in banks that failed or were on the verge of failure between January 2009 and February 2010, which raises some questions and reinforces the need for further analysis of the risks associated with alternative collateral. Prior to a bank’s failure, FDIC contractors conduct on-site reviews to assess the value (defined as the estimated market value of the loans as a percentage of the outstanding balances) of the assets held by the bank to calculate how much the failure will cost the Deposit Insurance Fund. According to FDIC officials, estimates are made on the value of the loans of such banks, including single-family residential loans, residential and nonresidential construction loans, consumer loans, business loans, and agricultural loans. According to the FDIC data, the estimated value of agricultural loans was higher than the value of any other type of loan reviewed. Our discussions with several agricultural CFIs and reviews of some regulatory and independent reports also suggest that the U.S. agricultural economy has performed somewhat better than the broader economy in recent years, which may explain why such collateral recently may have outperformed other types of loans as suggested by FDIC data. Furthermore, while the commercial and industrial loans category (which includes small business loans) had a lower estimated value than the agricultural, consumer, and single-family mortgage loan categories, according to the FDIC’s asset valuation estimates, it had a higher estimated value than the nonresidential and residential construction loan categories. However, important limitations apply to any analysis of these FDIC data. First, because the data only cover recent bank failures or near failures, they do not provide a historical basis to assess the relative risk of the various loan types. Many banks have failed recently primarily due to substantial losses on residential mortgages and commercial real estate loans, of which each has experienced significant price declines. Second, the analysis does not control for any other factors that may be related to FDIC’s asset valuation estimates, such as the characteristics of the loans made by the banks. Nevertheless, these data raise questions about the FHLBanks’ analytical basis for the haircuts that are currently applied to alternative collateral as well as the need for FHFA to routinely review the basis for these policies from a mission standpoint to help ensure that they are not unduly limiting the use of such collateral to secure advances. In 2000, FHFB issued regulations, which remain in effect today, that require each FHLBank’s board of directors to adopt a strategic business plan that describes how the business activities of the FHLBank will achieve its mission. As part of the strategic business plan, FHLBanks must establish quantitative performance goals for products related to multifamily housing, small business, small farm, and small agribusiness lending. Such products could include advances to CFIs that are secured by alternative collateral. As part of its mission oversight responsibilities, FHFA is responsible for ensuring that the FHLBanks comply with these annual goal requirements in establishing their plans. Our review indicates that the strategic business plans of five FHLBanks do not include such goals. While the remaining seven FHLBanks have established goals for alternative collateral lending, three have set goals at zero. The four FHLBank strategic business plans that include the required goals establish annual benchmarks for the number or dollar amount of advances made to members for the purpose of lending to small businesses, small farms, and small agribusinesses. FHFA officials said that lending goals for alternative collateral are not part of its planned review of FHLBanks’ 2010 strategic business plans. In the absence of vigorous oversight and enforcement by FHFA, many FHLBanks may continue to place a low priority on requirements that they establish quantitative annual goals for products related to agricultural and small business lending, which could include advances secured by alternative collateral. According to FHFA officials, the regulation pertaining to the AHP and CIP programs requires the FHLBanks to develop annual Targeted Community Lending Plans to address identified credit needs and market opportunities for targeted community lending in their districts. To develop these plans, FHLBanks are to consult with members, economic development organizations, and others, and establish quantitative community lending goals. FHLBanks also must conduct market research to ascertain their district’s economic development needs and opportunities. The regulator then uses the Targeted Community Lending Plans to help determine the extent to which FHLBanks have achieved their mission to provide community and economic development opportunities in their districts. Although FHFA’s regulation that requires the establishment of Targeted Community Lending Plans may provide a means for the FHLBanks to identify lending and economic development needs within their communities and respond accordingly, it does not specifically require the FHLBanks to analyze small business and agricultural lending needs or opportunities for the use of alternative collateral. According to FHFA officials, this is because the regulation pertains specifically to the AHP and CIP programs. Given that FHFA does not require the FHLBanks to include an assessment of opportunities to use alternative collateral to support small business and agricultural lending in their Targeted Community Lending Plans, such plans generally have not addressed such issues. One FHLBank’s Targeted Community Lending Plan—that of the FHLBank of Indianapolis—did discuss issues pertaining to agricultural and small business lending. Specifically, the plan for 2010 stated that the Bank intends to increase its small business, small farm, or small agribusiness lending by 5 percent in the next year. While FHFA officials told us that the regulation that requires the FHLBanks to develop Targeted Community Lending Plans does not pertain to alternative collateral, we note that the general process involved in creating the plans is potentially beneficial in that it calls on the FHLBanks to review relevant information and consult with stakeholders in their communities to identify and address relevant lending needs. A similar process—through revisions to FHFA’s regulations pertaining to Targeted Community Lending Plans, or strategic business plans, or other measures as appropriate—that would require the FHLBanks to assess agricultural and small business lending needs as well as opportunities to use alternative collateral, could better focus their attention on potential opportunities and strategies to enhance such financing. GLBA’s inclusion of new types of collateral for CFIs indicates that these types of available collateral should be taken in account when formulating strategies for the FHLBanks’ economic development efforts. However, the regulators’ limited oversight of FHLBank alternative collateral policies and practices over the years has provided the FHLBanks with wide discretion to establish risk-management policies, which although viewed as necessary to protect against potential losses may involve an off-setting trade-off. That is, they may unduly limit the appeal and use of alternative collateral. We have identified several areas of concern. In many cases the FHLBanks have not substantiated and documented their reasons for not accepting alternative collateral or applying relatively high haircuts to it. Available FHLBank documentation suggests that some alternative collateral haircuts may be too high; limited FDIC asset valuation estimates indicate that the risks associated with alternative collateral can vary over time; and 15 of the 30 CFI representatives we interviewed expressed concerns about haircuts applied to such collateral and other risk-management practices, some of whom said such policies and practices limited their willingness to use alternative collateral. In addition, because FHFA has not leveraged its existing examination procedures to include an assessment of the FHLBanks’ alternative collateral policies, the appropriateness of such policies may not be clear. Furthermore, FHFA has not ensured that all FHLBanks establish quantitative goals for products related to agricultural and small business lending, which could include alternative collateral, in their strategic business plans as required by the agency’s regulations. Finally, FHFA has not taken steps, such as revising its regulations pertaining to Targeted Community Development Plans, or strategic business plans, or other measures as may be appropriate, to follow a process whereby they conduct market analysis and consult with a range of stakeholders in their communities to identify and address agricultural and small business financing needs, including the use of alternative collateral. We recognize that FHFA has critical responsibilities to help ensure that the FHLBanks’ operate in a safe and sound manner, and has not focused on alternative collateral because it was not deemed a risk to safety and soundness. Nevertheless, the agency also has an obligation to take reasonable steps to help ensure that the FHLBank System is achieving the missions for which it was established, including economic development through the use of alternative collateral. We recommend that the Acting Director of FHFA take the following actions to help ensure that the FHLBanks’ economic development mission- related activities include the appropriate use of alternative collateral, as provided for in GLBA. Revise FHFA examination guidance to include requirements that its examiners periodically assess the FHLBanks’ alternative collateral policies and practices, similar to the manner in which other forms of collateral, such as single-family mortgages, are assessed. Specifically, FHFA should revise its guidance to ensure that examiners periodically assess the FHLBanks’ analytical basis for either (1) not accepting alternative collateral, or (2) establishing their haircuts and other risk-management policies for such collateral. Enforce regulatory requirements that the FHLBanks’ strategic business plans include quantitative performance goals for products related to agricultural and small business financing, including the use of alternative collateral as appropriate. Consider requiring the FHLBanks, through a process of market analysis and consultations with stakeholders, to periodically identify and address agricultural and small business financing needs in their communities, including the use of alternative collateral. Such requirements could be established through revisions to FHFA’s regulations for Targeted Community Development Plans or strategic business plans or through other measures as deemed appropriate. We provided a draft of this report to FHFA for its review and comment. We received written comments from FHFA’s Acting Director, which are reprinted in appendix II. In its comments, FHFA expressed certain reservations about the analysis in the draft as discussed below, but agreed to implement our recommendations. Specifically, FHFA stated that the agency would (1) review each FHLBank’s policies and practices, starting with the 2011 annual supervisory examination cycle, to assure that they can substantiate their collateral practices and are meeting their CFI members’ liquidity needs; (2) issue an Advisory Bulletin to the FHLBanks that provides supervisory guidance on how to include goals for alternative collateral in the preparation of FHLBank strategic business plans beginning in 2011, and review those plans to ensure they include such goals; and (3) direct the FHLBanks to document their outreach and alternative collateral needs assessment efforts in their strategic business plans, and instruct examiners to monitor the FHLBanks’ efforts in these areas as part of the agency’s ongoing supervisory review. FHFA also provided technical comments, which we incorporated as appropriate. In commenting on the draft report, FHFA said that it has no evidence that any CFI member is collaterally constrained and unable to access advances as a result of the FHLBanks’ collateral risk management practices. FHFA also said that it has no evidence that any issues discussed in the draft report have resulted in or contributed to a lack of liquidity for small farm, agriculture, and small business lending. In addition, FHFA noted that in many cases, CFI members obtain sufficient liquidity by pledging real estate-related collateral and, therefore, CFI members’ ability to obtain an advance is not limited by the type of collateral they have. While our draft report noted that most CFIs may not be collaterally constrained, we identified nearly 800 CFIs, constituting about 13 percent of all CFIs, that may face challenges in obtaining an advance using traditional collateral because they have substantial amounts of small business and agricultural collateral on their books. Further, we interviewed a nongeneralizable sample of 30 of these CFIs and found that half of them expressed concerns with FHLBank haircuts and other policies related to alternative collateral. Several CFIs said that the haircuts applied to alternative collateral were a factor in their decision not to pledge alternative collateral to secure an advance. In agreeing to implement the recommendations, FHFA will have the information necessary to help assess the extent to which CFIs may face challenges in obtaining financing as well as the appropriateness of FHLBank alternative collateral policies and practices. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to other interested congressional committees and to the Acting Director of the Federal Housing Finance Agency. 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 regarding this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. The objectives of this report were to (1) discuss factors that may limit the use of alternative collateral to secure Federal Home Loan Bank (FHLBank) advances; and (2) assess selected aspects of the Federal Housing Finance Agency’s (FHFA) oversight of the FHLBanks’ alternative collateral policies and practices. To address the first objective, we reviewed relevant sections of the Gramm-Leach-Bliley Act of 1999, the Housing and Economic Recovery Act of 2008, and FHLBank collateral policies and procedures, particularly those pertaining to alternative collateral. While we were able to review each FHLBank’s collateral policies and procedures, the confidentiality of such information limited what we could publicly disclose in our report. Specifically, because the collateral haircut policies of some of the FHLBanks generally are considered to be proprietary, we were unable to specify the policies of individual FHLBanks. Where appropriate, we used an alphabetic system when discussing FHLBank collateral policies and limited discussion of details to ensure the protection of the FHLBanks’ identities. We also conducted interviews with representatives from FHFA, the regulator of the FHLBank System; the 12 FHLBanks; the Council of Federal Home Loan Banks; the Independent Community Bankers of America; and obtained information from a nongeneralizable, random sample of 30 Community Financial Institutions (CFI). To develop the nongeneralizable, stratified random sample of 30 CFIs, we first identified the population of CFIs that may have limited sources of traditional collateral to secure FHLBank advances. To identify CFIs that may have relatively large volumes of agriculturally related loans on their books, we used the Federal Deposit Insurance Corporation’s (FDIC) definition of an agricultural bank; that is, a bank having 25 percent or more of its loans associated with agricultural lending. FHFA provided a list of 6,281 CFI members as of September 30, 2009—of which 470 met FDIC’s definition of an agricultural bank, meaning that they held at least 25 percent of their assets in agricultural loans. (We note that the report includes updated data on agricultural banks as of year-end 2009.) To identify CFIs that may have relatively large volumes of small business loans on their books, we used information from the Small Business Administration’s (SBA) Office of Advocacy. Specifically, because there is no similar threshold to define a small business lender, we used the SBA’s Office of Advocacy’s determination of the top 10 percent of small business lenders in each state to determine the small business sample population. We then matched and merged this list of institutions, by institution name, with FHFA’s list of CFI members. The resulting list included 326 small business CFIs and their total assets for each FHLBank district. The final sample population of agricultural and small business CFIs totaled 796. From this final sample population, we identified 10 lenders that met the definition of both an agricultural and small business CFI. We sampled this dual-status CFI population separately because of its potential to provide a unique perspective on alternative collateral in the FHLBank System. Our sample was stratified to ensure that it included the perspective of CFIs located in FHLBank districts that had (1) high, some, or no use of alternative collateral, as of year-end 2008; and, (2) banks that are very small, meaning less than $100 million in total assets. We defined an FHLBank as having had a “high” acceptance of alternative collateral if it accepted more than $500 million in alternative collateral in 2008; “some” acceptance if it accepted from $1 to $500 million in alternative collateral in 2008; and “no” acceptance if it accepted no alternative collateral ($0) in 2008. We then over sampled within each stratum to accommodate refusals to participate and randomly selected a nongeneralizable sample of 30 CFIs (see table 6). To obtain information from the CFIs in our sample, we used a Web-based protocol to conduct structured telephone interviews. The majority of responses, 29, were obtained by telephone; and 1 was obtained by e-mail. We used data from FHFA on the use of alternative collateral throughout the FHLBank System and information from our interviews with the 12 FHLBank representatives to develop our structured interview. We pretested the structured interview protocol and made revisions as necessary. Questions from the structured interview focused on the background and local economies of the CFIs, their use of products and services from their local FHLBank, and their views of and experience with pledging alternative collateral to obtain an advance from an FHLBank. The views expressed by representatives of the CFIs in our sample cannot be generalized to the entire population of all CFIs. To present details and illustrative examples regarding the information obtained from the CFI interviews, we analyzed the narrative (open-ended) and closed-ended responses and developed summaries. These summaries were then independently reviewed to ensure that original statements were accurately characterized. To assess the FHFA and FDIC data used in our analyses, we interviewed agency officials knowledgeable about the data. In addition, we assessed FHFA, FDIC, and SBA’s Office of Advocacy data for obvious outliers and missing information. To assess the accuracy of the SBA’s Office of Advocacy and FHFA data, we compared a sample of it against public information from the Federal Financial Institutions Examination Council’s Uniform Bank Performance Report, which is an analytical tool created for bank supervisory, examination, and management purposes and can be used to understand a bank’s financial condition. We determined that the data were sufficiently reliable for the purpose of this engagement. For the second objective, we reviewed FHFA’s examination policies and procedures and federal internal control standards, as well as a total of 23 FHFA and Federal Housing Finance Board (the FHFA predecessor) examinations covering each of the 12 FHLBanks over the past three examination cycles. We reviewed FHFA’s regulation pertaining to the development of strategic business plans and we reviewed 11 FHLBanks’ plans for 2010; and 1 plan submitted for 2009 because it was the most recently available for that FHLBank. Additionally, we reviewed FHFA’s regulation pertaining to the development of Targeted Community Lending Plans and we reviewed each of the 12 FHLBanks’ plans for 2010. We also discussed FHFA’s oversight program for alternative collateral with senior agency officials. Finally, we conducted limited analysis to gain a perspective on the level of FHLBank haircuts applied to alternative collateral. To do so, we obtained and reviewed documentation of analyses from 3 FHLBanks; the other 9 FHLBanks generally did not provide such documentation. Confidentiality considerations limited the amount of information we could disclose about the analyses from the 3 FHLBanks that provided documentation. We also obtained and analyzed data from FDIC on the estimated losses from banks that failed or were on the verge of failure, by various loan types, for the period January 2009 through February 2010. These data were obtained through asset specialists who were contracted by FDIC to review the asset portfolios of failed institutions and to develop anticipated loss rates, expressed as a percentage of outstanding loan balances, on the various categories of the banks’ asset portfolios. As discussed in this report, this approach has several important limitations, including not providing a historical basis for estimating the risks associated with alternative collateral over time or controlling for any other factors that may be related to the characteristics of the loans made by the banks. To assess the reliability of the FDIC data, we interviewed agency officials knowledgeable about the data. In addition, these data are corroborated by information from our CFI interviews and several independent reports which suggest that the agricultural sector has performed somewhat better than the broader economy in recent years. We determined that the data were sufficiently reliable for the purpose of this engagement, which was to understand the FHLBanks collateral haircuts relative to the recent performance of alternative collateral assets in the financial markets. We conducted this performance audit from October 2009 to July 2010, 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, Wesley M. Phillips, Assistant Director; Benjamin Bolitzer; Tiffani Humble; Ronald Ito; Fred Jimenez; Grant Mallie; Timothy Mooney; Linda Rego; Barbara Roesmann; Jerome Sandau; and Rebecca Shea made key contributions to this report.

The Federal Home Loan Bank System is a government-sponsored enterprise comprising 12 regionally-based Federal Home Loan Banks (FHLBank), the primary mission of which is to support housing finance and community and economic development. Each FHLBank makes loans (advances) to member financial institutions in its district, such as banks, which traditionally are secured by single-family mortgages. In 1999, the Gramm-Leach-Bliley Act (GLBA) authorized FHLBanks to accept alternative forms of collateral, such as agricultural and small business loans, from small members. GAO was asked to assess (1) factors that may limit the use of alternative collateral; and (2) selected aspects of the Federal Housing Finance Agency's, (FHFA) related regulatory oversight practices. GAO reviewed FHLBank policies and FHFA documentation; and interviewed FHLBank and FHFA officials, and a nongeneralizable random sample of 30 small lenders likely to have significant levels of agricultural or small business loans in their portfolios. FHLBank and FHFA officials cited several factors to help explain why alternative collateral represents about 1 percent of all collateral that is used to secure advances. These factors include a potential lack of interest by small lenders in pledging such collateral to secure advances or the view that many such lenders have sufficient levels of single-family mortgage collateral. Officials from two FHLBanks said their institutions do not accept alternative collateral at all, at least in part for these reasons. Further, FHLBank officials said alternative collateral can be more difficult to evaluate than single-family mortgages and, therefore, may present greater financial risks. To mitigate these risks, the 10 FHLBanks that accept alternative collateral generally apply higher discounts, or haircuts, to it than any other form of collateral, which may limit its use. For example, an FHLBank with a haircut of 80 percent on alternative collateral generally would allow a member to obtain an advance worth 20 percent of the collateral's value. While GAO's interviews with 30 small lenders likely to have significant alternative collateral on their books found that they generally valued their relationships with their local FHLBanks, officials from half said the large haircuts on alternative collateral or other policies limited the collateral's appeal. FHFA's oversight of FHLBank alternative collateral policies and practices has been limited. For example, FHFA guidance does not direct its examiners to assess the FHLBanks' alternative collateral policies. As a result, the FHLBanks have wide discretion to either not accept alternative collateral or apply relatively large haircuts to it. While the FHLBanks may view these policies as necessary to mitigate potential risks, 9 of the 12 FHLBanks did not provide documentation to GAO to substantiate such policies. Further, the documentation provided by three FHLBanks suggests that, in some cases, haircuts applied to alternative collateral may be too large. Also, the majority of the FHLBanks have not developed quantitative goals for products related to agricultural and small business lending, such as alternative collateral, as required by FHFA regulations. FHFA officials said that alternative collateral has not been a focus of the agency's oversight efforts because it does not represent a significant safety and soundness concern. However, in the absence of more proactive FHFA oversight from a mission standpoint, the appropriateness of FHLBank alternative collateral policies is not clear. FHFA should revise its examination guidelines to include periodic analysis of alternative collateral, and enforce its regulation pertaining to quantitative goals for products related to agricultural and small business lending. FHFA agreed with these recommendations.

You are an expert at summarizing long articles. Proceed to summarize the following text: Congress appropriates federal assistance grant funds to executive branch agencies that then use funding formulas to distribute federal assistance to states or local entities. These funding formulas are typically established through statute and expressed as one or more equations containing one or more variables. Executive branch agencies also use formulas to determine the amount of federal matching grants for jointly funded federal assistance programs where the amount of the federal match varies among the states based upon the formula calculation. For example, Medicaid’s Federal Matching Assistance Percentage (FMAP) is determined through a statutory formula based on each state’s per capita income relative to U.S. per capita income. Various statutory or administrative provisions can also modify the amount that would otherwise be determined under the formula. These provisions may be included to avoid disruptions that could be caused by year-to-year changes in funding, to cover fixed costs of a program, or for other reasons. Congress can use formula grants to target funds to achieve federal assistance program objectives by including specific variables in the formulas that relate to the programs’ objectives. For example, for a program intended to serve a specific segment of the population, the formula may contain variables that measure or identify the subset of the population. Therefore, the formula for a program designed to provide services for children in low income areas may contain variables that identify the total number of children living in poverty in a certain area. Historically, many formulas have relied at least in part on decennial census and related data as a source of these variables. The decennial census collects, among other things, information on whether a residence is owned or rented, as well as respondents’ sex, age, and race. To update decennial population counts, the Bureau’s Population Estimates Program produces population estimates for each year following the last published decennial census, as well as for past decennials, using administrative records such as birth and death certificates and federal tax returns. Census-related data stem from the decennial census and the Bureau’s population estimates and include (1) surveys with statistical samples designed to represent the entire population using data from the decennial census or its annual updates, and (2) statistics derived from decennial census data, its annual updates, or census-related surveys. Two of the census-related surveys produced by the Bureau include the American Community Survey (ACS) and the Current Population Survey (CPS). The ACS is an annual survey of about 3 million housing units that collects information about people and housing, including information previously collected during the decennial census. The CPS is a monthly survey of about 50,000 households conducted by the Census Bureau for the Bureau of Labor Statistics and provides data on the labor force characteristics of the U.S. population. Supplemental questions also produce estimates on a variety of topics including school enrollment, income, previous work experience, health, employee benefits, and work schedules. Federal agencies use census data, annual updates, and surveys based on these data to produce other statistics used in federal assistance grant formulas. For example, the Bureau of Economic Analysis produces per capita income data—a derivative of decennial census data—by dividing personal income by population obtained from census population estimates. Per capita income is used to calculate Medicaid’s FMAP. Another derivative is Fair Market Rent (FMR) that the Department of Housing and Urban Development calculates and uses to determine payment standard amounts for the Section 8 Housing Choice Voucher Program. The FMR for a particular area is based on decennial census data or other surveys such as the ACS for the years between censuses. Our analysis showed that each of the 10 largest federal assistance programs in fiscal year 2008 and 2009 relied at least in part on decennial census and related data to determine funding. For fiscal year 2008, this totaled about $334.9 billion, representing about 73 percent of total federal assistance. We considered funding based on decennial census and related data if any part of the funding formula or eligibility requirements relied on these data sources. Table 1 shows the fiscal year 2008 obligations for the 10 largest federal assistance programs in that year. For fiscal year 2009, the estimated obligations of the 10 largest federal assistance programs totaled about $478.3 billion, representing about 84 percent of total federal assistance. This amount included about $122.7 billion funded by the Recovery Act and about $355.6 billion funded by other means. The 10 largest federal assistance programs in fiscal year 2009 included a new program added by the Recovery Act—the State Fiscal Stabilization Fund. Table 2 shows the fiscal year 2009 estimated obligations for the 10 largest federal assistance programs and how much the Recovery Act increased that amount. Decennial census and related data play an important role in funding for the largest federal assistance programs. However, changes in population do not necessarily result in an increase or decrease in funding. Based on our prior work and related research on formula grants, we identified some of the factors that could affect the role of population grant formulas. We found that factors related to the formula equation(s) and those that modify the amount that a state or local entity would otherwise receive under the formula could affect the role of population in grant funding formulas. Further, the extent to which one particular factor can affect the role of population in grant funding varied across programs. Although at least one factor that could affect the role of population in grant funding formulas was present in each program in our review, the number and combination of factors varied across programs. To illustrate how these factors can be used in formula grant funding, we selected examples from the federal assistance programs in our review. The examples presented below are illustrative and do not necessarily indicate the relative importance of a factor compared to the other factors present. All of the programs in our review included one or more grants with formulas containing variables other than total population. Obviously, absent other factors, funding based on these formulas will be affected less by changes in population than those that rely solely on total population. The State Fiscal Stabilization Fund formula is based on total population and a subset of total population—states’ shares of individuals aged 5 to 24 relative to total population. The Federal Transit Program grants for urbanized areas with populations of 200,000 are based on total population and variables related to the level of transit service provided. TANF supplemental grants are awarded based on a formula with multiple variables. According to the Department of Health and Human Services’s Administration of Children and Families (ACF), which administers the program, supplemental grants are awarded to states with exceptionally high population growth in the early 1990s, historic welfare grants per poor person lower than 35 percent of the national average, or a combination of above average population growth and below average historic welfare grants per poor person. Medicaid’s FMAP is based on a 3-year average of a state’s per capita income relative to U.S. per capita income with per capita income defined as personal income divided by total population. The FMAP is affected by both changes in population and personal income. Because changes in population and personal income are not correlated, the affect of a population change may be diminished or increased by a change in personal income. Finally, because per capita is squared—that is, multiplied by itself—in the formula, the affect of a population change may be greater than if per capita income were not squared. In addition to the number of variables, the number of equations can also affect the role of population in grant funding formulas. Under CDBG, metropolitan counties and cites are eligible for the greater of the amounts calculated under two different equations. The variables in the first equation are population, extent of poverty, and extent of overcrowded housing. The variables in the second equation are population growth lag, extent of poverty, and age of housing. The use of the dual equation structure and the variables other than population in each equation reduce the effect of population changes on grant funding. Some formulas also have base amounts that are set at the amount of funding in a specified prior year and the remainder for funding is calculated according to a formula. For programs with set base amounts, only a portion of the funding might be affected by a change in population. Because appropriation amounts can change from year to year, the base amount portion of the grant will represent less of the total grant amount if appropriations increase, making total grant funding affected more by a change in population. When appropriations decrease, the share of the overall funding subject to the formula is lower, lessening the effect of a change in population on total funding. Some programs we reviewed contained such base amounts in their funding formula. Under IDEA Part B, generally each state first receives the same amount it received for fiscal year 1999 for the program for children aged 3 through 21, and, for the program for children aged 3 through 5, the amount the state received in fiscal year 1997. For the remainder of the state’s funding in a given year, (1) 85 percent is based on the state’s share of the 3 through 21 year old population for the school-aged program, and the 3 through 5 year old population for the preschool program and (2) 15 percent is based on the state’s share of those children living in poverty. In another example, the Head Start program guarantees the same base amount as in the prior year. The remainder of the funding is allocated to cost of living increases and Indian and migrant and seasonal Head Start programs depending upon the amount remaining. According to ACF, which administers Head Start, when the increase in appropriation is large enough to allow for expansion of Head Start, those funds are calculated based on the relative share of children aged 3 and 4 living in poverty in each state. Some factors modify the amount that a state would otherwise receive under the funding formula and could affect the role of population in grant funding formulas. The factors include the following: (1) hold harmless provisions and caps; (2) small state minimums; and (3) funding floors and ceilings. Hold Harmless Provisions/Caps: Hold harmless provisions and caps limit the amount of a decrease or increase from a prior year’s funding. Hold harmless provisions guarantee that the grantee will receive no less than a specified proportion of a previous year’s funding. If a population change resulted in a decrease in funding below a designated amount, the hold harmless provision would raise the amount of funding above what the grantee would otherwise have received under the formula and the amount of the increase would be deducted from the funding amounts of grantees not affected by the hold-harmless provision. Title I includes a hold harmless provision guaranteeing the amount made available to each local educational agency (LEA) not be less than from 85 to 95 percent of the previous fiscal year’s funding, depending on the LEA school age child poverty rate. Similarly, caps—also known as “stop gains”—limit the size of an annual increase as a proportion of a previous year’s funding amount or federal share. If a population change resulted in an increase in funding above a certain amount, the cap would limit the effect of the population change. Under IDEA Part B, no state’s allocation is to exceed the amount the state received under this section for the preceding fiscal year multiplied by the sum of 1.5 percent and the percentage increase in the amount appropriated under this section from the preceding fiscal year. Small-State Minimums: Small-state minimums guarantee that each state will receive at least a specified amount or percentage of total funding. These minimums can typically benefit smaller states that would otherwise receive allocations below the minimum. However, whether a state is considered “small” depends upon the program and is not necessarily based directly on a state’s population or geographic size. Several components within the federal-aid highway program contain such state minimums. For example, there is a statutory 0.5 percent state minimum on the annual apportionment from the Highway Trust Fund to the Surface Transportation Program for states having less than a specified threshold of qualifying roads, vehicle miles traveled on those roads, and taxes paid into the fund. When states’ minimums are applied, grant funding formulas may be affected less by changes in population. Floors/Ceilings: Floors and ceilings are lower and upper limits placed on the amount a state can receive under a formula. If a change in population results in funding under the formula falling below the floor, the state would be guaranteed the amount of the floor. If a population change results in the state exceeding the ceiling, the state could not receive more than the ceiling amount. The federal government’s share of Medicaid expenditures ranges from 50 percent (floor) to 83 percent (ceiling). Although 1973 was the most recent year that any state was affected by the ceiling, states often benefit from the FMAP floor. In fiscal year 2009, 13 states received the minimum 50 percent matching rate. In our 2003 report on federal formula grant funding, we found that in 2002, under the statutory formula, which is based on the ratio of a state’s per capita income relative to U.S. per capita income, Connecticut would have received a 15 percent federal matching rate. Despite Connecticut’s relatively high per capita income—a calculation based in part on population—Connecticut received a 50 percent federal match. For Connecticut, in this particular year, the floor affected the role of population in the amount of the federal match. Similarly, because CHIP’s matching formula is based on the Medicaid FMAP, CHIP’s enhanced FMAP is also affected by Medicaid’s floor and ceiling. For example, if a state was affected by the 50 percent floor, the state would receive a matching percentage of 65 percent. As a result, funding for states benefiting from the floor would be affected less by changes in population. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 7 days from the report date. At that time, we will send copies to interested parties. The report also will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions about this report please contact me at (202) 512- 2757 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our objectives were to determine (1) how much the federal government obligates to the largest federal assistance programs based on the decennial census and related data and how the Recovery Act changed that amount, and (2) what factors could affect the role of population in grant funding formulas. To answer our objectives, we identified 11 federal assistance programs representing the 10 largest programs in each of the fiscal years 2008 and 2009 based on the dollar amounts obligated reported in the President’s budget, issued in May 2009, Office of Management and Budget (OMB), Analytical Perspectives, Budget of the United States Government, Fiscal Year 2010 (Fiscal Year 2010 budget), Table 8-4, Summary of Programs by Agency, Bureau, and Program. We believe that these data are sufficiently reliable for purposes of our review. We included the following programs in our review: Children’s Health Insurance Program; Community Development Block Grants and Neighborhood Stabilization Education State Grants, State Fiscal Stabilization Fund; Federal Transit Formula Grants Programs; Head Start; Highway Planning and Construction; Individuals with Disabilities Education Act, Part B; Medicaid; Section 8 Housing Choice Vouchers; Temporary Aid for Needy Families; and Title I Grants to Local Education Agencies. To determine whether the program’s funding relied on decennial census and related census data, we reviewed statutes, GAO reports, the Catalog of Federal Domestic Assistance Programs (CFDA), Congressional Research Service (CRS) reports, and agency Web pages and reports related to each of the programs. For purposes of our analysis, we defined census and related data as (1) data obtained from the decennial census and annual updates, (2) census-related surveys—that is, those surveys that base their samples on the decennial census; or (3) their derivatives—that is, statistics produced from data contained in the decennial census or a census-related survey. We considered funding to be based on census or related data if any part of the funding formula or eligibility requirements relied on these data sources. For the programs that relied at least in part on census and related data, we summed the total obligation amounts reported in the Fiscal Year 2010 budget, Table 8-4, Summary of Programs by Agency, Bureau, and Program, as well as Table 8-6, Summary of Recovery Act Grants by Agency, Bureau, and Program. Because the actual obligations for fiscal year 2009 for each of these programs are not yet available from OMB, we are reporting the estimated fiscal year 2009 obligations reported in the Fiscal Year 2010 budget. We did not independently verify or assess the extent to which an agency actually distributes funds according to the statutory formula. We did not identify all possible uses of decennial census and related data to fund the selected programs. We did not conduct any simulations to determine the extent to which any particular variable relied on the funding formula. To determine what factors could affect the role of population in grant funding formulas, from our prior work related to formula grants (see the list of related GAO products at the end of this report) and other research on formula grants, we first identified factors that illustrate the different ways that such factors could affect the amount of grant funding. To obtain illustrative examples of how the factors are used in the selected programs, we reviewed statutes, GAO reports, the CFDA, CRS reports, and agency Web pages and reports related to each of the programs. We asked the responsible agencies to confirm the accuracy of information being reported on the existence of the factors in and descriptions of each program. We received responses on each of the 11 programs. We did not identify all possible factors that could affect the amount of grant funding. The presentation of these factors is not intended to suggest that they are the most important either generally, or to the specific programs listed here. The number of times a factor or a program is cited in reported examples does not indicate anything judgmental about the feature or the program. The presence of a factor in statute does not indicate that a factor is either significant or relevant to actual funding for the program. We conducted our work from June 2009 to December 2009, in accordance with all sections of GAO’s Quality Assurance Framework that are relevant to our objectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions. Children’s Health Insurance Program (CHIP): CHIP is a federal-state matching grant program administered by the Department of Health and Human Services’ Centers for Medicare & Medicaid Services (CMS). The program provides funding for states to cover children (and in some states pregnant women) who lack health insurance and whose families’ low to moderate income exceeds Medicaid eligibility levels. Each state has a different federal match level based on the Medicaid Federal Medical Assistance Percentage (FMAP), called the enhanced FMAP. Community Development Block Grant (CDBG) program: The Department of Housing and Urban Development provides CDBG funding to communities to develop decent housing, suitable living environments, and economic opportunities for people of low and moderate income. Funds are distributed among communities using a formula based on indicators of community development need. Education State Grants, State Fiscal Stabilization Fund (State Fiscal Stabilization Fund): The State Fiscal Stabilization Fund program is a new one-time appropriation under the American Recovery and Reinvestment Act of 2009. It is administered by the U.S. Department of Education. The funds are intended to help (1) stabilize state and local government budgets in order to minimize and avoid reductions in education and other essential public services; (2) ensure that local educational agencies and public institutions of higher education have the resources to avert cuts and retain teachers and professors; and (3) support the modernization, renovation, and repair of school and college facilities. According to the Department of Education, states participating in the program must provide a commitment to advance essential education reforms to benefit students from early learning through post-secondary education. Federal Transit Formula Grants Programs: Administered by the Department of Transportation’s Federal Transit Administration, these grant programs provide capital and operating assistance for public transit systems. Three of the major formula federal assistance programs include the following: (1) the Urbanized Area Formula Program, which makes federal resources available to areas with populations of 50,000 or more and to governors for transit capital and operating assistance and for transportation related planning; (2) the Nonurbanized Area Formula Program, which provides formula funding to states for the purpose of supporting public transportation in areas with populations of less than 50,000; and (3) Capital Investment—Fixed Guideway Modernization Program, which may be used for capital projects to maintain, modernize, or improve fixed guideway systems. Head Start: Head Start is administered by the Department of Health and Human Services’s Administration for Children and Families (ACF) and provides grants directly to over 1,600 local agencies. Head Start provides funds for early childhood development services to low-income children and their families. These services include education, health, nutrition, and social services to prepare children to enter kindergarten and to improve the conditions necessary for their success later in school and life. Highway Planning and Construction: The Department of Transportation’s Federal Highway Administration (FHWA) administers the Highway Planning and Construction Program, also known as the federal- aid highway program. According to FHWA, the federal-aid highway program provides federal financial resources and technical assistance to state and local governments for planning, constructing, preserving, and improving federal-aid eligible highways. The federal-aid eligible highway system includes the National Highway System (NHS), a network of about 163,000 miles of roads that comprises only 4 percent of the nation’s total public road mileage, but carries approximately 45 percent of the nation’s highway traffic as well as an additional 1.1 million miles of roads that are not on the NHS, but that are eligible for federal-aid. Individuals with Disabilities Education Act (IDEA) Part B: The Department of Education has responsibility for oversight of IDEA and for ensuring that states are complying with the law. IDEA Part B grants provide funding for special education and related services for children and youth ages 3 to 21. IDEA Part B governs how states and public agencies provide special education and related services to more than 6.5 million eligible children and youth with disabilities. To receive IDEA Part B funding, states agree to comply with certain requirements regarding appropriate special education and related services for children with disabilities. Medicaid: CMS provides federal oversight of state Medicaid programs. Medicaid is a health insurance program jointly funded by the federal government and the states. Generally, eligibility for Medicaid is limited to low-income children, pregnant women, parents of dependent children, the elderly, and people with disabilities. The federal government’s share of a state’s expenditures for most Medicaid services is called the Federal Medical Assistance Percentage (FMAP). Federal Medicaid funding to states is not limited, provided the states contribute their share of program expenditures. Section 8 Housing Choice Vouchers: The Section 8 Housing Choice Voucher Program is one of three key rental subsidy programs of the Department of Housing and Urban Development. The program is administered by local public housing agencies and provides rental vouchers to very low-income families to obtain decent, safe, and affordable housing. Following the discontinuation of funds for new construction of public housing and project-based Section 8, the Section 8 Housing Choice Voucher program has been the primary means of providing new rental assistance on a large scale. The program currently serves over 2 million families. Temporary Aid for Needy Families (TANF): TANF is administered by ACF and provides funding to states through four grants—basic block, supplemental, and two contingency (recession-related). These grants are intended to: (1) provide assistance to needy families with children so they can live in their own homes or relatives’ homes; (2) end parents’ dependence on government benefits through work, job preparation, and marriage; (3) reduce out-of-wedlock pregnancies; and (4) promote the formation and maintenance of two-parent families. Title I Grants to Local Education Agencies (LEA): Title I is administered by the Department of Education and provides financial assistance to LEAs that target funds to the schools with the highest percentage of low-income families. Schools use Title I funds to provide additional academic support and learning opportunities to help low- achieving children master challenging curricula and meet state standards in core academic subjects. Federal funds are currently allocated through four statutory formulas that are based primarily on census poverty estimates and the cost of education in each state, as measured by each state’s expenditure per elementary and secondary student. In addition to the individual named above, Ty Mitchell, Assistant Director; Robert Dinkelmeyer; Gregory Dybalski; Amber G. Edwards; Robert L. Gebhart; Lois Hanshaw; Andrea J. Levine; Victor J. Miller; Melanie H. Papasian; and Tamara F. Stenzel made key contributions to this report. Formula Grants: Census Data Are among Several Factors That Can Affect Funding Allocations. GAO-09-832T. Washington, D.C.: July 9, 2009. 2010 Census: Population Measures Are Important for Federal Funding Allocations. GAO-08-230T. Washington, D.C.: October 27, 2007. Community Development Block Grant Formula: Options for Improving the Targeting of Funds. GAO-06-904T. Washington, D.C.: June 27, 2006. Federal Assistance: Illustrative Simulations of Using Statistical Population Estimates for Reallocating Certain Federal Funding. GAO-06-567. Washington, D.C.: June 22, 2006. Community Development Block Grant Formula: Targeting Assistance to High-Need Communities Could Be Enhanced. GAO-05-622T. Washington, D.C.: April 26, 2005. Federal-Aid Highways: Trends, Effect on State Spending, and Options for Future Program Design. GAO-04-802. Washington, D.C.: August 31, 2004. Medicaid Formula: Differences in Funding Ability among States Often Are Widened. GAO-03-620. Washington, D.C.: July 10, 2003. Formula Grants: 2000 Census Redistributes Federal Funding Among States. GAO-03-178. Washington, D.C.: February 24, 2003. Title I Funding: Poor Children Benefit Though Funding Per Poor Child Differs. GAO-02-242. Washington, D.C.: January 31, 2002. Formula Grants: Effects of Adjusted Population Counts on Federal Funding to States. GAO/HEHS-99-69. Washington, D.C.: February 26, 1999. Federal Grants: Design Improvements Could Help Federal Resources Go Further.GAO/AMID-97-7. Washington, D.C.: December 18, 1996. Block Grants: Characteristics, Experience, and Lessons Learned. GAO/HEHS-95-74. Washington, D.C.: February 9, 1995. Formula Programs: Adjusted Census Data Would Redistribute Small Percentage of Funds to States. GAO/GGD-92-12. Washington, D.C.: November 7, 1991.

Many federal assistance programs are funded by formula grants that have historically relied at least in part on population data from the decennial census and related data to allocate funds. In June 2009, the Census Bureau reported that in fiscal year 2007 the federal government obligated over $446 billion through funding formulas that rely at least in part on census and related data. Funding for federal assistance programs continues to increase. Government Accountability Office (GAO) was asked to determine (1) how much the federal government obligates to the largest federal assistance programs based on the decennial census and related data, and how the Recovery Act changed that amount; and (2) what factors could affect the role of population in grant funding formulas. To answer these objectives, GAO identified the 10 largest federal assistance programs in each of the fiscal years 2008 and 2009 based on data from the President's fiscal year 2010 budget. GAO reviewed statutes, agency reports, and other sources to obtain illustrative examples of how different factors could affect the role of population data in grant funding. GAO's analysis showed that each of the 10 largest federal assistance programs in fiscal years 2008 and 2009 relied at least in part on the decennial census and related data--that is, data from surveys with designs that depend on the decennial census, or statistics, such as per capita income, that are derived from these data. For fiscal year 2008, this totaled about $334.9 billion, representing about 73 percent of total federal assistance. For fiscal year 2009, the estimated obligations of the 10 largest federal assistance programs totaled about $478.3 billion, representing about 84 percent of total federal assistance. This amount included about $122.7 billion funded by the Recovery Act and about $355.6 billion funded by other means. Several factors can affect the role of population in grant funding formulas. When a formula includes variables in addition to total population, the role of population in the grant funding formula is less than if the formula relies solely on total population. All of the programs in GAO's review included one or more grants with formulas containing variables other than total population, such as the level of transit service provided. In addition, other factors can modify the amount that a state or local entity would have otherwise received under the formula. These factors include (1) hold harmless provisions and caps; (2) small state minimums; and (3) funding floors and ceilings. With the application of these factors, grant funding may be affected less or entirely unaffected by changes in population.

You are an expert at summarizing long articles. Proceed to summarize the following text: The Department of State controls munitions items under the authority provided in the Arms Export Control Act. State promulgates the International Traffic in Arms Regulations (ITAR) and establishes, with the concurrence of the Department of Defense, the U.S. Munitions List. State and Defense can include a dual-use item on this list, as provided by the ITAR, if it “is specifically designed, developed, configured, adapted, or modified for a military application, and has significant military or intelligence applicability such that control under [the ITAR] is necessary.” The Department of Commerce controls dual-use items under a system established under the Export Administration Act. Commerce imposes export controls on the items within its jurisdiction through the Export Administration Regulations and establishes the Commerce Control List in consultation with other agencies and in parallel with U.S. commitments in international control regimes. In arriving at a licensing decision, Commerce provides license applications for the review of other agencies, including Defense, State, the Department of Energy, and the Arms Control and Disarmament Agency. A December 1995 executive order states that Commerce may refer all applications for a validated license to these agencies for review. If an agency disagrees with Commerce’s initial licensing decision, it can appeal the decision to interagency review committees. In March 1993, we reported that jurisdiction over commercial jet engine hot section technology and space-related items, such as communications satellites, was a long-standing issue between State and Commerce. In November 1990, the President ordered the removal of dual-use items from the U.S. Munitions List and State’s licensing controls, unless significant national security interests would be jeopardized. Pursuant to this order, State led an interagency review, including officials from Defense, Commerce, and other agencies, to determine which dual-use items should be removed from the munitions list and transferred to Commerce’s jurisdiction and which warranted retention on the munitions list. This review was conducted between December 1990 and April 1992. As part of this review, an interagency working group identified and established performance parameters for the militarily sensitive characteristics of communications satellites. If a satellite met or exceeded these parameters, the satellite would be controlled by State, otherwise it would be licensed by Commerce. As a result of the interagency review, over two dozen dual-use items were removed from the munitions list and placed under Commerce’s jurisdiction, including approximately half of the commercial communications satellites. Jurisdiction for hot section technology, however, was not resolved as a result of the interagency review. The executive branch’s recent decision to change the export licensing jurisdiction for commercial jet engine hot section technology addresses a long-standing disagreement as to whether State or Commerce should control its export. Until this decision, Commerce had claimed jurisdiction over hot section technology of commercial engines not derived from military technology, while State and Defense had maintained that hot section technology for commercial engines that is derived from military engines is the same technology used in military fighter engines and is of such sensitivity that ITAR control was appropriate. Now, all hot section technology for commercial engines, including certain civil and military engines that share the same hot section technology and are evolving together, will be controlled by Commerce. All commercial communications satellites, including those with militarily sensitive characteristics, will be licensed by Commerce. A jet engine is composed of three sections: the cold section, or the fan and compressor, which is where the air enters the engine; the hot section, comprised of the combustor and portions of the turbine, which are the components exposed to combustion gases; and the warm section, or exhaust nozzle, which is where the exhaust gases leave the engine. The turbine is one of the more critical components of jet engines because it extracts energy from combustion gases and converts it into the engine’s mechanical force. Hot section gas turbine technology that is used to manufacture military engines incorporate advanced design concepts, materials, and manufacturing processes that help keep the turbine cool while the engine operates at extremely hot temperatures. The key to achieving greater engine performance is to increase the temperature of operation within the engine’s hot section. Increased engine effectiveness enhances the performance of the aircraft and leads to improved survivability, lethality, reliability, and sustainability. According to Defense officials, the U.S. military has air superiority over other countries in large part because of the advanced technology used to build hot sections for military engines. U.S. fighter aircraft have the ability to outlast and outperform other foreign-built aircraft, which translates into a significant combat advantage over possible adversaries. Hot section technology required for military aircraft also has applications for engines used on commercial aircraft. Commercial engines require different performance parameters than military engines, but higher operating temperatures provide greater fuel efficiency. According to officials at Commerce, Defense, and State and industry representatives, the core elements of hot section technology are similar for both military and commercial jet engines. Although all agree that it is almost impossible to distinguish between military and commercial hot section technology, they differ in opinion on the applicability of commercial hot section technology to military uses. Defense and State officials informed us that exporting commercial hot section technology gives a foreign manufacturer information allowing it to build either a commercial or military engine if it is willing to make certain trade-offs in manufacturing, such as sacrificing durability to achieve higher performance and temperatures. Commerce officials maintain that if a foreign manufacturer decides to adapt commercial hot section technology to military use, it can make a military engine, but it will not have sufficient experience to allow it to make an engine equal to or exceeding U.S. military capabilities. Engine manufacturers agree that selected hot section technology for commercial engines should be protected for both competitive interest and national security, but they believe that certain technical data transfers to foreign partners facilitate cooperative engine development, production sharing, operational maintenance, and repair. Because of the military importance of hot section technology and the similarity between commercial and military technology, Defense officials are concerned about the diffusion of technology and availability of hot section components that could negatively affect the combat advantage of U.S. aircraft and pose a threat to U.S. national security concerns. To protect national security interests, Defense officials review applications referred by State to determine whether the export would undermine the U.S. lead in hot section technology and, consequently, U.S. air superiority.Defense and State have not approved the export of the most advanced hot section technology for either military or commercial use, although certain exports have been allowed under government-to-government agreements with U.S. allies that restrict transfer beyond the government. In addition to protecting the export of state-of-the-art hot section technology, Defense also makes recommendations on the advisability of exporting selected individual parts that make up the hot section (i.e., the blades, discs, and combustor lines). These parts are exposed to combustion gases and, in state-of-the-art engines, they must have the ability to sustain very high temperatures. According to Defense officials, allowing the export of the most advanced components would allow foreign manufacturers to assemble hot sections that match the capabilities of U.S. engines used in fighter aircraft. State defers to Defense’s recommendations on license applications for these parts. Licensing of these components is not affected by the change in jurisdiction and remains with State. Commercial communications satellites are intended to facilitate civil communication functions through various media, such as voice, data, and video. Commercial satellites often carry Defense data as well. In contrast, military communications satellites are used exclusively to transfer information related to national security and have characteristics that allow the satellites to be used for such purposes as providing real-time battlefield data and relaying intelligence data for specific military needs. Satellites used for either commercial or military communications may contain one or more of nine militarily sensitive characteristics. A description of the characteristics is provided in table 1. Satellites with characteristics exceeding certain parameters are considered militarily sensitive. Jurisdiction over commercial communications satellites that did not have any of these militarily sensitive characteristics changed to Commerce in October 1992 as a result of the interagency review begun in 1990. Those with any of the nine components remained under State’s jurisdiction, as did the individual components themselves and all sensitive technology to design, develop, or manufacture a satellite. The regulations move commercial satellites with one or more of the nine characteristics to Commerce, while the export of individual systems and components not incorporated in a satellite remain under State’s jurisdiction, as does the technology to design, develop, and manufacture the satellite. Certain kick motors that are not embedded in satellites, however, will be subject to Commerce’s jurisdiction when they are to be used for specific satellite launches, provided that a kick motor is neither specifically designed or modified for military use nor capable of being restarted after the satellite is in orbit. In reviewing export license applications, Defense and State officials examine the potential for the export of satellite technologies. The process of planning a satellite launch takes place over several months, and there is concern that technical discussions between U.S. and foreign representatives may go beyond that needed for the launch and lead to the transfer of information on militarily sensitive components. Officials say they are particularly concerned about the technologies to integrate the satellite to the launch vehicle because this technology can also be applied to launch ballistic missiles to improve their performance and reliability. They also expressed concern about the operational capability that specific characteristics, in particular antijam capability, crosslinks, and baseband processing, could give a potential adversary. State has approved the exports of commercial communications satellites and established detailed security guidelines and conditions to address concerns about the disclosure of technologies associated with the launch vehicle and militarily sensitive characteristics for launches from China and sites in the former Soviet Union. These conditions require that safeguards be applied to prevent the disclosure of technology beyond that needed for integration and launch of the satellite, as provided for in safeguard agreements between the United States and these countries. For launches in China and Russia, State also requires a technical assistance agreement, which is a signed contract between the U.S. firm and the foreign government that specifies what technical assistance and data can be provided. In addition, State requires that exporters fund the travel costs of Defense personnel traveling to oversee the satellite launches. In licensing communications satellites already under its jurisdiction, Commerce also places conditions on the export license on the type of technical information that can be transferred but does not require exporters to fund the travel costs of Defense personnel overseeing the launch. Export control of dual-use items has been a matter of contention over the years between Commerce and State. State claimed jurisdiction for both commercial and military hot section technology because State and Defense maintained that (1) the technology and manufacturing processes applied to the hot sections of military and commercial engines are basically the same and originated in military programs and (2) diffusion of critical hot section technology for commercial engines would accelerate other countries’ abilities to design and manufacture engines, including military engines, of equal capability to those manufactured in the United States. Commerce claimed jurisdiction for commercial hot section technology not derived from military technology. Commerce has argued that since the international Coordinating Committee for Multilateral Export Controls classified communications satellites and other space-related items as dual use, the entire category, except strictly military items, should be transferred to its jurisdiction.State and Defense insisted that the decision should be made on an item-by-item basis as part of the interagency review begun in 1990. Therefore, an interagency working group comprised of all concerned agencies was assembled to conduct an item-by-item review. The working group decided in 1992 to move approximately half the commercial communications satellites (those that did not have one or more of the nine ITAR performance characteristics) to the Commerce Control List. According to Commerce officials, the executive branch’s decision reflects Commerce’s long-held position that all commercial hot section technology and commercial communications satellites should be under its jurisdiction. Commerce argues that both items are, by definition, intended for commercial end use and are therefore not munitions. This argument reflects the view that all dual-use items should be subject to export control under Commerce’s licensing system because most applications of these items are commercial. Commerce also maintains that transferring jurisdiction to the dual-use list also makes U.S. controls consistent with treatment of these items under multilateral export control regimes. In contrast, State and Defense point out that the ITAR is not based on end use considerations, but on whether an item has been specifically designed for military applications. The executive branch’s decision is the result of an interagency review involving State, Commerce, Defense, and the intelligence community in which the agencies developed a common recommendation to the President to clarify the licensing jurisdiction of these items. Manufacturers of jet engines and communications satellites we talked with support the transfer of the items to the Commerce Control List. They cite the following reasons for favoring Commerce’s control: Export licensing jurisdiction should be determined solely by an export’s commercial application, and since both items are predominantly for commercial end use, they are not munitions and should therefore not be subject to State’s licensing process. The Commerce process is more responsive to business because time frames are clearly established, the review process is more predictable, and more information is shared with the exporter on the reasons for denials or conditions on the license. Under State’s jurisdiction, commercial products become subject to certain mandatory sanctions and embargoes that require denial of exports. Some sanctions and embargoes apply only to items on the munitions list and not to items on the Commerce Control List. Exports under State’s jurisdiction that exceed certain dollar thresholds are subject to congressional notifications, and exporters say this can delay the process. Satellite exports exceed these thresholds. The competitive market for commercial aircraft creates the need to establish foreign overhaul and repair facilities and to use foreign expertise to develop and manufacture current and new commercial aircraft engines. Although the jet engine industry agrees in principle that selected high technology know-how should be protected for both competitive and national security reasons, manufacturers believe certain technical data transfers to foreign partners facilitate cooperative engine development, sharing of production, and operational maintenance. China is seen as a large and growing market for commercial aircraft engines. Competing in the China market for the 100-passenger airliner requires transfer of technology for the maintenance and production of hot section components of an engine for such an aircraft . Some of the militarily sensitive systems or characteristics of communications satellites are no longer unique to military satellites. State and Commerce implement different laws to control exports of military and dual-use items. The underlying objectives of these laws differ. State controls munitions items to further the security and foreign policy of the United States. Commerce, on the other hand, weighs U.S. economic and trade interests with national security and foreign policy interests. Commerce controls the export of dual-use items under the Export Administration Act, as implemented under the Export Administration Regulations. The key provisions of its export control system are discussed in table 2. While the Export Administration Act provides broad authority to control exports, the national security and foreign policy controls that Commerce has put in place through the Export Administration Regulations provide for control of exports to specific destinations to achieve specific objectives. National security controls are to ensure that exports do not make a contribution to the military potential of specified countries such as China and Russia. Foreign policy controls can be imposed on all destinations and include the regional instability control and missile technology control. Exports controlled for regional instability reasons are reviewed to determine whether the exports could contribute directly or indirectly to any country’s military capabilities in a manner that would alter or destabilize a region’s military balance contrary to the foreign policy interests of the United States. State controls munitions items under the Arms Export Control Act. State requires individual licenses for all exports under its jurisdiction, with the exception of certain Defense exports. State has broad authority to deny a license, and it can deny simply with the explanation that it is against U.S. national security or foreign policy interests. State’s controls are permanent and do not need to be renewed periodically, and there are no provisions for foreign availability findings or re-exporting under de minimis thresholds. The Arms Export Control Act does not preclude judicial review of a licensing decision but no court has reversed a licensing decision by State. State has the authority to revoke a license for an export if it believes it to be against U.S. national security interests, even after a contract to manufacture the product to be exported is underway. All applications to export items that exceed certain values, including all commercial communications satellites, are subject to congressional notification prior to approval. Commerce and State enforce several types of unilateral U.S. sanctions on exports, including two domestic laws with particular significance for exports of commercial communications satellites and jet engine hot section technology. These are (1) the amendments to the Export Administration Act and Arms Export Control Act made by the National Defense Authorization Act for fiscal year 1991 (P.L. 101-510, Title XVII) regarding sanctions for activities related to specified trade in items on the Missile Technology Control Regime annex and (2) the sanctions in effect since 1990 on exports of munitions to and satellites for launch in China as a result of the Tiananmen Square incident that are published in the Foreign Relations Authorization Act for fiscal years 1990 and 1991 (P.L. 101-246, Title IX, as amended. The United States is a member of the Missile Technology Control Regime, a group formed in 1987 whose members coordinate their national export controls to limit the proliferation of missiles “capable of delivering nuclear weapons.” This group is composed of the United States and 27 other countries. The United States implements its export control policies partly based on the regime’s annex, which lists 20 items of missile-related goods and technologies, divided into two categories. Category I covers missile systems and their major subsystems and production equipment, and category II covers materials, components, production, and test equipment. Under the missile sanctions amendments to the Export Administration Act and Arms Exports Control Act, State determines whether sanctionable trade in items within category I or II of the Missile Technology Control Regime annex has occurred. If the sanctionable trade was in category I items, the laws require Commerce to deny the export of all items controlled under the Export Administration Act and State to deny the export of all items controlled under the Arms Export Control Act, in addition to certain other sanctions. If the sanctionable trade was in category II items, the laws require Commerce to deny the export of items listed in the annex that are controlled under the Export Administration Act and State to deny the export of items listed in the annex that are controlled under the Arms Export Control Act. In addition, the sanctions for trade in category II items permit the denial of exports of items not listed in the annex. An example of such an item is comercial communications satellites, which contain items listed in the annex. The National Security Council left the decision of how to treat such exports to Commerce and State. Thus, when the United States imposed category II sanctions on China in 1993, exports of commercial communications satellites controlled by State were not approved while exports of those satellites controlled by Commerce were not affected. The Tiananmen Square sanctions include prohibitions on the export of items on the munitions list and the export of satellites for launch from launch vehicles owned by China. The President can waive these prohibitions if such a waiver is in the national interest. Waivers have been granted allowing Commerce and State to approve the export of commercial communications satellites for launch from Chinese launch vehicles. Exports of hot section technology controlled by State are prohibited by the Tiananmen Square sanctions, while exports of hot section technology controlled by Commerce are not prohibited. In October and November 1996, Commerce and State published changes to their respective regulations transferring licensing jurisdiction for commercial jet engine hot section technology and commercial communications satellites to Commerce. Commerce’s interim regulations provide enhanced controls for the items. Additional controls are being implemented through an executive order and a presidential decision directive issued in October 1996. As a result of the change in licensing jurisdiction, State returned four applications for exports of commercial communications satellites without action. Two of these applications involved launches in China, one involved a launch in French Guiana, and the fourth involved a launch from a Russian-controlled facility in Kazakhstan. The exporters were advised by State to resubmit their license applications to Commerce and, in two cases, to request a separate license from State for items remaining subject to State licensing (e.g., rocket fuel). As a result of the change in jurisdiction, these exports will not be subject to certain sanctions or to congressional notification requirements. They will be subject to the controls put in place through Commerce’s interim regulations. Commerce’s new controls make the following changes for commercial jet engine hot section technology and commercial communications satellites: The items must be exported under individual validated licenses and will not be eligible for special comprehensive licenses or general licenses. Pursuant to the December 1995 executive order, Commerce may refer license applications to Defense, State, and other agencies for review. According to Commerce officials, all applications for the two items will be subject to full interagency review. The items will be controlled for national security reasons to all destinations. National security controls have been focused on preventing exports to certain destinations. A new “significant item” control will be created for these two items. This new foreign policy control will require a license for all destinations, except Canada. Although most foreign policy controls define specific and limited policy objectives, the policy objective for this control—consistency with U.S. national security and foreign policy interests—is broadly stated. Commerce officials stated that this control gives them broad discretion to deny an export. Technical information that can be transferred under a satellite license is more clearly defined. The two items transferring to Commerce’s jurisdiction will not be subject to mandatory decontrol or licensing as a result of a foreign availability finding, as is normally the case for items controlled solely for national security reasons. Commerce officials stated that mandatory licensing and decontrol do not apply to items controlled for foreign policy and that the provisions of the Export Administration Regulations requiring mandatory decontrol or licensing of items controlled for national security can be waived if the President determines that such a waiver is in the national interest. Rather than seek a presidential waiver on a case-by-case basis, a presidential decision directive has been issued saying that, in advance, mandatory decontrol or licensing is not in the national interest. Regulations providing the exporter with the ability to request a foreign availability finding and consideration of foreign availability in arriving at licensing decisions will still apply to these items. De minimis provisions will not apply to the two items. In the case of hot section technology, the de minimis provision provides that any technology prepared or engineered abroad for the design, construction, operation, or maintenance of any plant or equipment that uses U.S.-origin hot section technology will be subject to U.S. export control regulations. Contract sanctity provisions will not apply. In addition, procedures for interagency review of Commerce’s initial decisions on individual licenses have been modified for these items. These procedures provide for participation by reviewing agencies, including State and Defense. Commerce makes initial licensing decisions unless reviewing agencies are not in agreement. In those cases, decisions are made by an interagency group known as the Operating Committee, which is chaired by Commerce and includes representatives from Defense, State, Energy, and the Arms Control and Disarmament Agency. Under normal procedures, the chair of the Operating Committee, a Commerce official appointed by the Secretary of Commerce, decided to approve or deny a license and to include conditions on the license, after considering input from other committee members. Under revised procedures for these two items, the decision to deny or approve a license, and conditions for approval, will be made by a majority vote of the members of the Operating Committee. The executive order that establishes procedures for interagency review of Commerce license applications was revised in October 1996 to implement this procedural change. These regulatory and procedural changes are intended to allow Commerce to control and deny, when appropriate, exports of the two items to all destinations. This is particularly important for control of hot section technology. Exports of the most sensitive hot section technology have not been permitted, even to close allies. State approved exports of commercial communications satellites with conditions on the safeguard of the satellite and associated technology. According to Commerce and other executive branch officials, the change in jurisdiction is not intended to change U.S. licensing policy—what destinations and end users the United States will approve licenses for—but only the procedures under which licensing decisions will be made. Whether the current licensing policy will be maintained with the change in jurisdiction is uncertain. The underlying objectives of the two systems differ. The Arms Export Control Act gives State the authority to use export controls primarily to protect U.S. national security without regard to economic or commercial interests. Under the Export Administration Act, on the other hand, Commerce weighs economic and trade interests along with national security and foreign policy concerns. The importance attached to economic and commercial interests is reflected in Commerce’s role in the process as the representative of commercial interests. Defense, as the voice for national security concerns, is one of several agencies in Commerce’s licensing system. Under State’s licensing system, Defense is one of two agencies involved in licensing decisions. According to State, State denies an export if Defense raises significant national security concerns. These differences in the underlying basis for decisions create uncertainty as to whether the changed procedures for making licensing decisions will result in changes in licensing policy. Uncertainty is also created by the newness of the “significant item” control because it is not clear how it will be applied. The Departments of Defense and Commerce provided written comments on a draft of this report (see apps. I and II, respectively), and the Department of State provided oral comments. Both Defense and State said they had no objections to the report. State also commented that the report fairly and accurately laid out the issues associated with State’s position in these matters. Commerce stated that the President’s decision to transfer jurisdiction of the two items discussed in this report was based on the unanimous recommendation of Defense, Commerce, and State. Commerce cited major factors involved in the recommendation and decision: (1) changed military and industrial environment after the Cold War, (2) all U.S. allies treat these items as dual-use goods rather than munitions, (3) since December 1995 all agencies have had the right to participate fully in licensing deliberations, and (4) it made good business sense. Commerce suggested that our characterization of Defense’s and State’s positions was based on the views of junior staff members at these agencies and ignored the consensus that was ultimately achieved. Our presentation of the Defense and State positions is based on discussions with senior level officials in these agencies, including Defense’s Director of the Defense Technology Security Administration and State’s Director of Defense Trade Controls. Neither State nor Defense raised any objections to our presentation of their positions in the draft report and State commented that the report fairly and accurately reflected its position. Further, with respect to Commerce’s comment that the transfer of jurisdiction was based on the unanimous recommendation of Defense, Commerce, and State, it should be noted that an interagency group reviewing licensing jurisdiction for commercial communications satellites had recommended that commercial communications satellites with militarily sensitive characteristics continue to be licensed by the State Department. It also recommended further adjustments in the characteristics defining militarily sensitive commercial communications satellites. The Secretary of State upheld these recommendations. It was only after Commerce appealed the Secretary of State’s decision to the President, and the President decided to transfer jurisdiction for both commercial communications satellites and commercial jet engine hot section technology to the Department of Commerce that unanimous support for the transfer of jurisdiction came about. To assess the military sensitivity of the two items, we interviewed and obtained analyses from officials in the Air Force, the Navy, the Office of the Deputy Under Secretary of Defense for Space, the Defense Technology Security Administration, the National Security Agency, the Defense Intelligence Agency, and the Department of State. We also analyzed license applications for the two items submitted to State and referred to Defense to gain an understanding of the concerns at Defense and State related to the export of the items. To determine the executive branch’s rationale for the change in licensing jurisdiction, we interviewed officials at Commerce and State. We also interviewed and obtained documents from representatives of the Aerospace Industries Association, The Boeing Company, General Electric, The Hughes Corporation, Lockheed Martin, and United Technologies Corporation. The Aerospace Industries Association represents manufacturers of engines and spacecraft. Boeing purchases jet engines for its commercial and military aircraft. General Electric and United Technologies are two major engine manufacturers, and Hughes and Lockheed Martin are two major commercial satellite manufacturers. In addition, we reviewed documents at Commerce, Defense, and State related to the development of the interim regulations and analyses done by industry advisory groups. To evaluate the differences between Commerce’s and State’s export licensing jurisdictions for the two items, we interviewed and obtained documents from officials at Commerce, Defense, and State. We compared the provisions in the Export Administration Act and the Export Administration Regulations to those in the Arms Export Control Act and the International Traffic in Arms Regulations. In addition, we reviewed the interim final rule changing the jurisdiction to Commerce to evaluate the new controls that Commerce plans to implement to control the two items. We performed our review from June to November 1996 in accordance with generally accepted government auditing standards. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 10 days after its issue date. At that time, we will send copies to the Secretaries of Defense, the Army, the Navy, and the Air Force and other interested congressional committees. Copies will also be made available to others upon request. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix III. Raymond J. Wyrsch The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. 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Pursuant to a congressional request, GAO reviewed the implications of changing export licensing jurisdiction for two sensitive dual use items from the Department of State to the Department of Commerce, focusing on: (1) the military sensitivity of the two items; (2) the executive branch's rationale for the change in jurisdiction; (3) the licensing systems that the two departments use to control exports; and (4) proposed changes in Commerce controls for these two items. GAO found that: (1) the items transferred to Commerce control, commercial jet engine hot section technology and commercial communications satellites, are militarily sensitive items; (2) hot section technology gives U.S. fighter aircraft the ability to outlast and outperform other aircraft, a key element in achieving air superiority; (3) because of the military significance of this technology, State does not allow the export of the most advanced hot section technology for either military or commercial use; (4) commercial communications satellites being transferred to Commerce jurisdiction contain militarily sensitive characteristics; (5) State has approved the export of commercial communications satellites for foreign launch with conditions for safeguarding sensitive technologies for certain destinations such as China; (6) the executive branch's decision to transfer licensing jurisdiction reflects Commerce's position that all hot section technology and communications satellites for commercial use should be under Commerce jurisdiction; (7) transferring jurisdiction also makes U.S. national controls for these items consistent with international trade commitments to control them as dual use items; (8) State has broad authority to deny a license, and it can deny simply with the explanation that it is against U.S. national security or foreign policy interests; (9) jet engine and satellite manufacturers support the change in jurisdiction, viewing the Commerce system as more responsive to the needs of business; (10) the state and Commerce export control systems differ; (11) Commerce controls items to achieve specific national security and foreign policy objectives; (12) national security controls are aimed at preventing items from reaching certain destinations such as China and Russia; (13) foreign policy controls are aimed at achieving specific objectives, including antiterrorism, regional stability, and nonproliferation; (14) in recognition of the military sensitivity of these items, Commerce is implementing new and expanded control procedures; (15) these new control procedures are intended to allow Commerce to control and deny, where appropriate, exports of the two items to all destinations; (16) according to Commerce and other executive branch officials, the change in jurisdiction is not intended to change U.S. licensing policy, but it is intended only to change the procedures under which licensing decisions will be made; and (17) these differences in the underlying basis for decisions create uncertainty as to whether the changed procedures for making licensing decisions will result in changes in licensing policy.

You are an expert at summarizing long articles. Proceed to summarize the following text: The performance of passenger and checked baggage screeners in detecting threat objects at the nation’s airports has been a long-standing concern. In 1978, screeners failed to detect 13 percent of the potentially dangerous objects that Federal Aviation Administration (FAA) agents carried through airport screening checkpoints during tests. In 1987, screeners did not detect 20 percent of the objects in similar tests. In tests conducted during the late 1990s, as the testing objects became more realistic, screeners’ abilities to detect dangerous objects declined further. In April 2004, we, along with the DHS Office of the Inspector General (OIG), testified that the performance of screeners continued to be a concern. More recent tests conducted by TSA’s Office of Internal Affairs and Program Review (OIAPR) also identified weaknesses in the ability of screeners to detect threat objects, and separate DHS OIG tests identified comparable screener performance weaknesses. In its July 2004 report, The National Commission on Terrorist Attacks Upon the United States, known widely as the 9/11 Commission, also identified the need to improve screener performance and to better understand the reasons for performance problems. After the terrorist attacks of September 11, 2001, the President signed the Aviation and Transportation Security Act (ATSA) into law on November 19, 2001, with the primary goal of strengthening the security of the nation’s aviation system. ATSA created TSA as an agency with responsibility for securing all modes of transportation, including aviation. As part of this responsibility, TSA oversees security operations at the nation’s more than 450 commercial airports, including passenger and checked baggage screening operations. Prior to the passage of ATSA, air carriers were responsible for screening passengers and checked baggage, and most used private security firms to perform this function. FAA was responsible for ensuring compliance with screening regulations. Today, TSA security activities at airports are overseen by FSDs. Each FSD is responsible for overseeing security activities, including passenger and checked baggage screening, at one or more commercial airports. TSA classifies the over 450 commercial airports in the United States into one of five security risk categories (X, I, II, III, and IV) based on various factors, such as the total number of takeoffs and landings annually, the extent to which passengers are screened at the airport, and other special security considerations. In general, category X airports have the largest number of passenger boardings and category IV airports have the smallest. TSA periodically reviews airports in each category and, if appropriate, updates airport categorizations to reflect current operations. Figure 1 shows the number of commercial airports by airport security category as of December 2003. In addition to establishing TSA and giving it responsibility for passenger and checked baggage screening operations, ATSA set forth specific enhancements to screening operations for TSA to implement, with deadlines for completing many of them. These requirements included assuming responsibility for screeners and screening operations at more than 450 commercial airports by November 19, 2002; establishing a basic screener training program composed of a minimum of 40 hours of classroom instruction and 60 hours of on-the-job training; conducting an annual proficiency review of all screeners; conducting operational testing of screeners; requiring remedial training for any screener who fails an operational test; and screening all checked baggage for explosives using explosives detection systems by December 31, 2002. Passenger screening is a process by which authorized TSA personnel inspect individuals and property to deter and prevent the carriage of any unauthorized explosive, incendiary, weapon, or other dangerous item aboard an aircraft or into a sterile area. Passenger screeners must inspect individuals for prohibited items at designated screening locations. The four passenger screening functions are: X-ray screening of property, walk-through metal detector screening of individuals, hand-wand or pat-down screening of individuals, and physical search of property and trace detection for explosives. Checked baggage screening is a process by which authorized security screening personnel inspect checked baggage to deter, detect, and prevent the carriage of any unauthorized explosive, incendiary, or weapon onboard an aircraft. Checked baggage screening is accomplished through the use of explosive detection systems (EDS) or explosive trace detection (ETD) systems, and through the use of alternative means, such as manual searches, K-9 teams, and positive passenger bag match, when EDS and ETD systems are unavailable on a temporary basis. Figure 2 provides an illustration of passenger and checked baggage screening operations. There are several positions within TSA for employees that perform and directly supervise passenger and checked baggage screening functions. Figure 3 provides a description of these positions. To prepare screeners to perform screening functions, to keep their skills current, and to address performance deficiencies, TSA provides three categories of required screener training. Table 1 provides a description of the required training. In September 2003, we reported on our preliminary observations of TSA’s efforts to ensure that screeners were effectively trained and supervised and to measure screener performance. We found that TSA had established and deployed a basic screener training program and required remedial training but had not fully developed or deployed a recurrent training program for screeners or supervisors. We also reported that TSA had collected limited data to measure screener performance. Specifically, TSA had conducted limited covert testing, the Threat Image Projection System was not fully operational, and TSA had not implemented the annual screener proficiency testing required by ATSA. In subsequent products, we reported progress TSA had made in these areas and challenges TSA continued to face in making training available to screeners and in measuring and enhancing screener performance. A summary of our specific findings is included in appendix I. TSA has taken a number of actions to enhance the training of screeners and Screening Supervisors but has encountered difficulties in providing access to recurrent training. TSA has enhanced basic training by, among other things, adding a dual-function (passenger and checked baggage) screening course for new employees. Furthermore, in response to the need for frequent and ongoing training, TSA has implemented an Online Learning Center with self-guided training courses available to employees over TSA’s intranet and the Internet and developed and deployed a number of hands-on training tools. Moreover, TSA now requires screeners to participate in 3 hours of recurrent training per week, averaged over each quarter year. TSA has also implemented leadership and technical training programs for Screening Supervisors. However, some FSDs, in response to open-ended survey questions, identified a desire for more training in specific areas, including leadership, communication, and supervision. Further, despite the progress TSA has made in enhancing and expanding screener and supervisory training, TSA has faced challenges in providing access to recurrent training. FSDs reported that insufficient staffing and a lack of high-speed Internet/intranet connectivity at some training facilities have made it difficult to fully utilize these programs and to meet training requirements. TSA has acknowledged that challenges exist in recurrent screener training delivery and is taking steps to address these challenges, including factoring training requirements into workforce planning efforts and distributing training through written materials and CD-ROMs until full Internet/intranet connectivity is achieved. However, TSA does not have a plan for prioritizing and scheduling the deployment of high-speed connectivity to all airport training facilities once funding is available. The absence of such a plan limits TSA’s ability to make prudent decisions about how to move forward with deploying connectivity to all airports to provide screeners access to online training. TSA has enhanced its basic screener training program by updating the training to reflect changes to standard operating procedures, deploying a new dual-function (passenger and checked baggage screening) basic training curriculum, and allowing the option of training delivery by local staff. As required by ATSA, TSA established a basic training program for screeners composed of a minimum of 40 hours of classroom instruction and 60 hours of on-the-job training. TSA also updated the initial basic screener training courses at the end of 2003 to incorporate changes to standard operating procedures and directives, which contain detailed information on how to perform TSA-approved screening methods. However, a recent study by the DHS OIG found that while incorporating the standard operating procedures into the curricula was a positive step, a number of screener job tasks were incompletely addressed in or were absent from the basic training courses. In addition to updates to the training curriculum, in April 2004, TSA developed and implemented a new basic screener training program, dual- function screener training that covers the technical aspects of both passenger and checked baggage screening. Initially, new hire basic training was performed by a contractor and provided a screener with training in either passenger or checked baggage screening functions. A screener could then receive basic training in the other function later, at the discretion of the FSD, but could not be trained in both functions immediately upon hire. The new dual-training program is modular in design. Thus, FSDs can chose whether newly hired screeners will receive instruction in one or both of the screening functions during the initial training. In addition, the individual modules can also be used to provide recurrent training, such as refreshing checked baggage screening skills for a screener who has worked predominately as a passenger screener. TSA officials stated that this new approach provides the optimum training solution based on the specific needs of each airport and reflects the fact that at some airports the FSD does not require all screeners to be fully trained in both passenger and checked baggage screening functions. Some FSDs, particularly those at smaller airports, have made use of the flexibility offered by the modular design of the new course to train screeners immediately upon hire in both passenger and checked baggage screening functions. Such training up front allows FSDs to use screeners for either the passenger or the checked baggage screening function, immediately upon completion of basic training. Figure 4 shows that 58 percent (3,324) of newly hired screeners trained between April 1, 2004, and September 1, 2004, had completed the dual-function training. In April 2004, TSA also provided FSDs with the flexibility to deliver basic screener training using local instructors. TSA’s Workforce Performance and Training Office developed basic screener training internally, and initially, contractors delivered all of the basic training. Since then, TSA has provided FSDs with the discretion to provide the training using local TSA employees or to use contractors. The flexibility to use local employees allows FSDs and members of the screener workforce to leverage their first-hand screening knowledge and experience and address situations unique to individual airports. As of December 10, 2004, TSA had trained 1,021 local FSD staff (representing 218 airports) in how to instruct the dual-function screener training course. TSA officials stated that they expect the use of TSA-approved instructors to increase over time. “Numerous interviews revealed concerns with training curriculum, communication, and coordination issues that directly affect security screening. Unsatisfied with the quantity and breadth of topics, many Training Coordinators have developed supplementary lectures on both security and non-security related topics. These additional lectures…have been very highly received by screeners.” In October 2003, TSA introduced the Online Learning Center to provide screeners with remote access to self-guided training courses. As of September 14, 2004, TSA had provided access to over 550 training courses via the Online Learning Center and made the system available via the Internet and its intranet. TSA also developed and deployed a number of hands-on training modules and associated training tools for screeners at airports nationwide. These training modules cover topics including hand- wanding and pat-down techniques, physical bag searches, X-ray images, prohibited items, and customer service. Additionally, TSA instituted another module for the Online Learning Center called Threat in the Spotlight, that, based on intelligence TSA receives, provides screeners with the latest in threat information regarding terrorist attempts to get threat objects past screening checkpoints. Appendix III provides a summary of the recurrent training tools TSA has deployed to airports and the modules currently under development. In December 2003, TSA issued a directive requiring screeners to receive 3 hours of recurrent training per week averaged over a quarter year. One hour is required to be devoted to X-ray image interpretation and the other 2 hours to screening techniques, review of standard operating procedures, or other mandatory administrative training, such as ethics and privacy act training. In January 2004, TSA provided FSDs with additional tools to facilitate and enhance screener training. Specifically, TSA provided airports with at least one modular bomb set (MBS II) kit—containing components of an improvised explosive device—and one weapons training kit, in part because screeners had consistently told TSA’s OIAPR inspectors that they would like more training with objects similar to ones used in covert testing. Although TSA has made progress with the implementation of recurrent training, some FSDs identified the need for several additional courses, including courses that address more realistic threats. TSA acknowledged that additional screener training is needed, and officials stated that the agency is in the process of developing new and improved screener training, including additional recurrent training modules (see app. III). TSA has arranged for leadership training for screening supervisors through the Department of Agriculture Graduate School and has developed leadership and technical training courses for screening supervisors. However, some FSDs reported the need for more training for Screening Supervisors and Lead Screeners. The quality of Screening Supervisors has been a long-standing concern. In testifying before the 9/11 Commission in May 2003, a former FAA Assistant Administrator for Civil Aviation Security stated that following a series of covert tests at screening checkpoints to determine which were strongest, which were weakest, and why, invariably the checkpoint seemed to be as strong or as weak as the supervisor who was running it. Similarly, TSA’s OIAPR identified a lack of supervisory training as a cause for screener covert testing failures. Further, in a July 2003 internal study of screener performance, TSA identified poor supervision at the screening checkpoints as a cause for screener performance problems. In particular, TSA acknowledged that many Lead Screeners, Screening Supervisors, and Screening Managers did not demonstrate supervisory and management skills (i.e., mentoring, coaching, and positive reinforcement) and provided little or no timely feedback to guide and improve screener performance. In addition, the internal study found that because of poor supervision at the checkpoint, supervisors or peers were not correcting incorrect procedures, optimal performance received little reinforcement, and not enough breaks were provided to screeners. A September 2004 report by the DHS OIG supported these findings, noting that Screening Supervisors and Screening Managers needed to be more attentive in identifying and correcting improper or inadequate screener performance. TSA recognizes the importance of Screener Supervisors and has established training programs to enhance their performance and effectiveness. In September 2003, we reported that TSA had begun working with the Department of Agriculture Graduate School to tailor the school’s off-the-shelf supervisory course to meet the specific needs of Screening Supervisors, and had started training the existing supervisors at that time through this course until the customized course was fielded. According to TSA’s training records, as of September 2004, about 3,800 Screening Supervisors had completed the course—approximately 92 percent of current Screening Supervisors. In response to our survey, one FSD noted that the supervisory training was long overdue because most of the supervisors had no prior federal service or, in some cases, no leadership experience. This FSD also noted that “leadership and supervisory skills should be continuously honed; thus, the development of our supervisors should be an extended and sequential program with numerous opportunities to develop skills—not just a one-time class.” In addition to the Department of Agriculture Graduate School course, TSA’s Online Learning Center includes over 60 supervisory courses designed to develop leadership and coaching skills. In April 2004, TSA included in the Online Learning Center a Web-based technical training course—required for all Lead Screeners and Screening Supervisors. This course covers technical issues, such as resolving alarms at screening checkpoints. TSA introduced this course to the field in March 2004, and although the course is a requirement, TSA officials stated that they have not set goals for when all Lead Screeners and Screening Supervisors should have completed the course. In June 2004, TSA training officials stated that a second supervisor technical course was planned for development and introduction later in 2004. However, in December 2004, the training officials stated that planned funding for supervisory training may be used to support other TSA initiatives. The officials acknowledged that this would reduce TSA’s ability to provide the desired type and level of supervisory training to its Lead Screener, Screening Supervisor, and Screening Manager staff. TSA plans to revise its plans to provide Lead Screener, Screening Supervisor, and Screening Manager training based on funding availability. Although TSA has developed leadership and technical courses for Screening Supervisors, many FSDs, in response to our general survey, identified additional types of training needed to enhance screener supervision. Table 2 provides a summary of the additional training needs that FSDs reported. TSA training officials stated that the Online Learning Center provides several courses that cover these topics. Such courses include Situation Leadership II; Communicating with Difficult People: Handling Difficult Co-Workers; Team Participation: Resolving Conflict in Teams; Employee Performance: Resolving Conflict; High Impact Hiring; Team Conflict: Overcoming Conflict with Communication; Correcting Performance Problems: Disciplining Employees; Team Conflict: Working in Diversified Teams; Correcting Performance Problems: Identifying Performance Problems; Resolving Interpersonal Skills; Grammar, Skills, Punctuation, Mechanics and Word Usage; and Crisis in Organizations: Managing Crisis Situations. TSA training officials acknowledged that for various reasons FSDs might not be aware that the supervisory and leadership training is available. For example, FSDs at airports without high-speed Internet/intranet access to the Online Learning Center might not have access to all of these courses. It is also possible that certain FSDs have not fully browsed the contents of the Online Learning Center and therefore are not aware that the training is available. Furthermore, officials stated that online learning is relatively new to government and senior field managers, and some of the FSDs may expect traditional instructor-led classes rather than online software. Some FSDs responded to our general survey that they faced challenges with screeners receiving recurrent training, including insufficient staffing to allow all screeners to complete training within normal duty hours and a lack of high-speed Internet/intranet connectivity at some training facilities. According to our guide for assessing training, to foster an environment conducive to effective training and development, agencies must take actions to provide sufficient time, space, and equipment to employees to complete required training. TSA has set a requirement for 3 hours of recurrent training per week averaged over a quarter year, for both full-time and part-time screeners. However, FSDs for about 18 percent (48 of 263) of the airports in our airport-specific survey reported that screeners received less than 9 to 12 hours of recurrent training per month. Additionally, FSDs for 48 percent (125 of 263) of the airports in the survey reported that there was not sufficient time for screeners to receive recurrent training within regular work hours. At 66 percent of those airports where the FSD reported that there was not sufficient time for screeners to receive recurrent training within regular work hours, the FSDs cited screener staffing shortages as the primary reason. We reported in February 2004 that FSDs at 11 of the 15 category X airports we visited reported that they were below their authorized staffing levels because of attrition and difficulties in hiring new staff. In addition, three of these FSDs noted that they had never been successful in hiring up to the authorized staffing levels. We also reported in February 2004 that FSDs stated that because of staffing shortages, they were unable to let screeners participate in training because it affected the FSD’s ability to provide adequate coverage at the checkpoints. In response to our survey, FSDs across all categories of airports reported that screeners must work overtime in order to participate in training. A September 2004 DHS OIG report recommended that TSA examine the workforce implications of the 3-hour training requirement and take steps to correct identified imbalances in future workforce planning to ensure that all screeners are able to meet the recurrent training standard. The 3-hours-per-week training standard represents a staff time commitment of 7.5 percent of full- time and between 9 and 15 percent of part-time screeners’ nonovertime working hours. TSA headquarters officials have stated that because the 3- hours-per-week requirement is averaged over a quarter, it provides flexibility to account for the operational constraints that exist at airports. However, TSA headquarters officials acknowledged that many airports are facing challenges in meeting the 3-hour recurrent training requirement. TSA data for the fourth quarter of fiscal year 2004 reported that 75 percent of airports were averaging less than 3 hours of recurrent training per week per screener. The current screener staffing model, which is used to determine the screener staffing allocations for each airport, does not take the 3-hours-per-week recurrent training requirement into account. However, TSA headquarters officials said that they are factoring this training requirement into their workforce planning efforts, including the staffing model currently under development. Another barrier to providing recurrent training is the lack of high-speed Internet/intranet access at some of TSA’s training locations. TSA officials acknowledged that many of the features of the Online Learning Center, including some portions of the training modules and some Online Learning Center course offerings, are difficult or impossible to use in the absence of high-speed Internet/intranet connectivity. As one FSD put it, “the delayed deployment of the high-speed Internet package limits the connectivity to TSA HQ for various online programs that are mandated for passenger screening operations including screener training.” One FSD for a category IV airport noted the lack of a high-speed connection for the one computer at an airport he oversees made the Online Learning Center “nearly useless.” TSA began deploying high-speed access to its training sites and checkpoints in May 2003 and has identified high-speed connectivity as necessary in order to deliver continuous training to screeners. TSA’s July 2003 Performance Improvement Study recommended accelerating high- speed Internet/intranet access in order to provide quick and systematic distribution of information and, thus, reduce uncertainty caused by the day-to-day changes in local and national procedures and policy. In October 2003, TSA reported plans to have an estimated 350 airports online with high-speed connectivity within 6 months. However, in June 2004, TSA reported that it did not have the resources to reach this goal. TSA records show that as of October 2004, TSA had provided high-speed access for training purposes to just 109 airports, where 1,726 training computers were fully connected. These 109 airports had an authorized staffing level of over 24,900 screeners, meaning that nearly 20,100 screeners (45 percent of TSA’s authorized screening workforce) still did not have high-speed Internet/intranet access to the Online Learning Center at their training facility. In October 2004, TSA officials stated that TSA’s Office of Information Technology had selected an additional 16 airport training facilities with a total of 205 training computers to receive high- speed connectivity by the end of December 2004. As of January 19, 2005, TSA was unable to confirm that these facilities had received high-speed connectivity. Additionally, they could not provide a time frame for when they expected to provide high-speed connectivity to all airport training facilities because of funding uncertainties. Furthermore, TSA does not have a plan for prioritizing and scheduling the deployment of high-speed connectivity to all airport training facilities once funding is available. Without a plan, TSA’s strategy and timeline for implementing connectivity to airport training facilities is unclear. The absence of such a plan limits TSA’s ability to make prudent decisions about how to move forward with deploying connectivity once funding is available. Figure 5 shows the percentage of airports reported to have high-speed connectivity for their training computers by category of airport as of October 2004. To mitigate airport connectivity issues in the interim, on April 1, 2004, TSA made the Online Learning Center courses accessible through public Internet connections, which enable screeners to log on to the Online Learning Center from home, a public library, or other locations. However, TSA officials stated that the vast majority of screeners who have used the Online Learning Center have logged in from airports with connectivity at their training facilities. TSA also distributes new required training products using multiple delivery channels, including written materials and CD-ROMs for those locations where access to the Online Learning Center is limited. Specifically, TSA officials stated that they provided airports without high-speed connectivity with CD-ROMs for the 50 most commonly used optional commercial courseware titles covering topics such as information technology skills, customer service, and teamwork. Additionally, officials stated that as technical courses are added to the Online Learning Center, they are also distributed via CD-ROM and that until full connectivity is achieved, TSA will continue to distribute new training products using multiple delivery channels. Because of a lack of internal controls, TSA cannot provide reasonable assurance that screeners are completing required training. First, TSA policy does not clearly define responsibility for ensuring that screeners have completed all required training. Additionally, TSA has no formally defined policies or procedures for documenting completion of remedial training, or a system designed to facilitate review of this documentation for purposes of monitoring. Further, TSA headquarters does not have formal policies and procedures for monitoring completion of basic training and lacks procedures for monitoring recurrent training. Finally, at airports without high-speed connectivity, training records must be entered manually, making it challenging for some airports to keep accurate and up- to-date training records. TSA’s current guidance for FSDs regarding the training of the screener workforce does not clearly identify responsibility for tracking and ensuring compliance with training requirements. In a good control environment, areas of authority and responsibility are clearly defined and appropriate lines of reporting are established. In addition, internal control standards also require that responsibilities be communicated within an organization. The Online Learning Center provides TSA with a standardized, centralized tool capable of maintaining all training records in one system. It replaces an ad hoc system previously used during initial rollout of federalized screeners in which contractors maintained training records. A February 2004 management directive states that FSDs are responsible for ensuring the completeness, accuracy, and timeliness of training records maintained in the Online Learning Center for their employees. For basic and recurrent training, information is to be entered into the Online Learning Center within 30 days of completion of the training activity. However, the directive does not clearly identify who is responsible for ensuring that employees comply with training requirements. Likewise, a December 2003 directive requiring that screeners complete 3 hours of training per week averaged over a quarter states that FSDs are responsible for ensuring that training records for each screener are maintained in the Online Learning Center. Although both directives include language that requires FSDs to ensure training records are maintained in the Online Learning Center, neither specifies whether FSDs or headquarters officials are responsible for ensuring compliance with the basic, recurrent, and remedial training requirements. Even so, TSA headquarters officials told us that FSDs are ultimately responsible for ensuring screeners receive required training. However, officials provided no documentation clearly defining this responsibility. Without a clear designation of responsibility for monitoring training completion, this function may not receive adequate attention, leaving TSA unable to provide reasonable assurance that its screening workforce receives required training. In April 2005, TSA officials responsible for training stated that they were updating the February 2004 management directive on training records to include a specific requirement for FSDs to ensure that screeners complete required training. They expect to release the revised directive in May 2005. TSA has not established and documented policies and procedures for monitoring completion of basic and recurrent training. Internal control standards advise that internal controls should be designed so that monitoring is ongoing and ingrained in agency operations. However, TSA headquarters officials stated that they have no formal policy for monitoring screeners’ completion of basic training. They also stated that they have neither informal nor formal procedures for monitoring the completion of screeners’ recurrent training requirements, and acknowledged that TSA policy does not address what is to occur if a screener does not meet the recurrent training requirement. Officials further stated that individual FSDs have the discretion to determine what action, if any, to take when screeners do not meet this requirement. In July 2004, TSA training officials stated that headquarters staff recently began running a report in the Online Learning Center to review training records to ensure that newly hired screeners had completed required basic training. In addition, they stated that in June 2004, they began generating summary-level quarterly reports from the Online Learning Center to quantify and analyze hours expended for recurrent screener training. Specifically, TSA training officials stated that reports showing airport-level compliance with the 3-hour recurrent requirement were generated for the third and fourth quarters of fiscal year 2004 and delivered to the Office of Aviation Operations for further analysis and sharing with the field. However, Aviation Operations officials stated that they did not use these reports to monitor the status of screener compliance with the 3-hour recurrent training requirement and do not provide them to the field unless requested by an FSD. TSA training officials said that while headquarters intends to review recurrent training activity on an ongoing basis at a national and airport level, they view FSDs and FSD training staff as responsible for ensuring that individuals receive all required training. Further, they acknowledged that weaknesses existed in the reporting capability of the Online Learning Center and stated that they plan to upgrade the Online Learning Center with improved reporting tools by the end of April 2005. Without clearly defined policies and procedures for monitoring the completion of training, TSA lacks a structure to support continuous assurance that screeners are meeting training requirements. TSA has not established clear policies and procedures for documenting completion of required remedial training. The Standards for Internal Control state that agencies should document all transactions and other significant events and should be able to make this documentation readily available for examination. A TSA training bulletin dated October 15, 2002, specifies that when remedial training is required, FSDs must ensure the training is provided and a remedial training reporting form is completed and maintained with the screener’s local records. However, when we asked to review these records, we found confusion as to how and where they were to be maintained. TSA officials stated that they are waiting for a decision regarding how to maintain these records because of their sensitive nature. In the meantime, where and by whom the records should be maintained remains unclear. In September 2004, officials from TSA’s OIAPR—responsible for conducting covert testing—stated that they maintain oversight to ensure screeners requiring remedial training receive required training by providing a list of screeners that failed covert testing and therefore need remedial training to TSA’s Office of Aviation Operations. Aviation Operations is then to confirm via memo that each of the screeners has received the necessary remedial training and report back to OIAPR. Accordingly, we asked TSA for all Aviation Operations memos confirming completion of remedial training, but we were only able to obtain 1 of the 12 memos. In addition, during our review, we asked to review the remedial training reporting forms at five airports to determine whether screeners received required training, but we encountered confusion about requirements for maintaining training records and inconsistency in record keeping on the part of local TSA officials. Because of the unclear policies and procedures for recording completion of remedial training, TSA does not have adequate assurance that screeners are receiving legislatively mandated remedial training. Although training computers with high-speed Internet/intranet connectivity automatically record completion of training in the Online Learning Center, airports without high-speed access at their training facility must have these records entered manually. The February 2004 management directive that describes responsibility for entering training records into the Online Learning Center also established that all TSA employees are required to have an official TSA training record in the Online Learning Center that includes information on all official training that is funded wholly or in part with government funds. Without high- speed access, TSA officials stated that it can be a challenge for airports to keep the Online Learning Center up to date with the most recent training records. TSA headquarters officials further stated that when they want to track compliance with mandatory training such as ethics or civil rights training, they provide the Training Coordinators with a spreadsheet on which to enter the data rather than relying on the Online Learning Center. As one FSD told us, without high-speed connectivity at several of the airports he oversees, “this is very time consuming and labor intensive and strains my limited resources.” The difficulty that airports encounter in maintaining accurate records when high-speed access is absent could compromise TSA’s ability to provide reasonable assurance that screeners are receiving mandated basic and remedial training. TSA has improved its efforts to measure and enhance screener performance. However, these efforts have primarily focused on passenger screening rather than checked baggage screening, and TSA has not yet finalized performance targets for several key performance measures. For example, TSA has increased the amount of covert testing it performs at airports. These tests have identified that, overall, weaknesses and vulnerabilities continue to exist in the passenger and checked baggage screening systems. TSA also enabled FSDs to conduct local covert testing, fully deployed the Threat Image Projection (TIP) system to passenger screening checkpoints at commercial airports nationwide, and completed the 2003/2004 annual screener recertification program for all eligible screeners. However, not all of these performance measurement and enhancement tools are available for checked baggage screening. Specifically, TIP is not currently operational at checked baggage screening checkpoints, and the recertification program does not include an image recognition component for checked baggage screeners. However, TSA is taking steps to address the overall imbalance in passenger and checked baggage screening performance data, including working toward implementing TIP for checked baggage screening and developing an image recognition module for checked baggage screener recertification. To enhance screener and screening system performance, TSA has also conducted a passenger screener performance improvement study and subsequently developed an improvement plan consisting of multiple action items, many of which TSA has completed. However, TSA has not conducted a similar study for checked baggage screeners. In addition, TSA has established over 20 performance measures for the passenger and checked baggage screening systems as well as two performance indexes (one for passenger and one for checked baggage screening). However, TSA has not established performance targets for each of the component indicators within the indexes, such as covert testing. According to The Office of Management and Budget, performance goals are target levels of performance expressed as a measurable objective, against which actual achievement can be compared. Performance goals should incorporate measures (indicators used to gauge performance); targets (characteristics that tell how well a program must accomplish the measure), and time frames. Without these targets, TSA’s performance management system, and these performance indexes, specifically, may not provide the agency with the complete information necessary to assess achievements and make decisions about where to direct performance improvement efforts. Although TSA has not yet established performance targets for each of the component indicators, TSA plans to finalize performance targets for the indicators by the end of fiscal year 2005. TSA headquarters has increased the amount of covert testing it performs and enabled FSDs to conduct additional local covert testing at passenger screening checkpoints. TSA’s OIAPR conducts unannounced covert tests of screeners to assess their ability to detect threat objects and to adhere to TSA-approved procedures. These tests, in which undercover OIAPR inspectors attempt to pass threat objects through passenger screening checkpoints and in checked baggage, are designed to measure vulnerabilities in passenger and checked baggage screening systems and to identify systematic problems affecting performance of screeners in the areas of training, policy, and technology. TSA considers its covert testing as a “snapshot” of a screener’s ability to detect threat objects at a particular point in time and as one of several indicators of system wide screener performance. OIAPR conducts tests at passenger screening checkpoints and checked baggage screening checkpoints. According to OIAPR, these tests are designed to approximate techniques terrorists might use. These covert test results are one source of data on screener performance in detecting threat objects as well as an important mechanism for identifying areas in passenger and checked baggage screening needing improvement. In testimony before the 9/11 Commission, the Department of Transportation Inspector General stated that emphasis must be placed on implementing an aggressive covert testing program to evaluate operational effectiveness of security systems and equipment. Between September 10, 2002, and September 30, 2004, OIAPR conducted a total of 3,238 covert tests at 279 different airports. In September 2003, we reported that OIAPR had conducted limited covert testing but planned to double the amount of tests it conducted during fiscal year 2004, based on an anticipated increase in its staff from about 100 full-time equivalents to about 200 full-time equivalents. TSA officials stated that based on budget constraints, OIAPR’s fiscal year 2004 staffing authorization was limited to 183 full-time-equivalents, of which about 60 are located in the field. Despite a smaller than expected staff increase, by the end of the second quarter of fiscal year 2004, OIAPR had already surpassed the number of tests it performed during fiscal year 2003, as shown in table 3. In October 2003, OIAPR committed to testing between 90 and 150 airports by April 2004 as part of TSA’s short-term screening performance improvement plan. OAIPR officials stated that this was a onetime goal to increase testing. This initiative accounts for the spike in testing for the second quarter of fiscal year 2004. OIAPR has created a testing schedule designed to test all airports at least once during a 3-year time frame. Specifically, the schedule calls for OIAPR to test all category X airports once a year, category I and II airports once every 2 years, and category III and IV airports at least once every 3 years. In September 2003 and April 2004, we reported that TSA covert testing results had identified weaknesses in screeners’ ability to detect threat objects. More recently, in April 2005, we, along with the DHS OIG, identified that screener performance continued to be a concern. Specifically, our analysis of TSA’s covert testing results for tests conducted between September 2002 and September 2004 identified that overall, weaknesses still existed in the ability of screeners to detect threat objects on passengers, in their carry-on bags, and in checked baggage. Covert testing results in this analysis cannot be generalized either to the airports where the tests were conducted or to airports nationwide. These weaknesses and vulnerabilities were identified at airports of all sizes, at airports with federal screeners, and airports with private-sector screeners. For the two-year period reviewed, overall failure rates for covert tests (passenger and checked baggage) conducted at airports using private- sector screeners were somewhat lower than failure rates for the same tests conducted at airports using federal screeners for the airports tested during this period. Since these test results cannot be generalized as discussed above, each airport’s test results should not be considered a comprehensive measurement of the airport’s performance or any individual screener’s performance in detecting threat objects, or in determining whether airports with private sector screeners performed better than airports with federal screeners. On the basis of testing data through September 30, 2004, we determined that OIAPR had performed covert testing at 61 percent of the nation’s commercial airports. TSA has until September 30, 2005, to test the additional 39 percent of airports and meet its goal of testing all airports within 3 years. Although officials stated that they have had to divert resources from airport testing to conduct testing of other modes and that testing for other modes of transportation may affect their ability to conduct airport testing, they still expect to meet the goal. In February 2004, TSA provided protocols to help FSDs conduct their own covert testing of local airport passenger screening activities—a practice that TSA had previously prohibited. Results of local testing using these protocols are to be entered into the Online Learning Center. This information, in conjunction with OAIPR covert test results and TIP threat detection results, is intended to assist TSA in identifying specific training and performance improvement efforts. In February 2005, TSA released a general procedures document for local covert testing at checked baggage screening locations. TSA officials said that they had not yet begun to use data from local covert testing to identify training and performance needs because of difficulties in ensuring that local covert testing is implemented consistently nationwide. These officials said that after a few months of collecting and assessing the data, they will have a better idea of how the data can be used. TSA has nearly completed the reactivation of the TIP system at airports nationwide and plans to use data it is collecting to improve the effectiveness of the passenger screening system. TIP is designed to test passenger screeners’ detection capabilities by projecting threat images, including guns, knives, and explosives, onto bags as they are screened during actual operations. Screeners are responsible for identifying the threat image and calling for the bag to be searched. Once prompted, TIP identifies to the screener whether the threat is real and then records the screener’s performance in a database that could be analyzed for performance trends. TSA is evaluating the possibility of developing an adaptive functionality to TIP. Specifically, as individual screeners become proficient in identifying certain threat images, such as guns or knives, they will receive fewer of those images and more images that they are less proficient at detecting, such as improvised explosive devices. TIP was activated by FAA in 1999 with about 200 threat images, but it was shut down immediately following the September 11 terrorist attacks because of concerns that it would result in screening delays and panic, as screeners might think that they were actually viewing threat objects. In October 2003, TSA began reactivating and expanding TIP. In April 2004, we reported that TSA was reactivating TIP with an expanded library of 2,400 images at all but one of the more than 1,800 checkpoint lanes nationwide. To further enhance screener training and performance, TSA also plans to develop at least an additional 50 images each month. Despite these improvements, TIP is not yet available for checked baggage screening. In April 2004, we reported that TSA officials stated that they were working to resolve technical challenges associated with using TIP for checked baggage screening on EDS machines and have started EDS TIP image development. The DHS OIG reported in September 2004 that TSA plans to implement TIP on all EDS machines at checked baggage stations nationwide in fiscal year 2005. However, in December 2004, TSA officials stated that because of severe budget reductions, TSA will be unable to begin implementing a TIP program for checked baggage in fiscal year 2005. They did not specify when such a program might begin. TSA plans to use TIP data to improve the passenger screening system in two ways. First, TIP data can be used to measure screener threat detection effectiveness by different threats. Second, TSA plans to use TIP results to help identify specific recurrent training needs within and across airports and to tailor screeners’ recurrent training to focus on threat category areas that indicate a need for improvement. TSA considers February 2004 as the first full month of TIP reporting with the new library of 2,400 images. TSA began collecting these data in early March 2004 and is using the data to determine more precisely how they can be used to measure screener performance in detecting threat objects and to determine what the data identify about screener performance. TSA does not currently plan to use TIP data as an indicator of individual screener performance because TSA does not believe that TIP by itself adequately reflects a screener’s performance. Nevertheless, in April 2004, TSA gave FSDs the capability to query and analyze TIP data in a number of ways, including by screener, checkpoint, and airport. FSDs for over 60 percent of the airports included in our airport-specific survey stated that they use or plan to use TIP data as a source of information in their evaluations of individual screener performance. Additionally, FSDs for 50 percent of the airports covered in our survey reported using data generated by TIP to identify specific training needs for individual screeners. In September 2004, the DHS OIG reported that TSA is assessing the cost and feasibility of modifying TIP so that it recognizes and responds to specific threat objects with which individual screeners are most and least competent in detecting, over time. This feature would increase the utility of TIP as a training tool. The DHS OIG also reported that TSA is considering linking TIP over a network, which would facilitate TSA’s collection, analysis, and information-sharing efforts around TIP user results. The report recommended that TSA continue to pursue each of these initiatives, and TSA agreed. However, in December 2004, TSA officials stated that the availability of funding will determine whether or not they pursue these efforts further. TSA has completed its first round of the screener recertification program, and the second round is now under way. However, TSA does not currently include an image recognition component in the test for checked baggage screener recertification. ATSA requires that each screener receive an annual proficiency review to ensure he or she continues to meet all qualifications and standards required to perform the screening function. In September 2003, we reported that TSA had not yet implemented this requirement. To meet this requirement, TSA established a recertification program, and it began recertification testing in October 2003 and completed the testing in March 2004. The first recertification program was composed of two assessment components, one of screeners’ performance and the other of screeners’ knowledge and skills. During the performance assessment component of the recertification program, screeners are rated on both organizational and individual goals, such as maintaining the nation’s air security, vigilantly carrying out duties with utmost attention to tasks that will prevent security threats, and demonstrating the highest levels of courtesy to travelers to maximize their levels of satisfaction with screening services. The knowledge and skills assessment component consists of three modules: (1) knowledge of standard operating procedures, (2) image recognition, and (3) practical demonstration of skills. Table 4 provides a summary of these three modules. To be recertified, screeners must have a rating of “met” or “exceeded” standards on their annual performance assessments and have passed each of the applicable knowledge and skills modules. Screeners that failed any of the three modules were to receive study time or remedial training as well as a second opportunity to take and pass the modules. Screeners who failed on their second attempt were to be removed from screening duties and subject to termination. Screeners could also be terminated for receiving a rating of below “met” standards. TSA completed its analysis of the recertification testing and performance evaluations in May 2004. TSA’s analysis shows that less than 1 percent of screeners subject to recertification failed to complete this requirement. Figure 6 shows the recertification results. Across all airports screeners performed well on the recertification testing. Over 97 percent of screeners passed the standard operating procedures test on their first attempt. Screeners faced the most difficulty on the practical demonstration of skills component. However, following remediation, 98.6 percent of the screeners who initially failed this component passed on their second attempt. Table 5 shows the results of the recertification testing by module. As shown in table 6, screeners hired as checked baggage screeners were not required to complete the image recognition module in the first round of the recertification testing. In addition, during the first year of recertification testing, which took place from October 2003 through May 2004, dual-function screeners who were actively working as both passenger and checked baggage screeners were required to take only the recertification test for passenger screeners. They were therefore not required to take the recertification testing modules required for checked baggage, even though they worked in that capacity. TSA began implementing the second annual recertification testing in October 2004 and plans to complete it no later than June 2005. This recertification program includes components for dual-function screeners. However, TSA still has not included an image recognition module for checked baggage screeners—which would include dual-function screeners performing checked baggage screening. TSA officials stated that a decision was made to not include an image recognition module for checked baggage screeners during this cycle because not all checked baggage screeners would have completed training on the onscreen resolution protocol by the time recertification testing was conducted at their airports. In December 2004, TSA officials stated that they plan on developing an image recognition module for checked baggage and dual- function screeners, and that this test should be available for next year’s recertification program. The development and implementation of the image recognition test will be contingent, they stated, upon the availability of funds. TSA has implemented a number of improvements designed to enhance screener performance, based on concerns it identified in a July 2003 Passenger Screener Performance Improvement Study and recommendations from OIAPR. To date, however, these efforts have primarily focused on the performance of passenger screeners, and TSA has not yet undertaken a comparable performance study for checked baggage screeners. The Passenger Screener Performance Improvement Study relied in part on the findings of OIAPR’s covert testing. At the time the study was issued, OIAPR had conducted fewer than 50 tests of checked baggage screeners. The July 2003 study focused on and included numerous recommendations for improving the performance of passenger screeners, but recommended waiting to analyze the performance of checked baggage screeners until some time after implementation of the recommendations, some of which TSA indicated, also applied to checked baggage screeners. TSA officials told us that this analysis has been postponed until they have reviewed the impact of implementing the recommendations on passenger screening performance. In October 2003, to address passenger screener performance deficiencies identified in the Screener Performance Improvement Study, TSA developed a Short-Term Screening Performance Improvement Plan. This plan included specific action items in nine broad categories—such as enhance training, increase covert testing, finish installing TIP, and expedite high-speed connectivity to checkpoints and training computers— that TSA planned to pursue to provide tangible improvements in passenger screener performance and security (see app. IV for additional information on the action items). In June 2004, TSA reported that it had completed 57 of the 62 specific actions. As of December 2004, two of these actions still had not been implemented—full deployment of high-speed connectivity and a time and attendance package—both of which continue to be deferred pending the identification of appropriate resources. In addition to the Performance Improvement Study and corresponding action plans, TSA’s OIAPR makes recommendations in its reports on covert testing results. These recommendations address deficiencies identified during testing and are intended to improve screening effectiveness. As of December 2004, OIAPR had issued 18 reports to TSA management on the results of its checkpoint and checked baggage covert testing. These reports include 14 distinct recommendations, some of which were included in TSA’s screener improvement action plan. All but two of these reports included recommendations on corrective actions needed to enhance the effectiveness of passenger and checked baggage screening. TSA has established performance measures, indexes, and targets for the passenger and checked baggage screening systems, but has not established targets for the various components of the screening indexes. The Government Performance and Results Act of 1993 provides, among other things, that federal agencies establish program performance measures, including the assessment of relevant outputs and outcomes of each program activity. Performance measures are meant to cover key aspects of performance and help decision makers to assess program accomplishments and improve program performance. A performance target is a desired level of performance expressed as a tangible, measurable objective, against which actual achievement will be compared. By analyzing the gap between target and actual levels of performance, management can target those processes that are most in need of improvement, set improvement goals, and identify appropriate process improvements or other actions. An April 2004 consultant study commissioned by TSA found that FSDs and FSD staffs generally believed the lack of key performance indicators available to monitor passenger and checked baggage screening performance represented a significant organizational weakness. Since then, TSA has established over 20 performance measures for the passenger and checked baggage screening systems. For example, TSA measures the percentage of screeners meeting a threshold score on the annual recertification testing on their first attempt, the percentage of screeners scoring above the national standard level on TIP performance, and the number of passengers screened, by airport category. TSA also has developed two performance indexes to measure the effectiveness of the passenger and checked baggage screening systems. These indexes measure overall performance through a composite of indicators and are derived by combining specific performance measures relating to passenger and checked baggage screening, respectively. Specifically, these indexes measure the effectiveness of the screening systems through machine probability of detection and covert testing results; efficiency through a calculation of dollars spent per passenger or bag screened; and customer satisfaction through a national poll, customer surveys, and customer complaints at both airports and TSA’s national call center. According to TSA officials, the agency has finalized targets for the two overall indexes, but these targets have not yet been communicated throughout the agency. Further, TSA plans to provide the FSDs with only the performance index score, not the value of each of the components, because the probabilities of detection are classified as secret and TSA is concerned that by releasing components, those probabilities could be deduced. Table 7 summarizes the components of the performance indexes developed by TSA. TSA has not yet established performance targets for the various components of the screening indexes, including performance targets for covert testing (person probability of detection). TSA’s strategic plan states that the agency will use the performance data it collects to make tactical decisions based on performance. The screening performance indexes developed by TSA can be a useful analysis tool, but without targets for each component of the index, TSA will have difficulty performing meaningful analyses of the parts that add up to the index. For example, without performance targets for covert testing, TSA will not have identified a desired level of performance related to screener detection of threat objects. Performance targets for covert testing would enable TSA to focus its improvement efforts on areas determined to be most critical, as 100 percent detection capability may not be attainable. In January 2005, TSA officials stated that the agency plans to track the performance of individual index components and establish performance targets against which to measure these components. They further stated that they are currently collecting and analyzing baseline data to establish these targets and plan to finalize them by the end of fiscal year 2005. It has been over 2 years since TSA assumed responsibility for passenger and checked baggage screening operations at the nation’s commercial airports. TSA has made significant accomplishments over this period in meeting congressional mandates related to establishing these screening operations. With the congressional mandates now largely met, TSA has turned its attention to assessing and enhancing the effectiveness of its passenger and checked baggage screening systems. An important tool in enhancing screener performance is ongoing training. As threats and technology change, the training and development of screeners to ensure they have the competencies—knowledge, skills, abilities, and behaviors— needed to successfully perform their screening functions become vital to strengthening aviation security. Without addressing the challenges to delivering ongoing training, including installing high-speed connectivity at airport training facilities, TSA may have difficulty maintaining a screening workforce that possesses the critical skills needed to perform at a desired level. In addition, without adequate internal controls designed to help ensure screeners receive required training that are also communicated throughout the agency, TSA cannot effectively provide reasonable assurances that screeners receive all required training. Given the importance of the Online Learning Center in both delivering training and serving as the means by which the completion of screener training is documented, TSA would benefit from having a clearly defined plan for prioritizing the deployment of high-speed Internet/intranet connectivity to all airport training facilities. Such a plan would help enable TSA to move forward quickly and effectively in deploying high-speed connectivity once funding is available. Additionally, history demonstrates that U.S. commercial aircraft have long been a target for terrorist attacks through the use of explosives carried in checked baggage, and covert testing conducted by TSA and DHS OIG have identified that weaknesses and vulnerabilities continue to exist in the passenger and checked baggage screening systems, including the ability of screeners to detect threat objects. While covert test results provide an indicator of screening performance, they cannot solely be used as a comprehensive measure of any airport’s screening performance or any individual screener’s performance, or in determining the overall performance of federal versus private-sector screening. Rather, these data should be considered in the larger context of additional performance data, such as TIP and recertification test results, when assessing screener performance. While TSA has undertaken efforts to measures and strengthen performance, these efforts have primarily focused on passenger screening and not on checked baggage screening. TSA’s plans for implementing TIP for checked baggage screening, and establishing an image recognition component for the checked baggage screeners recertification testing—plans made during the course of our review— represent significant steps forward in its efforts to strengthen checked baggage screening functions. Additionally, although TSA has developed passenger and checked baggage screening effectiveness measures, the agency has not yet established performance targets for the individual components of these measures. Until such targets are established, it will be difficult for TSA to draw more meaningful conclusions about its performance and how to most effectively direct its improvement efforts. For example, performance targets for covert testing would enable TSA to focus its improvement efforts on areas determined to be most critical, as 100 percent detection capability may not be attainable. We are encouraged by TSA’s recent plan to establish targets for the individual components of the performance indexes. This effort, along with the additional performance data TSA plans to collect on checked baggage screening operations, should assist TSA in measuring and enhancing screening performance and provide TSA with more complete information with which to prioritize and focus its screening improvement efforts. To help ensure that all screeners have timely and complete access to screener training available in the Online Learning Center and to help provide TSA management with reasonable assurance that all screeners are receiving required passenger and checked baggage screener training, we recommend that the Secretary of the Department of Homeland Security direct the Assistant Secretary, Transportation Security Administration, to take the following two actions: develop a plan that prioritizes and schedules the deployment of high-speed Internet/intranet connectivity to all TSA’s airport training facilities to help facilitate the delivery of screener training and the documentation of training completion, and develop internal controls, such as specific directives, clearly defining responsibilities for monitoring and documenting the completion of required training, and clearly communicate these responsibilities throughout the agency. We provided a draft of this report to DHS for review and comment. On February 4, 2005, we received written comments on the draft report, which are reproduced in full in appendix V. DHS generally concurred with the findings and recommendations in the report, and agreed that efforts to implement our recommendations are critical to successful passenger and checked baggage screening training and performance. With regard to our recommendation that TSA develop a plan that prioritizes and schedules the deployment of high-speed Internet/intranet connectivity to all TSA’s airport training facilities, DHS stated that TSA has developed such a plan. However, although we requested a copy of the plan several times during our review and after receiving written comments from DHS, TSA did not provide us with a copy of the plan. Therefore, we cannot assess the extent to which the plan DHS referenced in its written comments fulfills our recommendation. In addition, regarding our recommendation that TSA develop internal controls clearly defining responsibilities for monitoring and documenting the completion of required training, and clearly communicate those responsibilities throughout TSA, DHS stated that it is taking steps to define responsibility for monitoring the completion of required training and to insert this accountability into the performance plans of all TSA supervisors. TSA’s successful completion of these ongoing and planned activities should address the concerns we raised in this report. DHS has also provided technical comments on our draft report, which we incorporated where appropriate. As agreed with your office, we will send copies of this report to relevant congressional committees and subcommittees and to the Secretary of the Department of Homeland Security. We will also make copies available to others upon request. In addition, the report will be made available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions about this report or wish to discuss it further, please contact me at (202) 512-8777. Key contributors to this report are listed in appendix VI. The Transportation Security Administration (TSA) had deployed a basic screener training program and required remedial training but had not fully developed or deployed a recurrent training program for screeners or supervisors. TSA had collected little information to measure screener performance in detecting threat objects. TSA’s Office of Internal Affairs and Program Review’s (OIAPR) covert testing was the primary source of information collected on screeners’ ability to detect threat objects. However, TSA did not consider the covert testing a measure of screener performance. TSA was not using the Threat Image Projection system (TIP) but planned to fully activate the system with significantly more threat images than previously used in October 2003. TSA had not yet implemented an annual proficiency review to ensure that screeners met all qualifications and standards required to perform their assigned screening functions. Although little data existed on the effectiveness of passenger screening, TSA was implementing several efforts to collect performance data. Aviation Security: Efforts to Measure Effectiveness and Address Challenges planned to double the number of tests it conducted during fiscal year 2004. TSA only recently began activating TIP on a wide-scale basis and expected it to be fully operational at every checkpoint at all airports by April 2004. TSA only recently began implementing the annual recertification program and did not expect to complete testing at all airports until March 2004. TSA was developing performance indexes for individual screeners and the screening system as a whole but had not fully established these indexes. TSA expected to have them in place by the end of fiscal year 2004. Aviation Security: Efforts to Measure Effectiveness and Strengthen Security Programs working with the U.S. Department of Agriculture’s Graduate School to tailor its off-the-shelf supervisory course to meet the specific training needs of screening supervisors. While TSA had taken steps to enhance its screener training programs, staffing imbalances, and lack of high-speed connectivity at airport training facilities had made it difficult for screeners at some airports to fully utilize these programs. Although TSA was making progress in measuring the performance of passenger screeners, it had collected limited performance data related to its checked baggage screening operations. However, TSA had begun collecting additional performance data related to its checked baggage screening operations and planned to increase these efforts in the future. As part of its efforts to develop performance indexes, TSA was developing baseline data for fiscal year 2004 and planned to report the indexes to DHS in fiscal year 2005. With the exception of covert testing and recent TIP data, data were not yet available to assess how well screeners were performing and what steps if any TSA needed to take to improve performance. Also, TSA was not using TIP as a formal indicator of screening performance, but instead was using it to identify individual screener training needs. To examine efforts by the Transportation Security Administration to enhance their passenger and checked baggage screening programs, we addressed the following questions: (1) What actions has TSA taken to enhance training for screeners and supervisors? (2) How does TSA monitor compliance with screener training requirements? (3) What is the status of TSA’s efforts to assess and enhance screener performance in detecting threat objects? To determine how TSA has enhanced training for screeners and supervisors and how TSA has monitored compliance with screener training requirements, we obtained and analyzed relevant legislation, as well as TSA’s training plans, guidance, and curriculum. We reviewed data from TSA’s Online Learning Center and assessed the reliability of the Online Learning Center database. We compared TSA’s procedures for ensuring that screeners receive required training according to Standards for Internal Controls in the Federal Government. We interviewed TSA officials from the Office of Workforce Performance and Training and the Office of Aviation Operations in Arlington, Virginia. At the airports we visited, we interviewed Federal Security Directors and their staffs, such as Training Coordinators. We also met with officials from four aviation associations—the American Association of Airport Executives, Airports Council International, the Air Transport Association, and the Regional Airline Association. We did not assess the methods used to develop TSA’s screener training program, nor did we analyze the contents of TSA’s curriculum. Although we could not independently verify the reliability of all of this information, we compared the information with other supporting documents, when available, to determine data consistency and reasonableness. We found the data to be sufficiently reliable for our purposes. To determine what efforts TSA has taken to assess and to enhance screener performance in detecting threat objects, we reviewed related reports from the Department of Transportation and the Department of Homeland Security (DHS) Inspector General, Congressional Research Service, and TSA, as well as prior GAO reports. We obtained and reviewed TSA’s covert test data and results of the annual recertification testing. (Results of the covert testing are classified and will be the subject of a separate classified GAO report.) We discussed methods for inputting, compiling, and maintaining the data with TSA officials. We also assessed the methodology of TSA’s covert tests and questioned OIAPR officials about the procedures used to ensure the reliability of the covert test data. When we found discrepancies between the data OIAPR maintained in spreadsheets and the data included in the hard copy reports we obtained from TSA, we worked with OIAPR to resolve the discrepancies. Further, we visited TSA headquarters to review TSA’s annual recertification testing modules and discuss TSA’s process for validating the recertification exams. As a result, we determined that the data provided by TSA were sufficiently reliable for the purposes of our review. We also reviewed TSA’s performance measures, targets, and indexes. Finally, we interviewed TSA headquarters officials from several offices in Arlington, Virginia, including Aviation Operations, Workforce Performance and Training, Strategic Management and Analysis, and Internal Affairs and Program Review. In addition, in accomplishing our objectives, we also conducted site visits at select airports nationwide to interview Federal Security Directors and their staffs and conducted two Web-based surveys of Federal Security Directors. Specifically, we conducted site visits at 29 airports (13 category X airports, 9 category I airports, 3 category II airports, 3 category III airports, and 1 category IV airport) to observe airport security screening procedures and discuss issues related to the screening process with TSA, airport, and airline officials. We chose these airports to obtain a cross- section of all airports by size and geographic distribution. In addition, we selected each of the five contract screening pilot airports. The results from our airport visits provide examples of screening operations and issues but cannot be generalized beyond the airports visited because we did not use statistical sampling techniques in selecting the airports. The category X airports we visited were Baltimore Washington International Airport, Boston Logan International Airport, Chicago O’Hare International Airport, Dallas/Fort Worth International Airport, Denver International Airport, Washington Dulles International Airport, John F. Kennedy International Airport, Los Angeles International Airport, Newark Liberty International Airport, Orlando International Airport, Ronald Reagan Washington National Airport, San Francisco International Airport, Seattle-Tacoma International Airport. The category I airports we visited were Burbank- Glendale-Pasadena Airport, John Wayne Airport, Chicago Midway International Airport, Dallas Love Field, Kansas City International Airport, Little Rock National Airport, Metropolitan Oakland International Airport, Portland International Airport, and Tampa International Airport. The category II airports we visited were Jackson International Airport, Dane County Regional Airport, and Greater Rochester International Airport. The category III airports we visited were Idaho Falls Regional Airport, Jackson Hole Airport, and Orlando Sanford International Airport. The category IV airport we visited was Tupelo Regional Airport. Further, we administered two Web-based surveys to all 155 Federal Security Directors who oversee security at each of the airports falling under TSA’s jurisdiction. One survey, the general survey, contained questions covering local and national efforts to train screeners and supervisors and the status of TSA’s efforts to evaluate screener performance, including the annual recertification program and TIP. The second survey attempted to gather more specific airport security information on an airport(s) under the Federal Security Director’s supervision. For the airport-specific survey, each Federal Security Director received one or two surveys to complete, depending on the number of airports they were responsible for. Where a Federal Security Director was responsible for more than two airports, we selected the first airport based on the Federal Security Director’s location and the second airport to obtain a cross-section of all airports by size and geographic distribution. In all, we requested information on 265 airports. However, two airports were dropped from our initial selection because the airlines serving these airports suspended operations and TSA employees were redeployed to other airports. As a result our sample size was reduced to 263 airports, which included all 21 category X, and 60, 49, 73, and 60 category I through IV airports respectively. In that we did not use probability sampling methods to select the sample of airports that were included in our airport-specific survey, we cannot generalize our findings beyond the selected airports. A GAO survey specialist designed the surveys in combination with other GAO staff knowledgeable about airport security issues. We conducted pretest interviews with six Federal Security Directors to ensure that the questions were clear, concise, and comprehensive. In addition, TSA managers and an independent GAO survey specialist reviewed the survey. We conducted these Web-based surveys from late March to mid-May 2004. We received completed general surveys from all 155 Federal Security Directors and completed airport-specific surveys for all 263 separate airports for which we sought information, for 100 percent response rates. The surveys’ results are not subject to sampling errors because all Federal Security Directors were asked to participate in the surveys and we did not use probability-sampling techniques to select specific airports. However, the practical difficulties of conducting any survey may introduce other errors, commonly referred to as nonsampling errors. For example, difficulties in how a particular question is interpreted, in the sources of information that are available to respondents, or in how the data are entered into a database or were analyzed can introduce unwanted variability into the survey results. We took steps in the development of the surveys, the data collection, and the data editing and analysis to minimize these nonsampling errors. Also, in that these were Web-based surveys whereby respondents entered their responses directly into our database, there was little possibility of data entry or transcription error. In addition, all computer programs used to analyze the data were peer reviewed and verified to ensure that the syntax was written and executed correctly. We performed our work from May 2003 through April 2005 in accordance with generally accepted government auditing standards. Certain information we obtained and analyzed regarding screener training and performance are classified or are considered by TSA to be sensitive security information. Accordingly, the results of our review of this information are not included in this report. This tool allows screeners to touch actual improvised explosive device (IED) components and build their own devices. This experiential learning will enable screeners to more readily detect real IEDs during screening. These weapons are also used to assist in training by using them for live testing conducted by FSD staff. This tool allows screeners to touch actual firearms and begin to understand how they can be broken down into various parts. By understanding this and experiencing it, screeners are better able to see the components of a firearm during actual screening. These weapons are also used to assist in training by using them for live testing conducted by FSD staff. Deployed January 26, 2004 Maintain and enhance the screeners’ X-ray image operational skills. Deployed February 5, 2004 Provide a tool that includes about 14,000 image combinations to practice threat identification. These teams go into airports where data shows performance needs attention. The team offers a variety of services to assist in improving the performance, such as on-the-spot training and consulting services. Team visits can be initiated by FSDs, Internal Affairs reports, Quality Assurance trips, or MTAT Supervisors proactively visiting the airport and FSD. Site visits completed from October 2003 through December 3, 2004: North Central (37 visits) South Central (51 visits) Northeast (25 visits) Southeast (60 visits) Western (53 visits) Improve screener supervisors’ knowledge of federal government and TSA personnel rules and how to effectively coach and communicate with employees. Approximately 3,800 supervisors have been trained. Certification of screeners to perform supervisory maintenance tasks above and beyond operator training. Provide students with basic skills needed to verify the identity of flying armed law enforcement officers. This weekly product brings to light actual cases of weapons being found by law enforcement, with an explanation of how those weapons could be used to attack aviation. Provide interactive, performance based recurrent Web-based training modules for checked baggage explosive detection systems (EDS). Improve screener performance by providing an interactive tool complementary to Hand Held Metal Detector and Pat Down Video that allows the screener to practice proper techniques and receive immediate feedback. Reinforces TSA’s customer service principles and places the screener in various situations requiring effective customer service responses. Provide interactive, performance-based recurrent training modules for checkpoint and checked baggage operations. Physical Bag Search Video Maintain and enhance screeners’ explosive trace detection (ETD) and physical bag search skills for carry-on and checked baggage. Provide interactive recurrent Web-based training modules for ETD and physical bag search. Provide an interactive, performance-based training tool to enhance screener’s ability to identify prohibited items. Provide an informative and effective learning tool to maintain and enhance the skills of screeners in the areas of persons with prosthetics. Provide a tool to practice threat identification with about 10,000,000 image combinations. Sharing the X-Ray Tutor Version 2 library, this tool will allow screeners to practice finding threat items using the full capabilities of the TIP-ready X-ray machines. Provide an interactive, performance-based tool to convey how the supervisor is to handle screening situations, handed off by the screening, following standard operator procedures. Provide a Web-based training that will engage the student with 3- dimensional representations of the muscular frame, showing proper lifting techniques and the results of improper techniques. In addition to those named above, David Alexander, Leo Barbour, Lisa Brown, Elizabeth Curda, Kevin Dooley, Kathryn Godfrey, David Hooper, Christopher Jones, Stuart Kaufman, Kim Gianopoulos, Thomas Lombardi, Cady S. Panetta, Minette Richardson, Sidney Schwartz, Su Jin Yon, and Susan Zimmerman were key contributors to this report.

The screening of airport passengers and their checked baggage is a critical component in securing our nation's commercial aviation system. Since May 2003, GAO has issued six products related to screener training and performance. This report updates the information presented in the prior products and incorporates results from GAO's survey of 155 Federal Security Directors--the ranking Transportation Security Administration (TSA) authority responsible for the leadership and coordination of TSA security activities at the nation's commercial airports. Specifically, this report addresses (1) actions TSA has taken to enhance training for passenger and checked baggage screeners and screening supervisors, (2) how TSA ensures that screeners complete required training, and (3) actions TSA has taken to measure and enhance screener performance in detecting threat objects. TSA has initiated a number of actions designed to enhance screener training, such as updating the basic screener training course. TSA also established a recurrent training requirement and introduced the Online Learning Center, which makes self-guided training courses available over TSA's intranet and the Internet. Even with these efforts, Federal Security Directors reported that insufficient screener staffing and a lack of high-speed Internet/intranet connectivity at some training facilities have made it difficult to fully utilize training programs and to meet the recurrent training requirement of 3 hours per week, averaged over a quarter year, within regular duty hours. TSA acknowledged that challenges exist in recurrent training delivery and is taking steps to address these challenges, including factoring training into workforce planning efforts and distributing training through written materials and CD-ROMs. However, TSA has not established a plan prioritizing the deployment of high-speed Internet/intranet connectivity to all airport training facilities to facilitate screener access to training materials. TSA lacks adequate internal controls to provide reasonable assurance that screeners receive legislatively mandated basic and remedial training, and to monitor its recurrent training program. Specifically, TSA policy does not clearly specify the responsibility for ensuring that screeners have completed all required training. In addition, TSA officials have no formal policies or methods for monitoring the completion of required training and were unable to provide documentation identifying the completion of remedial training. TSA has implemented and strengthened efforts to measure and enhance screener performance. For example, TSA has increased the number of covert tests it conducts at airports, which test screeners' ability to detect threat objects on passengers, in their carry-on baggage, and in checked baggage. These tests identified that overall, weaknesses and vulnerabilities continue to exist in passenger and checked baggage screening systems at airports of all sizes, at airports with federal screeners, and at airports with private-sector screeners. While these test results are an indicator of performance, they cannot solely be used as a comprehensive measure of any airport's screening performance or any individual screener's performance. We also found that TSA's efforts to measure and enhance screener performance have primarily focused on passenger screening, not checked baggage screening. For example, TSA only uses threat image software on passenger screening X-ray machines, and the recertification testing program does not include an image recognition module for checked baggage screeners. TSA is taking steps to address the overall imbalance in passenger and checked baggage screening performance data. TSA also established performance indexes for the passenger and checked baggage screening systems, to identify an overall desired level of performance. However, TSA has not established performance targets for each of the component indicators that make up the performance indexes, including performance targets for covert testing. TSA plans to finalize these targets by the end of fiscal year 2005.

You are an expert at summarizing long articles. Proceed to summarize the following text: Microelectronics focuses on the study and manufacture of micro devices, such as silicon integrated circuits, which are fabricated in submicron dimensions and form the basis of all electronic products. In DOD research, microelectronics extends beyond silicon integrated circuits and cuts across scientific disciplines such as biological sciences, materials sciences, quantum physics, and photonics. DOD research also covers many different types of materials, devices, and processes. For example, DOD service laboratories conduct research in materials other than silicon, such as gallium nitride, indium arsenide, and silicon carbide—materials that could provide higher performing or more reliable devices to meet DOD needs. DOD’s overall budget authority for fiscal year 2005 was approximately $400 billion. About $69 billion, or 17 percent of the overall budget, was directed toward research and development activities. The vast majority of this funding goes to development programs for major systems such as the Joint Strike Fighter and the Space Based Infrared System High. About $5.2 billion, or about 1.3 percent of the overall budget, was directed toward research (see fig. 1). Because DOD tracks funding by funding category, not by specific technology area, the microelectronics portion of this funding category cannot be broken out. DOD research and technology development is conducted by universities, DOD laboratories, industry, and other organizations. Universities and DOD laboratories are primarily involved in research. Once a new device is proven and has potential application for DOD, the technology is transferred to industry to further develop and ultimately produce and integrate into defense systems. These organizations may collaborate on microelectronics projects through various arrangements, such as cooperative research and development agreements and collaborative technology alliances. Figure 2 shows the distribution of DOD research and advanced technology development funding by performing organizations. Microelectronics production and research prototyping require specialized equipment and facilities. To prevent flaws in production, microelectronic devices are produced in clean rooms where the air is constantly filtered, and temperature, humidity, and pressure may be regulated. Clean rooms are rated according to a federal standard. For example, a class 1000 clean room has no more than 1000 particles larger than 0.5 microns in a cubic foot of air, while a class 100 clean room has no more than 100 particles. The people who work in clean rooms wear special protective clothing that prevents workers from contaminating the room (see fig. 3). The equipment found at research facilities and at production facilities are similar but are used for different purposes. Because research facilities focus on developing new device concepts, materials, and processes, the equipment is set up for flexibility because it is used for different experiments to prove concepts and validate theories. Once a technology is sufficiently developed, a small quantity is prototyped in a production environment to prove the design. Production facilities are set up to produce higher volumes of microelectronics and have more automation and multiple sets of equipment to increase productivity. At the time of our review, eight DOD and FFRDC facilities that received funding from DOD were involved in microelectronics research prototyping or production. Three military facilities focused solely on research; three primarily focused on research but had limited production capabilities; and two focused solely on production (see fig. 4). The three military facilities provide basic and applied research covering a wide spectrum of microelectronic devices and materials. For example, the Naval Research Laboratory facility is conducting basic research on the potential application of nonsilicon materials in microelectronic devices. Through its applied research, the Air Force Research Laboratory facility developed a process to improve the performance and reliability of microwave devices needed for military radar and communications systems. This technology was ultimately transferred from the Air Force to various contractors and used in a number of systems, including the Joint Strike Fighter. The Army Research Laboratory facility conducts both basic and applied research, primarily on multifunction radiofrequency, optoelectronics, and power conversion. Three other facilities also conduct research but can produce prototypes or limited numbers of devices if commercial sources are not available. For example, the Lincoln Laboratory’s facility—which primarily focuses on applied research in sensing and signal processing technologies—has developed components for the space-based visible sensor because no commercial source was available to meet this DOD need. Sandia’s facility primarily focuses on research and design of radiation hardened microelectronics. However, because the number of commercial producers able to meet the radiation requirements of the Department of Energy and DOD has dwindled to two suppliers, Sandia maintains limited in-house production capability to fill near-term critical needs. According to Sandia officials, they have not been called upon to produce microelectronics for DOD in recent years. The SPAWAR facility, which recently closed, primarily conducted research on radiation-hardened microelectronics, but at one time produced these devices for the Navy’s Trident missile system. When production of these devices was transferred to a commercial supplier, the facility maintained capability to produce microelectronics as a back-up to the commercial supplier. Two facilities focused only on production—one on leading edge technology and one on lagging edge technology. NSA’s microelectronics facility focuses on producing cryptographic microelectronics—devices not readily obtainable on the commercial market because of their unique and highly classified requirements. DMEA fills a unique role within DOD by providing solutions to microelectronics that are no longer commercially available. DMEA acquires process lines that commercial firms are abandoning and, through reverse-engineering and prototyping, provides DOD with these abandoned devices. In some cases, DMEA may produce the device. The type and complexity of research conducted or device produced largely determines a facility’s clean room class and size and its equipment replacement costs. For example, to produce cryptographic electronics, NSA has a 20,000 square foot class 10 clean room facility. In contrast, the Naval Research Laboratory conducts research in a 5,000 square foot class 100 clean room facility, with some class 10 modules where greater cleanliness is required. In general, research does not require state-of-the- art equipment to prove concepts, and tools can be purchased one at a time and are often second-hand or donated. Table 1 summarizes the eight facilities’ microelectronics focus, clean room class and size, and equipment replacement costs. Since we began our review, the SPAWAR facility closed on October 31, 2004, making Sandia the only backup to the two remaining commercial radiation-hardened suppliers to DOD. Officials from the facility told us that without funds from the Trident program, operating the facility became cost prohibitive. Further, NSA’s microelectronics facility is slated for closure in 2006. NSA estimated that it would cost $1.7 billion to upgrade its equipment and facility to produce the next generation of integrated circuits. NSA is contracting with IBM to take over production of the microelectronic devices produced at its facility. Part of the contract costs includes security requirements for IBM to produce classified circuits. There may be changes to other facilities pending the review of the Base Realignment and Closure Commission for 2005. As a result of prior commission recommendations, the Army constructed a new facility to consolidate Army specialized electronics research into one location. DOD has several mechanisms in place aimed at coordinating and planning research conducted by the Air Force, Army, Navy, and defense agencies. In electronics and microelectronics research, DOD works with industry to review special technology areas and make recommendations about future research. DOD’s Defense Reliance process provides the Department with a framework to look across science and technology (S&T) efforts of the Defense Advanced Research Projects Agency, Defense Threat Reduction Agency, and the Missile Defense Agency as well as the Army, Navy, and Air Force. Each service and defense agency updates its own S&T plans with the needs of each organization in mind. The Defense Reliance process is intended to improve coordination and determine if the overall DOD S&T vision and strategy are being met. The Defense Science and Technology Strategy document is updated periodically to provide a high-level description of what the science and technology programs aim to accomplish. The Defense Reliance process includes the development of three planning documents, which taken together provide a near-, mid-, and long-term look at DOD specific research needs (see table 2). The planning documents present the DOD S&T vision, strategy, plan, and objectives for the planners, programmers, and performers of defense S&T and guide the annual preparation of the defense program and budget. Figure 5 illustrates the relationship between the planning documents and overall reliance process. Science and technology efforts are planned and funded through service and defense agency plans. To obtain a perspective across DOD, a portion of the service and agency efforts are represented in the various Defense Reliance planning documents. DOD’s goal is to have about half of the investment in service and agency efforts represented in defense technology objectives. According to DOD officials, this goal is aimed at balancing flexibility—which services and defense agencies need to pursue research that is important to their organizations—with oversight and coordination. DOD officials stated that looking at a portion of the efforts provide an adequate perspective of the S&T research across the services and defense agencies to help ensure the goals of DOD’s S&T strategy are being met. These projects are generally considered high priority, joint efforts, or both. Two key components in the Defense Reliance process are the defense technology objectives and technology area review and assessments. Defense technology objectives are intended to guide the focus of DOD’s science and technology investments by identifying the following objectives, the specific technology advancements that will be developed or payoffs, the specific benefits to the warfighter resulting from the challenges, the technical barriers to be overcome; milestones, planned dates for technical accomplishments, including the anticipated date of technology availability; metrics, a measurement of anticipated results; customers sponsoring the research; and funding that DOD estimates is needed to achieve the technology advancements. Both the Joint Warfighting and Defense Technology Area plans are comprised of defense technology objectives that are updated annually. In its 2004 update, DOD identified 392 defense technology objectives —130 in the Joint Warfighting Science and Technology Plan across five joint capabilities, and 262 in the Defense Technology Area Plan across 12 technology areas. Microelectronics falls within the sensors, electronics, and electronic warfare area. There are 40 defense technology objectives in this area; five were identified as microelectronics (see fig. 6). However, according to DOD officials, research relating to microelectronics is not limited to these five defense technology objectives because microelectronics is an enabling technology found in many other research areas. For example, research in electronic warfare is highly dependent on microelectronics. To provide an independent assessment of the planned research, DOD uses Technology Area Review and Assessment panels. DOD strives to have a majority of the Technology Area Review and Assessment team members from outside DOD, including other government agencies, FFRDCs, universities, and industry. Most team members are recognized experts in their respective research fields. The Technology Area Review and Assessment panels assess DOD programs against S&T planning guidance, defense technology objectives, affordability, service-unique needs, and technology opportunities; and provide their assessments and recommendations to the Defense Science and Technology Advisory Group. For the electronics research area, additional industry and university insight is obtained through the Advisory Group on Electron Devices. DOD established this advisory group to help formulate a research investment strategy by providing ongoing reviews and assessments of government- sponsored programs in electronics, including microelectronics. The advisory group is comprised of experts representing the government, industry, and universities, who provide DOD with current knowledge on the content and objectives of various programs under way at industry, university, and government laboratories. Periodically, the advisory group conducts special technology area reviews to evaluate the status of an electronics technology for defense applications. The advisory group also serves as a bridge between electronic system and component developers within DOD by establishing regular, periodic interactions with system program offices, industry system developers, and government and industry components developers. We provided a draft of this report to DOD for review. In its response, DOD did not provide specific written or technical comments (see app. II). We are sending copies of this report to interested congressional committees; the Secretary of Defense; and the Director, Office of Management and Budget. We will make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 if you or your staff has any questions concerning this report. Major contributors to this report are listed in appendix III. To identify and describe DOD and FFRDC facilities that receive funding from DOD for microelectronics production or research prototyping, we visited all eight facilities identified by DOD as having capability to produce or prototype microelectronics. Using a set of structured questions, we interviewed officials at each facility to determine their microelectronics focus, clean-room and equipment characteristics, and types of research, production and/or research prototyping the facility provides. We also obtained and analyzed supporting documents and toured the facilities. We did not include in our scope universities or commercial firms that also conduct DOD research and have microelectronics facilities. Because microelectronics is a part of a much broader area of research, we looked at DOD’s overall research coordination in addition to microelectronics-specific areas. To determine how DOD coordinates its research investments, we interviewed officials from the Executive Staff of the Defense Science and Technology Reliance process; the Office of the Deputy Under Secretary of Defense for Science and Technology (Space and Sensor Technology); and the Advisory Group on Electron Devices. We also obtained and reviewed DOD’s defense research planning- documents—including the Basic Research Plan, the Defense Technology Area Plan, Joint Warfighting Science and Technology Plan, and the Defense Technology Objectives document. We also met with Defense Advanced Research Projects Agency officials to discuss their role in sponsoring DOD research and development activities. In addition, at the DOD service laboratories that we visited, we obtained information on microelectronics related research projects. We performed our review from November 2003 to January 2005 in accordance with generally accepted government auditing standards. In addition to the individual named above, Bradley Terry, Lisa Gardner, Karen Sloan, Hai Tran, Brian Eddington, and Steven Pedigo made key contributions to this report.

The Department of Defense's (DOD) ability to provide superior capabilities to the warfighter is dependent on its ability to incorporate rapidly evolving, cutting-edge microelectronic devices into its defense systems. While many commercial microelectronics advances apply to defense systems, DOD has some unique microelectronics needs not met by industry. Therefore, to maintain military superiority, DOD has the challenge of exploiting state-of-the-art commercial microelectronics technology and focusing its research investments in areas with the highest potential return for defense systems. Given the importance of advanced microelectronics to defense systems and the rapid changes in these technologies, Congress asked GAO to (1) identify and describe DOD and federally funded research and development center (FFRDC) facilities that receive funding from DOD for microelectronics production or research prototyping and (2) describe how DOD coordinates investments in microelectronics research. At the time of our review, eight DOD and FFRDC facilities that received funding from DOD were involved in microelectronics research prototyping or production. Three of these facilities focused solely on research; three primarily focused on research but had limited production capabilities; and two focused solely on production. The research conducted ranged from exploring potential applications of new materials in microelectronic devices to developing a process to improve the performance and reliability of microwave devices. Production efforts generally focus on devices that are used in defense systems but not readily obtainable on the commercial market, either because DOD's requirements are unique and highly classified or because they are no longer commercially produced. For example, one of the two facilities that focuses solely on production acquires process lines that commercial firms are abandoning and, through reverse-engineering and prototyping, provides DOD with these abandoned devices. During the course of GAO's review, one facility, which produced microelectronic circuits for DOD's Trident program, closed. Officials from the facility told us that without Trident program funds, operating the facility became cost prohibitive. These circuits are now provided by a commercial supplier. Another facility is slated for closure in 2006 due to exorbitant costs for producing the next generation of circuits. The classified integrated circuits produced by this facility will also be supplied by a commercial supplier. DOD has several mechanisms in place aimed at coordinating and planning research conducted by the military services and defense agencies. One key mechanism is identifying defense technology objectives--the specific technology advancements that will be developed or demonstrated across multiple joint capabilities and technology areas. As of February 2004, there were almost 400 defense technology objectives; five of these were identified as microelectronics. DOD also collaborates with industry to review and assess special technology areas and make recommendations about future electronics and microelectronics research.

You are an expert at summarizing long articles. Proceed to summarize the following text: Each military service—the Army, the Navy, the Air Force, and the Marine Corps—is responsible for assessing and making decisions regarding the ammunition in its inventory. The Army, as the Single Manager for Conventional Ammunition (SMCA), is responsible for centrally managing the demilitarization of all conventional ammunition including non-SMCA- managed items, for which capability, technology, and facilities exist to complete demilitarization and disposal. The services determine if the conventional ammunition in their accounts is unserviceable or above their needs, and if so, transfer the ammunition to installations as specified by the SMCA. However, before proceeding with demilitarization, any serviceable conventional ammunition that is beyond a service’s needs is to be offered to the other services through an annual cross-leveling process. The services are to screen all conventional ammunition inventories that are beyond their needs by the other military services. Once the screening is complete, the service can transfer ammunition to the demilitarization account as DOD excess, except when safety issues require immediate disposal. As shown in figure 1, once it has been determined that the conventional ammunition is unserviceable or DOD excess, the services deliver the ammunition to one of the seven demilitarization depots in the United States and the ammunition is incorporated into the CAD stockpile. Appendix III provides a map of the seven demilitarization depots and an explanation of the demilitarization methods used by the Army. Multiple DOD entities have responsibilities related to managing and overseeing conventional ammunition, with the Army having a prominent role. The Secretary of the Army serves as DOD’s SMCA and is responsible for centrally managing all aspects of the life cycle management of conventional ammunition, from research and development through demilitarization and disposal. The Program Executive Office for Ammunition has been designated the SMCA Executor and is responsible for executing all the functions of the SMCA. The Program Executive Office for Ammunition works with Joint Munitions Command and the Aviation and Missile Command to manage the demilitarization of conventional ammunition at seven Army depots and several commercial firms. The Program Executive Office for Ammunition budgets and funds the demilitarization and disposal of all munitions in the CAD stockpile. In addition, for ammunition, such as Bullpup rockets, that has no demilitarization process, the Program Executive Office for Ammunition plans, programs, budgets, and funds a joint-service research and development program to develop the necessary capability, technology, and facilities to demilitarize the ammunition. Within the Army Materiel Command, Army Aviation and Missile Command is responsible for the demilitarization of missiles and components, and the Joint Munitions Command is responsible for demilitarization of all remaining conventional ammunition. Army Aviation and Missile Command develops and implements the annual missile demilitarization operating plan, and Joint Munitions Command does the same for the CAD stockpile. Furthermore, Joint Munitions Command provides logistics and sustainment support to the Program Executive Office for Ammunition and the Army Aviation and Missile Command. Joint Munitions Command also oversees the storage of the CAD stockpile, maintains the CAD stockpile database, and arranges the transportation of conventional ammunition to the demilitarization site when necessary. The military departments have a process for collecting and sharing data on conventional ammunition through inventory stratification reports that they are required to prepare at least annually. They use these reports to identify inventory owned by one department that may be available to meet the needs of another department, as well as to identify both inventory deficiencies and excesses. DOD Manual 4140.01 Volumes 6 and 10 direct the military departments to assess the ability of the ammunition inventory to meet their needs by stratifying their inventories into various categories and requires them to prepare a report at least annually for internal purposes that lists the current inventory levels of all ammunition. The annual internal report divides the inventory into the categories of requirement-related munitions stock, economic retention munitions stock, contingency retention munitions stock, and potential reutilization and disposal stock. The manual also directs the departments to develop an external report identifying inventory in the same categories for each ammunition listed. The military departments are to use these reports, among other things, to identify opportunities for redistributing ammunition to meet unfilled needs in other military departments. The reports are then distributed to the other military departments to provide visibility. In addition, the Office of the Executive Director for Conventional Ammunition, which facilitates this process, compares the data in the inventory reports with data on planned procurements of ammunition. After the departments share their annual reports on ammunition inventory, including which ammunition could be reutilized; department officials participate in the Quad Services Review and review all the other departments’ stratification reports to identify potential cross-leveling opportunities and request logistics data for items of interest. DOD guidance indicates that this cross-leveling process should be used to offset individual procurements of the military departments in coordination with the Under Secretary of Defense for Acquisition, Technology, and Logistics. For example, the Executive Director for Conventional Ammunition reported in September 2014 that DOD avoids an average of $72 million annually in procurement costs by using the redistribution process regarding each service’s inventory holdings that exceed their needs. During the fiscal year 2014 redistribution process, the services transferred approximately 5 million items among each other, of which approximately 3 million were small-caliber items such as ammunition for rifles or pistols, about 2 million were for larger-caliber weapons such as mortars, and about 383,000 were a mixture of other types of ammunition. According to the Office of the Executive Director for Convention Ammunition’s Fiscal Year 2014 Cross-leveling End of Year Report, the potential acquisition cost avoidance achieved in the 2014 cross-leveling process totaled about $104.2 million. DOD guidance requires that at the end of the annual cross-leveling process, any remaining unclaimed potential reutilization and disposal stock should either be claimed by another military department, recategorized, or designated for disposal, whether through the Defense Logistics Agency Disposition Services Account, or the CAD stockpile, as appropriate. We last reported on DOD’s management of conventional ammunition in March 2014. We found that the Army’s annual stratification report, which shows the status of ammunition inventory at a given point in time, did not include information on all usable ammunition items because it did not include missiles managed by the Army Aviation and Missile Command. Since the Army’s missiles were not included in the annual stratification report, they were not considered during the cross-leveling process. Further, we found that items above the services’ needs in a prior year that had been placed into the CAD stockpile were not considered in the cross- leveling process. We made recommendations to improve data sharing among the services, and DOD concurred with all of these recommendations. Among our recommendations was to include missiles managed by the Army Aviation and Missile Command in the annual stratification report, and DOD stated that starting with the March 2014 annual stratification meeting the Army would provide missile information for the cross-leveling process. As a result, 100 Javelin missiles were identified for transfer from the Army to the Marine Corps in fiscal year 2015, potentially saving the Marine Corps an estimated $3 million. Further, we recommended the Army include information on ammunition that in a previous year was unclaimed by another service and had been categorized for disposal. In response, DOD officials stated that all of the military services have visibility into the Army system that tracks ammunition categorized for disposal and they would direct the military services to consider such ammunition in the cross-leveling process. In 2015, the Navy and the Air Force identified materiel worth about $488,000 in the CAD stockpile from prior years they could use. The services maintain information on their conventional ammunition; however, some inventory records for ammunition in the CAD stockpile have incorrect or incomplete information on its condition and weight. As discussed earlier, each service has its own inventory information system to maintain its conventional ammunition inventory, which includes any unserviceable ammunition or ammunition above its needs in its custody. Consolidated information from the military services on the ammunition in the CAD stockpile is maintained in the Army’s Logistics Modernization Program (LMP). DOD Instruction 5160.68 directs the services to provide the SMCA with data on ammunition transferred for demilitarization and disposal operations. LMP has information on the location and quantity of all items in the CAD stockpile, but some records have incomplete or incorrect data on condition and weight. Further, according to DOD officials, each item has a condition code assigned to it by the service when placed into the CAD stockpile, and the condition code is not updated while the item is in the Service officials stated that when they are considering pulling stockpile.an item from the stockpile to fill a current need, they generally inspect the condition of the item to determine whether the condition code of the item is still accurate and the item is useable. At times, the services have found particular items with a condition code indicating the materiel was serviceable, but the item’s shelf life had expired, while other ammunition had performance issues that made it unacceptable. Further, we found that DOD does not have the weight data for a number of items in the CAD stockpile. Federal Government state that an entity should have controls to ensure that all transactions are complete and accurately recorded. In our review of data in the LMP database from 2012 to February 2015 the number of records without assigned weight increased from 2,223 (out of 34,511 records) to 2,829 (out of 36,355 records), which shows the problem is growing. Although some of the records that are missing weight data have very few items in storage, there are several items with significant quantities, such as 3.8 million of chaff countermeasures, 125,000 of 75 millimeter projectiles, and 109,000 of 155 millimeter ammunition. LMP lists the gross weight of an individual item (shell, missile, or cartridge), however, officials involved in the demilitarization of conventional ammunition use pro-weight, which includes the weight of the item plus its packaging. Pro-weight is used because the demilitarization process has to recycle, or otherwise dispose of all packaging material and containers in addition to destroying the ammunition. The CAD stockpile weights are described in short tons, which is equal to 2,000 lbs. DOD uses weight data as a metric in managing the demilitarization of conventional ammunition. More specifically, SMCA officials use weight for (1) developing cost estimates for demilitarization projects; (2) determining what conventional ammunition should be demilitarized; (3) reporting the size of the CAD stockpile to the military services, the Office of the Secretary of Defense, and Congress; (4) forecasting the amount of conventional ammunition to be transferred into the CAD stockpile in the future; and (5) reporting on what ammunition has been demilitarized. The absence of weight data for some of the items in the CAD stockpile understates the size and composition of the CAD stockpile, thereby affecting DOD’s estimations of its demilitarization needs. According to DOD officials, the reasons for the missing data in the CAD stockpile are related to the types of items transferred into the stockpile, such as older ammunition stocks that do not have complete weight data, nonstandard ammunition, foreign ammunition used for testing, components removed from larger weapons, and ammunition with records that migrated from legacy data systems. DOD officials stated they are trying to correct current records with missing or inaccurate data, particularly weight. In some cases, such as older stocks, the only solution is to locate and physically weigh the ammunition item(s). DOD officials have not weighed the items because they said it would be costly and labor intensive. However, since the items without weight data are not factored into DOD’s demilitarization determination, DOD is not positioned to optimally demilitarize the most ammunition possible with the given resources available. Further, as discussed above, the number of records without weight data has increased over the years, which indicates that SMCA continues to accept materiel into the CAD stockpile without weight data. Officials from all the military services said they have access to LMP and they have used LMP to search the CAD stockpile for materiel they could use, but information on DOD excess is not widely shared with other government agencies such as the Department of Homeland Security, which also uses ammunition for purposes such as training exercises. Specifically, the military services have achieved benefits such as cost avoidances from access to the information in LMP on the CAD stockpile. For example, an Air Force need for 280,000 rounds of 40 millimeter ammunition was met by the remanufacture of Navy 40 millimeter shells drawn from the CAD stockpile, which according to Joint Munitions Command officials saved an estimated $30 million. Also, the Marine Corps identified the need for signal flares at security check points in Iraq and Afghanistan, so they pulled 95,594 flares out of the CAD stockpile, which according to Marine Corps officials saved the service an estimated $3.8 million. When the services have been able to fulfill needs by drawing ammunition from the CAD stockpile, financial benefits have arisen both in reduced demilitarization costs over time and reduced new procurements. DOD also has reduced its demilitarization costs by transferring some excess ammunition to other government agencies as opposed to demilitarizing the ammunition, but has made such transfers only on a limited basis. For example, in fiscal year 2014 DOD provided 38 million rounds of small arms ammunition to the Federal Bureau of Investigation and 7.5 million rounds of small arms ammunition to the U.S. Marshals Service. Officials stated that the Joint Munitions Command and Army Deputy Chief of Staff for Logistics (G-4) used informal methods to communicate with other government agencies on available excess ammunition. Recognizing that there are benefits to such transfers, the Office of the Executive Director for Conventional Ammunition, in its Fiscal Year 2014 Cross-Leveling End of Year Report, included remarks indicating efforts should be made to include other government agencies in the cross-leveling process. Communicating with other government agencies on available excess ammunition could help reduce the CAD stockpile. Section 346 of Ike Skelton National Defense Authorization Act, as amended, requires, among other things, that serviceable small arms ammunition and ammunition components in excess of military needs not be demilitarized, destroyed, or disposed of unless in excess of commercial demands or certified as unserviceable or unsafe by the Secretary of Defense. Before offering the excess serviceable small arms ammunition for commercial sale, however, this provision outlines a preference that DOD offer the small arms ammunition and ammunition components for purchase or transfer to other Federal government agencies and departments, or for sale to state and local law enforcement, firefighting, homeland security, and emergency management agencies as permitted by law. According to officials, DOD does not have a formal process for offering the excess small arms ammunition and components to other government agencies. This manual references 10 U.S.C. § 2576a, under which DOD is permitted to transfer (sell or donate) ammunition to federal or state agencies where the Secretary of Defense determines that the ammunition is “(A) suitable for use by the agencies in law enforcement activities, including counter-drug and counter-terrorism activities; and (B) excess to the needs of the Department of Defense.” The ammunition must also be part of the existing stock of DOD, accepted by the recipient agency on an as-is, where-is basis, transferred without the expenditure of any funds available to DOD for the procurement of defense equipment, and transferred such that all costs incurred subsequent to the transfer of the property are borne or reimbursed by the recipient agency. Finally, there is a stated preference for those applications indicating that the transferred property will be used in counter-drug or counter-terrorism activities of the recipient agency. training and qualification requirements. However, due to budget constraints the Department of Homeland Security reduced the number of training classes. If DOD guidance outlining a systematic process to share information on excess ammunition had been in place, the Department of Homeland Security could have possibly been aware of and obtained selected ammunition needed for training classes. Standards for Internal Control in the Federal Government states that 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. Transfers of ammunition to other government agencies, subject to certain requirements, could support DOD’s goal of reducing its CAD stockpile in a manner consistent with section 346 of the Ike Skelton National Defense Authorization Act for Fiscal Year 2011 as amended. Without establishing a systematic means to communicate with and provide other government agencies with information on available excess serviceable ammunition, government agencies could be spending their funds to procure ammunition that DOD has awaiting demilitarization and could provide to them. In addition, without such a means, DOD could miss opportunities to reduce its overall demilitarization and maintenance costs by transferring such ammunition to other government agencies. DOD has identified a number of challenges in managing the demilitarization of conventional ammunition, and has taken actions to address them. These challenges include compliance with environmental regulations; treaties regarding certain types of ammunition; services’ forecasts of excess, obsolete, and unserviceable ammunition; and annual funding. DOD officials stated they have identified the following challenges and are taking actions to address these challenges: Environmental Regulation Compliance: SMCA officials stated they must follow environmental laws in demilitarizing conventional ammunition and their compliance is governed by environmental permits that cover the design and operation of facilities that deal with waste management, noise, air, water, and land emissions. Many munitions are harmful to human health and the environment, and demilitarizing large quantities of ammunition requires the rigorous control and processing of toxic substances. Some of the demilitarization processes generate additional environmental hazards, such as air pollutants and waste water. Figure 2 shows the release of air pollutants from the open burning of munitions. Other demilitarization processes, such as open detonation, generate noise pollution affecting the local community. According to SMCA officials, open burn and open detonation are the primary and cheapest methods to demilitarize conventional ammunition; further, some munitions can only be demilitarized by this process. All seven depots that demilitarize conventional ammunition have the capability to demilitarize ammunition through open burn/open detonation. However, officials stated there are environmental concerns with open burn/open detonation that may force DOD to use alternate and more costly methods of disposal, like closed disposal technology, in the future. For example, officials at one demilitarization facility noted that they generally operated their open detonation demolition ranges at less than 50 percent of capacity (weight of explosive charge) due to air and noise pollution concerns. According to DOD officials, DOD works to ensure compliance with various environmental regulations by applying for and maintaining permits issued by federal and state agencies that regulate its demilitarization operations. Officials indicated that these permits are granted by federal and state agencies and specify which pollutants can be released and in what quantities, as well as describe in detail how each process controls pollutants and meets applicable standards. If environmental regulations change, DOD officials indicated they may need to renew their permits; if the permits are revised, DOD may be required to fund capital investments in equipment and processes to conform to the requirements of any new permits. SMCA officials stated they address these challenges by including in each annual demilitarization plan sufficient work for each depot to exercise existing environmental permits so the permits do not lapse. Also, they recycle or remanufacture, when possible, materiel that otherwise would be destroyed. Finally, the officials indicated that they contract with private companies to conduct some of the demilitarization work as well. Treaty Compliance: The U.S. government is considering two treaties that, if ratified, would significantly impact U.S. demilitarization operations. One treaty is the Convention on Cluster Munitions and the other is the Convention on the Prohibition of the Use, Stockpiling, Production and Transfer of Anti-Personnel Mines and on Their Destruction. DOD has an inventory of 471,726 tons of cluster munitions and 23,436 tons of anti-personnel landmines that will have to be disposed of if the United States ratifies the two treaties. Specifically, the conventions require the destruction of the respective cluster munitions and landmines inventories, and to comply, DOD officials stated that they would be forced to prioritize disposal of these weapons without concern to maximizing the reduction of the CAD stockpile. Service Forecasts: SMCA officials said that DOD’s demilitarization budget request frequently does not match actual funding needs. The request is based upon the estimated disposal costs required to reduce the existing CAD stockpile, as well as costs for disposing of ammunition the services forecast they will submit for disposal. Each of the services is required to submit a 5-year forecast on the amount of ammunition they expect to turn in for demilitarization each year. However, program officials indicate the services’ forecasts are generally inaccurate, which can make demilitarization planning challenging. In 2010, the Army Audit Agency found that Army officials had significantly understated the forecasted annual additions the services would transfer to the CAD stockpile from 2005 to March 2009, and these estimates were based on the projections furnished by the services. The Army Audit Agency recommended the Joint Conventional Ammunition Policies and Procedures 7 (Demilitarization and Disposal) be revised to help the military services develop better forecasts for additions to the stockpile. In their 2013 follow-up report, the Army Audit Agency found that the Joint Conventional Ammunition Policies and Procedures 7 (Demilitarization and Disposal) had been revised in 2011; however, the forecast additions for fiscal year 2012 were still inaccurate. SMCA officials told us that they still received inaccurate forecast information from the services. The SMCA officials stated they have no control over the ammunition the services actually transfer year to year, and they accept all excess, obsolete, and unserviceable conventional ammunition into the CAD stockpile, even if it exceeds forecasts. DOD officials stated they do not have options to address any problems caused by unplanned additions to the CAD stockpile, although DOD recalculates the demilitarization plan to include the additional ammunition when appropriate. Annual Funding: SMCA officials stated that the Army requests less funding than needed to meet its critical requirement each year, which could result in the CAD stockpile growing if the amount of ammunition demilitarized is less than the amount of ammunition transferred from the services during the year. The critical requirement is the funding necessary to demilitarize 3 percent of the existing stockpile and the full amount of ammunition the services plan to add to the CAD stockpile during the year. In December 2013, Army Audit Agency reported the Army Deputy Chief of Staff for Logistics (G-4) estimated the critical funding level for the demilitarization of conventional ammunition at approximately $185 million. Further, the report stated that the conventional ammunition demilitarization program is considered a lower priority when compared to other needs. The Department of the Army’s budget request for conventional ammunitions demilitarization in fiscal year 2015 was $114 million and for fiscal year 2016 it was $113 million. Officials stated that the amount of funding has caused them to be reluctant to initiate projects that increase demilitarization capacity or efficiency, since these capabilities may not be utilized in the future due to funding shortfalls. Furthermore, officials state they lack Research, Development, Test, and Evaluation (RDT&E) funding to develop demilitarization processes for the disposal of some materiel in the CAD stockpile that cannot be demilitarized using current processes, but they expect these funds will be increased in fiscal year 2017. SMCA addresses the funding challenge each year by developing an annual demilitarization plan to dispose of as much of the CAD stockpile as it can based on the amount of funding they receive. DOD officials have estimated the average cost to store, maintain, and dispose of excess, obsolete, and unserviceable conventional ammunition. DOD officials stated that in fiscal year 2015, it costs on average about $42 per ton to store conventional ammunition. This number was determined using the estimated cost to perform annual inventory counts, surveillance inspections of ammunition, and housekeeping movement of stocks to manage the storage space. Additionally, DOD officials stated that in fiscal year 2015, it costs on average about $2,000 per ton to demilitarize conventional ammunition. This cost is driven by the quantities and the complexity of the items being demilitarized. DOD has not conducted a formal analysis comparing the costs of storing excess, obsolete, and unserviceable conventional ammunition with the costs of its demilitarization and disposal. Based on our review of key DOD conventional ammunition demilitarization guidance, there is no requirement to conduct a cost comparison. DOD officials told us that since there is a large difference in the cost to store and the cost to demilitarize ammunition based on their estimates, they believe there is no need to conduct a formal analysis. Further, DOD officials stated their mission is to demilitarize all conventional ammunition in the CAD stockpile and the annual decisions on what to demilitarize are based on achieving that goal. For information on how SMCA officials determine what conventional ammunition to demilitarize, see appendix IV. Efficient management of the CAD stockpile and DOD’s demilitarization effort is important to ensure that as much hazardous material is disposed of as possible using the resources available. In order to meet its goals, the department needs accurate data, which requires complete and accurate documentation of the items transferred into the stockpile each year by the services, as well as ammunition already in the stockpile. Standards for Internal Control in the Federal Government state that an entity should have controls to ensure that all transactions are complete and accurately recorded. DOD does maintain data on conventional ammunition in the stockpile and uses it to manage demilitarization efforts, but officials have not fully maintained accurate and complete weight data on some ammunition items, which factors into their decision making about what to demilitarize in a given year. Without complete and accurate data, DOD is not well positioned to make the best demilitarization decisions and to use demilitarization resources as efficiently as possible. Furthermore, efficient management of the CAD stockpile is not solely a matter of demilitarization, since some materiel in it potentially could be transferred to other agencies, in keeping with DOD regulations and statutory requirements. Such transfers could allow DOD to reduce demilitarization costs and the size of the CAD stockpile while also reducing the need for other government agencies to procure new stocks of ammunition. While at times transfers have led to cost savings, there has not been a formal means to regularly communicate with external stakeholders about the availability of excess ammunition in the stockpile, which is necessary to meet DOD’s goals. Without a systematic means to communicate information on excess ammunition to other government agencies, DOD will miss opportunities to reduce the CAD stockpile and demilitarization costs through transfers. To improve the efficiency of DOD’s conventional demilitarization efforts, including systematically collecting and maintaining key information about the items in its CAD stockpile and sharing information on excess items with other government agencies, we recommend that the Secretary of Defense direct the Secretary of the Army to take the following two actions. To improve the completeness and accuracy of information on the weight of items in the CAD stockpile—the key measure used by DOD to manage the conventional ammunition demilitarization operation— establish a plan to (1) identify and record, to the extent possible, the missing or inaccurate weight information for existing ammunition records in the CAD stockpile and (2) ensure that all items transferred to the CAD stockpile, including for example components removed from larger weapons and nonstandard ammunition, have the appropriate weight data. To improve the visibility and awareness of serviceable excess ammunition in the CAD stockpile that could potentially be transferred to other government agencies, develop a systematic means to make information available to other government agencies on excess ammunition that could be used to meet their needs. We provided a draft of this report to DOD for review and comment. In its written comments, reproduced in appendix V, DOD concurred with both of the recommendations. DOD also provided technical comments on the draft report, which we incorporated as appropriate. DOD concurred with our first recommendation that the Secretary of the Army establish a plan to (1) identify and record, to the extent possible, the missing or inaccurate weight information for existing ammunition records in the CAD stockpile and (2) ensure that all items transferred to the CAD stockpile, including for example components removed from larger weapons and nonstandard ammunition, have the appropriate weight data. DOD stated that Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics would ensure that the Secretary of the Army is tasked to identify and record, to the extent practicable, weight data for the existing CAD stockpile and for items transferred to the CAD stockpile in the future. In response to our second recommendation that the Secretary of the Army develop a systematic means to make information available to other government agencies on excess ammunition that could be used to meet their needs, DOD stated that Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics would ensure that the Secretary of the Army is tasked to develop a systematic means to make information available to other government agencies on excess ammunition. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense; the Secretaries of the Army, the Navy, and the Air Force; and the Commandant of the Marine Corps. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-5257 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix VI. The Department of Defense (DOD) has policies and procedures that help govern the demilitarization of excess, obsolete, and unserviceable conventional ammunition and DOD officials involved in the demilitarization of conventional ammunition stated they believe the policies and guidance issued are effective to govern demilitarization. Additionally, depots have used the policies and guidance to develop their own implementing guidance and standard operating procedures for use at their locations. For example, Tooele Army Depot developed a letter of instruction for the inspection and disposal of inert material and Crane Army Ammunition Plant has developed several standard operating procedures to govern the base’s demilitarization processes. The table below provides an overview of key DOD policies on demilitarization. DOD Instruction 5025.01, DOD Issuances Program, establishes guidance for directives, instructions, manuals, and charters such as frequency of updates, length, purpose, and appropriate approval level. The guidance documents we reviewed in the table above conform to the requirements under DOD Instruction 5025.01: DOD Instruction 5025.01 provides that directives, instructions, and manuals (issuances) published before March 25, 2012 should be updated or cancelled within 10 years of their publication date, and that those published or changed after that date will be processed for cancellation by the Directives Division on the 10-year anniversary of their original publication dates, unless an extension is approved. That said, even for those issuances not required to be cancelled within 10 years, an issuance is not considered current when it is not within 10 years of its publication date. The directives, instructions and manuals we reviewed in the table above conformed to this requirement. For example, DOD Directive 5160.65, Single Manager for Conventional Ammunition (SMCA) was published on August 1, 2008. Therefore, it is not required to be updated or cancelled until August 2018. DOD Instruction 5025.01 provides that directives should not be more than 10 pages in length (including enclosures, with no procedures, and with the exception of charters); instructions not more than 50 pages (including enclosures) or they should be divided into volumes; and manuals should be divided into two or more volumes if more than 100 pages are required. The directives, instructions, and manuals we reviewed in the table above were within the established parameters. For example, DOD Instruction 5160.68 is 21 pages, which is within the required maximum limit of 50 pages for instructions not divided into multiple volumes. DOD Instruction 5025.01 requires that DOD directives exclusively establish policy, assign responsibility, and delegate authority to the DOD Components. Directives will not contain procedures. DOD instructions either implement policy or establish policy and assign responsibilities, and may provide general procedures for carrying out or implementing those policies. DOD manuals provide detailed procedures for implementing policy established in instructions and directives. The directives, instructions, and manuals we reviewed in the table above established and implemented policy as required. For example, DOD Instruction 5160.68 assigns responsibilities and mission functions for conventional ammunition management to the Secretary of the Army, the military services, and USSOCOM. DOD Instruction 5025.01 states that, generally, directives are to be signed by the Secretary of Defense or Deputy Secretary of Defense. Depending on the nature of the instruction, instructions must be signed by the component head in the Office of the Secretary of Defense, his or her Principal Deputy, or Office of the Secretary of Defense Presidentially-appointed, Senate-confirmed official. Manuals must be signed by an individual in one of these positions, as authorized by their chartering directives. The directives, instructions, and manuals we reviewed in the table above were signed by the appropriate officials. For example, DOD Directive 5160.65 was appropriately signed by the Deputy Secretary of Defense. DOD Instruction 5025.01 states that charters must define the scope of functional responsibility and identify all delegated authorities for the chartered organization. The SMCA charter defines responsibility and authorities, for example, by delegating to the Deputy Commanding General for Army Materiel Command the role of Executive Director for Conventional Ammunition and provides authorities as needed to execute the SMCA mission. To assess the extent to which the Department of Defense (DOD) has adequately maintained and shared information on the quantity, value, condition, and location of excess, obsolete, and unserviceable conventional ammunition for each military service, we reviewed DOD’s inventory data on excess, obsolete, and unserviceable conventional ammunition held in the conventional ammunition awaiting demilitarization and disposal (CAD) stockpile as of February 2015 to determine how complete and accurate the data are. The scope of the audit was limited to the materiel in the CAD stockpile and ammunition in the services’ inventory that was unserviceable or in excess of the services’ needs. We interviewed Army, Navy, Marine Corps, and Air Force officials to determine how they manage unserviceable ammunition and serviceable ammunition that is beyond the services’ needs. We also determined the extent to which the information in the services’ ammunition inventory systems is useful for their purposes. We interviewed Single Manager for Conventional Ammunition (SMCA) and service officials to learn how information on excess, obsolete, and unserviceable ammunition is shared. After initial discussions with DOD officials, we determined that the department does not consider the value of ammunition in the management of its CAD stockpile so we did not review the value of the conventional ammunition. Further, we conducted a data reliability assessment of the Air Force Combat Ammunition System, the Navy’s Ordnance Information System, the Marine Corp’s Ordnance Information System – Marine Corps, and the Army’s Logistics Modernization Program by reviewing the services’ responses to questionnaires on the internal controls they use to manage their systems. We applied Standards for Internal Control in Federal Government as our criteria, and found that the data was sufficiently reliable for determining whether DOD adequately maintained information on the quantity, value, condition, and location of excess, obsolete, and unserviceable conventional ammunition in its accounts and for our reporting purposes. The questions we sent the services solicited information on the controls they had implemented in their ammunition information systems. The questions seek to determine if there were controls that restricted access to the information system to prevent unauthorized access or inappropriate use and that there were data quality controls that ensured completeness, accuracy, authorization, and validity of all transactions. We interviewed service officials in the Army, Navy, Air Force, and Marine Corps to learn how ammunition is managed once the decision is made to demilitarize and transfer it to the CAD stockpile. We also interviewed officials on the visibility, accessibility, accuracy, and usefulness of the data on the CAD stockpile and determine if they have identified problems regarding the reliability of the data. Lastly, we reviewed policies and legislation to determine what guidance was provided on communicating excess conventional ammunition to other government agencies, and we interviewed SMCA officials about the extent to which they communicate the availability of excess ammunition to other government agencies and the challenges involved with making conventional ammunition available to government entities outside of DOD. To examine challenges, if any, DOD has identified in managing the current and anticipated CAD stockpile, and if so, actions taken to address those challenges, we reviewed DOD reports on the management of the current CAD stockpile to identify any problem areas and DOD’s plans to address these problems. We visited McAlester Army Ammunition Plant and examined the management of its ammunition demilitarization operation to include storage practices and a variety of methods to destroy the ammunition. We selected McAlester Army Ammunition Plant to visit because a large portion of the CAD stockpile was stored there, and it used several methods to demilitarize ammunition. We also contacted the other six depots that store and demilitarize ammunition and requested the same information on the management of their respective ammunition demilitarization operations.in the Army, Navy, Air Force, and Marine Corps to identify challenges they face in managing the stockpile and discuss the actions they have taken to address the challenges. We interviewed SMCA officials and officials To describe DOD’s average costs of storing and maintaining items in the CAD stockpile and the average costs of the disposal of items in the stockpile, we obtained fiscal year 2015 cost estimates for storing and demilitarizing ammunition from the Army Materiel Command’s Joint Munitions Command, and interviewed officials about what factors were used to develop these cost estimates. We also reviewed a 2013 DOD report on the cost of demilitarizing conventional ammunition to determine the factors that drive demilitarization costs. Additionally, we interviewed Army officials on the process they use to make demilitarization decisions. To describe DOD’s policies and procedures governing the demilitarization of excess, obsolete, and unserviceable conventional ammunition and discuss the extent to which they are consistent with DOD guidance for developing policies and procedures, we obtained policies, procedures, and guidance on demilitarization. We determined that these policies, procedures, and guidance would be considered adequate if they conformed to DOD guidance on directives and instructions. Therefore, we compared the requirements in DOD Instruction 5025.01, with the guidance governing demilitarization of conventional ammunition and determined whether DOD followed this instruction on how guidance documents should be developed and how often they should be updated.To determine the extent to which DOD policies and procedures on demilitarization of conventional ammunition are effective, we interviewed officials in the Army and contacted the demilitarization depots to obtain their opinions on the effectiveness and usefulness of DOD policies and procedures governing the demilitarization of conventional ammunition. We visited or contacted the following offices during our review. Unless otherwise specified, these organizations are located in or near Washington, D.C. Office of the Under Secretary of Defense for Acquisition, Technology U.S. Special Operations Command, Tampa, Florida Defense Logistics Agency Program Executive Office for Ammunition, Dover, New Jersey Office of the Executive Director for Conventional Ammunition, Dover, Office of the Assistant Secretary of the Army (Acquisition, Logistics and Technology) Headquarters, Department of the Army, Army Deputy Chief of Staff for Logistics (G-4) U.S. Army Materiel Command, Huntsville, Alabama U. S. Army Joint Munitions Command, Rock Island, Illinois U.S. Army Aviation and Missile Command, Huntsville, Alabama McAlester Army Ammunition Plant, McAlester, Oklahoma Office of the Chief of Naval Operations, Director for Material Readiness & Logistics (N4) Naval Supply Systems Command, Mechanicsburg, Pennsylvania U. S. Marine Corps Headquarters U.S. Marine Corps Systems Command, Quantico, Virginia U.S. Air Force Headquarters U.S. Air Force Life Cycle Management Center Readiness, Ogden, We conducted this performance audit from August 2014 to July 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 Army has seven demilitarization locations that store 98 percent of the conventional ammunition awaiting demilitarization and disposal (CAD) Stockpile. Figure 3 below shows these seven demilitarization locations, the amount of the CAD stockpile at those locations, and the demilitarization capabilities at each location. 1. Autoclave - Autoclave capability removes and reclaims main charge cast explosives (such as TNT) from projectiles and bombs. Munitions are prepared for the autoclave by disassembly or cutting to expose the main explosive charge. They are placed in the autoclave and the vessel is heated using steam. As the munitions body heats up, the explosive melts and flows to the bottom of the autoclave for collection in heated kettles. 2. Hot Water Washout - Washout capability removes and reclaims main cast explosive charges from projectiles, bombs, and mines. Munitions are prepared for washout by disassembly to expose the main explosive charge. Munitions are placed over a washout tank where low-pressure hot water is injected into the cavity to wash out the explosives into a recovery tank. 3. Cryofracture - Cryofracture involves the cooling of the munitions in a liquid nitrogen bath, followed by fracture of the embrittled item(s) in a hydraulic press and the subsequent thermal treatment of the fractured munitions debris in order to destroy the explosives and decontaminate any residual metal parts. 4. Hydrolysis – Hydrolysis uses a sodium hydroxide solution to dissolve the aluminum casing and expose the energetic materials contained within. The sodium hydroxide solution then reacts with the energetic materials, breaking them down and rendering them inert. 5. Improved Munitions Convention Download – Joint Munitions Command officials describe this as a process developed to demilitarize artillery projectiles that contain submunitions, which are small bombs. The base plate of the projectile is removed to access the submunitions and they are removed for disposition on the open detonation range. The metal parts including the projectile body and base plate are often reused in the manufacture of new rounds. 6. Incineration - Incineration provides an environmentally acceptable means to destroy munitions not suitable for other demilitarization methods and reclaim the metal scrap for sale. Small munitions and/or components are fed on conveyor(s) into the incinerator where they burn or detonate. Metal residues are discharged and collected for salvage. 7. INERT – According to Joint Munitions Command officials, INERT is the shredding, cutting, or mutilation of munitions items, components, or packaging that do not contain energetic materials. 8. Open Burn/Open Detonation - Open burn and open detonation are the intentional combustion or detonation of explosives or munitions, without control or containment of the reaction, and are the preferred method for cost-effective demilitarization of many items. Open burn and open detonation techniques were the primary means used to demilitarize munitions for several decades. 9. Slurry Emissions Manufacturing Facility – According to Joint Munitions Command officials this facility combines energetic material recovered from munitions items with other commercial ingredients to produce blasting charges the mining industry uses. 10. Steamout - Steamout is similar to hot water washout in that both processes essentially melt out energetic fillers in large-caliber projectiles, bombs, and other munitions. With the steamout process, items are placed on an inclined cradle, and steam is jetted in to melt out the fill. The molten slurry is collected and sent to corrugate cooling pans. The pans are held in a vented and heated hood until the water is all evaporated and the explosive solidifies. The solidified explosive is broken into chunks, boxed, and then according to Joint Munitions Command officials, used as donor material for open detonation projects. 11. White Phosphorus Plant - The White Phosphorus-Phosphoric Acid Conversion Plant provides an environmentally acceptable means to demilitarize munitions containing white phosphorus by converting it into phosphoric acid. The munitions are punched to expose the white phosphorus and quickly burned. Smoke from the burning munitions is pulled through a closed loop ducting system into the wet scrubber in the acid plant system for conversion to phosphoric acid. The phosphoric acid is collected and packaged for sale. Metal parts are discharged and collected for salvage. To determine what conventional ammunition should be demilitarized, Joint Munitions Command officials stated they use a database tool called the Demilitarization Optimizer. To develop an annual demilitarization plan, the optimizer produces an initial list of projects, in tons, that will result in demilitarizing the most ammunition possible based on factors entered into the optimizer. Officials stated they use the optimizer as a starting point in developing the annual demilitarization plan; they make adjustments to the optimizer output to maintain demilitarization capability at the depots and to balance the work load over the years. For the demilitarization of missiles, Army Aviation and Missile Command officials stated they do not use the optimizer because they prepare their plan using the number of missiles; however, they consider many of the same factors in determining what missiles to demilitarize in a given year. The optimizer is a database tool used to determine the ammunition, with the exception of missiles, that will be demilitarized, given certain parameters (e.g., inventory, depot capability and capacity, funding, transportation costs, and any mandatory workload requirements). The optimizer has been used by Joint Munitions Command since 1999 as a tool to assist in demilitarization program planning, provide justification to answer questions received from Congress as well as Army headquarters, and provide the most economic allocation of resources among the government depots. Further, the optimizer provides Joint Munitions Command with an auditable trail of decision making and an ability to provide a quick response to “what if” questions. The optimizer database uses several data points to determine what items should be demilitarized: 1. Demilitarization inventory and forecasted additions to the CAD stockpile – the amount of ammunition currently in the CAD stockpile and the estimated amount of ammunition that the services determine they will add to the stockpile that year. 2. Depot capability, capacity, and costs of carrying out demilitarization – depot capability is the type of demilitarization work the depot has the ability to conduct. For example, most of the depots have the capability to conduct demilitarization through open burn and open detonation. Depot capacity is the amount of work that the depot has the ability to conduct by demilitarization capability. For example, Letterkenny Munitions Center has the capacity to demilitarize 3,500 tons of ammunition each year by open burn and 1,250 tons by open detonation. The cost of carrying out demilitarization is an estimate, prepared by the depot, of the cost to demilitarizing specific ammunition using a particular demilitarization capability. Data on storage costs is not entered into the optimizer for cost calculations. 3. Funding – the amount of funding available for demilitarization based on the current fiscal year budget allocation. 4. Packing, crating, handling, and transportation – the cost of moving ammunition to the appropriate demilitarization location. 5. Mandatory workloads – any directives or management initiatives that would change the priority of demilitarization work that must be conducted. For example, if the United States signed the Convention on Cluster Munitions, DOD would be required to demilitarize all cluster munitions within 8 years. This information would be entered into the optimizer to ensure the treaty requirement would be met. Joint Munitions Command officials cautioned that there are some inherent uncertainties in the optimizer process that affect the outcome. One of the uncertainties is the incoming workload. While Joint Munitions Command has an estimate of how much inventory will be generated each year for demilitarization, the estimates are not perfect and leave uncertainty in the quantity of items that will be turned over for demilitarization and the time at which those items will enter the CAD stockpile. Joint Munitions Command officials stated that the optimizer provides a good starting point for decision-making, based on the specific parameters described above, but they do not assign demilitarization projects based solely on the optimizer output. Officials stated that the optimizer produces a list of projects, based on tons, that would be most economical to demilitarize for that given year. However, adjustments are made to balance complex, expensive demilitarization projects with simple, inexpensive demilitarization projects. Since the optimizer attempts to maximize the amount of conventional ammunition demilitarized, it tends to recommend a number of inexpensive projects. This results in pushing the expensive demilitarization projects into the future, which may increase future demilitarization costs. Therefore, to maintain a balance between future demilitarization funding needs and the current funding provided for demilitarization, officials replace some of the inexpensive projects the optimizer recommends with expensive projects. Additionally, officials make adjustments to the optimizer results to ensure each depot is provided sufficient work to maintain demilitarization capabilities. Officials are concerned that if they do not provide some work to each of the depots, the depots would lose their demilitarization capability because some processes require specialized skills or training and retaining those personnel would be impossible if demilitarization was curtailed for a significant amount of time. The loss of trained personnel would create a significant deficit in training and delay the restart of any future demilitarization operations. Further, officials are concerned they risk losing their environmental permits if demilitarization operations were stopped at an installation for a significant amount of time. For fiscal year 2015, the Joint Munitions Command and Program Executive Office for Ammunition officials stated they planned a demilitarization program of about $71 million, which would destroy about 67,640 tons of ammunition. Demilitarization officials at the Aviation and Missile Command stated they use similar factors in determining what missiles to demilitarize, including the location of the missiles, the capabilities and capacity of the depots, the estimated cost to demilitarize, and the funding available. Officials stated the Aviation and Missile Command does not use the optimizer tool, but instead the demilitarization officials coordinate with Product Manager Demilitarization to develop an annual missile demilitarization execution plan. In addition to the factors listed above, officials also consider the safety inspections that have been conducted on each missile and push any potentially unsafe-to-store items to the top of the demilitarization list. While Aviation and Missile Command demilitarization officials do not currently use an optimizer tool, they stated that they are considering whether an optimizer database would be feasible for use with missiles. For fiscal year 2015, the Aviation and Missile Command and Program Executive Office Ammunition officials stated they planned a demilitarization program of about $43 million, which would destroy about 141,598 missiles and components. In addition to the contact named above, Carleen Bennett (Assistant Director), George Bustamante, Lindsey Cross, Chaneé Gaskin, Kevin Keith, Carol Petersen, Michael Silver, Amie Steele, Alexander Welsh, Erik Wilkins-McKee, and Michael Willems made key contributions to this report.

DOD manages conventional ammunition that ranges from small arms cartridges to rockets, mortars, artillery shells, and tactical missiles. When a military service determines such ammunition is beyond its needs, obsolete, or unserviceable, it is offered to the other services and if not taken, transferred to the Army, which manages the CAD stockpile and takes actions to demilitarize and dispose of the ammunition in the stockpile. According to data provided by DOD officials, as of February 2015, the stockpile was about 529,373 tons. DOD estimates that from fiscal year 2016 to fiscal year 2020 it will add an additional 582,789 tons of conventional ammunition to this CAD stockpile. Section 352 of the National Defense Authorization Act for Fiscal Year 2015 included a provision that GAO review and report on the management of DOD's CAD stockpile. This report assesses, among other things, the extent to which DOD has adequately maintained and shared information on excess, obsolete, and unserviceable ammunition for the military services. GAO reviewed applicable guidance and the military service ammunition databases; visited an Army depot that conducts ammunition demilitarization; and interviewed appropriate DOD officials. The Department of Defense (DOD) maintains information on its excess, obsolete, and unserviceable conventional ammunition for the military services and shares this information on a limited basis with other government agencies, but its management of its conventional ammunition awaiting demilitarization and disposal (CAD) stockpile can be strengthened in two areas. The Army uses its Logistics Modernization Program database to maintain consolidated information on ammunition in the CAD stockpile, but GAO found that records for some items do not include complete data on weight. Specifically, of 36,355 records in the database, 2,829 did not have assigned weights as of February 2015. Internal control standards state that an entity should have controls to ensure that all transactions are complete and accurately recorded. DOD officials stated they are trying to correct current records with missing data; however, the number of records without weight data has increased. For example, as of February 2015, the number of records with missing data had increased by more than 600 since 2012. Since DOD uses weight in determining, among other things, cost estimates for demilitarization projects and what ammunition to demilitarize, missing weight data can negatively impact its efforts to destroy the most ammunition possible with the resources available. The military services have access to information on the CAD stockpile maintained in the Army's database and can search it for useable ammunition that could fill their requirements, but other government agencies do not and DOD does not have a systematic means for sharing such information. Federal internal control standards state that management should ensure there are adequate means of communicating with, and obtaining information from, external stakeholders. DOD officials told GAO that there have been instances of transfers of ammunition to other government agencies, but these have been done informally and on a limited basis. Without a systematic means for regularly sharing information on useable ammunition beyond DOD's needs, both DOD and other agencies may be missing opportunities to reduce costs related to demilitarization and ammunition procurement. GAO recommends DOD develop a plan to identify and record missing weight data and develop a systematic means to share information on the stockpile with other government agencies. DOD agreed with GAO's recommendations.