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Background The PSOB program provides death, disability, and education benefits to eligible public safety officers and their families in the event of the officer’s death or permanent and total disability in the line of duty. To qualify for program benefits, claims must be associated with an officer who worked for a public agency in one of the following official capacities: rescue squad or ambulance crew; employee of the Federal Emergency Management Agency (FEMA) who is responding to a federally declared disaster or emergency; state, local, or tribal officials who are working in cooperation with FEMA during a federally declared disaster or emergency; or fire or police department chaplain. Eligible survivors—including spouses, children, and surviving parents— may qualify for death benefits if an officer’s death was the direct and proximate result of an injury sustained in the line of duty. To qualify for disability benefits, the public safety officer has to be permanently and totally disabled as the direct result of catastrophic injury sustained in the line of duty that permanently prevents the individual from performing any gainful work. An officer’s spouse or children may also qualify for education benefits only after the officer’s eligibility for death or disability benefits has been established. The PSOB program is administered by the PSOB Office, a unit of the Bureau of Justice Assistance within DOJ’s Office of Justice Programs. At the time of our 2009 report, it employed a total of 10 staff, including the program director. In fiscal years 2006 through 2008, a total of 1,632 PSOB claims were filed through this office. The majority, or about 57 percent, were death claims; about 32 percent were education claims; and about 11 percent were disability claims. As we reported in 2009, claimants were required to submit documentation to the PSOB Office for each type of claim. Typically, the officer’s employer (i.e., the state or local agency for which the officer worked at the time of death or disability) assisted with filing death and disability claims on the officer’s behalf, while claimants generally file for education benefits on their own. Advocacy organizations may also have assisted. Upon receipt of all the required documentation, a PSOB benefits specialist reviewed the claim and its supporting documentation and drafted an initial determination on whether to approve or deny the claim. This draft determination was then reviewed by a senior benefits specialist, the PSOB director, and the Office of Justice Program’s Office of the General Counsel (referred to in this testimony as the “legal review” or the “attorneys’ review”) before a final determination was rendered. Furthermore, some death claims were reviewed by a contracted pathologist and all disability claims were reviewed by independent medical reviewers of various medical specialties and subspecialties who provide additional information as to whether claims meet medical standards for eligibility. A claim may have gone through different phases of the process multiple times if at any phase DOJ officials determined that more information may be needed to make a determination. In 2009, GAO Identified Issues with Timeliness of Claims Processing, Program Awareness, and DOJ’s Monitoring of Program Performance Death and Education Claims Were Processed Faster Than Disability Claims Based on the sample we used for our 2009 report, we estimated that the PSOB Office closed and approved the different types of claims at varying rates. Specifically, the office closed 78 percent of death claims and approved about 80 percent of those closed claims that were initiated in fiscal years 2006 through 2008. For education claims initiated over the same period, the office closed and approved all of those claims. In contrast, only 31 percent of disability claims were closed during the period we reviewed. Moreover, we could not reliably determine their approval rate due, in part, to the significantly longer time frame to process disability claims (see fig. 1) With regard to the first phase of the claims process—length of time between the date of death or disability and when the PSOB Office began to process the claim— we reported in 2009 that the average length varied significantly by type of claim. Specifically, the average length was 7 months to a year for death claims, 4 to 6 years for disability claims, and 7 to 10 years for education claims associated with approved death claims. PSOB officials told us that several factors may affect the length of this phase of the claims process, including claimants’ difficulty with obtaining necessary documentation to prove eligibility and lack of awareness about the program. Similarly with regard to the second phase of the claims process—length of time between the date the PSOB Office received the claim to sending a final determination letter to the claimant—our 2009 report found that the average length also varied by type of claim. Specifically, the average length of time was 4 to 6 months for education claims, 9 to 13 months for death claims, and 17 to 26 months for disability claims (see fig. 2). Officials explained that disability claims were generally more challenging and may have taken longer to process than death and education claims, in part because eligibility was based on adequate medical documentation from the claimant and an independent medical review by Bureau of Justice Assistance contractors. Disability claims decisions were also three times more likely to be appealed than death claims, which also contributed to longer processing times. We were unable to identify which steps of the claims process were most time-consuming because the claims files in the sample we reviewed in 2009 did not include reliable documentation regarding when claims passed through each step of the process. For example, the PSOB Office did not consistently document the dates of the attorneys’ reviews nor did it document the dates of the contractors’ medical reviews. However, based on our sample, we found in 2009 that the overall length of time from occurrence of death or disability to the claimant’s receipt of a final determination took an average of 16 to 21 months for death, 60 to 92 months (or 5 to about 7.5 years) for disability, and 96 to 126 months (or about 8 to 10.5 years) for education claims. At the time of our report, most of these claims were being processed on paper but the PSOB office had plans to and subsequently implemented an automated information management system in an effort to help ensure efficient claims processing and improve available data on claims. In 2009, Public Safety Organizations In Selected States Expressed Concerns about Program Awareness, Difficulties Establishing Eligibility, and Perceived Long Wait Times for Benefits In 2009, we reported that state and local officials from police and fire department and other public safety officer organizations did not always know about PSOB program benefits, particularly disability and education benefits. In particular, representatives of 15 of the 44 organizations we spoke with mentioned a lack of awareness about disability and education benefits, while officials from another 6 organizations were concerned that their constituents had a general lack of knowledge of the PSOB program. The general lack of awareness tended to pose a particular problem among smaller rural and volunteer departments. The lack of awareness also had an adverse effect on some claimants. For example, an official representing a local police officers’ union mentioned that a local police department unfamiliar with the disability benefits did not seek benefits on behalf of a severely and permanently disabled officer until the officer happened to seek educational assistance for his child. Officials from some public safety officer unions and the PSOB program said that they were more focused on promoting awareness of death benefits. Officials from the five selected states we reviewed in 2009 also told us that submitting all the necessary paperwork to prove eligibility was difficult and could be time-consuming. For example, according to local officials we interviewed, the application process could be delayed by long wait periods to obtain accident reports, medical records, and birth records. In one case, an official from a firefighters’ employee association in New York stated that an officer’s family had to wait 6 months before they could submit a death claim. Outdated beneficiary forms could have also delayed claims processing, and Office of Justice Programs officials acknowledged that sometimes the PSOB Office lost claim files. PSOB officials noted that they planned to address this concern by automating the claims process using an online application form. In 2009, officials most frequently expressed concern about perceived long wait times for receiving benefits and also reported difficulties obtaining information about claims status. A local police department official explained that relatively long wait times for PSOB benefits can impose a financial burden on families. A few state and local officials also expressed concern that the PSOB Office did not inform claimants or agencies of how long the claims process was expected to take. PSOB officials told us that the program provided information on what stage the claim was in the review process but not the estimated time frames for processing claims because they varied widely based on each claim’s circumstances. DOJ Did Not Monitor PSOB Program Performance in 2009 At the time of our 2009 report, the PSOB Office had not followed government guidelines for performance monitoring. All federal executive branch agencies are required by the Government Performance and Results Act of 1993 (GPRA) to set strategic goals, measure performance, and report on the degree to which goals were met in an effort to ensure government accountability and enhance public awareness about agencies’ accomplishments. Agencies are also subject to the Federal Managers’ Financial Integrity Act of 1982, which requires that they establish and maintain systems of administrative controls. GAO and the Office of Management and Budget have established guidelines for implementing these two acts. The guidelines include establishing goals and performance measures, monitoring progress—including collecting reliable data on program outcomes—and communicating program operations and outcomes to relevant stakeholders such as Congress and the public, including program participants. In 2009, we reported that DOJ had not set strategic goals and measures related to GPRA for the PSOB Office and therefore did not track or report such information to the public. As a result, the program had little accountability. Officials said that the program was not subject to strategic planning and goal setting because it was considered a payment program and its budget was largely mandatory. However, we noted that other federal programs that provide benefits after work-related injury and illness have established performance measures, such as ones for claims- processing timeliness, and reported their results publicly. While the PSOB program lacked GPRA-related strategic goals and performance measures, a 2004 Attorney General memorandum established two claims-processing goals. However, at the time of our 2009 report, the PSOB program director stated that the office did not track the memorandum’s first goal of processing claims within 90 days of receiving all necessary documentation because it lacked automated data that would have enabled the program to establish a baseline against which to gauge progress. As for the second goal, an official in the Office of Justice Programs’ Office of the General Counsel told us that their office had not established mechanisms to monitor whether the attorneys reviewed claims within 45 days of receiving all necessary documentation. Our 2009 report concluded that a more focused and systematic approach to managing the PSOB program could help ensure that the office achieves its goal of effectively and efficiently administering benefits that honor the work of many public officers who are killed or injured in the line of duty. To strengthen PSOB’s accountability and enhance awareness of the program and its benefits, we recommended in 2009 that the Bureau of Justice Assistance establish appropriate performance goals and measures and use reliable data to monitor and publicly report on the program’s performance. DOJ agreed with these recommendations. PSOB Office Has Taken Some Actions to Monitor Performance Since 2009, but a Recent OIG Report Identified Continuing Problems DOJ has taken steps to implement program improvements. By 2014, we observed that the Bureau of Justice Assistance had posted two PSOB performance measures and related data on its public website in consultation with public safety stakeholder groups: average time for the PSOB program to receive basic required documents, and average time for the PSOB program to determine a claim. The Bureau subsequently posted additional performance measures on its public website, including average number of days to assign a PSOB Outreach Specialist and percentage of claims determined within 1 year. While posting data on these performance measures represents an improvement, as of April 2016, the Bureau of Justice Assistance has not taken the additional step of publishing performance goals—which specify the desired level of performance—for the PSOB program. We continue to believe that the Bureau of Justice Assistance should publish performance goals to help the public gauge how well the program is working and enhance stakeholder awareness of the program. In addition, in its July 2015 report, DOJ’s OIG raised questions about claims processing times and performance measurement. Specifically, the report identified three primary factors that contributed to significant delays in processing death and disability claims: (1) claimants filing incomplete claims applications due, in part, to inadequate program guidance, (2) claimants and agencies being unresponsive to the PSOB Office’s request for additional information, and (3) the PSOB Office not adequately documenting the basis for its initial determination, which caused delays during the legal review phase. The OIG also determined that the PSOB Office had not reported annual and appropriate data on its performance measures and noted issues with the data’s reliability. For example, the OIG found the PSOB Office’s database was inconsistent and did not include data fields for important claims processing milestones, such as the date claimants submit applications and the PSOB submits claims for legal review. The OIG concluded that it did not believe that the PSOB Office’s database, as a management tool, was adequate to evaluate efficiencies in processing or to identify potential causes of timeliness problems. The OIG made four recommendations to DOJ to address these findings, and DOJ agreed with all four recommendations. In conclusion, the work of GAO and the OIG highlights difficulties DOJ has encountered in working to improve performance measurement for the PSOB program. While DOJ has taken some steps to address these issues, continued attention is needed to help ensure accountability for achieving program goals. Chairman Grassley, Ranking Member Leahy, and Members of the Committee, this concludes my statement. I would be pleased to respond to any questions you may have. GAO Contact and Staff Acknowledgments For further information regarding this testimony, please contact me at (202) 512-7215. Key contributors to this testimony were Holly Dye, Meeta Engle, Danielle Giese, Avani Locke, Lorin Obler and Almeta Spencer. 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 PSOB program, administered by the Department of Justice's Bureau of Justice Assistance, provides three types of benefits (death, disability, and education) to public safety officers and their eligible family members in cases of line-of-duty death or disability. GAO's 2009 report (GAO-10-5) examined the timeliness of claims processing and the extent to which the program followed government guidelines for monitoring program performance. The report made two recommendations to DOJ. DOJ's OIG issued a report in 2015 that provided updated information on the concerns raised by GAO in 2009. This testimony summarizes key findings of GAO's October 2009 report on the PSOB program and DOJ's actions to implement GAO's recommendations from that report. For its 2009 report, GAO reviewed a generalizable sample of 233 PSOB claims that were opened during fiscal years 2006 to 2008, reviewed relevant agency documents, and interviewed PSOB program officials, representatives of advocacy organizations, and state and local officials in five selected states. For this statement, GAO also reviewed DOJ's actions to date and the findings from the DOJ OIG's 2015 report on the PSOB program. GAO's 2009 report on the Public Safety Officers' Benefits (PSOB) program— created to provide certain benefits in cases of public safety officers' death or total disability in the line of duty—identified issues with the timeliness of claims processing, program awareness, and performance measurement. Specifically, GAO found that death and education claims were processed faster than disability claims. GAO estimated that the Department of Justice's (DOJ) PSOB Office generally had processed education and death claims in under a year while disability claims took between 17 and 26 months. In 2009, most claims were being processed on paper, and DOJ had plans to establish an automated claims system to help ensure more efficient claims processing and improve available claims data. This system has since been established. GAO's 2009 report also identified issues with awareness of program benefits and adherence to federal guidelines for performance monitoring. In particular, representatives of 15 of the 44 public safety organizations GAO spoke with mentioned a lack of awareness about disability or education benefits, while officials from another 6 organizations were concerned that their constituents had a general lack of knowledge of the program. Moreover, GAO found that because DOJ had not set strategic goals and measures for the program, monitored performance, or reported results, the program had little accountability. To enhance claimant awareness and program accountability, GAO recommended that DOJ establish appropriate performance measures and goals for the PSOB program and use reliable data to monitor and report on program performance. DOJ agreed with GAO's recommendations and has taken some steps to address them. Specifically, by 2014, DOJ had established two PSOB performance measures and posted data for these measures on its public website. DOJ subsequently posted data for additional performance measures on its website, including average number of days to assign a PSOB Outreach Specialist and percentage of claims determined within 1 year. While posting data on these measures represents an improvement, as of April 2016, DOJ had not taken the additional step of publishing performance goals—which specify the desired level of performance--for the PSOB program. GAO continues to believe that publishing performance goals is a key step in gauging how well the program is working and enhancing stakeholder awareness of the program. Findings from a 2015 report by DOJ's Office of Inspector General (OIG) highlighted the program's continuing problems in the timeliness of claims processing and reporting of reliable program performance data. The OIG concluded that it did not believe that the PSOB Office's database, as a management tool, was adequate to evaluate efficiencies in processing or to identify potential causes of timeliness problems. The OIG made four recommendations to DOJ to address these concerns, and DOJ agreed with the recommendations. Continued attention to these issues by DOJ is needed to help ensure accountability for achieving the program's goals.

Costly Financial Products With Features Inappropriate for Military Members Raise Sales Practice Concerns A limited number of insurance companies and broker-dealers are under investigation for deceptive sales practices to target military members with financial products that have features that reduce their benefit to service members. Although most service members already receive considerable low-cost life insurance as part of their government benefits, state insurance regulators we contacted said that at least six insurance companies have been selling a hybrid insurance product that combines life insurance coverage with a side savings fund to thousands of service members at installations across the United States and around the world. For example, four of these companies were licensed to sell insurance in at least 40 states, and the other two licensed in at least 35 states and five of them had received DOD approval 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. These products provide additional death benefits but are significantly more expensive than other life insurance coverage available to service members. For example, service members purchasing these products make payments of about $100 per month for additional death benefits generally ranging from $25,000 to $50,000. In contrast, all service members are currently able to purchase $400,000 of life insurance through Servicemembers’ Group Life Insurance (SGLI) for $26 per month. Although the insurance products these six companies were selling also included a savings component that recently promised to earn interest between 6.5 and 8.1 percent, these products also included features that reduced the likelihood that service members purchasing them would accumulate large amounts of savings. As we reported, military members move frequently and many leave the service after a few years, which which may reduce their ability or willingness to continue making payments to fulfill a long-term financial commitment. However, the products being marketed by these insurance companies require a long series of payments to result in significant benefits to their purchasers. For example, most of the payments made in the earliest years—ranging from 1 to 7 years— would be used to pay the premiums for life insurance coverage. In subsequent years, more of the service members’ payment would be allocated to the savings component. In addition, these products also included features that allowed the companies to use the money accumulated in a service member’s savings fund to automatically pay any unpaid insurance premiums. Although this would extend the period of time that these service members would be covered under the insurance policy, data we obtained from several of these companies indicated that 40 percent or more of the service members that purchased these products stopped making payments within the first 3 years. With regulators indicating that most purchasers failed to request refunds of their saving fund balance, few likely accumulated any savings as a result of their purchase. According to our analysis, the amount of time that it takes for a service member’s savings fund on these combined insurance and savings products to become totally depleted through the automatic payment provision varied. Figure 1 shows the impact on a service member who purchases the product providing $30,000 of insurance coverage that requires full payment of the total life insurance premimium during the first 7 years. As the figure shows, the money in the savings fund of a service member who makes the required $100 monthly payments for 4 years and then stops paying would be totally depleted to pay the subsequent insurance premiums in just over 1 year. This occurs because of the large premiums due in the early years on this type of policy, and because the accumulated value of the savings fund for this product was modest. For the other type of insurance and savings product typically being sold to military members, which involves lower but continuous premium payments over the life of the policy, service members who halt their payments after 4 years would have accumulated sufficient savings 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 and invest the remainder 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. Insurance Companies Accused of Inappropriate Sales Practices to Military Members The companies that market primarily to military members have been subject to actions by state insurance regulators, the Department of Justice (DOJ), DOD, and others. In the report we prepared for this committee, we identified at least 17 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 have been accused of inappropriate sales practices and agreed to settlements as part of lawsuits or administration actions involving fines, refunds, and other actions. For example, in December 2002, DOJ announced a settlement against an insurance company that had marketed a combined insurance and saving product primarily to military members in which the company paid a penalty and agreed to no longer sell insurance in the United States. 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 nonprofit fraternal organization that offered, as one of its benefits, the ability to purchase the company’s life insurance. The insurance companies that marketed primarily to service members have also been accused of violating DOD’s own solicitation policies for many years. For example, a 1999 DOD Inspector General report and a DOD-commissioned report issued in 2000 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’s 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. More recently, 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 group 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. As of August 11, 2005, this web site listed 21 agents from some of the 6 companies that market primarily to military members that are permanently barred—or have had their solicitation privileges temporarily suspended—at 8 different military installations. Our own work also found that problems involving sales of insurance products to military members appeared to be widespread. We reported in June 2005 that DOD only recently began systematically collecting and disseminating information on violations of DOD’s solicitation policy by sellers of financial products. However, as part of that report, we also surveyed DOD personal financial training program managers and found that nearly 37 percent believed that insurance company representatives had made misleading sales presentations at their installations during 2004, with 12 percent believing that such presentations were occurring routinely. At the two bases visited as part of work for this report, we also found evidence that problematic sales to service members were occurring. For example, our review of statements taken from 41 service members that military investigators interviewed at one Army base indicated that more than 70 percent of the service members said that the insurance sales personnel had described the product being sold as a savings or investment product rather than as insurance, which violates state insurance laws. Additionally, many of these service members also described conduct that appeared to represent instances in which insurance company sales personnel had violated one or more of the restrictions in DOD’s solicitation policy, such as making these sales presentations during group training sessions. In addition to these past actions, insurance regulators in as many as 14 states are also conducting examinations of these six insurance companies, as well as others that market to military members. Among the issues that regulators are investigating are whether representatives of these companies have not been clearly identifying these products as insurance, as state laws require, but instead marketing them as investments. Regulators and other organizations are also examining whether the sellers of these products are misrepresenting information on the forms used to initiate pay allotments to deduct the payments for the products directly from the service members’ pay. In addition, insurance regulators in some states are currently reviewing whether these combined insurance and savings products that are being sold to military members comply with all applicable state insurance laws and regulations. For example, regulators in Washington state rescinded approval to sell the products that had previously been approved for sales by some of these companies because the savings component, which the companies had been labeling as an annuity riders, was determined to not meet that state’s annuity regulations. Regulators in Virginia also recently ordered three companies that marketed primarily to military members to cease sales of combined insurance and savings products because of concerns over whether these products adequately complied with that state’s insurance law. However, although these products may be marketed in as many as 46 states, currently only 14 states are involved in such reviews of the legality of these products. As a result, in the report we prepared for this committee, we recommend that Congress act to have insurance regulators in all states conduct reviews to ensure that the products being marketed to military members adequately comply with state insurance laws. Companies also Selling Service Members a Mutual Fund Product with Features that Reduce Its Benefit to Most Military Members Large numbers of service members, including officers, were also purchasing a unique securities product, known as a contractual plan, with features that reduce its benefit to military members. Under the terms of the contractual plans sold to military service members, they would be expected to make monthly payments of a set amount for long periods, such as 15 years, that would be invested in the mutual funds offered by some of the largest mutual fund companies. Under the terms of the contractual plan, the broker-dealer selling the product deducts a sales charge (called a load) of up to 50 percent from each of the first year’s monthly payments with generally no further sales load deductions thereafter. In contrast, conventional mutual funds typically deduct loads that average 5 percent from each contribution made into the fund. According to regulators, about five broker-dealers accounted for the bulk of contractual plan sales to military members. According to the marketing materials of the broker-dealer that was the largest seller of contractual plans, this firm had nearly 300,000 military customers, with an estimated one-third of all commissioned officers and 40 percent of active duty generals or admirals as clients. This firm also 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. 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 2, 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. However, if a purchaser of one of these plans stops making regular investments earlier, the effective sales charge can be much higher. For example, halting payments after 3 years results in an effective sales load of 17 percent of the amount invested. At one time, contractual plans were the only way for small investors to invest in mutual funds as in the past many mutual funds required large initial investments, which 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 currently 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 over the telephone, the Internet, or by mail. Although contractual plans can provide benefits to those holding them for long periods, many service members were not making the expected payments and thus ended up paying more than had they invested in other alternatively available products. Given military members’ frequent moves and with many leaving the service after a few years, regulators found that most 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 broker-dealer that was the largest marketer of contractual plans had completed the full 15 years required under the contract—with many service members ceasing their payments after about 3 years and thus effectively having paid sales loads of 17 percent on their investment. Regulators found that customers of the other broker-dealers marketing these plans were similarly or even less successfully making all of the payments expected under the plan—for example, at one firm only 10 percent of customers had made payments for a full 15 years. Contractual plans have been associated with sales practice abuses for decades. Concerns about excessive sales charges and other abuses involving these products during the 1930s provided the impetus for provisions in the Investment Company Act of 1940 that limited the amounts that purchasers of contractual plans could be charged. Additional concerns involving contractual plans during the 1950s and 1960s also led Congress to amend the Act in 1970 to further limit the maximum sales charges and to provide a period in which purchasers could obtain refunds of their investment. Firms marketing contractual plans have again been accused of inappropriate sales practices. In December 2004, SEC and NASD sanctioned the largest broker-dealer marketing these plans to service members after alleging that the firm’s marketing materials were misleading. 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. This firm agreed to pay a total of about $12 million and has voluntarily discontinued sales of contractual plan products. About $8 million of the total money paid by this firm is to be used to fund financial education efforts for military members that are being developed and administered by NASD. Regulatory examinations of the other four smaller broker-dealers that continue to sell contractual plans are continuing. Given the longstanding history of sales-practice abuses associated with the contractual plans and the availability of viable alternative investments, we believe that Congress should act to ban the further sale of contractual plans. The bills currently under consideration in the Congress include language that would amend the Investment Company Act of 1940 to render sales of such plans illegal, thereby removing from the market a product that appears to have little need to continue to exist. Lack of DOD Complaint Sharing Hampered Regulators’ Ability to Identify Problems Involving Sales to Military Members Additional actions by Congress, DOD, and regulators also appear warranted to improve the effectiveness of insurance and securities regulators in overseeing sales of financial products to military members. As we reported, the ability of insurance and securities regulators to identify problems involving sales to military members was hampered because DOD personnel were not generally sharing service member concerns and complaints. In addition to conducting routine examinations, insurance and securities regulators use complaints from financial firms’ customers as an indicator that problems involving particular products, or the practices of particular firms, exist. For example, state insurance regulators conduct various types of reviews of the insurance companies they oversee, including reviews focusing on insurance companies’ financial soundness. Regulators in some states also review some aspects of insurance product sales as part of market conduct examinations that may involve reviews of a range of company practices, including sales, underwriting, and claims processing and payment. 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, under most state insurance laws, insurance regulators do not have the authority to evaluate whether the product sold to a military member was appropriate or suitable given the customer’s needs. State regulators and others have previously attempted to establish suitability standards for insurance products, but these efforts have had limited success. For example, a NAIC working group originally formed to develop suitability standards to apply to all insurance sales instead concluded its efforts by developing standards that applied only to the sale of annuity products to seniors age 65 and over. To reduce the likelihood that service members will be marketed products inappropriate to their needs, in the report we prepared for this committee, we recommend that Congress act to have insurance regulators work cooperatively with DOD to develop suitability or appropriateness standards that would apply to the sale of financial products to military members. The bills being considered in the U.S. Senate include provisions to have these parties work together to develop such standards. Such 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 and income levels. Having such standards could also provide protection for service members that are located in overseas installations not directly overseen by state regulators. Securities Regulators Also Hampered by Lack of Complaints Involving Military Members Similarly, the ability of SEC and NASD to identify problems involving sales by broker-dealers to military members was also hampered by the lack of complaints from DOD and for other reasons. For example, previous SEC and NASD examinations of the largest marketer of contractual plans had not identified any significant problems. However, staff from these organizations 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. The 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, SEC examiners had obtained data from the largest broker-dealer 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. However, after press reports appeared, NASD and SEC examiners reviewing this firm’s operations found that the firm maintained various sets of data on its customers’ activity. However, these various sets did not always include all customers’ information, which made regulators’ efforts to definitively determine the extent to which this firm’s customers were continuing to make payments and successfully completing their plans more difficult. By further analyzing the data, the regulators determined that, by excluding any customer whose account remained open but had not made any payments in the last year, the actual extent to which this broker-dealer’s customers were successfully completing their contractual plans was only 43 percent. As a result, the report we prepared for this committee recommends that, if contractual plans continue to be sold, SEC and NASD should consider ways (such as through revised examination procedures or recordkeeping rules) to ensure that they obtain better information on the extent to which broker-dealer customers are successfully making their payments. DOD Acting to Improve Sharing with Financial Regulators but Not All Efforts Complete 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. A primary way that DOD attempts to protect service members from inappropriate sales is through its directive on commercial solicitation on military installations. DOD staff within the Office of the Under Secretary of Defense for Personnel and Readiness are revising this directive and, in April 2005, sought public comments on a revised version that incorporates new requirements. For example, the revised directive would expressly prohibit insurance products from being sold as investments. The draft of the revised solicitation directive includes provisions that would also 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. In our June 2005 report, we recommended that DOD create a database of all violations of its solicitation policy. DOD has collected and posted some of this information to a web site available to its personnel and others. The bills under consideration in the Senate would further require DOD to promptly notify insurance and securities regulators of those individuals or companies whose solicitation privileges have been suspended, limited, or revoked by DOD installations. In our June 2005 report, we also identified various improvements that DOD has agreed to make to its oversight of insurance purchasers by military members, including the regulations governing the pay allotment process. We summarize these findings and DOD’s proposed improvements in appendix I of this statement. Although DOD personnel had not routinely shared service member complaints with financial regulators in the past, DOD officials have told us that they intend to require their personnel to report more of this 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. In addition, when we issued our June 2005 report on DOD’s insurance solicitation oversight, DOD was reluctant to provide information to regulators beyond indicating that DOD installations had suspended or revoked a given firm’s or individual’s solicitation privileges or that the violations involved the eligibility of the agent to hold a State license or meet other regulatory requirements. However, staff in the office that oversees the policy directive told us more recently that 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. DOD has not, as of yet, issued this new directive. To ensure that financial regulators have critical information that they need to identify problematic products and sales practices, the report we prepared for this committee recommends that DOD issue a revised DOD solicitation policy directive that would require that information on service member complaints related to financial product sales be provided to relevant state and federal financial regulators. DOD and financial regulators have also worked together to increase education for military members. For example, NAIC and DOD personnel have worked to together to develop a brochure that can be distributed to service members that describes insurance products and lists the state regulatory organizations to contact if they have concerns. In addition, NASD was cooperated with DOD personnel as part of developing the education campaign that is being planned using the money from the broker-dealer contractual plan settlement. However, DOD has not acted to fully address potential barriers to increased sharing with financial regulators. For example, securities regulatory staff told us that while they were conducting their investigations of contractual plan sales, 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 DOD has researched these legal issues and now 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 military installation personnel and financial regulatory staff understand how additional sharing could appropriately occur To ensure that financial regulators have critical information that they need to identify problematic products and sales practices, the report we prepared for this committee recommends that Congress direct DOD to develop mechanisms to overcome any barriers and coordinate with its installation personnel and with financial regulators on ways to share additional information about problematic financial firm practices and service member concerns. Our report further recommends that insurance regulators, SEC, and NASD designate specific staff that would receive complaints from DOD and conduct outreach with military installations to proactively learn of issues or concerns involving product sales. 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, a Texas insurance department official told us that he had trouble getting access to complaints information at a military installation because installation personnel questioned his authority to request such information. 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. 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. As a result, the report that we prepared for this committee also recommends that Congress consider acting to clarify the jurisdiction of state regulators over sales of financial products 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 offers and sales are generally applicable to any such activities 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 activities.- - - - - - - - - - - - - - Mr. Chairman, this concludes my prepared statement and I would be happy to respond to questions you or other members of the Committee many have. GAO Contacts and Acknowledgements For further information regarding this testimony, please contact Richard J. Hillman (202) 512-8678. In addition, others making key contributions to this statement included Cody Goebel, Assistant Director; Jack Edwards, Gwenetta Blackwell-Greer; Tania Calhoun; Barry Kirby; and Josephine Perez. Appendix I: Additional Actions Needed to Improve Oversight of Pay Allotments for Insurance for Military Members As a result of a report we issued in June 2005, the Department of Defense (DOD) has agreed with our recommendations to improve aspects of its oversight of insurance purchases by military members. At the request of the chairs of the House Committee on Government Reform and House Committee on Armed Services as well as various other members of the House of Representatives, we reviewed DOD’s procedures to oversee the sale of insurance products to military members, including the procedures used to process pay deduction allotments to pay for insurance products. Based on the work we conducted, we determined that DOD was not able to monitor the extent to which service members were purchasing supplement insurance because of problems with its personnel pay databases. Pay information for service members is maintained by the Defense Finance and Accounting Service (DFAS) in separate databases for the different military services. However, we were not able, even with DFAS assistance, to use information from these databases to reliably determine the extent to which service members had purchased additional insurance. For example, the codes in the databases used to identify an insurance company are not the same for all services. Further, DOD and service regulations permit the use of at least seven different allotment forms, but not all of these forms explicityly identify which allotments are for supplemental life insurance. A major cause of these database-related problems is DOD’s systems supporting service members’ pay, which we had previously found unreliable. While a significant system enhancement project is under way to improve the administration of military pay, DOD is likely to continue operating with existing system constraints for several years. The continued use of forms that do not require information and coding specific to supplemental life insurance could cause allotment data to continue to be unreliable for oversight purposes. The absence of accurate data on the extent to which service members are purchasing supplemental life insurance limits the ability of DOD policy officials and installation solicitation coordinators to oversee such sales and ensure that all relevant DOD policies are being followed. For example, the lack of accurate data prevents DOD personnel from readily identifying whether service members at a particular installation have submitted an unusually large number of new allotments for supplemental life insurance during a short period, which could indicate that a mass solicitation to recruits or trainees has occurred in violation of DOD’s personal commercial solicitation policy directive. As a result, our June 2005 report recommended that DOD determine what current and future modifications should be made to the regulations, forms, and procedures used to initiate and electronically capture supplemental life insurance allotments so that more useable data are available to the DOD, service, and installation offices responsible for overseeing supplemental life insurance solicitation. In its comments on a draft of our report, DOD concurred with this recommendation and stated that the department will consider our proposed changes for a future enhancement of their pay system and will review the regulations and forms to determine what further modification should be made. Based on our work, we also found that weaknesses in DOD’s regulations and forms prevented it from determining the extent to which its personnel adhere to allotment regulations. For junior enlisted service members (pay grades E-l to E-3), the DOD directive on personal commercial solicitation requires that at least 7 days elapse before the allotment is to be processed to allow these members to receive counseling about the purchase of the supplemental life insurance. However, contrary to the regulation, we found that some DOD financial personnel were accepting allotment forms to start supplemental life insurance without verifying that a cooling-off period had elapsed. Currently, the allotment forms that service members use to start supplemental life insurance do not require certification that the required cooling-off period and, possibly, counseling have occurred. The absence of this information from allotment forms prevents finance personnel from readily determining whether the 7 days have elapsed before they certify the allotment. In addition, ambiguities in the language of the solicitation policy directive may have also led to improper allotment processing. For example, the directive was not clear as to whether the counseling is required or optional during the cooling-off period. In addition, the directive and the standard allotment forms do not contain procedures for documenting whether the counseling took place. To ensure better compliance with the directive, our June 2005 report recommended that DOD clarify the requirements relating to the cooling-off period in its upcoming revision to the solicitation policy directive, and thereby eliminate the ambiguities about its requirements. In its comments on a draft of our report, DOD concurred with this recommendation and stated that it had identified an additional ambiguity in the current revised directive regarding who is responsible for monitoring and enforcing the cooling-off period for supplemental life insurance purchases. It indicates that the proposed revision to the directive will address these issues. We also found DOD personnel were not consistently complying with regulations relating to ensuring that allotments were appropriately authorized. According to DOD’s Financial Management Regulation, establishment of, discontinuance of, or changes to existing allotments for supplemental life insurance are to be based on a written request by a service member or someone with a special power of attorney on behalf of the service member. However, DOD personnel and insurance agents indicated that some offices accepted allotment forms personally submitted by insurance agents or through the mail with only the signature on the form serving as proof that the service member initiated the allotment. For example, finance office personnel at Naval Station Great Lakes said that about half of all insurance allotment forms submitted to and processed by their office came from insurance agents. In addition, we reported that a life insurance agent was alleged to have submitted allotment forms at Fort Bragg for service members who later said they had not wanted the policies for which they were paying. Finance personnel said they accepted allotment forms in this manner to ensure that polices start promptly, but starting allotments without service members’ awareness can negatively affect members’ finances and their unit’s morale and readiness. To ensure that allotments are properly authorized, our June 2005 report recommended that DOD issue a message to all finance offices and DFAS offices that process allotments for supplemental life insurance to remind personnel that DOD’s Financial Management Regulation indicates that only service members or their designated representatives with special power of attorney for the prescribed purpose are authorized to start, stop, or modify financial allotments. In its comments on a draft of our report, DOD concurred with this recommendation and stated that it will issue such a statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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In 2004, a series of media articles alleged that financial firms were marketing expensive and potentially unnecessary insurance or other financial products to members of the military. GAO's report for this committee examined (1) features and marketing of certain insurance and securities products being sold to military members and (2) how financial regulators and the Department of Defense (DOD) were overseeing the sales of insurance and securities products to military members. GAO also examined issues relating to DOD's oversight of insurance sales for a report issued in June 2005. A limited number of firms accused of using deceptive sales practices are targeting costly financial products to military members with features that reduce their benefits to military purchasers. Although some service members benefited from a product that combines insurance with a savings component, the additional coverage was more expensive than the low-cost government insurance almost all service members already receive. One feature reducing these products' benefits was that if the service member ever stopped making payments and did not request a refund, the accumulated savings is used to continue the life insurance coverage. With military members often leaving the service within a few years, most stopped their payments and likely failed to amass any savings from their purchase. Various regulatory and other actions have been taken against the insurance companies that sell these products in the past and new investigations are underway in 14 states over whether these companies have failed to clearly identify the products as insurance as required by law or whether the products' features comply with all state insurance requirements. A small number of broker-dealers were also marketing a securities product--the mutual fund contractual plan--that has largely disappeared from the civilian marketplace. Although potentially providing returns equivalent to other products if steady payments are made over a long period, these contractual plans proved more expensive to most military purchasers than other widely available alternative products because many military members stopped making payments in the first few years. In addition, the largest broker-dealer selling contractual plans has already been sanctioned by regulators for using misleading marketing materials and examinations into the practices of other firms marketing this product are also underway. A lack of routine complaint sharing by DOD prevented financial regulators from identifying inappropriate sales to military service members earlier. Although insurance regulators in some states review sales activities periodically, most rely on complaints to indicate that potentially problematic sales are occurring, particularly since no appropriateness or suitability standards exist for insurance. Securities regulators' efforts were also hampered by the lack of complaint sharing from DOD personnel. Because sharing with financial regulators can be complicated by privacy regulations and potential legal restrictions, DOD personnel at individual installations generally resolved matters involving product sales with companies directly. However, in light of the problems identified in our June 2005 report and the report issued for this committee, DOD has efforts underway to revise its solicitation policies regarding such sales, and has reviewed ways in which it can legally share additional information with financial regulators. However, DOD has not yet issued these new policies or coordinated with military installation personnel or with regulators on appropriate ways that additional sharing could occur.

Computer Security Is an Increasing Threat to Critical Government Operations The dramatic increase in computer interconnectivity and the popularity of the Internet are offering government agencies unprecedented opportunities to improve operations by reducing paper processing, cutting costs, and sharing information. At the same time, however, malicious attacks on computer systems are increasing at alarming rates and are posing serious risks to key government operations. Thus, the ultimate success of agencies’ ability to use interconnected systems to carry out critical governmental functions depends in large part on their ability to protect the integrity, privacy, and availability of the data and systems they rely upon. This Committee has long been concerned about the need to protect sensitive information in federal computer systems. These concerns are well-founded. At the request of you, Mr. Chairman, and Senator Glenn, we have undertaken a large body of work to address the issue, including reviews of most of the federal government’s largest departments’ and agencies’ computer security programs. In conjunction with our financial statement audit focus and high-risk reviews, this work has revealed a disturbing picture of our government’s lack of success in protecting federal assets from fraud and misuse, sensitive information from inappropriate disclosure, and critical operations from disruption. For example: In May 1996, we reported that computer hackers had penetrated Department of Defense computer systems; obtained and corrupted sensitive information; shut down and crashed entire systems and networks; and denied service to users who depend on automated systems to help meet critical missions, including weapons and supercomputer research, logistics, procurement, and military health. Our recommendations focused on the need for Defense to assign clear responsibility and accountability for the successful implementation of its security program, improve its security policies and procedures, increase security awareness, and implement more proactive technical protection and monitoring systems.In September 1996, we reported that, over the previous 2 years, serious weaknesses had been reported for 10 of the largest federal agencies, concluding that poor information security was a widespread federal problem with potentially devastating consequences. In that report, we recommended that the Office of Management and Budget (OMB) play a more proactive role in overseeing agency practices and managing improvements, in part through its role as chair of the Chief Information Officers (CIO) Council. In February 1997, we identified information security across all government agencies as a high-risk area. We found management and system controls to be largely inadequate, leaving critical operations at many agencies highly vulnerable to unauthorized access.In three 1997 reports, we identified a wide range of continuing serious weaknesses in Internal Revenue Service (IRS) systems, including inadequate controls over employee browsing of taxpayer records.In March 1998, in our report on the federal government’s consolidated financial statements, we emphasized that pervasive computer control weaknesses were placing enormous amounts of federal assets at risk of fraud and misuse, financial information at risk of inappropriate disclosure, and critical operations at risk of disruption. Also at your request, we are currently (1) examining computer security programs at other selected agencies including the National Aeronautics and Space Administration, (2) developing a comprehensive and detailed analysis of information security problems at the largest federal agencies, and (3) producing an updated summary of actions taken by OMB and the CIO Council to address these problems from a governmentwide perspective. Today, the Committee is releasing the redacted versions of our reports on computer security at State and FAA. These reviews resulted in many findings that are too sensitive to discuss in today’s open setting and, accordingly, detailed reports have been provided to this Committee and to appropriate agency officials under separate covers. However, we will describe the types of weaknesses found and the risks they posed to critical systems and information. Pervasive Computer Security Weaknesses Threaten State Department Operations Last year, this Committee asked us to assess whether the State Department’s unclassified automated information systems were susceptible to unauthorized access. State relies on a variety of decentralized information systems and networks to help it carry out its responsibilities and support business functions, such as personnel, financial management, medical, visas, passports, and diplomatic agreements and communications. The data stored in these systems, although unclassified, are sensitive enough to be attractive targets for individuals and organizations seeking monetary gain or desiring to learn about or damage State operations. For example, much of this information deals with employees working for the department and includes American and Foreign Service National personnel records, employee and retiree data, and private health records. Background investigation information about employees being considered for security clearances is also processed on State’s unclassified network. The potential consequences of misuse of this information are of major concern. For example, unauthorized deletion or alteration of data could enable known criminals, terrorists, and other dangerous individuals to enter the United States. Personnel information concerning approximately 35,000 State employees could be useful to foreign governments wishing to build personality profiles on selected employees. Manipulation of financial data could result in overpayments or underpayments to vendors, banks, and individuals, and inaccurate information being provided to agency managers and the Congress. Furthermore, the overseas activities of other federal agencies may be jeopardized to the extent they are supported by State systems. To determine State’s vulnerability to computer attacks, we tested the department’s technical and physical controls for ensuring that data, systems, and facilities are protected from unauthorized access. We designed our tests to simulate two security penetration scenarios: (1) an unauthorized individual who has no knowledge of State’s automated information infrastructure (for example, a hacker or terrorist organization) and (2) a mid-level internal user with limited access privileges and some specific computer related information (for example, a State employee) exceeding his or her limited privileges. In simulating these scenarios, we wanted to know whether an unauthorized user could compromise—that is, improperly access, modify, disclose, or destroy—sensitive data if he or she successfully penetrated State’s computer resources. During our testing, we performed controlled penetration attacks at dial-in access points, internal network security controls, the department’s Internet gateways, and public information servers. We also attempted to gain unauthorized physical access to certain State facilities and assessed users’ awareness by attempting to get them to reveal sensitive information, such as their passwords. Such techniques, sometimes referred to as social engineering, can be used by attackers to easily bypass an organization’s existing physical and logical security controls. Unfortunately, our penetration tests were largely successful. They demonstrated that State’s computer systems and the information contained within them are very susceptible to hackers, terrorists, or other unauthorized individuals seeking to damage State operations or reap financial gain by exploiting the department’s information security weaknesses. For example, without any passwords or specific knowledge of State’s systems, we successfully gained access to State’s networks through dial-in connections to modems. Having obtained this access, we could have modified, stolen, downloaded, or deleted important data; shut down services; and monitored network traffic, such as e-mail and data files. In addition, by posing as a trusted inside computer user, we were able to circumvent State’s internal network security controls and access information and sensitive data that would normally be off limits to most employees. For example, after we gained (administrator) access to host systems on several different operating platforms, such as UNIX and Windows NT, we viewed international financial information, travel arrangements, detailed network diagrams, a listing of valid users on local area networks, employees’ e-mail, performance appraisals, and other sensitive data. Our tests also showed that security awareness among State employees was problematic. For example, many computer users at State had weak passwords that were easily guessed, indicating that they were unaware of, or insensitive to, the need for secure passwords. One way to prevent password guessing is to ensure that users choose complex passwords, such as those composed of alphanumeric, upper- and lower-case characters. However, we found no evidence that State was training its users to employ these techniques. We also found little evidence that State was training its users to refrain from disclosing sensitive information. For example, we called a user under the pretense that we were systems maintenance personnel and were able to convince her to disclose her password. We also obtained access to State’s networks by breaching physical security at one facility, and finding user account information and active terminal sessions in unattended areas. For example, in several instances we were able to enter a State facility without required identification. In an unlocked office, we found unattended personal computers logged onto a local area network. We also found a user identification and password taped to one of the computers. Using these terminals, we were able to download a file that contained a password list. This list could have been used later to help hack into State’s systems. In another unlocked area, we were able to access the local area network server and obtain supervisor-level access to a workstation, which would have allowed us to even more easily circumvent controls and hide any traces of our activities. Internet security was the only area in which we found that State’s controls were currently adequate. We attempted to gain access to internal State networks by going through and around State’s Internet gateways or exploiting information servers from the outside via the Internet, but we were not able to gain access to State’s systems. State’s protection in this area was adequate, in part, because the department currently limits use and access to the Internet. However, State officials have been requesting greater Internet access and the department is considering various options for providing it. Expansion of Internet services would provide more pathways and additional tools for an intruder to attempt to enter unclassified computer resources and therefore increase the risk to State systems. Recognizing this, State conducted an analysis of the risks involved with increasing Internet use. However, the department has not yet decided to what extent it will accept and/or address these new risks. Until it does so, State will not be in a good position to expand its Internet use. The primary reason why our penetration tests were successful is that State, like many federal agencies, lacks the basic building blocks necessary to effectively manage information security risks. First, State did not have a central focal point to oversee and coordinate security activities. Computer security responsibilities were fragmented among three organizations—the Chief Information Office, Diplomatic Security, and Information Management—none of which had the authority to effect necessary changes. Second, State did not routinely perform risk assessments so that its sensitive information could be protected based on its sensitivity and criticality to mission-related operations. Third, the department’s primary information security policy document was incomplete. Fourth, State was not adequately ensuring that computer users were fully aware of the risks and responsibilities of protecting sensitive information. Fifth, the department did not routinely monitor and evaluate the effectiveness of its security programs, and it did not established a robust incident response capability. A key reason why these critical elements of security were not in place was that top managers at State had not demonstrated a commitment to establishing a comprehensive and effective information security program. For example, even though State had reported mainframe computer security to the President and the Congress as a material weakness under the Federal Managers’ Financial Integrity Act for the past 10 years, the problem had not yet been corrected. In addition, information security had often been assigned to low- and mid-level State employees as a collateral duty. Finally, State’s top managers had still not developed a comprehensive security plan or ensured that appropriate resources were devoted to improving computer security. In our report being released today, we recommended that State take a number of actions to address these weaknesses to improve its information security posture. For example, we recommended that the Secretary of State establish a central information security unit with responsibility for facilitating, coordinating, and overseeing departmental information security activities; develop and maintain an up-to-date security plan; develop policies and procedures that require senior State managers to evaluate the risks to their sensitive information and systems and determine appropriate solutions; assign the CIO the responsibility and full authority for ensuring that the information security policies, procedures, and practices of the agency are adequate; and defer expansion of Internet usage until State addresses known vulnerabilities and provides appropriate security measures commensurate with risks associated with the planned level of Internet expansion. In addition, we provided State with dozens of suggested solutions to mitigate the specific weaknesses that our tests identified. We are pleased to report that in concurring with our recommendations, State identified a number of actions it is beginning to take to strengthen its information security program. For example, State advised us that its Chief Information Officer is beginning to address the lack of a central focus for information systems security by establishing a Security Infrastructure Working Group. State also agreed to formalize and document risk management decisions, revise provisions of the Foreign Affairs Manual related to information security, and undertake an evaluation of one of its most significant networks based on our review. Furthermore, State said it is implementing a plan to correct the technical weaknesses identified during our testing. However, State did not agree with our recommendation to defer expansion of Internet use until the department addresses known vulnerabilities. In explaining its nonconcurrence, State asserted that expanding Internet usage is a priority and that the department has a plan to mitigate the risks of expansion. FAA’s Weak Computer Security Practices Jeopardize Flight Safety Given the paramount need to ensure safe air travel, this Committee also asked us to review FAA’s computer security program. FAA’s air traffic control (ATC) computer systems provide information to air traffic controllers and aircraft flight crews to ensure safe and expeditious movement of aircraft. Failure to adequately protect these systems, as well as the facilities that house them, could cause nationwide disruptions of air traffic or even loss of life due to collisions. To determine whether computer security at FAA is effective, we were asked to assess (1) whether FAA was effectively managing physical security at ATC facilities, (2) whether FAA was effectively managing systems security for its current operational systems, (3) whether FAA was effectively managing systems security for future ATC modernization systems, and (4) the effectiveness of its management structure and implementation of policy for computer security. We elected not to perform penetration testing at FAA because, in the early phases of our work, we already had (1) identified serious deficiencies in each of the areas we reviewed, (2) found evidence of ATC systems that had been penetrated and critical ATC data compromised, and (3) determined that FAA had planned to conduct its own penetration tests on select ATC systems. We found that FAA was not effectively managing physical security at ATC facilities. Known weaknesses exist at many facilities. For example, at one facility, an FAA inspection report disclosed that service contract employees were given unrestricted access to sensitive areas without having appropriate background investigations. FAA’s assessment of another facility that controls aircraft concluded that access control procedures were weak to nonexistent and that the facility was extremely vulnerable to criminal and terrorist attacks. Furthermore, we found that FAA did not know if other facilities were similarly vulnerable because it had not assessed the physical security controls at 187 facilities since 1993. FAA also was ineffective in managing systems security for its operational systems and was in violation of its own policy. A review conducted for FAA’s Office of Civil Aviation Security in October 1996 by the Volpe National Transportation Systems Center concluded that FAA had performed the necessary analysis to determine system threats, vulnerabilities, and safeguards for only 3 of 90 operational ATC computer systems, or less than 4 percent. FAA officials told us that this was an accurate depiction of the current state of operational systems security. In addition, only one of the nine operational ATC telecommunications networks had been analyzed. Such poor security management existed despite the fact that FAA’s 1994 Telecommunications Strategic Plan stated that “vulnerabilities that can be exploited in aeronautical telecommunications potentially threaten property and public safety.” FAA’s 1997 Telecommunications Strategic Plan continued to identify security of telecommunication systems as an area in need of improvement. Without knowing the specific vulnerabilities of its ATC systems, FAA cannot adequately protect them. FAA claimed that because current ATC systems often utilize custom-built, 20-year-old equipment with special purpose operating systems, proprietary communication interfaces, and custom-built software, the possibilities for unauthorized access are limited. While these configurations may not be commonly understood by external hackers, one cannot assume that old or obscure systems are, a priori, secure. In addition, the certification reports that FAA has done revealed operational systems vulnerabilities. Furthermore, archaic and proprietary features of the ATC system provide no protection from attack by disgruntled current and former employees who understand them. Additionally, FAA had not been effectively managing systems security for future ATC modernization systems. FAA had no security architecture, security concept of operations, or security standards. As a result, implementation of security requirements across ATC development efforts was sporadic and ad hoc. Of the six current ATC system development efforts that we reviewed, four had security requirements, but only two of the four developed their security requirements based on a risk assessment. Without security requirements based on sound risk assessments, FAA cannot effectively protect future ATC systems from attack. Further, with no security requirements specified during systems design, any attempts to retrofit security features later will be increasingly costly and technically challenging. As FAA modernizes and increases system interconnectivity, ATC systems will become more vulnerable, placing even more importance on FAA’s ability to develop adequate security measures. These future vulnerabilities are well documented in FAA’s information security mission need statement and also in reports completed by the President’s Commission on Critical Infrastructure Protection. The mission need statement asserts that “information security is the FAA mission area with the greatest need for policy, procedural, and technical improvement. Immediate action is called for to develop and integrate information security into ATC systems.” The President’s Commission summary report concluded that the future ATC architecture appeared to have vulnerabilities and recommended that FAA act immediately to develop, establish, fund, and implement a comprehensive systems security program to protect the modernized ATC system from information-based and other disruptions, intrusions, and attacks. It further recommended that this program be guided by the detailed recommendations made in the National Airspace Systems vulnerability assessment. Finally, FAA’s management structure and implementation of policy for ATC computer security was not effective. Security responsibilities were distributed among three organizations, all of which have been remiss in their ATC security duties. The Office of Civil Aviation Security was responsible for developing and enforcing security policy, the Office of Air Traffic Services was responsible for implementing security policy for operational ATC systems, and the Office of Research and Acquisitions was responsible for implementing policy for ATC systems that are being developed. The Office of Civil Aviation Security had not adequately enforced FAA’s policies that require the assessment of physical security controls at all ATC facilities and vulnerabilities, threats, and safeguards for all operational ATC computer systems. In addition, the Office of Air Traffic Services had not implemented FAA policies that require it to analyze all ATC systems for security vulnerabilities, threats, and safeguards. Finally, the Office of Research and Acquisitions had not implemented the FAA policy that requires it to formulate requirements for security in specifications for all new ATC modernization systems. FAA recently established a central security focal point, the National Airspace Systems Information Security (NIS) group, to develop additional security guidance (i.e., a security architecture, a security concept of operations, and security standards), to conduct risk assessments of selected ATC systems, to create a mechanism to respond to security incidents, and to provide security engineering support to ATC system development teams. This group has developed an action plan that describes each of its improvement activities, but it has not developed detailed plans or schedules to accomplish these tasks. Establishing a central security focal point is a practice employed by leading security organizations. However, in order to be effective, the security focal point must have access to senior executives that are organizationally positioned to take action and effect change across organizational divisions. One approach for ensuring that a central group has such access at FAA would be to place it under a Chief Information Officer (CIO) who reports directly to the FAA Administrator. This approach is consistent with the Clinger-Cohen Act, which requires that major federal departments and agencies establish CIOs who report to the department/agency head and are responsible for implementing effective information management. FAA does not have a CIO reporting to the Administrator. Although the NIS group has access to certain key Associate Administrators (e.g., the Associate Administrator for Civil Aviation Security and the Associate Administrator for Research and Acquisitions), it does not have access to the management level that can effect change across organizational divisions, especially FAA’s Administrator or Deputy Administrator. Thus, there is no assurance that the NIS group’s guidance, once issued, will be adequately implemented and enforced, that results of its risk assessments will be acted upon, and that all security breaches will be reported and adequately responded to. Until existing ATC computer security policy is effectively implemented and enforced, operational and developmental ATC systems will continue to be vulnerable to compromise of sensitive information and interruption of critical services. In our report, we recommended that FAA take a number of actions to improve its information security. For example, we recommended that FAA develop and execute a plan to inspect the 187 ATC facilities that have not been inspected in over 4 years and correct any weaknesses identified; correct identified physical security weaknesses at inspected facilities; ensure that specifications for all new ATC systems include security requirements based on detailed security assessments; and ensure the NIS group establishes detailed plans and schedules to develop a security architecture, a security concept of operations, and security standards and that these plans are implemented. Finally, we recommended that FAA establish an effective management structure for developing, implementing, and enforcing ATC computer security policy. Given the importance and the magnitude of the information technology initiative at FAA, we expanded on our earlier recommendation that a CIO management structure similar to the department-level CIOs as prescribed in the Clinger-Cohen Act be established for FAA by recommending that FAA’s CIO be responsible for computer security. We further recommended that the NIS group report to the CIO and that the CIO direct the NIS group to implement its plans. In contrast to State, the Department of Transportation’s response to our recommendations was disappointing. The department only discussed its efforts for timely corrective actions pertaining to 1 of our 15 recommendations. It did not state what, if any, specific action it would take on the remaining 14 recommendations. This noncommitment is troubling considering that several of our recommendations are requesting that FAA adhere to its existing computer security policies. Learning From Leading Organizations to Face the Challenges in Securing Systems Poor computer security is a pervasive problem across government. Security problems are often dealt with on an ad hoc basis with too little attention given to systemic issues and problems that underlie individual security lapses or breaches. Frequently, responsibility for computer security is viewed as burdensome and relegated to (1) technical staff who do not have the resources or clout to prompt improvements and/or (2) line staff who lack the training and experience necessary to fully appreciate and mitigate computer security risks. The problem is further complicated by the complex computing environment most agencies now must have to meet their operating needs. Many agencies have a conglomeration of mainframes, PCs, routers, servers, software applications, and external connections. Because absolute protection over these complex infrastructures is not feasible, developing effective information systems security involves an often intricate set of trade-offs between the (1) type and sensitivity of the information and operations to be protected, (2) vulnerabilities of the computers and networks, (3) various threats, including hackers, thieves, disgruntled employees, competitors, and, in the federal government’s case, foreign adversaries and spies, (4) countermeasures available to combat the problem, and (5) costs. In making these trade-offs, agencies must understand the information security risks to their operations and assets, decide what they are going to do to defend themselves, and determine what risks they are willing to accept. We have found that many problems contribute to agencies’ difficulties in successfully balancing the trade-offs necessary to establish effective computer security. However, an underlying factor is that senior agency officials have not established a framework for managing the information security risks associated with their operations. To better determine how leading organizations handled these trade-offs, we undertook a comprehensive study—at this Committee’s request—of eight organizations with superior security programs. These organizations—regardless of business type, size, or management structure—had one overriding tenet: business “owners,” not security experts, assumed both responsibility and accountability for computer security. At the same time, however, security specialists played a strong educational and advisory role and had the ability to elevate discussions to higher management levels when they believed that risks were not being adequately addressed. The organizations we studied managed their information security risks by implementing a continuing cycle of monitoring business risks, maintaining policies and controls, and monitoring operations. This cycle of activity parallels the process associated with managing the controls associated with any type of program. As illustrated in the figure below, all of these activities are coordinated through a central management office or group who served as consultants and facilitators to individual business units and senior management. Each element of the risk management cycle, in turn, has a number of individual practices that these organizations followed to minimize risk. We are pleased that the Committee is releasing the executive guide, which summarizes the results of our study, today. We are equally pleased that the CIO Council has also endorsed our executive guide and the 16 practices followed by leading organizations. We are working with the Council and the Office of Management and Budget to encourage agencies to adopt these practices as additional guidance that can be used to enhance the government’s ability to protect federal assets from fraud and misuse, inappropriate disclosure of sensitive information, and disruption of critical operations. And, of course, we are continuing our work for this Committee to review agency computer security programs and to identify solutions that target the underlying causes of security weaknesses. We are also working with the CIO Council to develop improved risk assessment practices and methodologies and have planned a significant amount of work in this area over the next 3 years. This completes our testimony. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. 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Pursuant to a congressional request, GAO discussed its work on computer security, focusing on the results of its recent reviews of the Department of State and the Federal Aviation Administration (FAA). GAO noted that: (1) the dramatic increase in computer interconnectivity and the popularity of the Internet are offering government agencies unprecedented opportunities to improve operations by reducing paper processing, cutting costs, and sharing information; (2) at the same time, however, malicious attacks on computer systems are increasing at alarming rates and are posing serious risks to key government operations; (3) in conjunction with GAO's financial statement audit focus and high-risk reviews, this work has revealed a disturbing picture of the government's lack of success in protecting federal assets from fraud and misuse, sensitive information from inappropriate disclosure, and critical operations from disruption; (4) State relies on a variety of decentralized information systems and networks to help it carry out its responsibilities; (5) GAO's tests demonstrated that State's computer systems and the information contained within them are susceptible to hackers, terrorists, or other unauthorized individuals seeking to damage State operations or reap financial gain by exploiting the department's information security weaknesses; (6) FAA's air traffic control (ATC) computer systems provide information to air traffic controllers and aircraft flight crews to ensure safe and expeditious movement of aircraft; (7) failure to adequately protect these systems, as well as the facilities that house them, could cause nationwide disruptions of air traffic or even loss of life due to collisions; (8) GAO found that FAA was not effectively managing physical security at ATC facilities; (9) furthermore, GAO found that FAA did not know if other facilities were similarly vulnerable because it had not assessed the physical security controls at 187 facilities since 1993; (10) FAA was also ineffective in managing systems security for its operational systems and was in violation of its own policy; (11) additionally, FAA had not been effectively managing systems security for future ATC modernization systems; (12) FAA's management structure and implementation of policy for ATC computer security was not effective; (13) GAO found that many problems contribute to agencies' difficulties in successfully balancing the tradeoffs necessary to establish effective computer security; and (14) the organizations with superior security programs managed their information security risks by implementing a continuing cycle of monitoring business risks, maintaining policies and controls, and monitoring operations.

Background DODDS was created pursuant to section 1402 of Public Law 95-561, the Defense Dependents’ Education Act of 1978, which directed the Secretary of Defense to establish and operate a program to provide a free public education through secondary school for dependents in overseas areas (20 U.S.C. 921). DODDS is a support organization within DOD whose mission is to educate every child authorized transportation overseas by DOD regardless of location or needs of the child. Due to the downsizing of the military overseas, DODDS enrollments have decreased from 160,000 for school year 1990-91 to 88,569 for school year 1994-95, and the number of DODDS schools decreased from 270 to 191. DODDS elementary and secondary schools are located in 14 countries worldwide and are administered by three regions and 12 district offices. The DODDS schools we visited were, indeed, American schools overseas. The facilities, resources, teachers, and curriculum were what one would find in a typical American school in the states. In addition, because the schools were located on military bases, they were very much a part of the community in which they were located. Students who were overseas on unaccompanied tours could not live in base housing and therefore the school was a link to the base—and American—community. Eligibility and Funding for Space-Available Students The Secretary of Defense has authority, granted by Public Law 95-561, to allow classes or categories of students, other than space-required students, to enroll in DODDS. The Secretary may also establish priorities among such classes, waive the tuition, and issue other regulations as deemed necessary. No limit has been established for the number of space-available children who can be enrolled in DODDS, and no regulatory criteria have been established on how space-available is to be determined. However, the July 29, 1985, Conference Report instructed DOD not to include the cost of educating tuition-free, space-available students in its budget requests. Eligibility Categories and Priorities Have Been Defined Section 1402 of Public Law 95-561, which created DODDS, defines a dependent as any minor who has not completed secondary school; who is the child, stepchild, adopted child, ward, or spouse of a sponsor, or who is a resident in the household of a sponsor who legally stands in place of parents to the minor; and who receives one-half or more of his or her support from this sponsor. DOD regulations define “space-available” as student accommodations that may be made available in DODDS schools if the Director of DODDS or a designee determines that a school has adequate staff and other resources to permit the enrollment of nonspace-required students. DOD regulations establish categories of space-available students. All space-available children fall into the two broad categories of tuition-paying or tuition-free. Tuition-paying students can be either federally connected, such as dependents of State Department or other U.S. government agency sponsors, or nonfederally connected, including dependents of retired military or foreign national sponsors. Ninety-six percent of tuition-free, space-available students are the dependents of DOD military or civilian sponsors who are not authorized government transportation and housing overseas for their dependents. The remaining 4 percent fall into the category of special cases and include students whose sponsors died while on active duty. The designation “tuition-free” for the class of students with sponsors on unaccompanied tours was made by the Director of DODDS in 1982. DODDS classified and prioritized space-available students within the categories specified in the regulations as shown: Tuition-paying, federally connected: Sponsors employed by U.S. government agencies, interests, and foreign services. Tuition-paying, nonfederally connected: Sponsors are U.S. citizens, foreign nationals, or retired military. Tuition-free: Sponsors are DOD military or civilians overseas, but their dependents are not authorized overseas. For a more detailed explanation of these classifications, see appendix I. Admissions Policies and Practices Neither the statute nor regulations address the issue of how available space is to be determined in schools. Our interviews showed that, in practice, the school principal usually determines whether space is available, using pupil-teacher ratios by grade level as criteria. With the exception of those in Korea, the schools we visited were generally able to meet the demand for space-available enrollments. Military drawdowns in Europe have enabled the schools to easily accommodate those few students who applied for admission. DODDS schools in Japan and Okinawa were often already overcrowded with space-required students, but the demand for space-available enrollment was also low. We were told the high cost of living in these areas often prohibits service personnel from bringing their families unless they have approved housing. In addition, the military services’ policies are to send members to these locations on accompanied tours, which classifies their children as space-required in the schools. Also, other private schools are available in these areas. In Korea, however, the situation is different. The military commanders there told us that because many tours require the service members to be stationed in dangerous locations without accommodations for dependents, about 90 percent of the U.S. military personnel in Korea are on unaccompanied tours. Nevertheless, because the cost of living is very low, it is feasible for a service member to support dependents on the local economy. This occurs more commonly in those families where the spouse is a Korean national. In addition, private schools in Korea are expensive, and Korean law prohibits American dependents from attending Korean public schools. As a result, many of these children, for whom there is no available space in DODDS schools, do not attend any school. In Korea, three of the six DODDS schools have space-available, tuition-free enrollments ranging from 180 to 220 students—14 to 34 percent of total school enrollments. DODDS officials told us they enrolled as many students as possible in Korea because these children are without practical alternatives. Currently, there is no count of children on unaccompanied tours, but base officials estimate there are hundreds and possibly thousands. Because of the large number of children in Korea on unaccompanied tours who are not attending any school at all, military commanders told us that dealing with serious behavior problems such as vandalism, theft, and drug abuse takes up an increasing amount of the post commanders’ time. Although the commander must take over these discipline problems from the Korean police, the commander has no direct authority over the civilian dependents—post commander authority lies only over the military sponsor. In addition to the problems that occur in Korea, the commanders feel a social responsibility because children sent back to the United States who have missed several years of school will likely have problems in the future. For example, the command found one 14-year-old dependent who had not attended school for 7 years. The sponsor was subsequently ordered to return to the United States. Accounting for Space-Available Students in the Budgeting Process The July 1985 Conference Report instructed DOD to treat differently the two classes of space-available students in its budgeting process. This report states that DOD is allowed to take into account the cost of additional teachers, supplies, and other resources, except for construction of facilities, for tuition-paying students in its request for funds. DOD may not, however, take into account the extra costs for educating the tuition-free, space-available children. Since there is no limit to the number of space-available children who may be enrolled in the schools, this budgeting process would allow for as many space-available, tuition-paying children as would apply, without authorizing new facilities, but would limit the number of tuition-free students to a true space-available criterion. In fact, however, DOD does take into account the extra costs for educating space-available, tuition-free students in requesting funds, because it estimates its costs on the basis of the total student population of the previous year, including the space-available, tuition-free students. Requiring these students to pay tuition would produce a savings of between $21 million and $23 million. However, some solution to the difficult situation in Korea would have to be achieved in conjunction with enforcing such a requirement. Otherwise, realizing these savings would most likely keep even more children from attending school. Enrollments by Category According to the DODDS Student Information Management System (SIMS), for school year 1994-95 DODDS enrolled 88,569 students in 191 schools in 14 countries worldwide. About 6 percent, or 5,478, of these students were enrolled as space-available. Figure 1 shows the percentage of space-available students by category within DODDS’ total enrollment. We analyzed enrollment data for each of the DODDS regions, districts, and schools to determine space-available enrollments by major category and subcategory. The following table summarizes the distribution of space-available students within each of the three DODDS regions. The distribution of space-available enrollments was generally consistent between the European and Pacific regions—about 5 percent overall and ranging from about 1 to 3 percent for each of the categories of students. The Panama Region, however, has 22.3 percent space-available enrollment primarily due to a higher number of tuition-free dependents of DOD civilians. However, as stated earlier, in 1999, the schools in Panama will be turned over to Panama for operation, according to the terms of the Panama Treaty. Because these schools are operated in accordance with the terms of the Treaty and because of their temporary status in DODDS, we did no further analysis of their enrollments. A detailed analysis of space-available enrollments at individual schools, districts, and regions is in appendix II. Circumstances Contributing to High Space-Available Enrollments Most DODDS schools—about 75 percent—have space-available enrollments of 5 percent or less. However, for varying reasons relating to military policy or interests, a few schools have space-available enrollments of 16 percent or more. Four of these schools have space-available enrollments of 65 percent or more. Reasons for Large Space-Available Enrollments Four schools—one in Bahrain; two in Bonn, Germany; and one in Ankara, Turkey—have space-available enrollments of 65 percent or more. Each of these schools maintains these enrollments for specific reasons dictated by military policy. DODDS provided the following explanations. Bahrain: The Bahrain school was established by DOD in the late 1970s. It has 958 students, of which 726 are space-available (75.8 percent). Bahrain was and still is a strategic area for U.S. military in the Persian Gulf region. In exchange for the rights for the U.S. Navy to port its ships in Bahrain, the Bahrain government asked DOD to establish and operate an American school for dependents of Bahrain government officials. The establishment of the school was cleared through both the State Department and DOD. Bonn: The Bonn elementary school has a total enrollment of 163 students, of which 82.2 percent (134 students) are space-available, and the high school has 259 students, of which 78.8 percent (204 students) are space-available. These schools were established before DODDS was created, when the DOD schools were still the responsibility of the individual military services. The State Department asked DOD to establish the schools for the large numbers of State Department dependents located in Bonn, formerly the capital of West Germany, when Germany was a divided nation. The schools have remained open, despite the military drawdown in the area, to continue educating State Department and other U.S. government agencies’ dependents remaining in Bonn since Germany’s reunification. Ankara: Because the military is gradually moving out of the area, the ratio between space-required and space-available students has changed greatly in Ankara in the past few years. As of September 1994, the enrollment was 190 students, of which 65 percent (124 students) were space-available. Currently, the State Department relies on the DODDS school because there are no alternative English-speaking schools available. In addition to these four schools, seven schools—three in the European Region and four in the Pacific Region—have space-available enrollments of 18 to 36 percent. Nearly two-thirds of these students are tuition-paying, which allows DODDS to include them in the budget process, thus allowing them space. Almost all of the remaining tuition-free students are in schools in Korea, where, as we discussed, DODDS attempts to enroll as many students as possible. Conclusion Space-available enrollments in DODDS schools are generally very low and do not present a problem for the school systems. However, in Korea a problem exists at several levels—at the program, military command, and social levels. In trying to attend to the education of dependents on unaccompanied tours, DODDS has enrolled a relatively large number of these children. First, at the program level, DODDS has not followed the stipulations of Conference Report 99-235, which prohibit DOD from requesting funds for teachers and resources to educate space-available, tuition-free students. However, the situation is not straightforward. If DODDS does not include these students in its budget, more students will probably do without an education in Korea because DODDS will receive less funding. Second, at the local military command level, the many children who do not attend school may require increased time and resources to address growing behavior problems. The command does not have the authority to keep noncommand-sponsored dependents out of Korea because it only has authority over the actions of the sponsor, not the civilian dependents. Finally, on a social level, leaving children uneducated raises a social and ethical dilemma for DODDS and the military. Sending children back to the United States after they have missed years of schooling places them at an educational disadvantage when they do return to school. Alternative solutions exist, however, such as (1) allowing DODDS to request resources in special situations, such as that in Korea, for space-available, tuition-free students, or (2) having the military take strong measures to discourage noncommand-sponsored dependents in areas such as Korea. Each alternative has costs—financial, military readiness, or legislative—that need to be fully identified before the Congress and DOD can make an informed decision. Recommendation We recommend that the Secretary of Defense propose to the Congress alternatives, and their costs, to bring DODDS into compliance with budgetary guidelines that prohibit DOD from requesting funds for space-available, tuition-free students and that consider the compliance, disciplinary, and social problems that currently exist. Agency Comments The Department of Defense stated that, contrary to our position, it views itself as being in compliance with congressional budget guidance. DOD stated that it has never requested an appropriation based upon any enrollment data but instead bases its request on factors such as workyears, needed for teachers and other positions; and the number of schools. We recognize that the DOD budget request is based on these factors. However, at least one of the factors used, workyears, is based on total enrollment. More specifically, DODDS includes space-available, tuition-free students in the total enrollment information it provides DOD for budget purposes. For this reason, we continue to believe our recommendation is valid. The full text of DOD’s comments is included in appendix III. We will send copies of this report to agency officials and to other interested parties. We will also make copies available to others on request. Major contributors to this report are listed in appendix IV. If you have any questions about this report, please call me on (202) 512-7014. Enrollment Categories for Students in DODDS Overseas Schools The enrollment categories for students in DODDS overseas schools are listed here along with a description of the types of students included in each category. Space-Required, Tuition-Free Minor dependents of U.S. military personnel (Army, Navy, Marines, and Air Force), when those dependents are authorized transportation at U.S. government expense. (1A-D) Although the Coast Guard is not part of DOD, Coast Guard dependents attend DODDS on a space-required, tuition-free basis by special arrangement. (1E) Minor dependents of DOD civilian employees who are full time; are paid from appropriated funds; are entitled to a housing allowance at the “with dependents” rate, that is, whose dependents have been transported to the overseas areas or are authorized such transportation, at U.S. government expense; and are U.S. citizens or are lawfully accorded permanent residence in the United States. (1F) Minor dependents of Nonappropriated Funds Institutions employees, such as post exchange employees on base, who are full time, are U.S. citizens or valid green card holders, are overseas pursuant to a transportation agreement, and are receiving a housing allowance at the “with dependents” rate. (1J) Space-Required, Tuition-Paying Minor dependents of DOD sponsors who are assigned to the Military Assistance or Foreign Military Sales Programs. The agency pays this tuition in order to collect the full cost of the program. (1G&H) Minor dependents of foreign national citizens who are enrolled in schools operated by the former Canal Zone Government. These students are space-required because their schools were incorporated into DODDS as a result of the Panama Canal Treaty of 1979. The Panama Canal Commission pays the tuition. (1I) Space-Available, Tuition-Paying, Federally Connected Minor dependents of U.S. government employees, provided the employee is a U.S. citizen or a person lawfully accorded permanent residence in the United States and is entitled to a housing allowance at the “with dependents” rate, or who has been identified by his or her agency as being eligible for educational benefits on a tuition-paying basis. Includes U.S. government employees who are covered by an Economy Act Agreement between the Department of State and DOD, or any component of such an agency and DOD. Examples: Dependents of U.S. citizen employees of all U.S. government agencies other than DOD, such as the State Department, Agency for International Development, Department of Agriculture, Federal Aviation Administration, Customs Service, General Services Administration, and the Smithsonian Institution. This also includes U.S. citizen employees of certain international organizations, such as the North Atlantic Treaty Organization and the United Nations. (2A) Minor dependents of DOD Nonappropriated Funds Institutions employees who are U.S. citizens (or persons lawfully accorded permanent residence in the United States), are full-time employees, are not overseas pursuant to a transportation agreement, but are receiving a housing allowance at the “with dependents” rate. (2B) Minor dependents of U.S. citizens who are employees of organizations overseas that serve significant defense-related interests and/or that have executed contracts or other agreements with the U.S. government that authorize dependent education in DODDS on a tuition-paying basis. For example: employees of permanent party American Red Cross, United Service Organizations, Boy and Girl Scouts, post exchange concessionaire contractors, and Stars and Stripes. Also, university education personnel, U.S. government contractor personnel, and technical representatives, when the contract authorizes dependent education in DODDS on a tuition-paying basis. (2C) Dependents of host nation or third-country national military or civilian personnel assigned or attached to the U.S. military services overseas at international or major DOD commands, when recommended by the major overseas commander. For example: third-country national military and civilian personnel service with U.S. armed forces overseas, North Atlantic Treaty Organization, United Nations, Canadian, or other allied forces. (2D) Space-Available, Tuition-Free Minor dependents of DOD military sponsors (Army, Navy, Marines, Air Force, and Coast Guard) who are stationed in an overseas area to which their dependents are not authorized transportation at U.S. government expense, but to which the sponsors have elected to transport their dependents at their own expense. (3A-E) Minor dependents of DOD civilian sponsors who are U.S. citizens (or persons lawfully accorded permanent residence in the United States) who are full time, are paid from appropriated funds, but who are not entitled to a housing allowance at the “with dependents” rate. (3F) Minor dependents of sponsors who have been granted a waiver of tuition costs by the Secretary of Defense (or designee). Includes dependents of military or DOD civilian sponsors who die while, or within 180 days of being, on active duty or while drawing compensation. Also includes U.S. citizens or green card holders who are employees of the U.S. Mission or U.S. Embassy in Berlin. (3G) Space-Available, Tuition-Paying, Nonfederally Connected Other minor dependents of U.S. citizens. Examples are persons who would be space-available, tuition-paying, and federally connected but lack entitlement to a housing allowance at the “with dependents” rate or a contract providing for education benefits. (4A) Minor dependents of foreign national citizens for whom the Secretary of Defense determines that enrollment is in the national interest. Includes all foreign national dependents attending Ankara, Bahrain, and Bonn schools unless excluded by the Department of State. (4B) All U.S. citizens not included in other categories, for example, U.S. retired military personnel. (4C) Dependents of local or third-country nationals when no significant U.S. interest is involved. (4D) DODDS Enrollment for School Year 1994-95, by Category and Location European Region (total schools = 143) (continued) (continued) (continued) (continued) Pacific Region (total schools = 34) (continued) Panama/Islands Region (total schools = 14) (continued) Total (191 schools) DOD military (3A-3E) DOD civilian (3F) DOD special (3G) (continued) DOD military (3A-3E) DOD civilian (3F) DOD special (3G) (continued) DOD military (3A-3E) DOD civilian (3F) DOD special (3G) (continued) DOD military (3A-3E) DOD civilian (3F) DOD special (3G) (continued) DOD military (3A-3E) DOD civilian (3F) DOD special (3G) (continued) DOD military (3A-3E) DOD civilian (3F) DOD special (3G) (continued) DOD military (3A-3E) DOD civilian (3F) DOD special (3G) Table II.3: Tuition-Paying, Space-Available Enrollment, for School Year 1994-95, by Category and Location U.S. government (2A) DOD NAFI (2B) U.S. organizations supporting DOD (2C) Foreign nationals supporting DOD (2D) Foreign nationals (4B) Other U.S. (4C) Other foreign (4D) (continued) U.S. government (2A) DOD NAFI (2B) U.S. organizations supporting DOD (2C) Foreign nationals supporting DOD (2D) Foreign nationals (4B) Other U.S. (4C) Other foreign (4D) (continued) U.S. government (2A) DOD NAFI (2B) U.S. organizations supporting DOD (2C) Foreign nationals supporting DOD (2D) Foreign nationals (4B) Other U.S. (4C) Other foreign (4D) (continued) U.S. government (2A) DOD NAFI (2B) U.S. organizations supporting DOD (2C) Foreign nationals supporting DOD (2D) Foreign nationals (4B) Other U.S. (4C) Other foreign (4D) (continued) U.S. government (2A) DOD NAFI (2B) U.S. organizations supporting DOD (2C) Foreign nationals supporting DOD (2D) Foreign nationals (4B) Other U.S. (4C) Other foreign (4D) (continued) U.S. government (2A) DOD NAFI (2B) U.S. organizations supporting DOD (2C) Foreign nationals supporting DOD (2D) Foreign nationals (4B) Other U.S. (4C) Other foreign (4D) (continued) U.S. government (2A) DOD NAFI (2B) U.S. organizations supporting DOD (2C) Foreign nationals supporting DOD (2D) Foreign nationals (4B) Other U.S. (4C) Other foreign (4D) Comments From the Department of Defense Major Contributors to This Report Larry Horinko, Assistant Director, (202) 512-7001 Mary E. Roy, Evaluator-in-Charge, (202) 512-7072 Joan A. Denomme, Evaluator, (202) 512-7050 Damaris Delgado-Vega, Attorney Thomas J. Laetz, Evaluator Mary W. Freeman, Evaluator Michael D. Rohrback, Evaluator Daniel J. Tikvart, 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. Address Correction Requested

Pursuant to a legislative requirement, GAO provided information on educating Department of Defense (DOD) dependents overseas, focusing on: (1) legislation that establishes eligibility and authorizes funding for students to enroll in DOD Dependents Schools (DODDS) as space becomes available; (2) the number of space-available students enrolled and their locations; and (3) the circumstances surrounding high space-available enrollments in some schools. GAO found that: (1) the Secretary of Defense is authorized to establish enrollment eligibility for space-available students and has categorized space-available students as either tuition-paying or tuition-free; (2) tuition-paying students can be either dependents of U.S. government agency sponsors or retired military and foreign national sponsors; (3) tuition-free, space-available students are the dependents of DOD sponsors who are not authorized government transportation and housing overseas for their dependents; (4) DOD is required to only include the cost of educating space-required and tuition-paying students in its budget request, but DODDS has not followed these instructions; (5) although tuition-free, space-available students only represent about 3 percent of the DODDS student population, the percentage is much higher in Korea; (6) in school year 1994-1995, space-available enrollments represented about 6 percent of total DODDS enrollment, almost half of which were tuition-free; and (7) although 75 percent of DODDS schools had space-available enrollments of 5 percent or less, four schools had enrollments of over 65 percent.

Background RTC needs complete and current information to ensure that it maximizes recoveries from the sale of its large inventory of hard-to-sell assets, which includes nonperforming loans. With complete and current asset information, RTC could provide investors with pertinent data about assets being offered for sale. RTC has found that the quality of the data it makes available to prospective bidders directly affects how investors bid on assets: better quality data lead to higher bids and, conversely, poor quality data lead to lower bids. Therefore, RTC has spent a great deal of time and resources attempting to provide investors with pertinent loan data before an auction to assist them in making bidding decisions and to increase investor participation and enhance asset recoveries. At the time of the August 1993 national auction, RTC data showed that it held about 122,000 nonperforming residential, consumer, and commercial loans with a total book value of $17 billion. By February 1994, this inventory had been reduced to about 96,300 loans with a book value of $11.9 billion. As shown in figure 1, these assets were primarily serviced by contracted loan servicers. RTC has used a variety of sales methods to dispose of the nonperforming loans of thrifts placed under RTC control, including Standard Asset Management and Disposition Agreement (SAMDA) contracts, securitization, portfolio sales, auctions, individual asset sales, and workouts. Open outcry auctions are used to sell most types of smaller balance (less than $50,000) nonperforming loans. RTC’s December 1993 Business Plan lists national auctions as the primary disposition strategy for performing and nonperforming “other” loans. It also lists auctions as a secondary disposition strategy for nonperforming single-family mortgages. To increase recoveries on the sale of these assets, national auction sales have become an important element of RTC’s overall asset disposition strategy. Before June 1991, nonperforming loans were normally assigned to SAMDA contractors. These contractors were required to negotiate with defaulting borrowers and handle the foreclosure and sale of collateral, if necessary. However, RTC concluded that it could dispose of nonperforming loans more expeditiously through auctions, thereby reducing asset holding costs and administrative expenses and increasing net recoveries. Accordingly, in June 1991, instead of giving nonperforming loans to SAMDA contractors for disposition, RTC’s field offices began using regional auctions. In September 1992, RTC held its first large, broad-scale national nonperforming loan auction in Los Angeles. At this auction RTC sold $416 million in nonperforming loans, recovering about $247 million, or about 59 percent of the book value. On the basis of the results of this initial auction, RTC decided to use national auctions as a primary disposition method for nonperforming loans. It shifted responsibility for conducting auctions from its field offices to the National Sales Center in Washington, D.C. According to RTC, through national auctions, it can dispose of large numbers of loans at a single event and improve its ability to group loans by investor preferences, such as loan type, loan size, or location of collateral. RTC believes it can increase investor participation and maximize recoveries by using national auctions to dispose of nonperforming loans. The National Sales Center has conducted 4 national nonperforming loan auctions, which disposed of about 43,440 loans with a total book value of about $1.6 billion. According to RTC, it has recovered 50 to 60 percent of the loans’ book value in each of these auctions. As shown in table 1, in the August 1993 auction RTC sold 11,181 loans with a total book value of $673 million and realized net proceeds of $330 million. Loan Auction Process RTC establishes the selection criteria for the loans to be offered in each auction. In general, for the August 1993 auction, loans had to be nonperforming with a maximum loan amount of $5 million and at least 91 days past due, except that loans secured by real estate had to be at least 121 days past due. The specific criteria used for this auction are listed in appendix I. RTC identified loans for the auction using its central loan database, which contains information on most RTC loan asset types. The database compiles data reported by loan servicers, whom RTC contracts to collect payments from borrowers and perform other tasks. The database contractor who maintained the central loan database used the August 1993 auction’s loan selection criteria specified by RTC to search the database to identify potential loans and create a separate auction database of loans meeting the criteria. After the August 1993 auction, about 425,000 active loans remained in the central loan database. Loan servicers and SAMDA contractors were then asked to send the loan files for the nonperforming loans identified to the national auction site in Kansas City. They were also to provide payment histories, appraisals, and updated legal information that may not have been in the files. Loan servicers were requested to submit monthly loan status updates to keep the auction database current. These updates were to include data such as the unpaid principal balance, current interest rate, maturity date, and number of days delinquent. A contractor hired by RTC to do due diligence work reviewed the loan files to verify data about each nonperforming loan. This contractor also created diskettes containing loan data that interested investors could purchase for $250 to review the loans being offered in the auction. In addition to conducting the auction, an auctioneer hired by RTC coordinated the marketing process and scheduled investor reviews of loan files. Investors reviewed the loan files and/or the loan data diskettes to decide whether to participate in the auction and how much to bid on loans. RTC used imaging technology to provide investors access to information in loan files while protecting the original loan documents. It scanned the documents in the loan files and created image databases on computer disks. For a period of about 4 weeks before the auction, investors could use image workstations at the auction site in Kansas City to view loan documents and study the payment histories for loans being offered for sale. The use of the imaging technology allowed multiple investors to review the same loan files simultaneously. Prior Audits Both GAO and the RTC Inspector General (IG) have issued reports on RTC’s use of auctions to dispose of assets. For example, the IG looked at two earlier auctions held in December 1991 and April 1992 by RTC’s Denver and Atlanta field offices. The IG reported that RTC may not have maximized its recovery for some loans sold in these auctions because it did not have an effective screening mechanism and adequate loan information before the auction. As discussed in this report, these conditions had not been corrected at the time of the August 1993 national auction. GAO, the IG, and RTC’s Office of Contractor Oversight and Surveillance have all issued audit reports on loan servicing activities that identified weaknesses in RTC’s oversight of loan servicers that could affect the quality of loan data they reported to RTC. For example, in April 1992, we reported that RTC did not adequately oversee loan servicers. It did not require its field offices to audit the servicers’ loan collection records and verify the accuracy of their loan status reports. Instead, RTC relied totally on the servicers to keep accounting records that accurately reflected what debtors had paid and what loan balances remained. Also, in an October 1993 report, the IG reported that the loan servicing efforts of one contractor were hampered because of continuing problems, such as incorrect loan balances, large loan payment suspense account balances, and unreliable delinquent loan reports. The IG reported that many of the contractor’s adjustable interest rate loan amortizations, payoff calculations, and payment postings were not accurate because its information system contained numerous errors resulting from poor quality conversions and mistakes made by unqualified conversion and posting personnel. Furthermore, in a December 1993 report, the IG reported that the Kansas City Financial Service Center did not have an efficient system for maintaining loan servicing information and did not determine and monitor reporting requirements for each servicer. The related audit reports listed on pages 36 and 37 describe the environment in which the August 1993 nonperforming loan auction was planned. The problems identified in these reports help explain the difficulties RTC experienced in selecting loans for this auction and providing current and complete data to investors prior to the auction. The RTC Completion Act requires RTC to respond to problems identified by auditors. Consequently, RTC is in the process of improving the maintenance of loan servicing information and other loan servicing problems identified by GAO and the IG. RTC’s goal is to reduce its universe of loan servicers, standardize the scope of services it requires, competitively bid new contracts as existing contracts expire, and better support the needs of the loan sales initiatives. Objectives, Scope, and Methodology The objectives of our review were to determine (1) how RTC selected loans to be offered in its August 1993 national nonperforming loan auction and (2) whether RTC provided investors with adequate and useful data on loans being offered for sale. RTC was identifying the loans for this auction when we began our work in February 1993. We were able to observe how RTC gathered loan data and processed loan files before the auction. We also attended the auction in Kansas City, MO. To determine RTC’s process for selecting loans for the auction, we reviewed the Asset Sales Guide, the loan selection criteria, and policy directives governing auctions. We reviewed RTC records and reports from the due diligence contractor. At the National Sales Center in Washington, D.C., we interviewed the Acting Director of National Auction Programs, auction marketing specialists, and the National Loan Auction Marketing Coordinator. We interviewed the due diligence contractor to determine how data were gathered for the auction database and reasons for auction inventory changes. We also observed the contractor reviewing loan files during the due diligence process. We visited RTC’s central loan database contractor to discuss the creation and maintenance of this database. We also met with the official in the Division of Asset Management and Sales responsible for the oversight of the central loan database contractor to discuss problems we had identified relating to the data in this database. To determine whether RTC was providing investors with adequate and useful loan data, we used a telephone survey to obtain the opinions of investors. We interviewed 29 investors randomly selected from the 146 who participated in the August 1993 auction. About half of the investors interviewed had participated in previous RTC national nonperforming loan auctions. We asked the investors for their opinions on the adequacy and usefulness of the loan data provided through the diskettes and the file reviews. In addition, we asked them for any comments or suggestions to help RTC improve the data provided to investors for future nonperforming loan auctions. Since the survey results were derived from a representative sample, we were able to project our findings to the 146 investors participating in the August 1993 auction. Furthermore, we independently analyzed the data contained on the diskettes created by the due diligence contractor to determine whether the data were complete and to check for invalid or miscoded data. We visited RTC’s Valley Forge, PA, and Atlanta offices to compare the diskette data with monthly loan servicer remittance reports. We did not validate the accuracy of all the data on the diskettes. Appendix II discusses in more detail the methodologies used in the diskettes’ analysis and the investor telephone survey and the precision of our sample survey results. As we began our work, the RTC IG was finishing the field work on a nonperforming loan auction assignment. We met with the IG staff doing this work and discussed their objectives, scope, and preliminary findings. Later, we reviewed their issued report to determine what recommendations had been made and RTC’s response to the report. We also reviewed other IG reports on audits of RTC’s loan servicers. We did our work between February 1993 and March 1994 in accordance with generally accepted government auditing standards. In July 1994, RTC provided written comments on a draft of this report, and we address these comments on pages 17, 18, and 20. RTC’s comments are reproduced in appendix III. Better Data Needed to Identify Loans for Auctions RTC used outdated and/or incomplete loan data from the central loan database to identify and select loans for the August 1993 national auction. It did not take the necessary steps to ensure that current and complete data were being collected to update the central loan database. As a result, RTC offered and sold less than 19 percent of the loans it had initially identified for auction. Although they were not required by loan servicing contracts to do so, RTC asked its loan servicers to provide the central loan database contractor with monthly loan data tapes to update the database. According to the contractor, many loan servicers provided copies of the tapes they sent to RTC’s financial service centers, but some servicers did not report loans that had been sold until the end of the year. The contractor told us that some data in the central loan database had not been updated since 1991. To identify the loans to be offered in the August 1993 national auction, RTC applied the loan selection criteria for this auction to the data in the central loan database. As a result, RTC initially identified and planned to offer for sale over 60,000 nonperforming residential, consumer, and commercial loans with a total book value of about $2.7 billion. However, because the central loan database contained outdated and/or incomplete data, RTC was able to offer for sale only 11,181 of these loans with a total book value of about $673 million. About 49,000 loans were dropped from the auction because they (1) did not meet the auction selection criteria, (2) were involved in litigation, (3) had already been designated for other sales initiatives, (4) had already been paid off or sold, or (5) had loan files that could not be located. Also, RTC personnel and contractors spent time and effort trying to locate loan files and doing due diligence and other activities on loans that could not be included in the auction for the above reasons. For example, about 2,500 loans that had been paid off or already sold were incorrectly identified in the database as available for sale. Figure 2 shows inventory changes during the planning and marketing period before the August 1993 national auction. Inefficiencies in the selection process caused the auction date to slip from June 1993 to August 1993 and hampered RTC’s overall efforts to dispose of nonperforming loans. For a period of 5 months before the event, RTC staff and contractors spent time and resources preparing for the auction. This time was spent doing due diligence work, gathering loan data, preparing the loan data diskettes, locating and imaging loan files, and doing various other tasks. Because the central loan database was outdated and incomplete, some of these efforts were wasted. This, and the slippage of the auction date, increased RTC’s holding costs and administrative expenses and reduced the net recoveries from the auction. Also, loans that were identified and selected for the August 1993 auction generally could not be placed in other marketing initiatives during the selection and preparation process, further hampering RTC’s disposition efforts. RTC planned to hold quarterly national nonperforming loan auctions, but it took 8 months to plan and organize the next auction, which was held in April l994. RTC offered 6,200 loans totaling $350 million in book value at this auction. It now expects to hold two more national nonperforming loan auctions before the end of 1994. Loan Servicers Were Not Required to Provide Data Needed to Market Loans RTC’s loan servicing contracts did not require the loan servicers to provide needed loan data to update the central loan database to ensure that it contained complete and current data needed for marketing purposes.Therefore, current and complete loan data needed to determine whether loans met the loan selection criteria for the August 1993 national auction were not always available. For example, loan servicers did not always identify whether loans were judgments, deficiencies, or charge-offs (JDC), which were to be excluded from the auction. In one instance, over 10,000 loans were incorrectly included in the auction inventory because a loan servicer did not identify these loans as JDCs. Similarly, the loan servicers did not always report whether loans were involved in litigation. As a result, another 10,000 loans initially identified for the auction had to be deleted from the inventory because they had also been incorrectly classified. Under RTC’s contracting procedures, only the contracting officer has authority to modify the terms and conditions of any contract or contract task order. Nevertheless, RTC officials made at least two attempts to get needed loan data from loan servicers without having the contracting officer seek to modify the contracts to require standard reporting of the loan data RTC needed for marketing purposes. In their first attempt, using a form designed to obtain loan data for the securitization program, RTC officials bypassed contracting procedures by asking loan servicers early in 1992 to submit monthly loan data tapes in a specific format to update the central loan database. Although the request form listed certain data elements that were to be included on the tapes, servicers did not always provide this data. RTC officials told us that loan servicers had complained and some refused to comply because their contracts did not require them to provide these tapes. The officials said that some servicers said they would not provide the tapes even if they were paid for this task. In the second attempt, in November 1993, the RTC oversight manager for the central loan database contract asked the RTC oversight managers for the various loan servicing contracts to specify in letters to the loan servicers the data elements that they should update monthly. Performing Loans Were Included in the Auction RTC sold performing loans that did not meet the loan selection criteria in the August 1993 nonperforming auction. The criteria RTC provided to loan servicers in April l993 stated that only loans at least 91 days past due should be selected. However, approximately 1,700 performing loans that were less than 91 days past due, totaling about $57 million in book value, were selected for and sold in the auction. We did not determine whether RTC may have lost any revenue by including these performing loans. An analysis by the IG showed that RTC did not maximize its returns when it pooled performing and nonperforming loans for previous auctions. The IG reported that 1,399 performing loans were sold at deep discounts in two nonperforming loan auctions conducted by RTC field offices in 1991 and 1992. The report estimated that pooling performing and nonperforming loans in these auctions lowered recoveries on the performing loans by as much as $12 million. The IG recommended that RTC require that information submitted by loan servicers be reviewed by RTC auction officials to identify and remove certain loans that do not meet selection criteria for a loan auction. RTC auction officials told us that the performing loans were included in the August 1993 auction because of a memorandum issued by the Director of the National Sales Center in December 1992. This memorandum stated that loans that were 60 days delinquent could be sold in a nonperforming loan auction even if payments were made to bring the loan up to current status before the auction date. However, our review of the performing loans that were sold in the August 1993 auction showed that about 18 percent of the 1,700 performing loans were less than 60 days past due. These loans should not have been governed by the director’s memorandum. RTC auction staff told us that performing loans will not be included in the next scheduled auction due to recent changes to remove loans that are not delinquent at the time of the auction. These changes implement recommendations made by the IG in its nonperforming loan auctions report. In commenting on the IG’s report, RTC said that under the new procedures, loan files submitted by loan servicers and SAMDA contractors will be reviewed at the auction site to verify data on the loan servicing tapes and to provide additional information regarding the loans’ delinquency status. Also, loan servicer oversight managers have been asked to intensify their oversight to include review of nonperforming loans to determine whether the servicer is properly managing these loans. RTC Could Improve Loan Data Provided to Investors RTC’s policy is to conduct “minimal” due diligence on nonperforming loans because they are to be sold “as is” without representations and warranties. Therefore, investors are offered an opportunity to conduct their own loan file reviews prior to bidding. Before the auction, RTC offered data about loans to investors in two ways. First, investors could purchase computer diskettes of basic data about the loans being offered at the auction, such as the unpaid principal balance, current interest rate, maturity date, collateral type, and days delinquent. Second, investors could use RTC’s imaging system to review the individual loan files at the auction site to obtain more detailed data. Our telephone survey indicated that investors who participated in the August 1993 auction generally believed the loan data provided by RTC to be useful, but they found that important data were missing or outdated. Furthermore, our analysis of the computer diskettes revealed missing data, invalid and miscoded data, inadequate documentation, and a cumbersome data format. Investors also said that the loan files were missing important documentation, such as bankruptcy, foreclosure, and miscellaneous correspondence, that they needed to make bidding decisions. Some investors told us that they consequently lowered their bids or decided not to bid. Investors Cited Problems With Diskettes Although about half of the investors found the diskettes to be “greatly” or “very greatly” useful, about half found that the diskettes they purchased from RTC were missing important data. Examples of missing data cited by investors included unpaid principal balance, current interest rate, last payment date, lien priority, and bankruptcy status. Some investors said that because these data were missing, they lowered their bids or decided not to bid. Problems We Identified With Diskettes RTC identified about 70 data elements that the due diligence contractor was to extract from loan files and loan servicer tapes for loans included in the August 1993 auction. These data elements were compiled on the diskettes offered to investors. Our analysis of these diskettes identified four key problems: missing data, invalid and miscoded loan data, inadequate documentation, and a cumbersome data format. These problems may have made it difficult for investors to analyze the data, and they may have doubted its accuracy. As a result, they may have lowered their bids or decided not to bid. Certain data fields for many loans were left blank on the diskettes because the data were not on the servicer tapes used to create the data diskettes. Blank data fields can imply that the data are not applicable or not available. For example, the data field for lender participation was blank for 86 percent of the commercial loans, 98 percent of the consumer loans, and 76 percent of the residential loans. As a result, investors could not be certain whether the loan was owned by more than one lender. Also, the data field for the maturity date was blank for 21 percent of the commercial loans, 36 percent of the consumer loans, and 18 percent of the residential loans. Some loan data on the diskettes appeared to be invalid and some data were miscoded. For 3,500 loans, the diskettes showed that each of these loans was 727,000 days (or over 2,000 years) delinquent. This was obviously an invalid entry. Also, the diskettes contained codes that were not defined for investors in the accompanying documentation. For example, about 2,400 loans had an undefined code for the data field indicating lien priority. Consequently, investors could not determine the lien priority that would be applicable to these loans. Further, RTC did not provide adequate documentation to explain why some loan data fields were left blank. For example, the maturity date was left blank for about 3,000 loans. Investors could not determine when the loans were supposed to be paid off, a key factor in determining the current value of loans. We also observed that data on the diskettes were not easy to review because of a cumbersome data format that used larger data fields than necessary. Consequently, some investors’ personal computers did not have the capability to easily access and manipulate the data. The total number of spaces allocated for the 85 data elements for each loan was 712 spaces on a single line. This means that to see the complete file record for an individual loan, the investor had to review multiple computer screens, a tedious, time-consuming process. To transfer data from servicer tapes, which were not in a standard format, the due diligence contractor used wide data fields that accepted data from servicer tapes regardless of the format. After the data were transferred, the contractor could have significantly reduced the number of spaces used without eliminating any data, because some data fields were wider than needed to record the data. For example, the width of the data field for the borrower’s Social Security number was 21 spaces even though all Social Security numbers require only 11 spaces with hyphens, or 9 spaces if the hyphens are eliminated. Also, the data field identifying the RTC field office responsible for the loan was 10 spaces wide, but this entry needed only 1 space. In total, we identified 63 of the 85 data elements on the diskettes for which the allocated space could have been reduced without any data loss. After we brought these problems to its attention, RTC took steps to address them. For the next national nonperforming loan auction, RTC has revised the diskette format to include only 25 data elements. In addition, the loan data are being made available on an on-line system that investors may access over telephone lines using a computer that is equipped with a modem. This system, which is to be updated periodically, includes search capabilities to help investors quickly identify loans by various characteristics, such as loan type or location of loan collateral. The data diskettes are still to be available for those investors who wish to continue to use them. Loan Files Missing Important Documents Approximately three-quarters of the investors told us that the loan files they reviewed on RTC’s imaging system were missing important documents. When performing loans become delinquent, the loan servicers are directed to review the entire loan file to determine whether all required documentation is complete and take necessary steps to obtain any missing documents. Investors said that important documents missing from the loan files included bankruptcy and foreclosure documentation and miscellaneous correspondence. Some investors said that because documentation was missing, they lowered their bids or did not bid at all. In some cases, investors said they purchased loans that they would not have acquired if they had been aware of problems that they discovered after the sale. For example, two firms said they discovered after the auction that loans they had purchased were in bankruptcy proceedings. Another firm said it discovered the bankruptcy status as a result of a handwritten note in a file received from RTC’s loan servicer after the sale. The investors told us that RTC would not buy back the loans despite these deficiencies. RTC officials said that the loans were sold “as is” without any representations or warranties and that investors knew that they were taking certain risks when they bid. Also, they said that investors were bidding on pools of loans, rather than individual loans, so they should have expected to find some loans with such deficiencies in a loan pool. Investors Experienced Problems Conducting File Reviews Over two-thirds of the investors said that they experienced at least some problems reviewing individual loan files on RTC’s imaging system. First, some investors said they had to spend too much time learning to use RTC’s imaging system. Additionally, investors said using the image workstations to review loan documents and study payment histories was slow because they had to review documents in sequence and could not randomly call up specific pages within a document. Since the August 1993 auction, RTC has upgraded the imaging system to address the access problems identified by investors. Finally, some investors said that imaged documents were not clearly marked to indicate whether they were originals or copies. Investors reported they were unwilling to buy loans if the original documents were not available. RTC officials said they thought that the system clearly identified original documents. They said they would check the imaging system for the next auction to ensure that this information is provided. RTC Actions to Address Problems Throughout our review, we met with the RTC headquarters auction staff to discuss our findings and observations. As a result of those discussions, the auction staff began taking corrective actions in their planning for the April 1994 national nonperforming loan auction to address the issues we identified. Other actions were taken after we completed our audit work in March 1994. After we discussed the data integrity problems with RTC officials during the review, RTC took some steps to address the quality of nonperforming loan data provided by loan servicers for auctions and other sales events by reemphasizing certain tasks oversight managers should perform in overseeing contractor performance. In January 1994, loan servicer oversight managers were asked to routinely include a number of specific items in their oversight activities. These items included visiting the servicer, reviewing the asset files, and meeting with appropriate servicer personnel to ensure that each loan is properly managed; and verifying that the servicer is documenting the asset files on a regular basis to reflect collection efforts, bankruptcy, litigation, appraisals, and environmental reports and impress upon the servicer the importance of maintaining current information in asset files. While these steps, which oversight managers should have been doing all along in carrying out their oversight responsibilities, are necessary to adequately oversee loan servicers’ performance, they do not address one of the root causes of the problem of inadequate loan data for marketing purposes. Until the loan servicing contracts require loan servicers to submit monthly loan status updates of data needed by RTC for marketing purposes to the central loan database contractor, RTC cannot compel servicers to provide the needed information. In RTC’s written response to the draft report (see app. III), the Vice President for Asset Management and Sales said that since the August l993 auction, RTC had developed new standard loan servicing documents that incorporate the requirements for tape submissions to RTC’s central loan database contractor and require servicer support of RTC’s marketing and disposition activities. He said that (1) all existing servicing contracts were either being modified and extended or allowed to expire, and (2) RTC had announced in the Commerce Business Daily a solicitation for 1- to 4-family residential mortgage loan servicing using the new standard servicing documents. He said that RTC anticipates announcing solicitations for other loan types shortly. The new contracts and extensions are to include language requiring the servicers to (1) submit loan data tapes to the central loan database contractor and (2) assist RTC during loan sales initiatives. He further said in his written comments that to ensure compliance with the new standards, RTC had developed agreements with the central loan database contractor to revise its procedures for notifying RTC of the failure of servicers to deliver acceptable tapes in a timely manner. He said that RTC had appointed “technical monitors” in each field office to coordinate efforts to obtain acceptable tapes from servicers and to resolve data discrepancies. To improve the quality of the central loan database and the loan data provided to investors, the Vice President for Asset Management and Sales stated that RTC hired contractors, effective June 1, l994, to implement the central loan database data quality improvement plan approved in May l994. He also said that RTC had implemented a data quality program to review the data being provided to investors to ensure that it is as correct as possible before it is released. In addition, RTC’s Loan Servicer Oversight Program has been revised to address database quality integrity concerns. Furthermore, RTC has modified both the format of the loan data diskettes and the contents of the loan data to meet bidders’ needs more precisely. Data are available in a spreadsheet format, and the user can also download the data into user-specified formats. According to RTC, the summary information that it now provides ensures that the investor has adequate information from which to determine initial interest in participating in the auction process. To address the loan file imaging problems identified, the Vice President for Asset Management and Sales said that RTC has dedicated on-site personnel at the Auction Center to monitor the current procedures and the imaging contractor to ensure better oversight and completeness of the imaging process. Conclusion The process used by RTC to initially select nonperforming loans for the August 1993 auction was not efficient. As a result, the auction date had to be changed and RTC personnel and contractors spent time and effort trying to locate loan files and doing due diligence and other activities on loans that, although initially identified for the auction, could not be offered for sale in the auction for various reasons. This occurred because the loan data in the central loan database were outdated and/or incomplete. On the basis of outdated and/or incomplete data in the central loan database, RTC selected loans for the auction that had already been sold or otherwise did not meet the loan selection criteria for this auction. Although RTC initially identified and planned to offer over 60,000 loans for the auction, it was able to offer and sell only 11,181 of these loans. The added costs associated with culling out the loans that could not be offered decreased the net recovery from the auction. RTC needs current and complete data to efficiently identify and select loans that meet auction criteria. The central loan database did not provide the loan data RTC needed to identify and select loans for the auction because RTC had not taken the necessary steps to ensure that needed data were obtained regularly from loan servicers. RTC officials told us that they requested loan servicers to provide monthly updates and specified certain data elements to be reported. However, RTC did not modify the loan servicing contracts to include these requirements as provided for by RTC contracting procedures. RTC has advised us that it is in the process of modifying existing loan servicing contracts and awarding new contracts to require loan tape submissions to RTC’s central loan database contractor. RTC has also revised the procedures for contractors to use when notifying RTC that servicers failed to deliver acceptable tapes in a timely manner. Finally, although investors generally found them useful, the loan diskettes that RTC made available to investors for the August 1993 auction contained invalid and incomplete data. In addition, the diskettes were inadequately documented and had a cumbersome data format that made it difficult for some investors to analyze the loans and make bidding decisions. Furthermore, investors told us that the loan files on RTC’s imaging system were missing important documents needed to make bidding decisions, and loan documents accessed through RTC’s imaging system were not always clearly identified as originals or copies. As a result of these problems, some investors said they either lowered their bids or did not bid on certain loans in the August 1993 auction. Better data for investors should increase participation and enhance recoveries in nonperforming loan auctions. The actions RTC has taken or has in process should adequately address the issues we identified. When RTC completes its efforts to modify existing loan servicing contracts and award new contracts for all types of loans using the new standard servicing documents, it should be able to obtain the loan data needed to effectively market nonperforming loans. However, while RTC has implemented a data quality plan to improve the quality of the data provided to investors, it must be diligent in overseeing the implementation of the plan to ensure that it is implemented consistently throughout RTC. Recommendations To improve the quality of the data in RTC’s central loan database and the data provided to investors to market the loans being offered for sale, we recommend that the Deputy and Acting Chief Executive Officer ensure that all loan servicing contracts require loan servicers to submit monthly loan status updates of data needed for marketing purposes to the central loan database contractor; and information provided to investors on loan data diskettes or in imaged loan files is valid, complete, well documented, and in a format that meets investors’ needs. Agency Comments In commenting on a draft of this report, RTC officials agreed with our recommendations. They said that they had made changes to the April and September l994 auctions to incorporate the procedures and changes we recommended. We added a new section to the body of the report recognizing the actions that RTC has taken, and we revised our conclusions as appropriate. Because RTC had already completed actions to address three recommendations in our draft report, they are not included in the final report. These recommendations pertained to developing standard loan servicer reporting requirements, ensuring that loan servicers complied with these requirements, and ensuring that RTC’s imaging system provided complete loan data. Because RTC was created as a mixed-ownership government corporation, it is not required by 31 U.S.C. 720 to submit a written statement on actions taken on these recommendations to the Senate Committee on Governmental Affairs, the House Committee on Government Operations, and the House and Senate Committees on Appropriations. However, we would appreciate receiving such a statement within 60 days of the date of this letter to assist in our follow-up actions and to enable us to keep the appropriate congressional committees informed of RTC activities. We are sending copies of this report to interested congressional members and committees and the Chairman of the Thrift Depositor Protection Oversight Board. We will also provide copies to others upon request. Major contributors to this report are listed in appendix IV. Please contact me on (202) 736-0479 if you have any questions concerning this report. Loan Selection Criteria for the August 1993 National Nonperforming Loan Auction 1. Nonperforming, wholly-owned loans only. No participations unless fully participated by other RTC institutions. 2. Real estate backed loans. 1- to 4-family, commercial real estate, and land. 120+ days past due only. $5 million maximum loan amount. Securitization waiver will be obtained. 3. Non-real estate backed loans. Consumer and commercial non-real estate. 90+ days past due only. $5 million maximum loan amount. 4. Timeshares. Performing and nonperforming. $5 million maximum loan amount. 5. No judgments, deficiencies, or charge-offs. Methodologies for Loan Diskette Analysis and Investor Survey Methodology for Analysis of RTC Loan Diskettes We analyzed the completeness of loan data on diskettes that were supplied to investors before the August 1993 auction. Using computer analysis techniques, we analyzed the loan diskettes to determine the extent to which data were missing or invalid. We also compared codes used in the data on the diskettes with coding information in the documentation given to investors along with the diskettes to determine whether all the codes used were defined. To conduct our analysis, we obtained copies of the data diskettes from RTC. We did not validate the accuracy of all of the data on the diskettes. Methodology for RTC Investors Survey We surveyed investors through telephone interviews to obtain comments about the adequacy and usefulness of the loan data RTC provided them for the August 1993 nonperforming loan auction. We identified 146 investors from RTC’s lists of bidders who registered for the August auction. We also used RTC records to stratify our sample by whether they were winning bidders and by the type of loan data investors reviewed before the auction—i.e., the loan diskettes or the loan files or both. We then drew a stratified probability sample of 34 participants to represent the 146 participants in the auction. Of these participants, 17 were successful bidders and 17 were not. We developed a questionnaire covering the loan data diskettes and the loan files that RTC provided investors. A copy of the questionnaire is provided at the end of this appendix. We pretested the questionnaire in September and October 1993 and conducted the telephone interviews in October and November 1993. Before conducting the survey, we faxed the questionnaire to the investors and we contacted the investors by telephone to obtain their responses. To ensure consistency, we read the questions verbatim and entered the investors’ responses and comments directly on the questionnaire form. We combined individual responses with those of other respondents for analysis and reporting purposes. We interviewed 29 of the 34 sample members, which gave us a response rate of 85 percent. Five investors declined to respond. All sample results have been weighted to provide an estimate that represents the total population of 146 participants. We considered the possibility that our survey findings on the usefulness and completeness of RTC data might apply only to certain investors. We compared successful bidders with other participants, individual investors with institutional investors, new auction participants with those who had previously participated in an RTC loan auction, and small investors with larger investors (more than 10 employees). None of these differences between investors was associated with a statistically significant difference in evaluations of the usefulness of either the loan data diskettes or the loan file reviews. The lack of a statistically significant difference was also found for the investors’ experiences with missing or omitted data on the diskettes and the file reviews. We therefore concluded that our findings were not limited to particular investors. Sampling Errors Because we surveyed a sample rather than all investors, each reported estimate has a sampling error associated with it. The size of the sampling error reflects the precision of the estimate; the smaller the sampling error, the more precise the estimate. We used a 95-percent confidence level to describe the precision of survey findings. This means that the chances are about 95 out of 100 that the actual percentage falls within the confidence interval. For example, we have estimated that 47 percent of investors said the diskettes were “greatly” or “very greatly” useful in providing information they needed. The margin of sampling error for this percentage is plus or minus about 20 percentage points, which means that we are 95-percent confident that between 27 and 66 percent of investors found the diskettes to be greatly or very greatly useful. Other survey findings have a similar degree of precision, as shown in table II.1. Although about half of the investors found the diskettes to be “greatly” or “very greatly” useful, about half found that the diskettes they purchased from RTC were missing important data. Approximately three-quarters of the investors told us that the loan files they reviewed on RTC’s imaging system were missing important documents. Over two-thirds of the investors said they experienced at least some problems reviewing individual loan files on RTC’s imaging system. In addition to the reported sampling errors, the practical difficulties of conducting any survey may introduce nonsampling errors. For example, variation in the wordings of questions, the sources of information available to the respondent, or the types of people who do not respond can lead to somewhat different results. We included steps in both the data collection and data analysis stages for the purpose of minimizing such nonsampling errors. Comments From the Resolution Trust Corporation Major Contributors to This Report General Government Division, Washington, D.C. Atlanta Regional Office Related Audit Reports GAO Reports Resolution Trust Corporation: 1992 Washington/Baltimore Auctions Planned and Managed Poorly (GAO/GGD-93-115, Jul. 7, 1993). Resolution Trust Corporation: Timelier Action Needed to Locate Missing Asset Files (GAO/GGD-93-76, Apr. 28, 1993). Resolution Trust Corporation: Oversight of Certain Loan Servicers Needs Improvement (GAO/GGD-92-76, Apr. 24, 1992). Resolution Trust Corporation: Status of Loans and Other Assets Inventory System (GAO/IMTEC-92-35BR, Mar. 5, 1992). Resolution Trust Corporation: Effectiveness of Auction Sales Should Be Demonstrated (GAO/GGD-92-7, Oct. 31, 1991). Resolution Trust Corporation: Evolving Oversight on Interim Servicing Arrangements (GAO/GGD-91-120, Sept. 18, 1991). Resolution Trust Corporation: Unnecessary Loan Servicing Costs Due to Inadequate Contract Oversight (GAO/GGD-91-19, Jan. 17, 1991). RTC Reports RTC’s Identification of Loans for Securitization, RTC Office of Inspector General (A94-HQ-009, Jul. 14, 1994). Loan Servicing Audit of Wendover Funding, Inc., RTC Office of Inspector General (A94-PA-021, Mar. 11, 1994). Loan Servicing Audit of EQ Services, Inc., RTC Office of Inspector General (A94-PA-020, Mar. 11, 1994). Loan Servicing Audit of Knutson Mortgage Corporation, RTC Office of Inspector General (A94-PA-017, Mar. 4, 1994). Nonperforming Loan Auctions, RTC Office of Inspector General (Audit Report A94-DE-005, Feb. 2, 1994). CLS Corporation Contract Fees, RTC Office of Inspector General (Audit Report A94-DE-003, Jan. 14, 1994). Kansas City Receivership Operations—Controls Over Loan Servicer Remittances, RTC Office of Inspector General (Audit Report A94-KC-003, Dec. 29, 1993). Loan Servicing Activities at Midland Loan Services, L.P., RTC Office of Inspector General (Audit Report A94-KC-002, Dec. 16, 1993). FIServ Joint Venture, Inc., Loan Servicing, RTC Office of Inspector General (Audit Report A94-DA-001, Oct. 29, 1993). J. I. Kislak Mortgage Corporation Loan Servicing, RTC Office of Inspector General (Audit Report A93-057, Aug. 25, 1993). Disposition of Non-Performing Loans Secured by Commercial Real Estate, RTC Office of Inspector General (Audit Report A93-039, Jun. 1, 1993). Review of the Internal Accounting and Management Controls for the Mortgage Loan Servicing Operations of IMCO Realty Services, Inc., Office of Contractor Oversight and Surveillance (Report to the Senior Vice President, Division of Asset Management and Sales, RTC/OCOS-92-1-LS, Mar. 1992). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

GAO reviewed the Resolution Trust Corporation's (RTC) August 1993 national nonperforming loan auction, focusing on the: (1) process RTC used to select loans for the auction; and (2) adequacy and usefulness of loan data provided to investors before the auction. GAO found that: (1) RTC efforts to select and dispose of nonperforming loans was hindered by incomplete and outdated loan data; (2) RTC identified over 60,000 nonperforming loans with a total book value of about #2.7 billion for the auction; (3) RTC failed to follow its contracting procedures in modifying loan servicers' contracts to require the submission of monthly standard loan data; (4) the RTC central loan database contained incomplete and outdated data because some loan servicers did not timely submit all relevant data; (5) RTC withdrew about 81 percent of the original 60,000-plus loans selected for auction because they did not meet auction criteria, were in litigation, had been paid off, sold, or designated for other sales; (6) some performing loans were erroneously included in the auction and sold at deep discounts; (7) investors generally believed that RTC loan data was useful, but important data were missing, inadequate, or invalid; (8) some investors lowered their bids or did not participate in the auction because of poor RTC loan data; and (9) RTC has taken actions to correct identified problems in conducting auctions of nonperforming loans.

Background The Federal Agriculture Improvement and Reform Act of 1996, referred to as the 1996 Farm Bill, continued a commodity loan program that has existed in various forms since the 1930s. The Marketing Assistance Loan Program is aimed at helping farmers with the orderly marketing of their crops through short-term financing. Farmers secure these loans after harvest, when prices frequently are the lowest. The loans give farmers up- front capital to use until they market their crops. However, at times of low prices, the program becomes part of the federal safety net for farmers by providing income support. In essence, the program provides a minimum guaranteed price that farmers will receive for certain commodities and provides them with income support payments. Marketing assistance loans are available to the farmers of various crops, including wheat, rice, feed grains, oilseeds, and upland cotton. Farmers obtain marketing loans by using their crops as collateral. The loan amount is based on a statutory national loan rate (a per unit price for each crop). To determine the loan amount, USDA multiplies the loan rate by the amount of crop offered as collateral. Farmers may repay the loan’s principal and interest at any time within the loan period (usually 9 months). In lieu of repaying their loans, farmers may forfeit their crops to the government when the loans mature and keep the loan principal. Forfeitures typically occur when the price farmers can receive for their crops falls below the loan rate. In such cases, farmers receive greater revenue by forfeiting the crops than by marketing them. Because the government incurs costs in obtaining and selling forfeited crops, the commodity loan program has provisions that allow farmers to repay their commodity loans at prevailing market prices. Basically, when the price farmers will receive for their crops falls below the loan rate, they can repay their loans at a lower alternative repayment rate, also known as the posted county price. USDA calculates the repayment rate on the basis of local market prices (for cotton and rice, USDA uses an adjusted world price that it calculates weekly). Farmers keep the difference between the loan rate and the lower alternative repayment rate. This difference is known as a “marketing loan gain” and is considered a cash payment to farmers. Farmers retain their crops and have the opportunity to later sell them at prices higher than their loan repayment rate. Farmers who do not choose to obtain marketing loans may still receive similar help from USDA when prices are low. In lieu of securing loans, eligible farmers may choose to receive payments for the difference between the alternative repayment rate and the loan rate. These direct payments are called “loan deficiency payments.” The sum of the marketing loan gains and loan deficiency payments for all crops during the crop year is normally limited by law to $75,000 per person. For payment limitations, persons can be individuals as well as entities such as limited partnerships, corporations, and trusts, which all may only receive up to $75,000. However, a partnership or a joint operation may have several members, each of whom can receive up to $75,000. To monitor limitations, USDA tracks payments to the individuals who are members of partnerships and joint operations. Farmers can receive payments for more than one farming operation. However, no individual may receive payments for more than three entities (i.e., partnerships, corporations) in which that individual holds a substantial beneficial interest. Owing to concerns that low prices were causing numerous farmers to reach the payment limit, for crop years 1999 and 2000, the Congress lifted the cap on the loan subsidy payments that farmers could receive. It doubled this payment limit, so that each person was eligible to receive $150,000. In October 1999, the Congress amended the 1996 Farm Bill to provide for the issuance of commodity certificates. USDA implemented the commodity certificate program in February 2000. Certificates are available for crop years 1998 through 2002. The commodity certificate program is intended to discourage marketing loan forfeitures. Commodity certificates are essentially another option for providing a government payment to farmers if market prices are below the loan rate. Unlike marketing loan gains or loan deficiency payments, however, certificate gains do not count against a farmer’s payment limit. In effect, certificates do away with the payment limit. Farmers use commodity certificates to redeem their marketing assistance loans at a lower repayment rate. By purchasing these certificates, farmers can immediately reclaim their commodities under loan. The purchase price for their commodity is the posted county price multiplied by the quantity of crop to be redeemed from the loan. No paper certificates are actually issued. The commodity certificate is only valid for immediate use and expires immediately upon repayment of the loan and exchange of the certificate for the commodity under loan. Because of low commodity prices, payments through marketing assistance loan program have been significant. In crop year 1999, the combination of marketing loan gains, loan deficiency payments, and certificate gains totaled more than $8 billion, and crop year 2000 payments were more than $7 billion. Figure 1 shows the distribution of these benefits, by crop, for crop years 1999 and 2000. Changes to the Marketing Assistance Loan Program Had Only a Modest Impact on Total Payments The increase in the payment limit and the introduction of commodity certificates had a limited impact on total payments made through the Marketing Assistance Loan Program in crop years 1999 and 2000. Because of the increase in the payment limit, 1999 payments for loan deficiency payments and marketing loan gains were 2.5 percent, or $170.7 million, more than they would have been otherwise. In 2000, these payments were 1.4 percent, or $90.4 million more than they would have been otherwise. Total payments over $75,000 were less in 2000 than 1999 because cotton payments decreased. In both years, the farmers who collected payments of more than $75,000 represented less than 1 percent of all farmers receiving benefits, and most of these farmers did not reach the increased limit of $150,000. Commodity certificates also composed a small proportion of all program payments—$380 million of the $15 billion in marketing loan assistance payments made over the 2-year period. Members of cooperatives collected most of these certificate gains. In terms of crops, —94 percent of certificate gains went to rice and cotton farmers (both cooperative members and individual farmers) in 1999; in 2000, 70 percent of the gains went to rice and cotton farmers and 22 percent to corn and soybean farmers. Arkansas was the leading state in certificate gains in both years because its rice cooperatives collected a significant amount of certificate gains on behalf of their members. The Increase in Payment Limits Benefited Only a Small Percentage of Farmers In both crop years 1999 and 2000, over 925,000 farmers received marketing loan benefits from USDA’s county offices. Most farmers collected less than $15,000—85 percent in 1999 and 86 percent in 2000. In both years, less than 1 percent of farmers obtained more than $75,000 in combined market loan gains and loan deficiency payments. Figure 2 shows the percentage of farmers in various payment categories for total marketing loan gains and loan deficiency payments for crop year 2000. The percentages were roughly the same for crop year 1999. Of the 1 percent of farmers who collected more than $75,000 each year, the majority did not reach the increased payment limit of $150,000. Most farmers collected less than $20,000 over the original payment limit of $75,000, or less than $95,000 in total benefits. Farmers who obtained more than $75,000 in benefits came from about 40 states in each year. The leading states in 1999 were Arkansas and Texas, which together accounted for 19 percent of the farmers who received more than $75,000 in payments; in 2000, the leading states were North Dakota, Illinois, and South Dakota, which together accounted for 32 percent of the farmers who received more than $75,000 in payments. (App. III provides the number of farmers by state who received more than $75,000 due to the increased payment limit.) Commodity Certificates Did Not Substantially Add to Program Payments Commodity certificate gains totaled over $98 million in crop year 1999 and increased to over $282 million in crop year 2000. These certificate payments represented 1.2 percent of total marketing assistance loan program payments in crop year 1999 and 3.9 percent in crop year 2000. In both years, the majority of certificate gains were distributed by cooperatives to their members. Seventy-eight percent of certificate gains went to 12 cooperatives in 1999 and 67 percent to 17 cooperatives in 2000. The remaining certificate gains were issued to 671 farmers in 1999 and 2,713 farmers in 2000 by USDA county offices. Figure 3 shows the distribution of marketing assistance loan benefits by payment type in relation to the distribution of certificate payments by farmers and cooperatives for crop year 2000. The majority of certificate gains in both years were for cotton and rice. In crop year 1999, over 90 percent of certificate gains were for these two crops—58 percent for rice and 36 percent for cotton. In crop year 2000, while rice and cotton farmers were still receiving the bulk of the payments (33 percent for rice and 37 percent for cotton), farmers of other crops, such as corn and soybeans, used the certificate program more in 2000 than they had in 1999. While the percentage of total certificate payments for cotton stayed about the same and rice decreased, total certificate payments for each of these crops increased from 1999 to 2000—from $57 million to $94 million for rice, and from $36 million to $104 million for cotton. Figure 4 shows the percentage distribution of certificate gain payments by crop for crop years 1999 and 2000. (App. II provides the total quantity of each crop that was redeemed from a marketing loan with a certificate.) Farmers and cooperatives in 35 states in 1999 and 34 states in 2000 used certificates. In 1999, the leading states in terms of total certificate gains were Arkansas, 59 percent; California, 20 percent; and Texas, 9 percent. In 2000, Arkansas was still the leader with 33 percent of certificate gains, followed by Mississippi, 20 percent; Texas, 12 percent; and California, 7 percent. The leading states were the homes of the cooperatives that obtained the majority of certificate gains. In both years, most of the remaining states received 1 percent or less of the certificate gains for their members. However, these other states obtained a larger share of the total certificate gains in 2000 than they did in the previous year. If only the payments made by USDA county offices to farmers are considered, the results differ. In 2000, the states that collected the most gains were North Dakota, South Dakota, and Illinois; farmers in these states used certificates to collect gains for corn, soybeans, rice, and wheat. Figure 5 shows the certificate gains by the leading states for crop years 1999 and 2000. Appendix III provides a complete list of certificate gains by state. Payments to cooperatives varied considerably. The cooperatives obtained total certificate gains that ranged from $55,000 to $35 million in 1999 and from $7,000 to $57 million in 2000 to distribute to their members. The cooperative that received the largest certificate funds in both crop years 1999 and 2000 distributed these funds to about 6,000 members. Farmers who received certificate gains from USDA county offices realized gains that were typically less than $25,000. However, several farmers obtained larger certificate gains. In crop year 1999, 42 farmers received over $100,000 in certificate gains. Nine of these received more than $250,000 and two received more than $1 million. The farmer realizing the most in payments received a total of $2.7 million in certificate gains for cotton. In crop year 2000, no farmers received gains in excess of $1 million, but 24 farmers received gains of between $250,000 and $750,000. In both years, at the lower total range of certificate gains, a high percentage of farmers received a low percentage of gains. Conversely, at the higher range of certificate gains, a low percentage of farmers received a high percentage of gains. For example, in crop year 2000, the 57 percent of farmers who received $25,000 or less in certificate gains received 17 percent of the dollars, while the 6 percent of farmers who received more than $100,000 received 31 percent of the total dollars. Figure 6 shows the relationship between the percentage of farmers for different payment categories and the total percentage of payments these farmers received in crop year 2000. Certificate Gains Were Generally Used to Reduce the Administrative Burden for Cooperatives Rather Than to Avoid Payment Limits Although commodity certificates allow users to receive payments in excess of the amount they could receive otherwise, cooperative officials told us that they primarily used commodity certificates to reduce administrative burdens. According to these officials, certificates eliminate the time-consuming and costly need to track when their members reach their payment limits. Moreover, according to the rice and cotton cooperative officials we spoke to, certificates provide more flexibility in marketing crops. Similarly, the majority of farmers who obtained certificate gains from USDA county offices did not exceed the $75,000 payment limit. According to USDA officials, most farmers used certificates early in the year to avoid the possibility of reaching the payment limit later in the year. While most certificates were not used by farmers to exceed the payment limit, certificates did potentially reduce forfeitures for the small number of farmers who were at the payment limit and used certificates. Although certificates can benefit the government by avoiding the associated costs of storing and selling crops that would otherwise be forfeited, they also lead to more marketing assistance loan payments. The net effect of this trade-off is difficult to determine precisely, but the Congressional Budget Office has estimated that it is, for all practical purposes, “a wash.” The two rice cooperatives we met with obtained 70 percent of certificate gains distributed by all cooperatives in 1999 and 43 percent in 2000. These cooperatives used certificates in both years, rather than obtaining marketing loan gains or loan deficiency payments, because the certificates eliminated the need to monitor compliance with the payment limit for each of their members. These cooperatives were not using certificates because their members were reaching the payment limit. They reported that they had few members affected by the increased $150,000 payment limitation. The cooperatives’ certificate gains were about the same as they would have been if they had chosen to obtain market gains or loan deficiency payments. Combined, the two rice cooperatives distributed the certificate gains to over 8,000 members in 1999 and 2000. We discussed the use of certificates with four cotton cooperatives that represented 28 percent of certificate gains obtained by all cooperatives in 1999 and 49 percent in 2000. In crop year 1999, cotton prices were much lower than the loan rate, and these four cotton cooperatives had members who reached the payment limit. Nevertheless, the cooperatives made limited use of certificates because certificates were not available until late in the crop year. By the time certificates became available, two of the cooperatives had already obtained marketing loan benefits for most of their crops so their use of certificates was limited. If the cooperatives had been able to use certificates for their members who reached the payment limit for the entire crop year, they could have gained more in benefits. According to its calculations, one of the cooperatives told us it could have gained about $5 million in benefits for 150 members who had reached the payment limit. The other two cotton cooperatives were able to use certificates. Officials at these two cooperatives estimate that they were able to help about 340 of their large farmers who would have reached their limit if they used marketing loan gains and loan deficiency payments and not been able to receive any additional payments for their crops. These two cooperatives received over $17 million in certificate gains to distribute to their members. They would not have been able to receive all of these funds without the availability of certificates. In crop year 2000, however, these cooperatives shifted from obtaining loan deficiency payments and marketing loan gains to receiving the majority of their members’ loan program benefits through certificates. However, this decision was not primarily to receive benefits over the payment limit because the cooperatives did not have many farmers who would reach the limit in that year. According to the cooperative officials, most members were unlikely to reach the payment limit because cotton prices were not that different from the loan rate—therefore, marketing loan gains per pound were small. Like the rice cooperatives, the cotton cooperatives said they used certificates primarily because the certificates eliminated the administrative burden of monitoring payment limits. Cooperative officials told us this is a laborious, inexact, and time-consuming process. More importantly, certificates assist cooperatives with the orderly marketing of their crops. Certificates provide cooperatives with flexibility in their marketing decisions because the cooperatives do not have to make marketing decisions according to when, or if, members reach the payment limit. Most of the farmers who purchased certificates through county offices did not use them to receive benefits above the payment limit. For each farmer who received certificate gains, we determined total certificate gains, loan deficiency payments, and marketing loan gains by payment limit individuals, whether they were acting alone or as members of a partnership or other entity. The available data show that the majority of farmers who used certificates did not receive more than $75,000 in total benefits. In crop years 1999 and 2000, 86 and 84 percent, respectively, received less than $75,000. In crop years 1999 and 2000, only 5 percent and 3 percent, respectively, of farmers who used certificates obtained more than $150,000 in total benefits. That is, 47 farmers in 1999 and 100 farmers in 2000 received more than $150,000. In 1999, 2 of the 47 farmers received more than $1 million in payments; in 2000, 8 of the 100 farmers received over $350,000. Figure 7 shows the percent distribution of total payments at the payment limit level for farmers who used certificates in crop years 1999 and 2000. We spoke with several county office officials about the reasons farmers in their county used certificates. The county officials said that some farmers chose to use certificates instead of marketing loan gains or loan deficiency payments at the beginning of the harvest because they were concerned they might eventually reach the $75,000 payment limit. However, the Congress subsequently raised the payment limit to $150,000. If the limit had been raised earlier, these farmers might not have used certificates, according to these officials. While most farmers did not use the majority of the certificates to receive benefits in excess of the payment limit, a handful of farmers did so. Furthermore, in 2000, the number of farmers who needed certificates would have been slightly higher if the Congress had not increased the payment limit to $150,000. With certificates, farmers reaching the payment limit can continue to obtain payments when posted county prices are lower than loan rates, retain their crops, and sell them later when market prices are higher than the loan rate. With program payments, and possibly higher prices, farmers might receive a total return higher than the loan rate. Without certificates, the farmers at the payment limit might forfeit their crops. When farmers forfeit their crops, they receive the loan rate for their crops, but they lose the crops and the potential for greater revenue. Also, except for cotton, farmers are responsible for the costs of storing the crops during the 9-month loan period before they can forfeit it. Because certificates reduce the potential for forfeitures, they save the government the costs associated with storing and disposing of forfeited crops. However, certificates also lead to higher expenditures if farmers use them to collect payments in excess of the payment limit. The Congressional Budget Office estimates that these government savings and costs roughly offset each other. However, according to USDA officials at the Economic Research Service, farmers could respond to increased loan program benefits by increasing their production of eligible crops. Because certificates could increase overall loan program benefits, they might result in increased federal spending for commodity loan programs. USDA’s Oversight of Payments to Cooperatives Is Inadequate During the course of our work, we found that, until recently, USDA had not been reviewing cooperatives’ internal controls to ensure that the market loan benefits they distributed to their members were valid and accurate. In crop years 1999 and 2000, the 30 cooperatives obtained over $1.8 billion in marketing loan program benefits to distribute to their members. USDA is responsible for monitoring whether the controls in place ensure that (1) cooperative members are eligible for payments, (2) members do not exceed their payment limit, and (3) duplicate benefits are not provided for the same crop. We have issued standards for internal control in government that provide the overall framework for establishing and maintaining internal control. These standards define the minimum level of quality acceptable for internal control in government and provide the basis against which internal control is to be evaluated. One standard provides that agencies should monitor the effectiveness of internal control to assess the quality of performance over time. In considering the extent to which the continued effectiveness of internal control is monitored, both ongoing monitoring activities and separate evaluations of the internal control system, or portions thereof, should be considered. In addition, USDA guidance has a provision to review cooperative operations. Agency officials stated that although they have not been reviewing the cooperatives, other controls provide some assurance of compliance with farm eligibility and payment limitation provisions. One control procedure is USDA’s automated weekly update process, which provides the cooperatives with information on eligible farms and payment limits for individual persons. However, cooperative officials said that the automated update process does not work very well at times. For example, one cooperative official told us that erroneous USDA computer data had contributed to the cooperative’s internal compliance report showing that the cooperative collected over $60 million in excess of the payment limit or for ineligible production. The data discrepancy was later resolved after cooperative officials contacted USDA. Another control is an end-of-year process when cooperatives report the volume in bushels, or other units of measure, of crop placed under loan or on which they received benefits. While USDA has these processes in place, it has yet to develop reasonableness tests on the total payments the cooperatives received. Without effective monitoring, USDA cannot determine how well its internal controls are functioning or determine what, where, and how improvements, when needed, should be implemented. Specifically, without periodically reviewing cooperative operations, USDA cannot be assured that only eligible farmers and eligible crops are receiving payments or that the amount of payments is valid. USDA has recently taken some steps to ensure that cooperatives are operating properly. In 2001, the agency held a training session for cooperative officials on determining their members’ payment eligibility. They have also completed work on an audit program and recently conducted reviews at two cooperatives. USDA officials acknowledged that these reviews are important and that they should conduct more of them. However, they told us that they did not have the resources necessary because high turnover had resulted in a shortage of staff with the necessary expertise to conduct the reviews. Currently, USDA has two staff working part-time to conduct these reviews. The officials said that with current resources, they could continue to review two cooperatives a year. At this rate, it would take USDA about 15 years to complete the reviews. Conclusions With over $1.8 billion in payments made to cooperatives during a 2-year period, it is important for USDA to have controls in place to ensure the validity and accuracy of these payments. Without timely reviews of these payments, the stewardship of public resources is at risk. Recommendation To ensure that marketing loan benefit payments made to cooperatives are appropriate, we recommend that the Secretary of Agriculture ensure that a sufficient number of staff with requisite skills are available to conduct timely reviews of such payments. Specifically, the reviews should ensure that payments are made only for eligible producers and that the payments are valid. Agency Comments We provided USDA with a draft of this report for review and comment. The Acting Deputy Administrator for Farm Programs concurred with our finding that oversight of payments to cooperatives is inadequate and with our recommendation to address this problem. We performed our work from December 2000 through August 2001 in accordance with generally accepted government auditing standards. We did not independently assess the accuracy and reliability of the USDA payment files we used. 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. We will then send copies of this report to the congressional committees with jurisdiction over farm programs, the Secretary of Agriculture, the Director of the Office of Management and Budget, and other interested parties. We will also make copies available upon request. If you have any questions about this report, please contact me at (202) 512- 3841. Major contributors to this report are listed in appendix IV. Appendix I: Scope and Methodology To determine the extent to which the increased payment limit of $150,000 raised payments under the marketing assistance loan program, we used U.S. Department of Agriculture’s (USDA) payment data (“payment file”) from the Price Support Loans System for crop years 1999 and 2000. While the data for crop year 1999 are complete, the analysis for crop year 2000 is as of May 2001. Farmers will continue to receive payments for crop year 2000 until February 2002 and, consequently, the crop year 2000 data do not fully reflect total payments that will eventually be made for this crop year (see table 1 for amount of crops still eligible to receive marketing loan gains as of June 13, 2001). We used the payment file to identify the marketing loan gains and loan deficiency payments USDA made to farmers. This file provided by USDA has these payments allocated to persons by identification number. We did not independently assess the accuracy and reliability of the Price Support Loans System’s database. To examine the extent to which payments rose above the prior payment limit of $75,000, we totaled the payments for each identification number. We identified 951,948 persons who received marketing loan gains and loan deficiency payments for crop year 1999 and 925,482 for crop year 2000. We focused on USDA payments made directly to these farmers and excluded payments made through cooperative marketing associations and loan servicing agents (referred to as cooperatives). These cooperatives, which market the members’ crops, obtain the benefits for their members from USDA and distribute them according to cooperative rules. Accordingly, we were not able to identify payments received by individual farmers and to determine if these payments exceeded payment limits. USDA provided separate files with the total marketing loan gains and loan deficiency payments made to each cooperative in crop years 1999 and 2000. Cooperatives received about 14 percent of the total payments in 1999 and about 5 percent in 2000. To determine the extent to which the availability of commodity certificates increased payments under the marketing assistance loan program, we used USDA’s commodity certificate data from the Price Support Loans System (“certificate file”) for crop years 1999 and 2000 for farmers and cooperatives that received benefits through USDA county offices. These data are as of April 2001. To determine the reliability of the certificate data, we validated the data for a random sample of 50 certificates, 25 for each crop year. We contacted 43 county offices that processed the sample certificates to determine the accuracy of selected data fields. The data fields we validated include producer, loan number, transaction date, crop, certificate value, certificate gain, and the outstanding amount. We found the error rate contained in the sample was less than 1 percent in 1999 and zero in 2000. Cotton cooperatives apply for marketing benefits, including certificate gains, using an automated process managed by the Kansas City Management Office (KCMO) in Kansas City, Kansas, instead of the USDA county offices. For each cotton cooperative, we obtained total marketing loan benefits and the total certificate gains from the Automated Cotton Reporting System in KCMO. These data are as of March 2001. To determine the extent to which farmers used commodity certificates to receive gains that would otherwise exceed the payment limits, we performed a computerized match to compare farmer identification numbers from the certificate file to the payment file. For each matching identification number, we totaled the certificate gains and marketing loan benefits. We compared these payments to the original dollar limit— $75,000—and to the new dollar limit of $150,000. We identified 526 of 671 identification numbers in the certificate file that matched the payment file for crop year 1999 and 2,291 of 2,713 that matched in crop year 2000. For the identification numbers that did not match, we conducted further analysis to determine the total certificate gains and marketing loan benefits. The certificate file does not have farm entities that are partnerships or joint operations broken down by the number of persons receiving the payment, but the payment file does. We provided KCMO a list for each year of the identification numbers in the certificate file that did not have a match in the payment file. KCMO used the Permitted Entity file for crop years 1999 and 2000 to provide us a list of the members of each partnership and joint operation as well as their individual identification number and share of payments. Using this information, we determined the certificate gains for each individual member. This information was matched with the payment file to obtain each member’s total certificate gains and marketing loan benefits. While we have the total certificate gains for each cooperative, we do not have data on how the cooperatives distributed these funds to their members. Without these data, we cannot determine the number of cooperative members who obtained certificate gains over the payment limit. To address this data limitation, we interviewed officials from two rice and four cotton cooperatives to discuss their reasons for using certificates. These cooperatives accounted for 98 percent of the certificate gains obtained by cooperatives in 1999 and 92 percent in 2000. Finally, to obtain information on how the marketing loan assistance program operates, we reviewed relevant laws, regulations, and notices and handbooks from USDA’s Farm Service Agency. We also interviewed officials from USDA’s Farm Service Agency and Economic Research Service officials in Washington, D.C. In addition, we visited four USDA county offices in Arkansas and Texas and discussed certificates via telephone with 43 county offices. Finally, we met with academia and representatives from the National Cotton Council in Memphis, Tennessee, and Plains Cotton Growers, Inc., in Lubbock, Texas. We performed our work from December 2000 through August 2001 in accordance with generally accepted government auditing standards. Appendix II: Crops and Loan Quantities Redeemed With Certificates, Crop Years 1999 and 2000 Appendix III: Farmers, by State, Receiving More than $75,000 Due to Increase in the Payment Limit, Crop Years 1999 and 2000 In both crop years 1999 and 2000, less than 1 percent of farmers who received marketing loan benefits from USDA’s county offices received over $75,000 in market loan gains and loan deficiency payments combined. Table 3 provides the number of payment limit individuals in each state who received more than $75,000. Appendix IV: State-by State Analysis of Certificate Gains, Crop Years 1999 and 2000 Less than 1 percent. Less than 1 percent. Appendix V: State-by State Analysis of Total Marketing Loan Program Benefits in Excess of $75,000, Crop Years 1999 and 2000 Appendix VI: GAO Contacts and Staff Acknowledgments GAO Contacts Staff Acknowledgments In addition to those named above, Leigh White; Cleofas Zapata, Jr.; Charles W. Bausell, Jr.; James W. Turkett; and Carol Herrnstadt Shulman made key contributions to this report.

Under the Department of Agriculture's (USDA) Marketing Assistance Loan Program, the federal government accepts harvested crops as collateral for interest-bearing loans (marketing assistance loans) that are typically due in nine months. When market prices drop below the loan rate (the loan price per pound or bushel), the government allows farmers to repay the loan at a lower rate and retain ownership of their commodity for eventual sale. The difference between the loan rate and the lower repayment rate is called the "marketing loan gain." Conversely, farmers who do not have marketing assistance loans can also receive a benefit when prices are low called a "loan deficiency payment." The loan deficiency payment is equal to the marketing loan gain that the farmer would have received if he or she had a loan. Farmers may choose to obtain either a marketing loan gain or a loan deficiency payment--both of which are known as the marketing loan benefit. The increase in the payment limit and the availability of commodity certificates had only modest effects on the $15 billion in marketing assistance loan payments provided for crop year 1999 and for crop year 2000 through May 2001. Because of the increase in the payment limit, total payments over the two-year period were 1.9 percent more than they would have been under the previous limit, or an additional $261.1 million. Most farmers did not use commodity certificates to receive gains more than the payment limit, but a small number of farmers did benefit from the program. According to the best available data from USDA's county offices, 47 farmers used certificates to receive more than $150,000 in 1999, and 100 farmers did so in 2000.

Background DHS’s NPPD leads the national effort to protect and enhance the resilience of the nation’s physical and cyber infrastructure. The directorate includes the Office of Infrastructure Protection, which leads the coordinated national effort to reduce risk to U.S. critical infrastructure posed by acts of terrorism. Within the Office of Infrastructure Protection, ISCD leads the nation’s effort to secure high-risk chemical facilities and prevent the use of certain chemicals in a terrorist act on the homeland, as well as implementing CFATS and managing the CFATS program, including its whistleblower process and procedures. The CFATS program is intended to ensure the security of the nation’s chemical infrastructure by identifying, assessing the risk posed by, and requiring the implementation of measures to protect high-risk chemical facilities. Section 550 of the DHS Appropriations Act, 2007, required DHS to issue regulations establishing risk-based performance standards for chemical facilities that, as determined by DHS, present high levels of risk; the act also required vulnerability assessments and development and implementation of site security plans for such facilities. DHS published the CFATS interim final rule in April 2007 and appendix A to the rule, published in November 2007, lists 322 COI and the screening threshold quantities for each. According to DHS, subject to certain statutory exclusions, all facilities that manufacture COI as well as facilities that store or use such chemicals as part of their daily operations may be subject to CFATS. However, only chemical facilities determined to possess a requisite quantity of COI (that is, the screening threshold quantity) and subsequently determined to present high levels of security risk—that is, covered facilities—are subject to the more substantive requirements of the CFATS regulation. The CFATS Act of 2014 amended the Homeland Security Act of 2002 by adding the Chemical Facility Anti-Terrorism Standards as Title XXI and, in effect, authorizing the program for an additional 4 years. Among other things, the act expressly repeals DHS’s authority to implement the program under section 550 of the DHS Appropriations Act, 2007, but also expressly provides that the CFATS regulation promulgated under that authority shall remain in effect unless otherwise amended, consolidated, or repealed. Consequently, while the act imposes new and additional responsibilities on DHS to implement the CFATS program, including a whistleblower procedure, the program continues to be implemented by ISCD under the existing regulatory framework. For more information about the CFATS regulation and process, see appendix II. According to the CFATS Act of 2014, among other things, DHS is to implement the following six provisions related to a whistleblower procedure: 1. not later than 180 days after the date of enactment of the CFATS Act of 2014, establish and provide information to the public regarding a procedure under which any employee or contractor of a chemical facility of interest may submit a report of a CFATS violation, 2. keep confidential the identity of an employee or contractor at a chemical facility of interest, who submits a report of a potential CFATS violation under the established whistleblower procedure, 3. promptly respond to an employee or contractor at a chemical facility of interest, who provides contact information, to acknowledge receipt of the report, 4. review and consider the information provided in any report submitted, and take action, as appropriate, to address any substantiated CFATS violation, 5. follow certain procedural requirements if the Secretary determines that a violation has occurred and decides to institute a civil enforcement or issue an emergency order against a chemical facility, as appropriate under the law, and 6. work in partnership with industry associations and labor organizations to make publicly available, physically and online, the rights that an individual who provides DHS with whistleblower information about a covered chemical facility, would have under federal law. In addition, the CFATS Act of 2014 provides that an owner or operator of a chemical facility of interest may not discharge or otherwise discriminate against an employee or contractor because of submitting a report to DHS of a CFATS violation. According to DHS officials, to meet the definition of a whistleblower report under the CFATS Act of 2014, the report must be from an employee or contractor at a chemical facility of interest and involve a potential CFATS violation. A CFATS violation is when officials at a chemical facility of interest violate a provision of the CFATS Act of 2014 or CFATS regulations, such as knowingly submitting false information to DHS or failing to maintain appropriate records. DHS Received 105 Reports and Closed 97 Because They Did Not Involve CFATS Regulatory Requirements From June 16, 2015 (when ISCD implemented its whistleblower process) to April 19, 2016, ISCD received 105 reports from individuals—90 via the ISCD telephone tip line, 14 via e-mail, and 1 from ISCD’s CFATS help desk. ISCD officials determined that 8 of the 105 reports were potential CFATS violations and, after further review, that 1 of the 8 reports involved a CFATS violation. For the report that ISCD determined was a CFATS violation, ISCD took action against the chemical facility by requiring it to register with ISCD pursuant to requirements of the CFATS program. DHS Closed the Vast Majority of Reports Because They Did Not Involve CFATS Regulatory Requirements ISCD officials determined that 97 of the 105 reports were not potential CFATS violations and closed the reports because they did not pertain to requirements under the CFATS program. The most common types of reports that ISCD officials determined were not potential CFATS violations involved allegations of suspicious or illegal activity not related to CFATS. Additionally, the majority of the reports were submitted by concerned individuals, not employees or contractors at chemical facilities; therefore, the individuals were not whistleblowers as defined by DHS. However, ISCD officials also review and address reports from individuals who are outside of the statutory definition. ISCD officials referred 70 of the 97 reports (72 percent) to other federal agencies or departments consistent with ISCD’s interim process for addressing reports, which states that certain reports are to be referred to other agencies or departments. For example, reports related to terrorism are to be referred to the Federal Bureau of Investigation (FBI) Washington Field Office, and reports related to environmental or community safety are to be referred to the EPA. Of the 70 reports that ISCD referred to other federal agencies or departments, 63 reports (90 percent) related to terrorism and other allegations of criminal activity were referred to the FBI. Figure 1 illustrates the number and percentage of reports that ISCD received from June 16, 2015 through April 19, 2016, and the disposition for the 97 reports that ISCD officials determined did not involve potential CFATS violations. In addition to the 105 reports that ISCD received from June 16, 2015 to April 19, 2016, ISCD received 345 calls from February 2009—when ISCD created its telephone tip line for potential CFATS violations—to June 15, 2015 (the day before ISCD implemented its interim process for addressing CFATS whistleblower reports). See appendix III for our analysis of the 345 calls. DHS Further Reviewed Eight Reports Determined to Involve Potential CFATS Violations and Ultimately Determined That One Report Involved a CFATS Violation Of the 105 reports, ISCD further reviewed 8 reports (8 percent) that officials determined to involve potential CFATS violations. ISCD officials determined that, for one of the eight reports, the chemical facility met threshold requirements for COI and, therefore, the chemical facility had violated CFATS for failure to submit required CFATS documentation to ISCD. Specifically, a concerned individual, who was not an employee or contractor of a chemical facility, submitted a report about a commercial propane facility near a residential area. The individual cited concerns about the facility’s lack of security and expressed fear of a catastrophic event if the facility was not in compliance with DHS’s security regulations. ISCD followed-up with the individual to obtain more information and contacted the facility to obtain information about the quantity of COI at the facility. ISCD determined that a CFATS violation had occurred because the facility met the threshold reporting requirements, but had not registered with ISCD. In addition, ISCD determined that the company had seven other facilities that should have registered with ISCD. ISCD closed the report without pursuing civil enforcement action because the facility submitted required CFATS documentation after ISCD directed the facility to do so. ISCD determined that six of the eight reports were not CFATS violations because the chemical facilities or issues reported were not subject to CFATS regulations. For example, for four reports, ISCD found that the facilities did not have sufficient quantities of COI to meet threshold regulatory requirements. The remaining report is still open because ISCD officials have not completed their investigation. Table 1 describes the eight reports that ISCD further reviewed to determine whether they were CFATS violations. ISCD Has Implemented an Interim Process for Whistleblower Reports but Not for Retaliation Reports, and Guidance for Whistleblowers Is Limited ISCD Developed and Implemented a Documented, Interim Process to Address Whistleblower Reports In response to the CFATS Act of 2014, ISCD developed a documented, interim process to address reports of potential CFATS violations, and implemented the process on June 16, 2015. Figure 2 illustrates the process and its key procedures. Our analyses of ISCD’s efforts related to implementing a whistleblower procedure show that, since June 16, 2015, ISCD has had an interim process and procedures for all six related provisions for DHS in the CFATS Act of 2014. Our analyses also show that ISCD has implemented its interim process and procedures for five of the six provisions. ISCD officials stated that there has not been a need to implement the remaining provision—to follow certain procedural requirements if the Secretary determines that a violation has occurred and decides to institute a civil enforcement or issue an emergency order. Specifically, from June 16, 2015 to April 19, 2016, there was one whistleblower report that they substantiated, but it did not result in a civil enforcement or emergency order because the chemical facility took the action that ISCD required. Table 2 lists the results of our assessment of ISCD’s efforts since June 16, 2015 to develop and implement a whistleblower process and procedures for the six related provisions for DHS in the CFATS Act of 2014. For a more detailed description of ISCD’s efforts to develop and implement a whistleblower process and procedures, see appendix IV. Regarding ISCD’s specific efforts to implement the five provisions, ISCD officials told us that, for two provisions, they maintained the confidentiality of each individual’s identity, and worked in partnership with industry associations and labor organizations to make publicly available the rights that an individual, who provides whistleblower information about a covered chemical facility, would have under federal law. Based on our analysis of ISCD’s documentation for reports from individuals who provided their contact information, we did not see any indication that ISCD breached individuals’ confidentiality. We interviewed officials in the three industry associations and three labor organizations, who ISCD officials reached out to, and the industry and labor officials stated that ISCD officials worked in partnership with them to publicize whistleblower protections and rights. In addition, our analyses indicate that ISCD implemented the other three provisions by implementing its interim process and procedures for addressing whistleblower reports, providing acknowledgment receipts to individuals, who provided their contact information and submitted reports that DHS determined to involve potential CFATS violations, and reviewing and considering the information provided in the reports. ISCD officials stated that they are developing formal standard operating procedures to address reports of potential CFATS violations and the formal procedures were expected to be implemented by the end of June 2016. The formal procedures will supersede the interim procedures. DHS Has Not Developed a Documented Process and Procedures for Addressing Whistleblower Retaliation Reports The CFATS Act of 2014 prohibits retaliation against whistleblowers, but DHS lacks a process and procedures to address whistleblower retaliation reports, according to DHS officials. Specifically, an owner or operator of a chemical facility of interest or agent may not discharge an employee or otherwise discriminate against an employee with respect to the compensation provided to, or terms, conditions, or privileges of the employment of, the employee, for reporting a potential CFATS violation to DHS. DHS officials stated that DHS has authority under the CFATS Act of 2014 to issue an administrative order against a chemical facility of interest that violates the act, including for retaliating against a whistleblower. If chemical facility officials do not comply with the order, DHS has authority to issue a civil penalty of up to $25,000 for each day the facility is not in compliance. As of April 2016, DHS did not have documented procedures to investigate whether whistleblower retaliation had occurred, according to DHS officials. DHS has not received a whistleblower retaliation report that it substantiated since ISCD implemented the interim process for whistleblower reports on June 16, 2015. ISCD officials said they do not plan to include a process and procedures to investigate future retaliation reports in the formal, standard operating procedures for addressing whistleblower reports, which were expected to be implemented by the end of June 2016. However, DHS officials stated that a process to address retaliation reports would be useful and that DHS intends to conduct rulemaking to develop a formal process and procedures. The officials stated that, in the meantime, they would address any future retaliation reports on a case-by-case basis. Vetting future retaliation reports on a case-by-case basis may not provide adequate assurance that ISCD can effectively and efficiently investigate and respond to reports of retaliation. Standards for Internal Control in the Federal Government states that management should document the responsibilities of the organization in policies, so that personnel can carry out control activities for their assigned responsibilities. Without a documented process and procedures for investigating and responding to whistleblower retaliation reports, ISCD officials risk making ad hoc decisions that may not help ensure consistent and appropriate use of ISCD’s authority to issue administrative orders and penalties against the chemical facility. DHS officials stated that, during 2015, they met with officials in the Department of Labor’s Occupational Safety and Health Administration (OSHA), Environmental Protection Agency (EPA), and Nuclear Regulatory Commission to discuss and learn about, among other things, the three agencies’ procedures to address whistleblower retaliation reports and mechanisms to enforce protections against whistleblower retaliation. OSHA officials told us that they provided DHS officials with an overview of the process that OSHA uses in its program to protect whistleblowers from retaliation. DHS officials stated that they are considering what they learned from OSHA, EPA, and the Nuclear Regulatory Commission as DHS matures its CFATS whistleblower process, including how to address any future whistleblower retaliation reports. Although it is not yet available for DHS to use, OSHA has developed draft guidance with recommended practices for public, private, and non-profit employers to use in preventing and addressing whistleblower retaliation, which OSHA expects to publish in fall 2016. While the guidance is intended for employers, it could be useful for consideration when developing a whistleblower retaliation function within a regulatory program such as CFATS. The practices are based on recommendations unanimously agreed upon by the Secretary of Labor’s Whistleblower Protection Advisory Committee. OSHA’s recommended practices include five steps for creating an effective anti-retaliation program: (1) ensure leadership commitment, (2) foster an anti-retaliation culture, (3) implement a system to respond to reports of retaliation, (4) conduct anti-retaliation training, and (5) monitor progress and program improvement. To implement a system to respond to reports of retaliation, the OSHA draft guidance recommends, among other things, using an objective, independent report review process, focusing on the facts and underlying concern rather than on defending against the claim, and listening to all sides before making a judgment. Leveraging recommended practices, such as those to be published by OSHA, could help ISCD officials take advantage of lessons learned by other whistleblower program managers. However, until DHS establishes a documented process and procedures that could include what was learned from these other agencies, DHS officials will have an ad hoc process for investigating retaliation. Guidance on the ISCD Telephone Tip Line and Website for Whistleblower Reports Is Insufficient for Gathering Adequate Information from Whistleblowers The ISCD current telephone tip line greeting and ISCD website for CFATS whistleblower reports provide no guidance and limited guidance, respectively, to whistleblowers regarding the types of information that would be most useful to ISCD in vetting and determining next steps for the reports. ISCD received almost all of the reports of potential CFATS violations via its telephone tip line and e-mail address, which are included on the ISCD website for CFATS whistleblower reports. In the automated greeting played when a whistleblower calls the telephone tip line to submit a verbal report, as described in the transcription of the greeting below, there is no specific guidance given to the whistleblower about the types of information to provide in the report. Thank you for calling the CFATS Chemical Facility Security Tip line. If you would like to report a possible security concern involving the Chemical Facility Anti-Terrorism Standards (CFATS) regulation at your facility or another facility, you may do so by leaving a message after the tone. You are welcome to report these concerns anonymously, or, if you would like a return call, please leave your name and number. If you are calling to report a potential security incident that has already occurred, please call the National Infrastructure Coordination Center at 202-282-9201. If you have a security emergency or terrorist incident, please hang up and call the FBI or 911 immediately. If you have questions about CFATS generally, please call 866-323-2957. The ISCD website states the following with regard to the types of information that a whistleblower should provide. For anonymous reports, please provide a detailed description of the nature of the potential violation, including, where possible, names and dates. ISCD officials stated that there are no current plans to add guidance to the telephone tip line greeting and on the website about the types of information that would be most helpful to ISCD; however, the officials said that adding guidance would be helpful. Our analysis of 105 reports received by ISCD from June 16, 2015 to April 19, 2016 identified the following challenges that ISCD officials experienced in vetting reports due to insufficient information. Of the 105 reports, ISCD identified 8 reports as potential CFATS violations. One of the eight reports did not include the name or location of the chemical facility. ISCD officials told us that the name and location of the chemical facility are two of the most important pieces of information in vetting a report that ISCD determines to be a potential CFATS violation. ISCD officials followed up with the individual to obtain the location of the chemical facility and information about the owner/operator of the facility. The individual provided ISCD with the address and owner of the chemical facility. ISCD used this additional information to further review the report and determined that a CFATS violation had occurred. Without this additional information, ISCD officials would not have had sufficient information to determine whether a CFATS violation occurred, and would have missed the opportunity to appropriately address the report and take action against the facility for CFATS non-compliance. Of the 105 reports, 62 were submitted from individuals who provided their contact information. ISCD officials followed up on 13 of the 62 reports (about 21 percent) to obtain additional information to help ISCD officials determine whether the reports were potential CFATS violations. Nine of the 13 individuals responded to ISCD’s request for additional information. However, ISCD officials were unable to reach the remaining four individuals to obtain needed information and, consequently, closed the reports without being able to determine if they involved potential CFATS violations. Of the 105 reports, 43 were submitted from anonymous individuals who did not provide contact information. ISCD officials stated that they were unable to determine if a CFATS violation had occurred for some reports from anonymous individuals due to insufficient information. Standards for Internal Control in the Federal Government calls for agencies to identify the information requirements needed and communicate these needs internally and externally to achieve the entity’s objectives. Additional guidance on the ISCD telephone tip line and ISCD whistleblower website could help ensure that individuals who submit reports are aware of the types of information to include in the report and, thus, reduce the amount of ISCD follow-up with individuals due to insufficient information and enhance information available to ISCD officials for determining if CFATS violations occurred. Furthermore, providing additional guidance to whistleblowers about the types of information most needed by ISCD could help to decrease the number of reports that ISCD closes without being able to determine whether CFATS violations occurred. Conclusions The CFATS Act of 2014 required a procedure for whistleblowers to submit reports about potential CFATS violations at chemical facilities, including prohibiting retaliation against whistleblowers. However, DHS has not developed a documented process and procedures to investigate whether retaliation has occurred. A documented process and procedures for addressing and investigating whistleblower retaliation reports would better ensure that DHS can effectively and efficiently investigate reports to determine whether whistleblowers were retaliated against. DHS has limited guidance on its whistleblower website and no guidance on its telephone tip line greeting regarding the types of information that DHS needs from individuals who submit reports of potential CFATS violations. Without providing additional guidance to individuals, DHS officials may miss opportunities to obtain the information needed to determine if CFATS violations occurred or to do so without conducting follow-up efforts. This specific guidance will help assist DHS in collecting the information needed to properly investigate whistleblower reports and make informed decisions about whether CFATS violations have occurred. Recommendations for Executive Action To help ensure that whistleblower retaliation reports are addressed efficiently and effectively, we recommend that the Secretary of Homeland Security direct the Under Secretary of NPPD, the Assistant Secretary for Infrastructure Protection, and the Director of ISCD to develop a documented process and procedures to address and investigate whistleblower retaliation reports that could include existing practices, such as OSHA’s recommended practices, in developing the process and procedures. To assist DHS in collecting the information needed to investigate whistleblower reports and make informed decisions, we recommend that the Secretary of Homeland Security direct the Under Secretary of NPPD, the Assistant Secretary for Infrastructure Protection, and the Director of ISCD to provide additional guidance on the ISCD whistleblower website and telephone tip line greeting to clearly communicate the information needed in the reports. Agency Comments and Our Evaluation We provided a draft of this report to DHS and relevant excerpts of this report to the Department of Labor/OSHA, EPA, and the U.S. Nuclear Regulatory Commission for their review and comment. DHS provided written comments, which are reproduced in full in appendix V. DHS also provided technical comments on our draft report and the Department of Labor/OSHA provided technical comments on the relevant excerpts of our draft report, which we incorporated as appropriate. The EPA and U.S. Nuclear Regulatory Commission did not have comments on the relevant excerpts of our draft report. DHS concurred with both of our recommendations and described actions planned to address them. Regarding our recommendation that DHS develop a documented process and procedures to address and investigate whistleblower retaliation reports that could include existing practices, such as OSHA’s recommended practices, DHS stated that due to the construction of the CFATS-authorizing legislation, developing formal processes and procedures for investigating whistleblower retaliation reports will require modifications to the CFATS regulations. According to DHS, rulemaking typically involves multiple steps over a considerable length of time and developing a thorough whistleblower retaliation investigation process and procedures will likely take a number of years. DHS noted that the OSHA guidance with recommended practices for addressing whistleblower retaliation complaints is not yet final, so establishing a formal whistleblower retaliation investigation process prior to the publication of OSHA’s guidance on the subject may be premature. However, DHS stated that while awaiting finalized guidance from OSHA, NPPD’s ISCD will begin moving forward to initiate the whistleblower retaliation-related rulemaking activities, and develop an interim process and procedures that will enable the department to consistently handle any whistleblower retaliation complaints received during the rulemaking process. These actions, if fully implemented, should address the intent of the recommendation. For our recommendation that DHS provide additional guidance on the ISCD whistleblower website and telephone tip line greeting, DHS stated that providing additional guidance to potential whistleblowers regarding the types of information most useful in assessing a potential CFATS violation is likely to increase the quality of the reports received, and enable a more efficient and effective evaluation and investigation of them. DHS also stated that ISCD will update the automated greeting on the CFATS tip line and the ISCD webpage with additional guidance and instructions for potential whistleblowers. These actions, if fully implemented, should address the intent of the recommendation. We are sending copies of this report to interested congressional committees and the Secretaries of Homeland Security and Labor, as well as the Administrator of EPA and the Executive Director for Operations for the U.S. Nuclear Regulatory Commission. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (404) 679-1875 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VI. Appendix I: Objectives, Scope, and Methodology Our objectives were to determine (1) the number and types of Chemical Facility Anti-Terrorism Standards (CFATS) whistleblower reports the Department of Homeland Security (DHS) received, and any actions DHS took as a result of the reports, and (2) the extent to which DHS has implemented and followed a process to address reports from the whistleblowers, including reports of retaliation against whistleblowers. To determine the number and types of reports that DHS received, and any actions DHS took as a result of the reports, we reviewed all reports that DHS’s Infrastructure Security Compliance Division (ISCD) received from June 16, 2015 to April 19, 2016. Specifically, we reviewed the content of the 105 reports that ISCD received on the telephone tip line and by e-mail to identify the types of issues reported. We also interviewed ISCD officials, who were responsible for vetting and deciding what to do with these reports, about any actions taken to address the reports. In addition, we reviewed documentation from ISCD, such as the electronic spreadsheet for recording and tracking the reports, and documentation between the individuals who submitted the reports and ISCD, to evaluate ISCD’s actions from initial receipt of the reports to determining whether or not CFATS violations had occurred. We assessed the reliability of the data for the reports by, for example, reviewing ISCD’s standard operating procedures for receiving and documenting CFATS reports received on the telephone tip line and by e-mail, and interviewing knowledgeable officials to identify internal controls to ensure the completeness and accuracy of the information in the electronic spreadsheet. We determined the data to be sufficiently reliable for purposes of determining the number and types of reports received by ISCD. Although we focused on analyzing reports that DHS received since June 16, 2015, for context, we reviewed the CFATS telephone tip line calls that ISCD received from February 2009, when the telephone tip line started, to June 15, 2015—the day prior to ISCD’s implementation of the whistleblower procedure required under the Protecting and Securing Chemical Facilities from Terrorist Attacks Act of 2014 (CFATS Act of 2014). We analyzed the tip line calls to identify the types of issues reported and any DHS actions to address the calls. Specifically, we reviewed the transcriptions for 345 telephone tip line calls received and analyzed the content of the calls to identify those that may have been related to a potential CFATS violation, and to summarize the types of issues reported. We identified the key characteristics of the calls and categorized them as either not related to a CFATS violation or involving a potential CFATS violation. For those categorized as involving a potential CFATS violation, we categorized them into two sub-categories—either they potentially involved CFATS non-compliance, or they involved suspicious or illegal activity related to a chemical facility. Our analysis was limited to the content of the transcribed calls. ISCD has limited documentation on actions taken to address the calls received prior to June 16, 2015. Therefore, we were unable to review ISCD’s decisions on these calls, and our analysis does not include actions taken or decisions made by ISCD. However, our analysis is intended to provide perspective on the extent to which the calls were CFATS related and some examples of the types of issues that were reported to DHS prior to the implementation of the whistleblower process in response to the mandate in the CFATS Act of 2014. We assessed the reliability of the data for the calls by, for example, reviewing ISCD’s standard operating procedures for receiving and documenting CFATS tip line calls and interviewing knowledgeable officials and reviewing guidance to understand how the calls are received and transcribed. We determined the data to be sufficiently reliable for purposes of determining the number of calls received by ISCD and the types of issues reported. To determine the extent to which DHS implemented and followed a process to address reports from CFATS whistleblowers, we reviewed the CFATS Act of 2014, the Infrastructure Security Compliance Division Interim Process for Addressing Reports of Potential Chemical Facility Anti-Terrorism Standards (CFATS) Violations, and ISCD’s spreadsheet which documents ISCD officials’ review, actions taken, and decisions about each CFATS report received since June 16, 2015, when ISCD implemented its interim process. We also reviewed ISCD’s guidance for submitting a whistleblower report on ISCD’s telephone tip line and CFATS whistleblower website. We identified provisions related to whistleblower protections in the CFATS Act of 2014, and analyzed ISCD’s interim process for addressing reports of potential CFATS violations to determine if ISCD has a process and procedures for each applicable provision in the CFATS Act of 2014, and implemented its process and procedures since June 16, 2015 for each applicable provision in the CFATS Act of 2014. We interviewed DHS officials responsible for vetting and making decisions about reports received from June 16, 2015 to April 19, 2016 (the date of ISCD’s last data update to us). To better understand DHS’s process for addressing these reports, we reviewed the electronic tracking spreadsheet that ISCD officials use to document the reports, including actions taken to address them and the disposition of the reports. We used this information to evaluate ISCD’s efforts to implement the process and procedures to address each provision of the CFATS Act of 2014, including, for example, acknowledging receipt of the report and informing individuals of their whistleblower rights. We also analyzed information and interviewed DHS officials about factors that could affect how reports were addressed, such as the process for addressing reports received from individuals who did not meet DHS’s definition of a whistleblower, and reports that did not involve CFATS violations, as well whether there were any reports of retaliation against whistleblowers and how DHS would process such reports. In addition, we interviewed the lead official for ISCD’s telephone tip line and analyzed documents for the tip line at Oak Ridge National Laboratory in Tennessee about the process used to receive calls, transcribe them, and e-mail them to ISCD headquarters since February 2009. We compared ISCD’s interim process against Standards for Internal Control in the Federal Government to identify the extent to which DHS’s process was in alignment with these standards. In addition, to identify practices that are used to address whistleblower reports and reports of retaliation in comparable federal settings, we interviewed officials who DHS had consulted with at the Department of Labor’s Occupational Safety and Health Administration (OSHA), Nuclear Regulatory Commission, and Environmental Protection Agency, and analyzed related documents, including OSHA’s draft paper on recommended practices for employers for preventing and addressing retaliation. To determine if DHS worked in partnership with industry associations and labor organizations to inform them of ISCD’s whistleblower process and related whistleblower rights under federal law, and to obtain industry and labor perspectives on ISCD’s interim process for addressing reports of potential CFATS violations, we interviewed officials from ISCD and all six industry associations and labor organizations that ISCD officials told us they met with. The industry associations were three sector coordinating councils— Chemical, Food and Agriculture, and Oil and Natural Gas. The labor organizations were the International Brotherhood of Teamsters, International Chemical Workers Union Council, and United Steelworkers Union. The information we gathered from these six organizations is not generalizable, but provides perspectives on ISCD’s coordination with them regarding ISCD’s whistleblower process. We conducted this performance audit from September 2015 to July 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. Appendix II: The Chemical Facility Anti- Terrorism Standards Regulation and Process The Chemical Facility Anti-Terrorism Standards (CFATS) regulation and the Protecting and Securing Chemical Facilities from Terrorist Attacks Act of 2014 (CFATS Act of 2014) outline how the Department of Homeland Security’s (DHS) Infrastructure Security Compliance Division (ISCD) is to administer the CFATS program. Specifically, any facility that possesses any of the 322 chemicals of interest (COI) in quantities that meet or exceed the screening threshold quantities established by DHS for those COI are required to use ISCD’s Chemical Security Assessment Tool (CSAT)—a web-based application through which owners and operators of facilities with COI are to provide information about the facility—to complete a Top-Screen. The Top-Screen is the initial screening tool whereby a chemical facility in possession of a COI at the requisite thresholds is to provide ISCD data, including the name and location of the facility and the COI and their quantities at the site. ISCD’s risk assessment approach, which relies on data from the Top- Screen, among other sources, is based on three security issues: (1) release (toxic, flammable, and explosive) chemicals with the potential for impacts within and beyond a facility; (2) theft or diversion; and (3) sabotage, depending on the type of risk associated with the COI. Release: For the release threat, ISCD’s approach assumes that a terrorist will release the COI at the facility and then estimates the risk to the facility and surrounding population. Facilities with toxic release chemicals are to calculate and report in their Top-Screen submission the Distance of Concern—which represents the radius of an area in which exposure to a toxic chemical cloud from a release event could cause serious injury or fatalities from short- term exposure. ISCD uses the Distance of Concern to estimate the number of fatalities from an intentional toxic release and to categorize the risk posed by this facility. The Top-Screen directs respondents to use an online tool called RMP*Comp to calculate the Distance of Concern. RMP*Comp takes inputs such as the quantity of chemical that could be released and the surrounding terrain type to determine the Distance of Concern. Theft or diversion: For theft or diversion, the approach assumes that a terrorist will steal or have the COI diverted to him or herself and then estimates the risk of a terrorist attack using the COI to cause the most harm at an unspecified off-site location. Sabotage: For sabotage, the approach assumes that a terrorist will cause water to be mixed with a COI that is shipped from the facility, creating a toxic release at an unspecified location, and then estimates the risk to a medium-sized U.S. city. If, according to ISCD’s automated assessment of information provided via the Top-Screen, the facility is preliminarily categorized to be high-risk it becomes a “covered chemical facility,” and ISCD is to notify the facility of its preliminary placement in one of four risk-based tiers—tier 1, 2, 3, or 4. If ISCD does not categorize the chemical facility as high-risk, ISCD does not assign the facility to one of these four risk-based tiers and the facility is not subject to additional requirements under the CFATS regulation. Facilities that ISCD preliminarily categorizes to be high-risk—covered chemical facilities—are required to then complete the CSAT security vulnerability assessment, which includes the identification of potential critical assets at the facility, and a related vulnerability analysis. ISCD is to review the security vulnerability assessment to confirm and notify the facility as to whether the facility remains categorized as high-risk and, if so, about its final placement in one of the four tiers. Once a covered chemical facility is assigned a final tier, the facility may use CSAT to submit a site security plan (SSP) or submit an Alternative Security Program in lieu of the CSAT SSP. The security plan is to describe the existing and planned security measures to be implemented to address the vulnerabilities identified in the security vulnerability assessment, and identify and describe how existing and planned security measures selected by the facility are to address the applicable risk-based performance standards. To meet risk-based performance standards, covered facilities may choose the security programs or processes they deem appropriate to address the performance standards so long as ISCD determines that the facilities achieve the requisite level of performance on each of the applicable areas in their existing and agreed-upon planned measures. To determine whether facilities achieve the requisite level of performance for each of the applicable areas, ISCD is to conduct a preliminary review of the facility’s security plan to determine whether it meets the risk-based regulatory requirements. If these requirements appear to be satisfied, ISCD is to issue a letter of authorization for the plan, and conduct an authorization inspection of the facility to determine whether to approve the plan. Upon inspection of the facility, if ISCD determines that the plan satisfies the CFATS requirements, it will issue a letter of approval to the facility, which is to then implement the approved SSP. If ISCD determines that the plan does not satisfy CFATS requirements, ISCD then notifies the facility of any deficiencies and the facility must submit a revised plan for correcting them. Following ISCD’s approval of a facility’s SSP, in order to assess compliance with CFATS requirements as addressed through the approved SSP, ISCD conducts a compliance inspection (CI) of the covered facilities. CIs are to follow specific standard operating procedures that focus on verifying existing measures and the implementation and effectiveness of planned measures, including dates implemented, as well as verifying and reviewing any significant changes in the facility’s security posture. If through a compliance inspection it is determined a facility has not fully implemented security measures as outlined in its approved site security plan, ISCD is to provide the facility with written notification that clearly identifies the deficiencies in the SSP and will work with the facility toward achieving full compliance or, if warranted, take enforcement action. For example, the CFATS regulation provides that an order compelling a facility to take appropriate action may be issued if the facility was found to be in violation of any part of the regulation. If a facility were to violate this initial order, an order assessing a civil penalty of up to $25,000 per day or to cease operations, or both, may be issued. According to ISCD guidance, inspectors conducting a CI are to document in a CI report any necessary enforcement actions that may result from the inspection, including, among others, security measures not implemented in accordance with the SSP. ISCD guidance further provides that inspectors are not to recommend enforcement actions where issues identified during a CI are quickly remedied on-site; however, inspectors are to document their finding in the CI report. Inspection teams are to submit their CI report to ISCD management for review and approval within 25 business days from the inspection completion. ISCD management is to then determine whether a facility is in compliance with their approved SSP or whether to take enforcement actions. Figure 3 illustrates the CFATS regulatory process. Appendix III: Analysis of Calls Received by the Department of Homeland Security’s Infrastructure Security Compliance Division from February 2009 to June 15, 2015 In February 2009, the Department of Homeland Security’s (DHS) Infrastructure Security Compliance Division (ISCD) began receiving calls related to Chemical Facility Anti-Terrorism Standards (CFATS) via a telephone tip line that ISCD established. ISCD received 345 calls via the telephone tip line from February 2009 to June 15, 2015, the day before ISCD implemented its whistleblower process for addressing CFATS reports in response to the Protecting and Securing Chemical Facilities from Terrorist Attacks Act of 2014 (CFATS Act of 2014). DHS officials stated that there was no requirement for DHS to address CFATS whistleblower reports prior to the act. Starting on June 16, 2015, ISCD implemented a whistleblower process and procedures for addressing CFATS reports, including those received via its telephone tip line, and began to collect and track information for each report in an electronic spreadsheet. Of the 345 calls that ISCD received before implementing the interim process for addressing whistleblower reports, we identified 46 calls (13 percent) that may have involved potential CFATS violations. ISCD officials stated that, at the time they received and vetted the calls, they determined that none of the 345 calls involved CFATS violations. We were not able to reconcile the differences between our determinations and ISCD’s determinations because ISCD officials said they did not consistently document their reviews of the calls, any actions taken, or decisions. Also, our analysis was limited to the transcriptions of each tip line call and did not include any additional documentation. Therefore, our analysis is not intended to assess ISCD’s performance in addressing these reports, but to provide perspective on the types of calls that ISCD received prior to implementing the interim process for addressing reports of potential CFATS violations. Table 3 shows our analysis of the 345 calls that ISCD received via its telephone tip line from February 2009 to June 15, 2015. Table 4 shows the 46 calls that we determined may have involved potential CFATS violations during fiscal years 2009 to 2015 by type of call, based on the information contained in the calls. To provide further insight into the types of calls that ISCD received via the telephone tip line from February 2009 to June 2015, table 5 describes six examples of the calls—three that we determined were not related to CFATS and three that we determined may have involved potential CFATS violations, based on the information contained in the calls. Appendix IV: Summary of the Department of Homeland Security’s Efforts to Develop and Implement a Process and Procedures for Whistleblower Reports Related to Chemical Facility Anti-Terrorism Standards The Department of Homeland Security’s (DHS) Infrastructure Security Compliance Division (ISCD) developed a process and procedures to address reports of potential violations of Chemical Facility Anti-Terrorism Standards (CFATS). The process and procedures were implemented on June 16, 2015. Table 6 describes ISCD’s efforts to develop and implement the process and procedures for the provisions related to a whistleblower procedure in the Protecting and Securing Chemical Facilities from Terrorist Attacks Act of 2014 (CFATS Act of 2014). Appendix V: Comments from the Department of Homeland Security Appendix VI: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, Ben Atwater, Assistant Director, and Joseph E. Dewechter, Analyst-in-Charge, managed this audit engagement. Michele Fejfar, Eric Hauswirth, Tracey King, Natalie Maddox, and Tovah Rom made significant contributions to this report.

The CFATS program is intended to ensure the security of the nation's chemical infrastructure by assessing risks and requiring the implementation of measures to protect high-risk chemical facilities. The CFATS Act of 2014 required DHS to establish a whistleblower process. Employees and contractors at hundreds of thousands of U.S. facilities with hazardous chemicals can play an important role in helping to ensure CFATS compliance by submitting a whistleblower report when they suspect noncompliance. Whistleblowers who disclose wrongdoing at chemical facilities can save lives and help improve public safety and health. The CFATS Act of 2014 also requires GAO to review the CFATS whistleblower process. This report addresses (1) the number and types of CFATS whistleblower reports DHS received, and any actions DHS took as a result, and (2) the extent to which DHS has implemented and followed a process to address the whistleblower reports, including reports of retaliation against whistleblowers. GAO reviewed laws, regulations, and CFATS program documents; analyzed whistleblower reports DHS received from June 16, 2015 to April 19, 2016; and interviewed officials responsible for vetting the reports and deciding how to address them. Of the 105 reports that the Department of Homeland Security (DHS) received under its interim process for whistleblowers from June 16, 2015 (the date DHS was mandated to begin collecting reports by), to April 19, 2016, DHS closed 97 because they did not pertain to Chemical Facility Anti-Terrorism Standards (CFATS) regulations, and referred 70 of the 97 to other federal agencies with legal authority relevant to the reports. DHS determined that 8 of the 105 reports involved potential CFATS violations, and after further review, that 1 report involved an actual CFATS violation. As a result of this report, DHS required the chemical facility to register with DHS as a CFATS-regulated facility. Total Reports Received by DHS and Disposition for Reports, June 16, 2015 to April 19, 2016 In June 2015, DHS implemented an interim process to respond to whistleblower reports involving CFATS and has followed its process since then; however, DHS does not have a documented process and procedures to investigate whistleblower retaliation reports. The Protecting and Securing Chemical Facilities from Terrorist Attacks Act of 2014 (CFATS Act of 2014) prohibits retaliation against whistleblowers. According to DHS, the department has not received a report of whistleblower retaliation that it substantiated since implementing the interim process and any future retaliation reports would be addressed on a case-by-case basis. However, without a documented process and procedures for investigating whistleblower retaliation reports, DHS may not be able to effectively and efficiently investigate any future retaliation reports. In addition, DHS maintains a telephone tip line and a website with an e-mail address to receive CFATS whistleblower reports. However, the tip line greeting provides no guidance and the website provides limited guidance about the type of information that would be most useful to DHS for addressing the reports. GAO's analysis of 105 reports received by DHS from June 16, 2015, to April 19, 2016, identified challenges that DHS experienced in vetting reports due to insufficient information, such as the name or location of the chemical facility. Additional guidance explaining the detailed information that DHS needs to review reports could help reduce the amount of follow-up time to obtain this information.

Background Engagement with Partner Nation Security Forces through Security Cooperation DOD engages with partner nation security forces through a range of security cooperation efforts. Security cooperation is the broad term used to define those activities undertaken by DOD to build relationships that promote specified U.S. interests, build partner nations’ capabilities for self-defense and coalition operations, and provide U.S. forces with peacetime and contingency access to host nations. These activities are carried out under various statutory authorities and programs that allow DOD to engage with partner nations across a range of activities, such as sending out military liaison teams, conducting seminars and conferences, and training and equipping partner nations’ security forces in support of U.S. national policies and objectives. DOD also provides forces to support the Department of State’s security assistance programs, such as the Africa Contingency Operations Training and Assistance program. DOD coordinates security cooperation activities with and through the Department of State and its Embassy Country Teams. AFRICOM’s Planning Processes AFRICOM is one of DOD’s six geographic combatant commands and is responsible for a variety of functions including planning for and conducting missions such as security cooperation, humanitarian assistance, and combat operations. AFRICOM is supported by its component commands—USARAF, Air Forces Africa, Naval Forces Africa, Marine Forces Africa, Special Operations Command Africa—which, along with each of the military services, are responsible for organizing, training and equipping their forces to execute AFRICOM operational requirements. As part of its planning responsibilities, AFRICOM develops a campaign plan, which is a joint, multiyear plan that reflects the command’s strategy to achieve certain end states within its area of responsibility, including activities to shape the environment and deter conflict. This plan is informed by a hierarchy of national and strategic guidance and guides the development, organization, and integration of activities conducted in Africa. AFRICOM’s current campaign plan sets forth specific lines of effort, such as countering violent extremist organizations, strengthening defense institutions, and peacekeeping and crisis response. The campaign plan also includes intermediate military objectives, which are intended to be resource-informed, measurable, and achievable objectives with a one-to-two year time horizon that build toward the command’s identified end states. Subordinate campaign plans, such as the East Africa Campaign Plan and individual country cooperation plans, which are currently being developed, are intended to further define and scope these intermediate military objectives by region and country. In addition, AFRICOM’s country cooperation plans for each country in Africa are intended to include objectives, focus areas, and milestones that are specific to the country and identify the program resources available to meet those objectives and milestones, which then in turn drive the identification of individual security cooperation activities.These planning processes are depicted in figure 1 below. AFRICOM’s security cooperation programs in Africa are coordinated through Offices of Security Cooperation and Defense Attaché Offices in approximately 38 nations. These offices are staffed by military personnel and are located within the U.S. embassies. They manage DOD’s security cooperation programs under the guidance of AFRICOM and serve as DOD’s representatives to the U.S. Embassy Country Teams to ensure that DOD activities conducted in country are coordinated with and through the Department of State. Their mission is to enhance the long-term bilateral defense relationship between the United States and the host nation. Army Brigades Allocated to AFRICOM AFRICOM submits requests for forces to support its operations— including security cooperation activities—through the Global Force Management process. The Global Force Management process enables DOD to manage the availability of U.S. military forces by assigning and allocating forces to meet rotational and emergent force requirements within each geographic command. AFRICOM and USARAF officials said that obtaining forces through this process to support individual security cooperation activities can be slow and unpredictable because each request for forces competes with requests from the other geographic combatant commands and with other strategic priorities, which can make it difficult for the commands to plan for security cooperation or respond to emerging requirements. To better support the combatant commands and be globally responsive and regionally engaged, the Army is in the process of aligning its total force to geographic combatant commands—including the Active Component, Army National Guard, and Army Reserves. Under its regional alignment of forces policy, the Army has identified three categories of aligned forces: Assignment: Assigned forces are placed under a combatant commander’s authority for a relatively permanent period of time at the direction of the Secretary of Defense through the Global Force Management process. Allocation: Allocated forces are temporarily provided on a rotational basis to combatant commands through the Global Force Management process in response to specific requests for capabilities and at the direction of the Secretary of Defense. Allocation conveys specific authorities for the use of the forces by combatant commands. The Army brigade combat teams aligned to AFRICOM since 2013 are allocated forces. Service Retained, Combatant Commander Aligned: All Army forces that are not assigned or allocated fall into this category. This type of alignment does not create any formal relationship between the aligned forces and combatant commands but does allow for some coordination between the two. The allocation of a brigade to AFRICOM in 2013 was initiated in response to AFRICOM’s request for a brigade combat team through the Global Force Management system to conduct security cooperation and other activities in support of its campaign plan. Historically, AFRICOM had to submit a separate request for forces through the Global Force Management process to support each individual security cooperation activity that the command conducted. However, with this allocation, AFRICOM was granted authority by the Secretary of Defense to utilize personnel from the brigade to conduct individual security cooperation activities in accordance with strategic guidance and within certain timeframes. AFRICOM maintains accountability of the engagements by producing and endorsing an annual operations order to the Joint Staff and Army Forces Command. Any other use of the brigade, or request for capabilities that the allocated brigade cannot provide, requires AFRICOM to submit a new request for forces through the Global Force Management system. Since 2013, three brigade combat teams have been allocated to AFRICOM. 2nd Brigade, 1st Infantry Division was the first brigade allocated to AFRICOM and was employed in support of AFRICOM from April 2013 to June 2014. 4th Brigade, 1st Infantry Division was employed in support of AFRICOM from June 2014 to February 2015. 4th Brigade, 1st Armored Division is expected to be employed in support of AFRICOM from February 2015 to October 2015. 4th Brigade, 1st Armored Division was reflagged as 3rd Brigade, 1st Armored Division during its employment in Africa as part of the Army’s ongoing restructuring initiatives, but we will refer to it consistently as 4th Brigade throughout this report. 4th Brigade, 1st Armored Division is also expected to have a shorter period of allocation as the Army is moving toward using infantry or stryker brigades instead of armored brigades to support the mission in Africa. of Africa, which required each brigade to deploy a battalion task force to Camp Lemonnier in Djibouti for the duration of its alignment. These battalion task forces also conduct some security cooperation activities in support of the Combined Joint Task Force - Horn of Africa. In addition, the brigades have supported a significant number of activities for the Department of State, such as providing units or individual mentors to train African forces for peace keeping support operations. Figure 2 shows personnel from the 4th Brigade, 1st Infantry Division conducting live fire and search and seizure training in Senegal. In addition to supporting AFRICOM-directed security cooperation activities, Army guidance directs the brigades to maintain readiness for their core missions—to fight and win “decisive action” operations globally. Decisive action is broadly defined as tasks related to the continuous, simultaneous combinations of offense, defense, and stability or defense support of civil authorities. To achieve and maintain readiness for decisive action, the brigades conduct a combination of unit and individual training. They report their core mission readiness monthly in the Defense Readiness Reporting System, which provides the data that are used to assess readiness in several areas, including personnel availability, supply, equipment operability, and training. AFRICOM Identifies and Synchronizes Security Cooperation Activities, but the Allocated Brigades Sometimes Lack Key Information about the Activities The brigades have conducted a range of security cooperation activities identified and synchronized through AFRICOM’s campaign planning process. Within the construct of AFRICOM’s broader planning processes, the Offices of Security Cooperation and USARAF have primary responsibility to develop and coordinate individual security cooperation activities conducted by the brigades based on theater- and country-level objectives. However, the brigades sometimes lacked timely and complete information required to effectively carry out these activities. The Brigades Have Conducted Hundreds of Security Cooperation Activities throughout Africa Since they were first allocated in 2013, the brigades have conducted hundreds of security cooperation activities in Africa. These activities have ranged in focus, duration, complexity, and location. Figure 3 below provides information on the activities conducted by the brigades, including some examples of specific activities, as reported by the brigades or parent divisions. AFRICOM, USARAF, the Combined Joint Task Force - Horn of Africa, and U.S. embassy officials stated that the brigades’ availability and capabilities have been an important tool for addressing increased demand for security cooperation activities in Africa and supporting efforts to enhance partner nation capabilities. During our review of after action reports submitted by the 4th Brigade, 1st Infantry Division, which was the brigade allocated to AFRICOM during the majority of our review, brigade personnel also generally reported that their efforts enhanced the partner nations’ capabilities after the activity was completed. AFRICOM officials told us that the Command is in the process of rewriting its intermediate military objectives and developing associated measures of effectiveness to assess security cooperation activity outcomes so that they can ascertain the effect of these activities. The Army and USARAF have also been examining other options for meeting security cooperation requirements in Africa in the future. For instance, USARAF has proposed that the Army make adjustments to the alignment of forces in AFRICOM, including allocating or assigning an entire division—which is substantially larger than a brigade—and either assigning or habitually allocating units in order to maintain institutional knowledge among forces and facilitate long-term relationships, among other expected benefits. The Army also is examining the possibility of creating a multi-functional battalion task force that could potentially be allocated to AFRICOM to conduct smaller-scale security cooperation activities. The degree to which such proposals may be implemented in the future is unclear at this time. AFRICOM’s Campaign Planning Process Includes Mechanisms to Improve Synchronization of Security Cooperation Plans and Activities across Components Development of security cooperation activities begins with AFRICOM’s planning process. AFRICOM’s campaign planning process includes mechanisms to synchronize security cooperation activities across the command. Planning for security cooperation involves multiple stakeholders, including each of the service component commands, AFRICOM’s special operations component, the Combined Joint Task Force-Horn of Africa, program managers responsible for identifying resources to support security cooperation activities, and the Offices of Security Cooperation at U.S. embassies in Africa. Each of the components and the task force plans for and conducts individual security cooperation activities that are derived from the campaign planning process, utilizing available forces. AFRICOM officials said that synchronizing activities across the command can be a challenge, but the command has taken several steps to refine and synchronize security cooperation activities including establishing a number of mechanisms as part of AFRICOM’s annual campaign planning process. According to officials, these mechanisms are intended to achieve unity of effort by the different stakeholders and to ensure that the activities being conducted in Africa support the command’s identified objectives. Such mechanisms include Conferences: AFRICOM leads interagency conferences to discuss theater- and country-level objectives, resources, and supporting activities. For example, in September 2014, AFRICOM held its annual Theater Synchronization Conference, which involved officials from AFRICOM, its components, the Combined Joint Task Force – Horn of Africa, and Offices of Security Cooperation. When we observed the conference, theater, regional, and country objectives and supporting activities were discussed and refined with the intention of synchronizing planned activities within and across countries. Similarly, in January 2015, the Combined Joint Task Force – Horn of Africa held its first annual Theater Security Cooperation Synchronization Conference, which brought together planners from AFRICOM and the service components, as well as the Offices of Security Cooperation to refine and synchronize regional- and country-level objectives, milestones, and security cooperation activities for the 10 countries in the Task Force’s area of interest. Guidance Related to the Combined Joint Task Force – Horn of Africa: With each of the components supporting activities in East Africa, AFRICOM recently instructed the service components to coordinate activities conducted in East Africa through the Combined Joint Task Force’s headquarters to ensure that the Task Force has visibility over efforts in its area of interest. The Combined Joint Task Force has also established a Joint Activities Synchronization Board, which it uses to validate and approve security cooperation activities to ensure that they are aligned with the command’s objectives. Country-Level Meetings: As part of AFRICOM’s process for developing country plans, it holds country coordination meetings— typically for those countries with a large number of engagements— that include the components and officials from the host nation to develop, review, and synchronize proposed security cooperation activities in the broader context of country and regional goals. For instance, the Office of Security Cooperation in Uganda held a program review meeting with the Ugandan People’s Defense Forces in December 2014 to discuss Ugandan capability needs and coordinate security cooperation efforts for the coming year. Officials said that while it would be beneficial to hold these in each country annually, it is logistically difficult to do so. According to AFRICOM and Department of State officials, each country plan should be reviewed and validated by the corresponding U.S. embassy to ensure that DOD’s objectives and supporting activities are aligned with and in support of Department of State objectives and plans within that country. The country plans also identify AFRICOM component responsibilities for supporting key objectives, focus areas, and milestones. The Offices of Security Cooperation and USARAF Identify, Develop, and Support Individual Security Cooperation Activities for the Brigades to Conduct Based on the objectives and end states identified through AFRICOM’s broader planning processes, the Offices of Security Cooperation and USARAF have key roles in identifying, developing, and supporting individual security cooperation activities for the brigades. Officials from AFRICOM, USARAF, and Offices of Security Cooperation told us that the Offices of Security Cooperation generate many of the initial concepts for security cooperation activities ultimately supported by the brigades, based on their evaluation of the country-level objectives and the force capability needs of the host nation. Because they are typically located in the U.S. embassies, Office of Security Cooperation personnel are often best positioned to inform country-level capability assessments and coordinate with the host nations to identify their needs. For example, one Office of Security Cooperation Chief stated that he routinely attends security cooperation activities conducted by the U.S. forces in his country, and that doing so provides him with an opportunity to assess the performance of the country’s security forces. He uses this information to develop ideas for further security cooperation activities. Offices of Security Cooperation also represent the interests of the U.S. embassy Country Team and are responsible for ensuring that security cooperation activities conducted by DOD, including the brigades, are aligned with the objectives and efforts of the U.S. Ambassador in that country. Once proposed activities have been identified by the Offices of Security of Cooperation, USARAF is responsible for further developing the concepts for those activities in coordination with the Offices of Security Cooperation, identifying resources and authorities to support the activities, and validating the proposed activities in consideration of the country-level objectives and in coordination with AFRICOM. USARAF has established a working group and review boards to facilitate this process, including a security cooperation working group to guide and coordinate concept development, and synchronization, resourcing and final decision boards that collectively review and determine whether to approve and move forward with planning an activity. USARAF officials said that, in addition to these mechanisms, component officials responsible for planning activities are consistently engaged in informal conversations with the Offices of Security Cooperation regarding the proposed activities. Security cooperation activities that are identified and validated through these processes are tasked to the brigades and other executing units on both annual and emergent bases. USARAF provides an annual baseline projection of validated security cooperation activities for the coming fiscal year—via AFRICOM and Army Forces Command— to the brigades to aid Emergent security cooperation activities may also in their preparation.be generated for execution in the same fiscal year and are tasked to the brigades on an individual basis as they are approved or through quarterly updates to USARAF’s annual projection. For example, the United States is in the process of equipping one country with Mine Resistant Ambush Protected vehicles to support its deployments to Somalia, but late changes to the location where the vehicles are being shipped was expected to result in potential emergent requirements for the brigades, to provide training to the host nation on those vehicles. According to USARAF planning documents and officials, there are an increasing number of emergent activities, which the brigades are being used to support. USARAF officials told us that emergent activities accounted for 51 percent of 2nd Brigade, 1st Infantry Division’s activities. AFRICOM and USARAF officials attributed the number of emergent activities in Africa to a dynamic planning environment with security threats and opportunities that change quickly and to the uncertainty of funding, among other factors. USARAF officials told us that as a result of this environment, emergent activities may develop with limited warning, challenging the command’s planning. Furthermore, planned activities are frequently cancelled or delayed as a result of the dynamic environment. For example, the 4th Brigade, 1st Armored Division was tasked to support 188 baseline and emergent activities as of May 2015 according to brigade documents. Of the 188 activities that the brigade was tasked with, 74 have been canceled and 26 placed on hold; USARAF officials said these cancellations and delays are due mostly to changing conditions on the ground that are driven by the host nation. The Brigades Sometimes Lack Timely and Complete Information Necessary to Effectively Conduct Security Cooperation Activities While USARAF and the Offices of Security Cooperation are responsible for supporting the brigades’ preparation for the individual activities, officials from each brigade also told us that the information they receive for upcoming security cooperation activities is often untimely or incomplete. USARAF is generally responsible for clarifying key information about the activities with the Office of Security Cooperation while the Office of Security Cooperation is responsible for discussing activity logistics with the host nation, including who will attend, what equipment is available, and where the activity will take place. To enhance the brigades’ awareness of activities and facilitate coordination, the brigades have each embedded a liaison officer with a small support team inside USARAF’s headquarters. This team provides the brigades with updated activity information and relays any questions the brigades may have, among other things. In addition to the formal notifications that the brigades receive, USARAF’s fiscal year 2015 Operations Order, which establishes policies to guide USARAF’s planning efforts, states that USARAF personnel are responsible for developing task orders for each security cooperation activity.provide task orders to the brigades 90 days in advance of each activity to guide their preparation. Task orders are intended to identify an activity’s key details, such as the task, purpose, and desired end state. USARAF officials noted that they try to Although USARAF has a process in place to provide task orders to executing units, we found that the brigades have not always received activity information in a timely manner. Brigade officials told us that task orders are often provided late and sometimes not at all. Specifically, brigade officials from one team that deployed reported that they did not receive a task order before deploying to conduct a logistics training activity. These officials obtained a copy of the final task order through alternative communication channels five days after arriving in country and while brigade officials used previous experience to prepare as best as they could, they did not receive a clear breakdown of the activities objectives—which would have helped them develop a better program of instruction—before deploying. USARAF officials said that while offices responsible for planning and refining individual activities aim to provide task orders 90 days in advance of an activity, they often provide them to the brigades less than 30 days before execution, which in turn challenges the brigades’ ability to prepare for the activity. According to officials, these delays in providing some task orders are due to the challenges of planning activities within a dynamic environment. USARAF officials also said that while some task orders are very detailed, others may lack key details due to a number of challenges including the planners’ ability to confirm activity details with the host nation through the Offices of Security Cooperation prior to the activity execution date or the increasing workload of USARAF staff, who are often planning multiple activities at any one time. Officials from each brigade told us that the information they receive about upcoming security cooperation activities is often untimely or incomplete. The brigades may be aware before deploying that they do not have complete information, but they are often unable to fully communicate and collaborate with USARAF and the applicable Office of Security Cooperation to get the information they need in the right time frame because they may not have approval from USARAF to contact the Offices of Security Cooperation directly or may not know whom to speak with at USARAF. In other instances, the brigades may not know that there is an information gap or miscommunication until they arrive in country. In addition, officials from each brigade cited concerns regarding the completeness of the information they receive before an activity, which they said can affect their ability to effectively prepare for and conduct security cooperation activities. Brigade officials identified the following issues they have experienced: Objectives unclear or inaccurate: Brigade officials cited instances where activity objectives were not clearly articulated to them or where they prepared to conduct one type of activity when the Office of Security Cooperation and the host nation had expected them to conduct a different activity. For example, one team deployed for an activity with the understanding that they would be conducting artillery training with the host nation, but when the team arrived in country it discovered that it was supposed to conduct a site survey for future training activities. This misunderstanding was not clear to the brigade, the Office of Security Cooperation, or USARAF until the team arrived in country. As a result, brigade officials had to work with the country team to quickly revise their approach to the execution of the activity and then return two months later to conduct the initially planned activity. In an after-action report documenting this activity, brigade personnel noted that earlier and more direct communication with security cooperation personnel at the embassy are necessary to confirm the purpose and intent of activities before execution. In the case of another activity, brigade personnel deployed to conduct a survey of training sites, plans, and logistics for future activities. Brigade personnel noted that in the lead up to the activity it was difficult to understand the purpose of their survey which made it difficult to properly plan and prepare for the activity. The personnel that conducted the activity stated that once the brigade is tasked with an activity, it would be helpful for USARAF and the brigade personnel executing the activity to discuss the activity in advance. Personnel skill requirements not clearly defined: Brigade officials cited instances where the activity information they received did not clearly identify personnel skill requirements and that, as a result, the brigades did not deploy the right personnel to fully conduct the activity. For example, brigade officials who deployed to conduct vehicle maintenance training said that they did not find out until two weeks prior to deploying what type of vehicles they would be training host nation personnel to maintain. As a result, they did not have enough time to train their personnel specifically for maintaining those types of vehicles before they deployed. Instead, they had to send general mechanics, who, because they did not have expertise on the specific vehicles themselves, were not fully prepared to train host country personnel to maintain them. Key information about host nation security forces’ capabilities missing or incorrect: Brigade officials said that they often did not have sufficient information about the host nation security forces’ capabilities to effectively target their training efforts, which forced them to refine or develop new programs of instruction mid-event. For example, brigade personnel deployed to provide field artillery training to a host nation with the understanding that personnel attending the training from the host nation would have at least a basic level of proficiency that would enable brigade trainers to focus the activity on refining and enhancing the host nation’s fire support skills. When brigade personnel arrived in the host nation they learned that none of the artillery personnel present had conducted live fire training with their howitzers and other large caliber mortars in over a year. As a result, brigade staff spent time developing follow-on artillery training to bring the host nation’s live fire artillery skills to a basic proficiency level, instead of working with the available artillery personnel to refine and advance their abilities. Logistics and support incorrect or uncoordinated: Brigade officials noted instances where information about an activity—such as translation services, equipment logistics and communications plans— was not fully coordinated before deploying. For example, brigade officials deployed to a host nation to provide training on preparing intelligence information and when they arrived in country they discovered that they were required to pay for their interpreters and drivers directly with cash, which was unexpected. Brigade personnel were unable to use the local ATMs to obtain the cash, so an USARAF official present had to cover the costs. Had the USARAF official not been present, the brigade personnel may have had difficulty completing the activity. In another example, brigade personnel deployed to conduct vehicle maintenance training. However, when the team arrived, the host nation asked to change the starting date twice which the brigade personnel were not able to support. The brigade personnel sent to conduct this activity noted in their after action report that USARAF, the embassy, and host nation need to better coordinate key activity logistics, such as the starting date. USARAF and Office of Security Cooperation officials noted that they rely on each other to develop and coordinate activities, but officials cited challenges that limit their ability to do so. USARAF officials stated that the Offices of Security Cooperation, which may be staffed by personnel from different services (e.g., the Navy or Air Force), may not always know what questions or information they should be communicating to the host nation to effectively shape Army security cooperation activities. In addition, according to USARAF and Office of Security Cooperation officials, the increasing number of activities being conducted in Africa, coupled with manning shortages, challenges the ability of the Offices of Security Cooperation to fully coordinate individual activities with the host nation, AFRICOM, USARAF, the other service components, and DOD executing units, including the brigades. Furthermore, Office of Security Cooperation personnel stated they may have limited insight into the development and validation of security cooperation activities proposed by USARAF, which makes it challenging to coordinate and refine activities. For instance, one Office of Security Cooperation chief noted that he had proposed several activities based on his assessment of the host nation’s security forces, but he received a list of approved activities from USARAF that was significantly different and was unaware of how those activities had been developed and why certain capabilities were being targeted. Another Office of Security Cooperation chief said that he sometimes receives activity proposals from AFRICOM and its components that, particularly for emergent activities, do not include specifics on the activity. This lack of information challenges his ability to coordinate those activities with the host nation. In those instances, he said that he will ask for greater details on the activity or put such activities on hold until he can obtain sufficient information from the component. According to the Army’s Field Manual for Army Support to Security Cooperation, security cooperation personnel should have a clear and timely understanding of their objectives and operational environment to effectively plan and conduct their activities. Furthermore, according to GAO leading practices for interagency coordination, when coordination mechanisms are not formalized or fully utilized, the result can be a patchwork of activities that waste scarce funds and limit the effectiveness of missions. Defining coordination mechanisms can help agencies clarify key details about strategy implementation, such as the purpose of an activity. Brigades sometimes lack complete and timely information, which they need to effectively conduct activities, because USARAF, which is responsible for formally validating security cooperation activities, has not established a formal mechanism to consistently share information with country stakeholders such as the Office of Security Cooperation and the brigades in order to address information gaps and shape the activity in advance. Conferences like AFRICOM’s Theater Synchronization Conference can provide an opportunity to discuss and synchronize activities on an annual basis, but the significant number of emergent activities and frequent changes to planned activities limits their effectiveness for refining the details of activities leading up to execution. Further, while USARAF’s fiscal year 2015 Operation Order identifies the need to coordinate activity concepts with the Offices of Security Cooperation, it does not specify a clear mechanism for doing so and USARAF, the Offices of Security Cooperation, and the brigades lack a collective venue for coordination, which they would need in order to respond to dynamic activity requirements and to ensure a shared For instance, officials said that understanding of critical information.USARAF planners and the Offices of Security Cooperation informally contact one another on an individual basis to discuss proposed activities, but they do not consistently and formally meet to discuss upcoming activities. Furthermore, the brigades are rarely involved in these informal conversations and often do not have the authority to contact the Offices of Security Cooperation directly until shortly before they deploy. Given the challenges faced by the Offices of Security Cooperation, Office of Security Cooperation officials said that the best method for refining activity concepts and ensuring that they are completed in a timely manner is to hold a meeting where key stakeholders can discuss activity details in advance. Such a meeting could also help to refine the task orders that USARAF issues to the brigades to ensure that they capture all critical information and could provide an additional venue to further improve synchronization of activities within AFRICOM. Figure 4 depicts the fragmented way in which activity information is coordinated between USARAF, the Offices of Security Cooperation, and the brigades. Without a formal and consistent mechanism for stakeholders to coordinate upcoming activities and ensure that information about the activities is timely and complete, the brigades’ ability to effectively conduct security cooperation activities may be challenged and the resources invested may not have the anticipated effect. The Brigades Have Generally Been Prepared to Meet Requirements in Africa, but Limitations Exist With Regard to Mission-Specific Training, Equipping, and Access to Passports The brigades have been trained and equipped for their core decisive- action missions, which has generally prepared them to meet requirements in Africa. The brigades conduct decisive-action training for their core missions and then augment this training with programs they develop specifically to prepare for deployments to Africa, but opportunities exist to enhance training for the allocated brigades. All three of the brigades that have been allocated to AFRICOM to date have experienced gaps in communications capabilities, because mission-specific equipment requirements for operating in Africa have not been clearly identified, and no consistent mechanism has been established to ensure that brigades have mission-specific equipment as they begin their missions. In addition, delays in obtaining official passports have affected the brigades’ ability to meet certain time and personnel requirements, sometimes leading to delayed activities or the deployment of personnel not considered the best- suited for the activity—simply because they had passports. Concerns Identified About Mission-Specific Training Programs that Augment Decisive-Action Training and Support Requirements in Africa The brigades are expected to train for both their decisive-action and AFRICOM-directed missions. To help accomplish this, Army Forces Command has published Regionally Aligned Forces Pre-Deployment Training Requirements to identify the decisive-action and mission-specific training required for regionally aligned force units, including the brigades allocated to AFRICOM. The brigades develop training programs to address these requirements, but Army stakeholders have identified some concerns about how brigade training is being conducted, supported, and funded. Brigades Develop Decisive- Action and Mission-Specific Training To date, three brigade combat teams have conducted both decisive- action and mission-specific training for deployments to Africa in support of AFRICOM and based on Army Forces Command guidance. The allocated brigades first conduct decisive-action training for their standard missions—including a rotation through one of the Army’s Combat Training Centers—in order to remain globally responsive. Army and brigade officials estimated that decisive-action training also addresses about 90 to 95 percent of the training required to support security cooperation and other activities in Africa. In addition, the Army Forces Command training requirements identify regionally-focused training to augment decisive- action training and prepare the allocated brigades to conduct security cooperation activities. This training includes regionally-focused culture, language, use of interpreters, non-standard weapons, and peace-keeping support operations, among other things. There is no standardized program of instruction for brigades allocated to AFRICOM, although individual organizations that support training may have standardized program offerings. Brigade commanders are expected to utilize the Army Forces Command training requirements as they analyze their missions to develop training for their units that will address both their decisive-action and AFRICOM mission-specific requirements. In some cases, the requirements specify how the brigades are to train for their missions in Africa, such as identifying which organization is to provide the training; in other cases, they do not. When no specific program is identified, the brigades have flexibility in determining how to meet the mission-specific training requirements. Figure 5 is a general time line of the brigades’ decisive-action and mission-specific training. To address tasks not covered as part of decisive-action training, Combat Training Center rotation, or through other specifically identified training organizations, each of the brigades has developed a mission-specific training program at its homestation. For example, as the first brigade allocated to AFRICOM, the 2nd Brigade, 1st Infantry Division developed a 5-day program referred to as Dagger University that included courses on the region, language, use of interpreters, embassy operations, and how to build rapport with partner nation forces. It also included situational exercises with cultural role players and simulated key leader engagements. The brigade used a number of external resources to develop this training, including the 162nd Infantry Training Brigade, the Army Training and Doctrine Command Culture Center, the Asymmetric Warfare Group, and the African Studies Department from nearby Kansas State University, which provided African cultural expertise and role players. The 4th Brigade, 1st Infantry Division created a similar program that it referred to as Dragon University. The 4th Brigade, 1st Armored Division also developed a program at its homestation referred to as Highlander University, but this program did not incorporate external training organizations—such as Army Training and Doctrine Command— to the same extent. Figure 6 shows brigade personnel first conducting mission-specific training at their homestation with the assistance of a role player and then interacting with security forces from Burkina Faso in 2014. USARAF, Army Forces Command, and brigade officials have generally expressed confidence in the brigades’ capabilities to develop and execute mission-specific training—with assistance from external organizations in certain key areas where they do not have organic expertise, such as peace-keeping operations and non-standard weapons. One brigade commander noted when a brigade manages its own mission-specific training rather than using a standardized curriculum it can maintain scheduling flexibility, and young leaders reap benefits as they learn to plan and develop training programs based on analyzing missions. However, Army stakeholders from a range of organizations have identified some concerns about how mission-specific training for regionally aligned forces is being conducted, supported, and funded, and in some cases they identified areas for improvement. For example, the Army held a Regionally Aligned Forces Table Top Exercise in December 2014 that included participants from across the Army to discuss challenges related to the implementation of the regionally aligned forces concept. One of the findings from this exercise was that the current unit approach to conducting mission-specific training is ad hoc, unfunded (i.e., no dedicated funding) and likely insufficient to meet all training requirements. The table top exercise also found that there is limited or poorly advertised institutional support for security cooperation and culture Findings from the and language training for regionally aligned units.table top exercise recommended that the Army identify capabilities to support regionally aligned forces training and facilitate unit training at homestation, including related funding. In addition, officials from Army Training and Doctrine Command said the brigades may not be aware of all of the training resources that exist in the Army and the extent to which the units take advantage of those resources is largely unit driven. For example, one Army Forces Command official said that the 85th Civil Affairs Brigade has expertise and training capabilities that the allocated brigades could leverage in support of their training programs, but it is not clear to what extent the allocated brigades are aware of this potential support. These officials noted that the Army does not have an entity to coordinate all of the organizations that can support training for regionally aligned forces consistently through different brigade rotations and may need a central organization with expertise to serve that function. In addition to providing training to regionally aligned forces, the 3rd Battalion, 353rd Regiment has also been tasked with other missions, such as training individuals and teams of advisors deploying to Afghanistan. from 2nd Brigade and 4th Brigade, 1st Infantry Division. According to documentation provided by 162nd Brigade officials, these training teams were funded by the 162nd and incorporated other enablers, such as contractors with regional expertise and the Army Training and Doctrine Command Culture Center. Officials from 3rd Battalion said that the battalion expects to be able to fund its own instructor and travel costs related to the trainings, but future allocated brigades will likely have to fund the costs of additional training enablers to augment these courses, such as contractors with regional cultural expertise. According to battalion officials, if brigades have to pay for the additional enablers, they might be less likely to use them, and the region-specific training might not be as extensive. In an effort to determine whether its mission-specific training approach for the regionally aligned forces was sufficient, the Army issued guidance in 2013 that established a requirement for Army Forces Command, with support from other Army training organizations, to conduct an assessment of the training and preparation of regionally aligned force units by January 2014, with follow-up assessments every six months. We have previously reported that training assessments provide opportunities to enhance the coordination, effectiveness, and efficiency of training. However, the Army may not have all of the information that it needs to make this determination or address stakeholder concerns because, as of March 2015, Army Forces Command had not completed this assessment. When we asked why the assessment had not been completed, officials from Army Forces Command said that the mission the brigades are conducting is not new and does not require a special assessment, as was initially thought when the requirement was established. In addition, these officials noted that every unit is currently assessed through brigade-level after-action reviews and the documentation of lessons learned. While an individual unit after-action review provides valuable insights on unit experiences, it may not provide the breadth of information necessary to address some of the concerns that were cited at the Army’s table top exercise or by other stakeholders. Given that three brigades have completed mission-specific training for AFRICOM-directed activities, and other brigades have been conducting training for missions in other geographic combatant commands, the Army should now be positioned to conduct an overall assessment of its approach to training aligned forces. The Army’s 2013 Fragmentary Order to the Regionally Aligned Forces Execute Order includes a framework for the required assessment that specifies assessment questions for aligned units and training enablers—for example, how training is certified and whether the training is sufficient—and identifies collection methods that provide a base of information, which could be expanded upon to include additional questions and information sources, in order to address the concerns about the training that have been identified by various stakeholders. The Army has also commissioned the RAND Corporation to conduct a study on the estimated operational and institutional support costs of regionally aligned forces, including training costs. This study is expected to be published in August 2015 and could further inform the Army’s assessment of its training approach. Absent an assessment of the allocated brigades’ mission-specific training that expands upon the framework the Army established in its 2013 fragmentary order and fully considers the training concerns that have been identified, such as the degree to which institutional-level coordination or management of training is needed and how training programs should be funded going forward, and whether adjustments to its training approach are needed, the Army may be missing opportunities to enhance the effectiveness and sufficiency of training for brigades allocated to AFRICOM. The Brigades’ Standard Equipment is Generally Sufficient to Support Activities in Africa but Gaps in Mission-Specific Equipment Remain The brigades allocated to AFRICOM have largely relied on their standard set of equipment to support their mission in Africa but have identified some capability gaps. The brigades are each equipped with the standard set of equipment needed to support their core decisive-action missions; they can leverage this equipment to support deployments in support of AFRICOM. According to Division and USARAF officials, the brigade’s standard equipment set is generally sufficient for the mission in Africa. However, all three of the brigades have identified some capability gaps related to equipment—in particular communications equipment needed to maintain command, control, and voice and data communications capabilities while operating in Africa. While the brigades’ standard equipment sets include communications equipment to support brigade and battalion-sized headquarters elements and for use in conjunction with large vehicles, they are not designed to support the many deployments by small teams required for the AFRICOM mission. Communications capability gaps can create risk for deployed teams by limiting their access to communications they need for operational control and safety and limiting the Commander’s situational awareness of deployed teams. Some of the communications equipment needs identified by the brigades are: Secure Internet Protocol Router/Non-Secure Internet Protocol Router Access Points, which are designed to provide satellite communications to small units at remote forward locations; mobile communications terminals that provide secure and non-secure internet service and can be transported with personnel on commercial airlines; and high-frequency radios that are compatible with those of African partner nations and can be used for training and exercises. USARAF has been able to provide some communications equipment to the brigades, such as satellite phones, local cellular phones, locator beacons, and a mobile communications system, but USARAF officials told us that the equipment they could provide was not sufficient for the numerous brigade missions. The brigades were able to acquire much of the remaining equipment they needed for mission-specific communications through the Army’s operational needs statement process, which operational commanders can use to document urgent needs for nonstandard capabilities and request capabilities to correct a deficiency or enhance mission accomplishment. In addition to the communications equipment gaps for which the brigades they requested equipment through operational needs statements,experienced other mission-specific equipment gaps, such as water purification systems, mosquito nets, cots, and medical supplies. Unit officials said that this type of equipment was obtainable without much difficulty through the Army’s supply system or the Army’s rapid fielding initiative. The Army Has Not Fully Identified and Supplied Mission-Specific Equipment Needs in a Timely Manner According to Army officials, the Army has policies and procedures that, when applied, can be used to fill the gaps between standard equipment sets and mission-specific equipment. For example, the brigades have been able to fill many of the communications equipment gaps that they identified by submitting operational needs statements, but in some cases delays in identifying these requirements—along with the process for validating and providing the equipment—have resulted in mission-specific equipment arriving late in the brigades’ mission so that the brigades have had to operate without it. For example, The 1st Infantry Division submitted an operational needs statement for six Secure Internet Protocol Router/Non-Secure Internet Protocol Router Access Points in October 2013 to support brigade missions in Africa, as well as the Division’s own mission in Africa; the request was approved in November 2013, but the division did not receive these items until May/June 2014—the end of 2nd Brigade’s mission. The 1st Infantry Division submitted a request for high-frequency radios for the 4th Brigade, 1st Infantry Division in May 2014, but the brigade did not receive them until December 2014—just before the mission was assumed by the next brigade. As of late April 2015—two months after assuming the mission— 4th Brigade, 1st Armored Division still had not received two of the three communications equipment items that the brigade requested through the operational needs statement process. The justifications supporting these equipment requests described the risks to the brigades of not having such equipment, including limiting their ability to conduct command and control; communications; and intelligence, surveillance, and reconnaissance without the requested Access Points and to train and prepare to operate a multi-national radio network with African nations without the high-frequency radios. The brigades have experienced capability gaps, because the Army has not fully identified the mission-essential equipment required for the brigades to operate in Africa as allocated forces throughout their period of employment and has not provided this equipment to the brigades in a timely manner. Army Forces Command guidance states that allocated units are to be equipped according to the appropriate requirements document for their mission—either their standard equipment set or a mission-essential equipment list, which is a tool the Army can use to address missions outside the scope of a unit’s standard equipment set. This guidance further states that the Army Service Component Command—USARAF in this case—is responsible for identifying mission- essential equipment that is not included as part of a unit’s standard equipment set. In September 2012, we reported that identifying and validating needs and clearly establishing well-defined requirements can improve outcomes when managing programs. USARAF officials said that no requirements had been initially identified, because it was not clear what mission-specific equipment would be required when brigades were initially allocated and beginning to operate in Africa. Officials said that USARAF is working on developing communications equipment requirements for the brigades and should be better positioned to fully identify mission-specific equipment requirements after the current brigade rotation, although they do not believe that mission-specific equipment requirements are extensive. Mission-Specific Equipment Not Consistently Transferred or Provided to Follow-on Units When the brigades obtain mission-specific equipment through operational needs statements to support their mission in Africa, this equipment is not consistently transferred to the follow-on unit to support its activities, for various reasons. In some cases, equipment obtained by the 1st Infantry Division to support requirements in Africa was purchased by the Army and thus it was transitioned to 4th Brigade, 1st Armored Division (e.g., high frequency radios), but other equipment was not transferred because it was purchased by 1st Infantry Division and added to its property book, or the transfer has been delayed. For example, the 1st Infantry Division had purchased several Secure Internet Protocol Router/Non-Secure Internet Protocol Router Access Points with its own funds in order to support division and brigade missions in Africa. Rather than transition this equipment to the follow-on brigade, the division is currently utilizing it for its mission in Iraq. As a result, the 4th Brigade, 1st Armored Division submitted an Operational Needs Statement for these same items, but brigade officials said their request was rejected and, as of April 2015, they are still operating without these items. As another example, officials from 1st Infantry Division said that while a number of satellite phones were being transferred to the 4th Brigade, 1st Armored Division, attachments for the phones that facilitate secure communications were only on loan to the Division and would not be transitioning with the phones. Moreover, the transfer of the phones had been administratively delayed and the brigade did not receive the majority of the phones until early April 2015, even though it had assumed the mission in February 2015. USARAF officials said that for the equipment that USARAF has provided to the units, they are working with Army Forces Command for it to assume responsibility for training personnel on the equipment and transferring it between the brigades, but this has not yet been fully coordinated. Additionally, a USARAF official said that USARAF had obtained five additional Secure Internet Protocol Router/Non-Secure Internet Protocol Router Access Points in May 2015, three of which USARAF plans to rotate among the brigades to support security cooperation activities in Africa, although the details for how this process will work are not yet fully determined. The current allocated brigade has experienced communication capability challenges similar to those experienced by the initial brigades because, in addition to not fully identifying requirements, the Army has not established, or applied, a consistent mechanism to ensure that the brigades allocated to AFRICOM have the required mission-essential equipment at the start of their mission, whether through a coordinated transition of equipment between brigades or through other means. Further, while Army Forces Command guidance directs allocated forces to utilize the operational needs statement process to address gaps in mission-essential equipment, the challenges experienced by the brigades in obtaining equipment through this process demonstrate the limitations of relying fully on this approach. For example, Army Headquarters officials said that one of the challenges of obtaining non-standard equipment through Operational Needs Statements is that the process does not include clearly associated sustainment or training plans, whereas formal requirements documents, such as mission-essential equipment lists are developed with these considerations in mind. To address the gaps in mission-essential equipment that the brigades have experienced, brigade and division officials have suggested that the Army establish a consistent mechanism to ensure that each successive brigade receives all mission-specific equipment at the outset of its mission, such as a mission-essential equipment set that is centrally- funded, maintained and rotated among brigades. The 4th Brigade, 1st Infantry Division developed a recommended list of equipment for such a set, which includes communications equipment as well as other equipment not included in the brigade’s standard equipment sets that the brigade needed during its mission. This equipment included such items as mosquito nets, and laptops with the capabilities required to support exercises. The brigade stated that brigades need homestation access to this mission-essential equipment. Stakeholders at the Army’s Regionally Aligned Forces Table Top Exercise also recommended that the Army identify mission-specific equipment acquisition, training, maintenance, and turnover policies for equipment requirements identified by the combatant commands. According to Army headquarters officials, a working group looked at regionally aligned force equipping issues and determined that the Army has existing policies, guidance, and procedures that, when applied, are sufficient to address mission-specific equipment needs, but more education regarding those policies, guidance, procedures, and processes is necessary to ensure that brigades’ equipping needs are being met in a timely manner. Without clearly identified, mission-specific equipment requirements and the establishment, or application, of a consistent mechanism for ensuring that brigades consistently receive mission-specific equipment at the outset of their missions, future brigades allocated to AFRICOM will likely continue to experience the same capability gaps and may repetitively request the same types of equipment, resulting in both inefficiencies and potential risk that brigades will not have the appropriate equipment to operate effectively in Africa. Challenges and Delays in Obtaining Official Passports Have Affected Brigades’ Ability to Meet Requirements The brigades have experienced challenges and delays in obtaining official passports that have affected their ability to deploy to meet requirements in Africa because, in part, AFRICOM activity timeframes do not always facilitate timely compliance with Department of State passport procedures. Servicemembers are generally required to use official passports to enter and exit a foreign country while performing official duties; although in some countries, bilateral agreements enable servicemembers to enter the country on their military orders. Challenges Processing Large Numbers of Passport Applications According to unit officials, the brigades had challenges at the installation level processing the volume of passport applications as well as quality control issues related to the applications. Most DOD installations have DOD passport agents who process official passport applications, however the volume of passport applications submitted to support the brigades’ AFRICOM mission far exceed the number of applications these offices are staffed to process. For example, officials from the Fort Bliss passport office said that the office typically processes approximately 2,500 passports a year; however they estimated that their office had received and processed approximately 4,000 passport applications between October 2014 and February 2015 and brigade officials said that approximately 2,500 of the 4,000 passport applications processed were submitted in support of the 4th Brigade’s mission in Africa. Army officials said that the number of passport applications submitted by the brigades has also challenged the Department of State’s processing capacity. In addition, officials from the Fort Bliss passport office, the Department of State, and Army Logistics Services Washingtonbrigade personnel filled out applications incorrectly. For example, brigade cited instances where personnel sometimes submitted passport applications to travel to countries that do not require passports for military personnel, and the Department of State rejected those applications. In response to these challenges, the Army has taken steps to improve passport application processes for regionally aligned force units, such as issuing guidance on the process for obtaining passports and providing templates for brigades to use in submitting passport applications. This guidance also identifies a training course that personnel from aligned units can take to enable them to support passport and visa application processes and assist with quality control. AFRICOM Activity Timeframes May Not Align with Passport Regulations Division and brigade officials said that even with the Army’s efforts to address the volume and quality of passport applications, the brigades face continuing challenges obtaining passports because AFRICOM activity timeframes do not always facilitate timely compliance with Department of State passport procedures, which require information on destinations, dates, and often supporting travel orders to clearly establish an applicant’s need to travel to a specific country that requires a passport for entry. The brigades typically used one of two application types— routine or expedited. Army officials who used these processes said that normal processing time for routine passport requests was approximately 6-10 weeks, while the processing time for expedited passport requests averaged about 2-4 weeks. Each of the brigades initially attempted to process passport applications for a significant number of their personnel before assuming the mission, but unit officials said that the sheer number of applications being submitted by the brigades caused Department of State officials to question whether the passports were actually required. Officials from the Department of State’s Bureau of Consular Affairs said the military was previously submitting a high volume of requests for official passports for entire units through a Department of State waiver process that allowed units blanket authority to apply for passports without identifying a specific travel destination. Officials said that the high volume of passport requests also created a backlog in passport processing, and while the military does not pay a fee for official passports, there are costs associated with processing applications and issuing passports, which officials estimate to amount to approximately $110 per passport. These costs get passed on to the general public. In addition, officials said that thousands of passports obtained by DOD were being returned unused. For instance, between October 23, 2014 and November 5, 2014, the Bureau’s Special Issuance Agency reviewed 1,689 no-fee passports— 1,426 of them official passports—that were returned for proper disposition and found that approximately 55 percent of these passports had never been used. Of the 920 passports that had never been used, the agency estimated that 482 were from DOD. As a result of these issues, the Department of State determined that it needed to be more stringent in reviewing passport applications, to ensure that the applicants had a validated requirement for official passports. Subsequently, the Department of State signed a Memorandum of Understanding with DOD in 2012 that invalidated existing unit blanket-waiver letters and required specific destination information to process individual official passport applications for military personnel except in specific circumstances. In addition, Department of State officials stated that on a case-by-case basis, the Special Issuance Agency may request travel orders to validate entitlement to an official passport; Army officials said that the Department of State is requesting travel orders routinely in the case of the allocated brigades. However, brigades do not always receive deployment orders—required to generate travel orders—for activities in time to apply for passports. Brigade and division officials said that the brigades have been tasked with many emergent activities with execution dates that leave little time to apply for passports. They also said that the brigades are often informally notified in advance of activities for which they are to prepare. However, the activity may not be finalized and personnel may not have the official deployment orders necessary to apply for passports until weeks or even days before deployment. Officials from the 1st Infantry Division and 1st Armored Division said that they employed different tactics to work around the Department of State’s constraints with varying degrees of success. For example, 1st Infantry Division officials said that they submitted a memorandum signed by a 1st Infantry Division general officer stating that any applications accompanying it were in support of validated deployments, but this was rejected by the Department of State, which division officials said continued to require official orders showing personnel deploying into a country that required official passports for entry. 1st Armored Division officials, on the other hand, said that they had success working with Department of State officials to find a solution that involved attaching the general Army Forces Command deployment order for the 4th brigade’s overall mission to an AFRICOM administrative message identifying the list of projected activities as of January 2015. This method was successful, although the administrative message did not include requirements for emergent activities. Brigades also had to utilize workarounds, such as submitting passport applications for more personnel than were actually needed for a specific event in order to try to build a pool of personnel with official passports that could be used for emergent requirements or to provide flexibility for planned events. Delays in Obtaining Passports Have Affected Missions The brigades’ inability to obtain adequate numbers of official passports in advance has resulted in some adverse effects for the brigades. For example, many countries in Africa require visas to enter the country. While the visa application process is controlled by the host country and varies by country, personnel cannot apply for a visa until they have a passport. Thus, a delay in obtaining a passport places further time pressures on the already constrained visa process, causing some activities to be delayed. Brigade officials said that several of their activities were cancelled or delayed because some personnel could not obtain an official passport or visa in advance of the planned activity. In addition, brigade officials said that when the soldier best suited for an activity—and the commander’s first choice—did not have a passport, they have been forced to deploy personnel that only meet the basic skill and capability requirements of the activity simply because they had a passport. In one instance, officials said their unit was unable to deploy its lead maintenance technician as requested because he did not have the official passport and visa necessary to support an emergent requirement. The Army’s Field Manual for Army Support to Security Cooperation states that soldiers supporting security cooperation efforts need a variety of skills including technical proficiency and soft skills, noting that not every soldier is suited to be an advisor; thus, limiting a commander’s choice of personnel could hinder mission-effectiveness. Our work on results-oriented government states that to facilitate collaboration, agencies—which may need to find common ground while still satisfying their respective operating needs—need to address compatibility of standards, policies, and procedures that will be used in a collaborative effort.Department of State, officials from the two organizations have met on a number of occasions to discuss the passport challenges experienced by the brigades, but have not agreed upon a consistent method through which personnel from these brigades can apply for official passports before they have deployment orders. While the 2012 Memorandum of Understanding invalidated existing blanket waivers, it does still allow for organizational commanders to submit new requests for waiver letters under certain circumstances; it states that military commanders can apply for waivers to the requirement to list a specific travel destination on the application based on the organization’s mission and historical travel pattern, including examples of missions that would have failed for lack of a waiver. However, Department of State officials stated that there is no official process to request a waiver from the requirement for DOD personnel to submit travel orders when requested. Department of State officials told us that if the Army could provide an accurate analysis on historical data of the number of personnel with associated ranks and skill requirements that have deployed to Africa for each allocated brigade, then a waiver in accordance with the Memorandum could potentially be provided. Brigade and division officials told us that, while it may not address every emergent requirement, it would be beneficial for each brigade allocated to AFRICOM to be authorized a certain number of official passports based on their historical mission set, so that they could build a pool of personnel with passports that are likely to deploy. According to officials from the Army and the Army officials said that the brigades are intended to be a flexible sourcing pool that can quickly respond to USARAF’s unpredictable security cooperation requirements, but that challenges obtaining passports limit their responsiveness. Without a consistent, agreed-upon approach that allows for the brigades to obtain a sufficient number of official passports at the outset of their missions, future brigades allocated to AFRICOM will likely continue to face challenges in this area, and the flexibility of the brigades to respond to emergent requirements may be limited. Brigades Have Reported Facing Some Challenges to Core Mission Readiness, but Deployments to Africa Are Perceived to Have Benefits for Soldier Development The brigades allocated to AFRICOM have reported facing some challenges in sustaining core mission readiness while deploying in response to requirements in Africa, due in part to limitations on the training that can be conducted in deployed environments. However, Army officials have cited some benefits of deployments to Africa that are not captured in the brigades’ readiness reporting, such as developing soldiers with an expeditionary mindset and increased cultural awareness. The Brigades Have Faced Some Challenges Sustaining Decisive-Action Readiness and May Require Augmentation or Additional Time to Train if a Contingency Arises The allocated brigades are expected to maintain decisive-action readiness for their core mission in order to be available for potential contingencies, while being responsive to the requirements of the combatant command to which they are allocated. The Army’s regulation on readiness reporting states that all Army units are required to report their ability to accomplish core functions, provide designed capabilities, and execute the standardized mission-essential tasks for decisive action on a monthly basis. Additionally, Army guidance for regionally aligned forces requires the brigades to maintain certain levels of decisive-action readiness throughout their employment. All three of the brigades allocated to AFRICOM conducted decisive-action training and completed a Combat Training Center rotation, and they continued to train on their core skills while employed in Africa. However, the two brigades that have completed their missions in Africa reported facing some challenges in maintaining core-mission readiness while employed in Africa, and they said that they might have required additional time to train or augmentation from another unit if they had been called upon to support a contingency. Officials from the current brigade said that they were anticipating similar challenges. The brigades identified several factors that resulted in readiness degradation while they were employed in Africa, including Uncertain Security Cooperation Requirements and Timing: The brigades each took steps to maintain the decisive-action readiness of their homestation-based units and personnel during their periods of availability, with a particular focus on training, but officials said that factors such as uncertain security cooperation requirements, frequent deployments of key leaders, and training events that kept personnel and equipment deployed or in transit for long periods of time resulted in some degradation of readiness. For example, with key leaders and other personnel deploying frequently, the brigades’ ability to conduct collective training, particularly at the higher unit echelons, is limited. Additionally, although each of the brigades developed plans to conduct decisive-action training around planned security cooperation activities, emergent activities and frequently shifting schedules for planned events sometimes made it difficult for them to adhere to their training plans. Brigade officials said that, in one such instance, the shifting dates of a planned event caused a battalion to miss its range time, which prevented it from completing all of its collective gunnery exercises. The unit utilized simulators to fulfill some training requirements, but officials said that live fire training on the range would have been preferable. Battalion Task Force Deployments: A Battalion task force from each of the three brigades was deployed for approximately six to nine months to the Combined Joint Task Force – Horn of Africa to fill a requirement for security and crisis response capabilities. These deployments presented personnel readiness challenges for the brigades because they caused some units within the brigades to be bifurcated (i.e., part of the unit was deployed and part remained at homestation). This affected the reported personnel readiness ratings of the brigades, because the bifurcated units would not be prepared to deploy elsewhere as cohesive units without time to redeploy personnel and reassemble these units. Division officials said that they believe readiness degradation caused by unit bifurcation is more of an administrative concern, as they do not view the bifurcated units as less capable simply because they have personnel who are forward deployed. Army readiness officials said that assessing the strategic readiness implications of unit bifurcation is an ongoing challenge for the Army, which is increasingly being asked to do small unit deployments. Specific Effects for Armor Brigades: Unit officials said that the requirement to maintain decisive-action readiness presented greater challenges for the allocated armored brigades—the 2nd Brigade, 1st Infantry Division and the 4th Brigade, 1st Armored Division—than for the allocated infantry brigade. An Army official said that this is because, armored units are required to train frequently on their equipment platforms (e.g., tanks and artillery) and conduct sequenced gunnery exercises, which require significant time and resources. The armored brigades were particularly affected by the task force deployments. The two armored battalions from the brigades that deployed for the mission could not fully conduct required gunnery training because they did not have adequate range space and equipment (e.g., mounted vehicles, crew-served weapons) in the deployed environment. In addition, brigade officials said that the armored battalion currently deployed will not have enough time after redeploying to reset and train before the brigade’s next Combat Training Center rotation in 2016 and thus will have to go through a rotation with a different brigade a few months later. As a result of these challenges, brigade and Army Forces Command officials said that the brigades may have needed some time to redeploy personnel conducting security cooperation activities from Africa and to conduct training. Furthermore, to replace the battalion deployed to the Combined Joint Task Force – Horn of Africa, the brigades may require augmentation from an external unit if they are called upon to support a contingency. According to Army Forces Command officials, the Army has made changes to the types of units that it will use to fill both the allocated brigade and security forces requirements in Africa. They further said that these changes may lessen some of the negative effects on decisive- action readiness for future allocated brigades, although the extent of the potential effect is unclear. The officials said that the Army will be allocating infantry or Stryker brigades to AFRICOM in the future and that they expect infantry brigades to be utilized for the mission more frequently. The next brigade scheduled for this mission is an infantry brigade. Brigade officials said that infantry brigades, in particular, are better positioned than armored brigades to balance core-mission training with requirements in Africa, and USARAF officials added that they are also better suited to the environment in Africa. The current brigade’s mission is being curtailed to hasten this transition. Army Forces Command officials also said that the Army will be filling the requirements for security forces in the Horn of Africa with Reserve Component battalions in the future, although the allocated brigade in Africa is still projected to deploy a company to the Horn of Africa to provide crisis response capabilities. The next battalion scheduled for this mission is a National Guard battalion. Brigade officials generally said they believe that without the deployments of the battalion task forces, the brigades could more easily maintain adequate levels of readiness. Furthermore, stakeholders at the December 2014 Army Regionally Aligned Forces Table Top Exercise recommended that the Army consider creating a multifunctional, battalion-sized force that could be allocated to AFRICOM to directly satisfy AFRICOM’s requirements for small-scale security cooperation activities while preserving the allocated brigades for larger-scale exercises. Army Headquarters officials said that this idea is currently being studied but if implemented, it may also help to preserve unit readiness, although the extent of the potential effect is unclear. Deployments to Africa for Security Cooperation Activities Can Have Benefits for Training and Soldier Development Although the brigades have experienced some challenges maintaining decisive-action readiness, their frequent deployments to Africa for security cooperation activities can also have training benefits. Army, combatant command, and unit officials cited ancillary benefits of the mission in Africa for individual readiness and soldier development that are not easily captured in the brigades’ readiness reporting. Examples noted by some of these officials include the development of expeditionary mindsets, increased cultural awareness and regional expertise, and adaptive leadership capabilities. Officials said that, based on findings from the Army’s December 2014 Regionally Aligned Forces Table Top Exercise, Army Headquarters is currently looking at potential options for capturing some of these benefits as part of the readiness reporting process. Officials provided the following examples of these benefits: Supporting exercises in Africa provides units with an opportunity to exercise operations with multiple command posts, manage joint and command relationships, and practice deployment and staging processes. Managing multiple concurrent and dispersed security cooperation deployments can stretch and enhance the brigades’ command and control and communications capabilities. Deployments to Africa to support AFRICOM require soldiers to operate in a complex, multicultural environment and to adapt quickly to ill-defined or shifting requirements. Soldiers are forced to deal with challenges in Africa with limited support, for example, equipment not arriving in time for an activity or last-minute changes to programs of instruction to accommodate foreign forces, and to step up at their homestation to manage unit training and other tasks while key leaders are deployed. One brigade commander suggested that the long-term benefits that the Army could accrue from having continuously engaged forces through regional alignment may be worth the trade-off with individual brigade readiness. Conclusions The Army’s regionally aligned forces policy is a key element of DOD’s broader strategy to build partnerships, strengthen partner nation security forces, and shape security environments globally. The experiences and lessons learned of the brigades allocated to AFRICOM provide the Army with an opportunity to refine its approach to planning for and employing regionally aligned forces in Africa and elsewhere. By establishing a formal mechanism for key stakeholders to review, discuss, and shape upcoming activities, USARAF can better ensure that its planners, the Offices of Security Cooperation, and the brigades have a shared understanding of the objectives and details of the activity. In turn, such a mechanism would enhance the brigades’ ability to address potential information gaps in advance and more effectively perform activities, resulting in a greater return on investments made in the partner nation. Moreover, the use of brigades to conduct activities beyond their typical mission sets has revealed some gaps in the systems that the Army is using to train and equip regionally aligned forces; accordingly, DOD must take steps to ensure that the brigades are consistently and effectively prepared to support security cooperation activities in Africa. An assessment of the sufficiency and effectiveness of its approach for training regionally aligned forces will position the Army to address stakeholder concerns about training and identify opportunities to enhance the brigades’ ability to fulfill their mission in Africa. Further, by formalizing mission-specific equipment requirements for the brigades and utilizing existing policy and procedures to establish a timely and consistent mechanism for the provision of such equipment, USARAF and the Army can ensure that the brigades will have the capabilities to safely and effectively carry out distributed activities throughout Africa, and limit potential inefficiencies that may result from each successive brigade obtaining mission-specific equipment on an individual basis. Finally, the flexibility of the brigades to respond to Combatant Commander requirements has been cited as an important benefit of regionally aligned forces; for this benefit to be fully realized, coordinated actions by the Army and the Department of State are needed to ensure that allocated brigades have sufficient numbers of official passports in accordance with their mission set. Recommendations for Executive Action We recommend that the Secretary of Defense take the following four actions to enhance the efforts of the allocated brigades in Africa: 1. To help ensure that the allocated brigades have timely and complete information to enable them to prepare for and execute security cooperation activities, direct the Commander of AFRICOM in conjunction with the Commander of USARAF, to develop a formal mechanism—such as regularly scheduled, country-specific meetings that include USARAF desk officers, the Offices of Security Cooperation, and the brigades—to review and discuss upcoming security cooperation activities to ensure that key stakeholders are aware of critical information, have an opportunity to shape the activity, and can gather additional information if necessary. 2. To identify opportunities to enhance brigade mission-specific training, direct the Secretary of the Army, in coordination with the Commander of Army Forces Command and the Commander of Army Training and Doctrine Command, to conduct an assessment of the Army’s approach to providing mission-specific training to regionally aligned forces, including the brigades allocated to AFRICOM, and determine whether any adjustments are needed. In addition to the assessment questions already identified by the Army in the Regionally Aligned Forces Execute Order, this assessment could consider The degree to which the brigades’ training—to include the curricula, resources, and execution—should be managed or coordinated at the institutional level. How unit training programs should be resourced and the degree to which dedicated funding may be needed. 3. To facilitate consistent, and predictable planning for mission-specific equipment requirements and efficient provision of such equipment, direct the Secretary of the Army, in coordination with the Commander of Army Forces Command and the Commander of USARAF, to: Identify the mission-specific equipment requirements on an appropriate requirements document for the brigades allocated to AFRICOM for security cooperation and other missions in Africa. To the extent practicable, establish a consistent mechanism (e.g., a rotating equipment set, mission-essential equipment list) to ensure that the brigades allocated to AFRICOM are equipped with all known mission-essential equipment at the outset of their missions. 4. To facilitate the timely and efficient provision of official passports to the brigades allocated to AFRICOM, direct the Secretary of the Army, Commander of Army Forces Command, and the Commander of USARAF to: Conduct an analysis of the brigades’ personnel deployment trends for security cooperation activities to identify the number of official passports typically required for each allocated brigade to support its mission. Based on this analysis and building upon the 2012 Memorandum of Understanding between DOD and the Department of State, as appropriate, coordinate with the Department of State Bureau of Consular Affairs to develop, agree upon, and execute a waiver process authorizing an allotment of official passports to brigades allocated to AFRICOM at the outset of their rotations. We also recommend that the Secretary of State take the following action to facilitate the timely and efficient provision of official passports to the brigades allocated to AFRICOM. Building upon the process in the 2012 Memorandum of Understanding between DOD and the Department of State as appropriate, the Secretary of State should direct the Bureau of Consular Affairs to coordinate with the Department of the Army to mutually develop, agree upon, and execute a waiver process authorizing an allotment of official passports to brigades allocated to AFRICOM at the outset of their rotations, based on the brigades’ personnel deployment trends. Agency Comments and Our Evaluation In written comments on a draft of this report, DOD concurred with each of the four recommendations we directed to the Secretary of Defense, and the Department of State concurred with the one recommendation we directed to the Secretary of State. DOD’s and the Department of State’s comments are summarized below and reprinted in appendixes III and IV, respectively. DOD also provided technical comments, which we incorporated where appropriate. DOD concurred with our first recommendation, that AFRICOM and USARAF develop a formal mechanism to review and discuss upcoming security cooperation activities to ensure that key stakeholders are aware of critical information, have an opportunity to shape those activities, and can gather additional information if necessary. In its comments, DOD stated that USARAF has implemented several changes to its business practices since the end of GAO’s audit to improve planning, support, and information exchanges with regionally aligned forces for Africa, including improving the utilization of existing brigade liaison officers by integrating them into working groups, relocating liaison officers’ workspace to improve brigade situational awareness, increasing the number of liaison officers embedded at USARAF, conducting multi-day planning and synchronization meetings with brigades to be aligned to AFRICOM in fiscal year 2016, and publishing a base operations order with a more comprehensive projection of security cooperation requirements for fiscal year 2016. While these actions are positive steps that may help to ensure that the brigades are more aware of critical information, we continue to believe that USARAF can further enhance its efforts by establishing a consistent mechanism by which all of the key stakeholders, including Offices of Security Cooperation, can consistently coordinate upcoming activities and share information. DOD concurred with our second recommendation, that the Army conduct an assessment of its approach to providing mission-specific training to regionally aligned forces, including brigades allocated to AFRICOM, and determine whether any adjustments are needed. In its comments, DOD said that updates to training guidance are based on lessons learned and after-action reviews submitted by regionally aligned force elements returning from missions. In addition, the Army is preparing an update to existing regionally aligned forces guidance, to be issued in the fourth quarter of fiscal year 2015, that will require commands to assess regionally aligned forces implementation and submit lessons learned and suggested improvements to the Army, which the Army will review and make adjustments as necessary to enhance regionally aligned forces implementation. Guidance requiring commands to assess regionally aligned forces implementation, if fully implemented, should provide the Army valuable information about the sufficiency of its training approach for regionally aligned forces and where adjustments may be needed and thus would meet the intent of our recommendation. DOD concurred with our third recommendation, that the Army identify the mission-specific equipment requirements for the brigades allocated to AFRICOM and, to the extent practicable, establish a consistent mechanism to ensure that the brigades allocated to AFRICOM are equipped with all known mission-essential equipment at the outset of their missions. In its comments, DOD said that the Army issued guidance for USARAF to establish a prepositioned equipment set specifically designed to support regionally aligned forces units operating in Africa, called the Africa Activity Set. The concept for the Africa Activity Set is still under development, but DOD stated that, once it is complete, this activity set will consist of mission-specific, prepositioned equipment sets to be used by regionally aligned force units conducting security cooperation, humanitarian assistance, disaster relief, and other missions across Africa. Prepositioned equipment sets that can be used by the brigades for security cooperation and other activities will be very beneficial, but without knowing the details of how the Africa Activity Set will be implemented and how brigades will be able to access this equipment, it is difficult to know the degree to which it will fully address the brigades’ gaps in mission- essential equipment. Specifically, as we noted in our report, the brigades said that they need homestation access to this mission-essential equipment. We therefore believe that USARAF, as it develops the concept for the activity set, should consider how mission-essential equipment can be made available to the brigades at the outset of their missions, in accordance with our recommendation. DOD concurred with our fourth recommendation, that the Army conduct an analysis of the brigades’ personnel deployment trends for security cooperation activities to identify the number of official passports typically required for each allocated brigade to support its mission and, based on this analysis, coordinate with the Department of State to develop, agree upon, and execute a waiver process authorizing an allotment of official passports to these brigades at the outset of their rotations. In its comments, DOD stated that the Army is preparing an update to existing regionally aligned forces guidance that will clarify existing passport procurement policies to ensure that regionally aligned force units are aware of processes and procedures to improve individual and unit-level acquisition efforts. While clarifying guidance on passport policies may be beneficial, we continue to believe that an analysis of the brigades’ personnel deployment trends and development of a process authorizing an allotment of official passports to the brigades at the outset of their rotations are essential to ensure that allocated brigades have sufficient numbers of official passports, in accordance with their mission sets. The Department of State also concurred with a parallel recommendation, that the Bureau of Consular Affairs coordinate with the Army to mutually develop, agree upon, and execute a waiver process authorizing an allotment of official passports to brigades allocated to AFRICOM at the outset of their rotations. In its comments, the Department of State indicated that the Bureau of Consular Affairs has been coordinating with AFRICOM to find a reliable way to verify passport requirements prior to the creation of deployment or travel orders and understands that AFRICOM will closely scrutinize the number of personnel being deployed to countries requiring the use of special issuance passport, and will vet this information through the Special Issuance Agency and Army Logistics Services Washington on a quarterly basis. The Department of State further stated that the Special Issuance Agency has provided comments on a fragmentary order that details internal DOD coordination and accountability for the passport application process, which it believes establishes a mutually acceptable framework for identifying the positions and individuals requiring passports within each brigade. While these steps do not constitute a “waiver” as the Special Issuance Agency has historically used the term, the Department of State indicated that these steps should allow the Special Issuance Agency to issue required passports to the brigades earlier in the process than it has been and should assist the agency with resource management in the production of the passports. To the extent that these steps enable brigades to receive allotments of passports at the outset of their rotations, these actions would meet the intent of our recommendation. We are providing copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of State, and the Secretary of the Army. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5431 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made key contributions to this report are listed in appendix V. Appendix I: Scope and Methodology To determine the extent to which U.S. Africa Command (AFRICOM) has clearly identified and synchronized security cooperation activities for the brigades in Africa, we reviewed key security cooperation activity planning documentation such as theater- and country-level plans, briefings and information on AFRICOM’s and U.S. Army Africa’s (USARAF) planning processes, and operations orders. We observed conference sessions during AFRICOM’s Theater Synchronization Conference and the Combined Joint Task Force – Horn of Africa Theater Security Cooperation Conference to see how AFRICOM and its components, including USARAF, coordinate as part of the planning process to synchronize efforts across Africa and identify security cooperation activities to meet theater and country objectives. We additionally reviewed brigade data on the number and types of security cooperation activities the brigades conducted in Africa and, based on information provided by unit officials, determined that it was sufficiently reliable to use as one of the bases for our findings. We also reviewed task orders provided to the brigades and analyzed brigade after-action reports provided by 4th Brigade, 1st Infantry Division for activities that were conducted between June 2014 and December 2014 to identify the types of information provided to the brigades in advance of tasked security cooperation activities and any gaps in this information. Finally, we interviewed officials from AFRICOM, USARAF, the Combined Joint Task Force – Horn of Africa, Marine Forces Africa, Special Operations Command Africa, Army Forces Command, 1st Infantry Division, 1st Armored Division, the three brigades allocated to AFRICOM to date, and Department of State Headquarters. We also visited and interviewed Embassy Country Team officials in Djibouti, Niger, and Uganda, including Ambassadors, Office of Security Cooperation Chiefs, and Defense Attaches, and interviewed the Office of Security Cooperation Chiefs from Rwanda, Ethiopia, and Burundi that were onsite during our visit to the Combined Joint Task Force – Horn of Africa. To determine the extent to which the brigades have been prepared to meet mission requirements in Africa, we reviewed documents that provide guidance and information related to the implementation of the regionally aligned forces concept, such as execute, fragmentary, and mission alignment orders as well as briefings from the Regionally Aligned Forces Table Top Exercise and issue-area working groups. We also reviewed mission-specific training documentation, including training requirements for regionally aligned forces, briefings on brigade training, and brigade after-action reports and lessons learned documents. In addition, we examined operational needs statements, which units use to request mission-essential equipment to fill identified gaps, and related memorandums validating such requests, brigade and division proposals for mission-essential equipment sets, and guidance on equipping aligned units. Furthermore, we reviewed documents pertaining to the passport application process, for example a 2012 Memorandum of Understanding between the Department of State and the Department of Defense, data provided by the Department of State and the Army related to unused passports and the number of passport applications that are processed, respectively, and Army guidance on obtaining official passports. We also interviewed relevant officials from AFRICOM, USARAF, Army Headquarters, Army Forces Command, Army Training and Doctrine Command, the 162nd Infantry Training Brigade, the 3rd Battalion, 353rd Regiment, 1st Infantry Division, 1st Armored Division, the three brigades allocated to AFRICOM to date, Army Logistics Services Washington, and the Department of State Bureau of Consular Affairs. To determine the extent to which the brigades have been able to sustain core mission readiness while deploying for missions in Africa, we reviewed Army readiness regulations and readiness guidance applicable to allocated brigades. We also analyzed readiness data reported by the three brigades during their periods of allocation to AFRICOM as reported in the Defense Readiness Reporting System through April 2015. We spoke with brigade and division officials about this data and obtained survey responses from Army Readiness Division officials in order to assess its reliability. Based on these efforts, we determined that the data is sufficiently reliable to use as one of the bases for our findings in conjunction with corroborating evidence obtained during interviews. We also interviewed officials from AFRICOM, USARAF, Army Headquarters, Army Forces Command, 1st Infantry Division, 1st Armor Division, and the three brigades allocated to AFRICOM. We visited or contacted officials from the following DOD and Department of State organizations during our review: Office of the Secretary of Defense, Arlington, Virginia Joint Staff, Arlington, Virginia U.S. Africa Command, Stuttgart, Germany U.S. Army Africa, Vicenza, Italy U.S. Marine Corps Africa, Stuttgart, Germany Special Operations Command Africa, Stuttgart, Germany Combined Joint Task Force – Horn of Africa, Djibouti o Task Force 2-16, 4th Brigade/1st Infantry Division, Djibouti, Department of the Army Headquarters, Arlington, Virginia U.S. Army Forces Command, Fort Bragg, North Carolina U.S. Army Training and Doctrine Command and subordinate organizations, Fort Eustis, Virginia 162nd Infantry Training Brigade, Fort Polk, Louisiana 3rd Battalion/353rd Regiment Advise and Assist Battalion, Fort 1st Infantry Division, Fort Riley, Kansas o 1st Infantry Division Headquarters o 2nd Armored Brigade Combat Team/1st Infantry Division o 4th Infantry Brigade Combat Team/1st Infantry Division 1st Armored Division, Fort Bliss, Texas o 1st Armored Division Headquarters o 4th Armored Brigade Combat Team/1st Armored Division o Fort Bliss Passport Office Logistics Services Washington, Office of the Administrative Assistant to the Secretary of the Army, Arlington, Virginia Department of State Headquarters, Washington, DC Bureau of Africa Affairs, Washington, DC Bureau of Consular Affairs, Washington, DC Global Peace Operations Initiative Program Office, Washington, Africa Contingency Operations Training and Assistance Program Office, Washington, DC U.S. Embassy Djibouti City, Djibouti U.S. Embassy Kampala, Uganda U.S. Embassy Niamey, Niger Office of Security Cooperation Chiefs from three additional U.S. We conducted this performance audit from June 2014 to August 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. Appendix II: Examples of Security Cooperation Activities Conducted by the Allocated Brigades in Africa Appendix III: Comments from the Department of Defense Appendix IV: Comments from the Department of State Appendix V: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, James Reynolds, Assistant Director; David Adams; Tracy Barnes; Kasea Hamar; Joanne Landesman; Michael Silver; and Amie Steele made key contributions to this report. Related GAO Products Afghanistan Transition: U.S. Force Reductions Impact DOD’s Advising Mission in Afghanistan. GAO-14-475C. Washington, D.C.: May 16, 2014 Security Force Assistance: The Army and Marine Corps Have Ongoing Efforts to Identify and Track Advisors, but the Army Needs a Plan to Capture Advising Experience. GAO-14-482. Washington, D.C.: July 11, 2014. Security Force Assistance: More Detailed Planning and Improved Access to Information Needed to Guide Efforts of Advisor Teams in Afghanistan. GAO-13-381. Washington, D.C.: April 30, 2013. Building Partner Capacity: Key Practices to Effectively Manage Department of Defense Efforts to Promote Security Cooperation. GAO-13-335T. Washington, D.C.: February 14, 2013. Afghanistan Security: Long-standing Challenges May Affect Progress and Sustainment of Afghan National Security Forces. GAO-12-951T. Washington, D.C.: July 24, 2012. State Partnership Program: Improved Oversight, Guidance, and Training Needed for National Guard’s Efforts with Foreign Partners. GAO-12-548. Washington, D.C.: May 15, 2012. Security Force Assistance: Additional Actions Needed to Guide Geographic Combatant Command and Service Efforts. GAO-12-556. Washington, D.C.: May 10, 2012. Iraq and Afghanistan: Actions Needed to Enhance the Ability of Army Brigades to Support the Advising Mission. GAO-11-760. Washington, D.C.: August 2, 2011. Defense Management: Improved Planning, Training, and Interagency Collaboration Could Strengthen DOD’s Efforts in Africa. GAO-10-794. Washington, D.C.: July 28, 2010.

In support of the Department of Defense's (DOD) increasing emphasis on strengthening partner nations' security forces, the Army is aligning its forces with geographic combatant commands to provide tailored, trained, and responsive forces to meet the commands' requirements. In 2013, AFRICOM became the first combatant command to be allocated an Army regionally aligned brigade combat team—the first of three to date—which was tasked to the command primarily to support security cooperation. The House Report accompanying a bill for the National Defense Authorization Act for Fiscal Year 2015 included a provision that GAO assess DOD's efforts to plan for and employ these brigades in Africa. This report assesses, among other things, the extent to which (1) AFRICOM has clearly identified and synchronized security cooperation activities for the brigades in Africa and (2) the brigades have been prepared to meet mission requirements in Africa. The term ‘synchronize' refers to coordination efforts by AFRICOM and its components to achieve unity of effort across the command. GAO reviewed documents and data and interviewed DOD and Department of State officials. U.S. Africa Command (AFRICOM) identifies and synchronizes security cooperation activities through various planning processes, but the brigades allocated to AFRICOM sometimes lack key information about these activities. The brigades have conducted hundreds of security cooperation activities, such as exercises with partner nations, throughout Africa. As part of AFRICOM's planning processes, the Offices of Security Cooperation—located in U.S. embassies in Africa—work with U.S. Army Africa (USARAF) to identify and develop security cooperation activities based on the needs of the host nation and AFRICOM's objectives. The brigades are tasked to conduct many of these activities, but they sometimes lack timely and complete information about the activities, such as activity objectives, which can compromise their effectiveness. While personnel from USARAF and the Offices of Security Cooperation coordinate informally, they do not always have a shared understanding of the activity objectives or involve the brigades in planning. Furthermore, USARAF does not have a formal mechanism that includes both the Offices of Security Cooperation and the brigades to shape activities and address information gaps. As a result, the brigades' ability to conduct activities may be challenged, and the resources invested may not have the anticipated effect. The brigades have been trained and equipped for their core missions, which has generally prepared them to meet requirements in Africa, but opportunities exist to enhance their mission-specific preparation. The brigades' core training is estimated to cover 90 to 95 percent of the skills needed to support activities in Africa. The brigades have developed regionally-focused, mission-specific training programs to cover the remaining skills. Some Army officials identified concerns about how this training is being supported, but the Army may not have the information it needs to address these concerns, because it has not completed an Army-directed assessment of training for regionally aligned forces. In addition, the brigades have experienced some equipment gaps, particularly in communications systems, because the Army has not fully identified mission-specific equipment requirements or established, or applied, a mechanism to ensure that brigades have the necessary equipment. Furthermore, the Army and the Department of State have not agreed on a process for providing official passports to brigade personnel before their employment period. As a result, the brigades have faced challenges in obtaining passports that have limited their ability to deploy the appropriate personnel to Africa. Without action on these issues, the brigades' ability to fully support the mission in Africa may be affected.

Background Various criminal statutes, agency-specific policies, and professional standards address potential post-employment and conflict-of-interest questions. Executive branch employees, including SEC employees, are subject to criminal conflict-of-interest statutes. For example, restrictions on the activity of former federal employees and restrictions on current federal employees negotiating for private employment are reflected in sections 207 and 208 of Title 18 of the United States Code (sections 207 and 208) and associated regulations. Specifically, section 208 prohibits employees from personally and substantially participating in government decisions that affect their financial interests, including the interests of any organization with which he or she is in negotiations or with which he or she has a prospective employment relationship. After separating from an agency, section 207 provisions can restrict former employees from representing a firm to his or her former agency for defined cooling-off periods that vary according to the former employee’s involvement and seniority. Examples of conduct prohibited by section 207 include the following:  Former personnel are permanently barred from communicating with or appearing before, with the intent to influence, their former agency on behalf of their new employer for particular matters on which they were personally and substantially involved, which involved a specific party or parties at the time of such participation.  For 2 years after leaving federal service, former personnel may not communicate with or appear before, with the intent to influence, their former agency on behalf of their new employer on particular matters that were pending under their official responsibility in their last year of service, which involved a specific party or parties at the time it was pending, even if the employee was not directly involved with the matter.  For 1 year after leaving federal service, a former senior-level employee may not contact his or her former agency on behalf of any other person in connection with any matter on which the person represented by the former employee is seeking official action. The Office of Government Ethics (OGE) oversees a uniform system of ethics standards across the executive branch. Among other responsibilities, OGE formulates and interprets ethical standards and conflict-of-interest rules, reviews ethics programs at agencies, and provides support to agency ethics officials. While OGE sets ethical standards and specifies appropriate regulation for the executive branch, individual agencies, such as SEC, are responsible for implementing ethics programs. With OGE’s concurrence, agencies also may supplement executive branch-wide ethics regulations. For example, as part of supplemental regulation specific to SEC, former SEC employees (within 2 years of separating from the agency) must submit a notice of appearance, also referred to as an 8b letter, to request approval to appear before SEC for purposes of representational activity. These notices typically contain a former employee’s name, current employer, and the nature of the matter about which they would like to appear before SEC. Federal ethics regulations overseen by OGE include rules requiring that agencies provide training and information about post-employment and other conflict-of-interest issues to their employees. SEC’s Ethics Office serves as the agency’s focal point in carrying out these responsibilities. In addition to criminal statutes and agency-specific regulations, attorneys and accountants are subject to professional standards that relate to post- employment activities. Attorney members of state bar associations are subject to the rules of professional conduct for each state, which may be based on the American Bar Association Model Rules of Professional Conduct. The model rules address client-lawyer relationships, including special conflicts of interest for former and current government officers and employees. For certified public accountants, the American Institute of Certified Public Accountants professional code of conduct includes both principles and rules that apply to its members in all areas of accounting practice. Among other tenets, these rules outline standards for an accountant’s independence, integrity, and objectivity. Four SEC IG reports issued during 2009 through 2011 have highlighted concerns regarding the appearance of conflicts of interest at SEC. These reports did not conclude that former SEC employees violated post- employment restrictions; although, the reports noted some related concerns based on reviews of particular SEC investigations and the actions of former employees, including the following:  The SEC IG’s report found that the SEC’s lack of documentation resulted in an unclear record of what projects a former associate director in the Division of Trading and Markets recused herself from and on what projects she continued to work during employment negotiations with a trading firm.  The SEC IG report raised questions about the extent to which a company’s SEC connections and aggressive tactics may have influenced SEC decisions about the examination and resulting investigation of the regulated entity.  The SEC IG report found that a former head of the Division of Enforcement at a field office appeared to have violated state bar rules by working for a client involved in ongoing SEC matters in which he had participated while employed at SEC. While Employee Movement between SEC and the Private Sector Offers Potential Benefits to Each Side, It Also Raises Questions SEC Only Recently Has Begun to Collect Future Employer Information from Departing Employees SEC only recently began asking separating employees—on an agencywide basis—for future employer information. As a result, comprehensive data to determine where former employees obtained employment after separating from SEC were not yet available. We previously recommended that SEC request that departing employees provide the name of their next employer as part of SEC’s exit procedures. In response, the Office of Compliance Inspections and Examinations (OCIE) began conducting exit interviews with departing OCIE staff in December 2005 that included documentation about their post-employment plans. However, no other divisions or offices appeared to make similar efforts until December 2010—at which time the SEC Ethics Office implemented an agencywide process to collect post- employment information. Specifically, the Ethics Office revised the interview form that ethics officials use when conducting the mandatory exit interviews of all separating employees. The revised interview form includes a question asking for the separating employee’s next employer, which respondents are asked to provide voluntarily. As of March 11, 2011, the Ethics Office had conducted 47 exit interviews and documented future employer information for most of the separating employees. While SEC recently has started to collect future employer information from separating employees, it consistently has maintained information on the number of employees leaving the agency each year and for what purposes (such as retirement). According to SEC’s data, in fiscal years 2006 through 2010 a total of 2,127 employees separated from the agency. About 37 percent of these employees were included in occupation categories that captured examiners, accountants, economists, and attorneys—occupations relevant to SEC’s examination and investigative efforts—who separated from SEC due to resignation, retirement, or removal. The other 63 percent of employees had occupations such as information technology specialist, human resource specialist, and secretary, among several other occupations. Figure 1 shows the attrition trend for selected occupation categories for fiscal years 2006 through 2010. In addition to the occupation categories of departing employees, we also reviewed the length of tenure of employees in the selected categories for the same time period. We found that the average SEC tenure of departing employees increased during this period, with the average service years at time of separation increasing from 8.3 years in fiscal year 2006 to 13.5 years in fiscal year 2010 for employees in occupation categories we considered relevant to SEC’s examination and investigative efforts. According to SEC officials, the decline in the number of employees leaving SEC and the increase in the tenure of departing employees during this period primarily was attributable to the financial crisis and economic recession, which made private-sector employment less available and attractive. Using sources such as letters from former employees requesting to appear before SEC, Web-based search results, and interviews with those knowledgeable about SEC, we found that former SEC employees frequently obtained employment with financial entities or law or consulting firms that represent them. We reviewed 825 notice of appearance requests (also referred to as 8b letters) that the agency received from October 2005 through October 2010 that were submitted by former SEC employees that the SEC subsequently approved. We found that SEC received these notices from 224 individuals employed at 136 separate entities ranging from financial companies to legal and consulting firms. Sixteen entities accounted for approximately 35 percent of the individuals filing notices of appearance during this period. Of the 16 entities, 9 were law firms, 5 were consulting firms, 1 was a financial firm, and 1 was an independent regulatory entity. We also conducted searches for a nongeneralizable sample of 150 former employees who separated from SEC between October 2005 and September 2010, and found that many of these employees later obtained employment at law, consulting, or financial firms. Of the 150 former employees we selected, 113 had resigned from SEC, 35 had retired, and 2 had been removed from their positions. We found post-employment information for 64 of the 150, including 2 retirees. Of the 64 former employees, 22 individuals had obtained employment at law firms, 15 at consulting firms, 13 at financial firms, and 14 at other entities after their separation from SEC. We also spoke with the Association of SEC Alumni, which collects information on current employer information as part of its membership application. Association representatives indicated that employment paths vary when employees leave SEC but that, in general, people go to work for law firms, financial firms, or retire. SEC officials also stated that former employees go to work for various firms, such as financial or accounting firms, after separating from the agency. SEC Officials and Others Cited Both Benefits and Challenges of Movement between SEC and Regulated Entities or Firms That Represent Them Collectively, SEC officials, academic researchers, citizen advocacy groups, and representatives from financial firms and law firms with whom we spoke said that there are a number of benefits and challenges of employee movement between SEC and the private sector. SEC officials, academic researchers, and representatives from financial firms and law firms cited the following benefits:  Better regulatory understanding and compliance. SEC experience may bring about a better understanding of securities regulation and compliance in the private sector, which could benefit SEC and securities firms or firms that represent securities firms. Former SEC personnel who take positions in the regulated industry or their representatives, including law firms, may have enhanced credibility as a result of their SEC experience, and thus greatly aid in encouraging firms to adopt a culture of compliance.  Better communications. When employees of regulated entities or law firms representing regulated entities are familiar with SEC regulations and the context of securities investigations and enforcement, SEC and the employees of regulated entities or law firms may communicate more efficiently and openly about the matter being discussed.  Recruitment of specialized expertise. The perceived value of SEC experience may bolster the agency’s ability to recruit individuals with current knowledge and expertise in securities products and other areas that SEC regulates. Attracting specialized market experts, as well as those with the expertise that SEC traditionally has sought (including lawyers, accountants, and compliance personnel) helps the agency fulfill its mission of investor protection. Academic researchers and citizen advocacy groups identified the following challenges of employee movement between SEC and the private sector:  Competing interests for current SEC employees. SEC employees may be influenced by the prospect of future employment opportunities to be more lenient or favor prospective future employers while undertaking SEC actions. For example, according to one academic researcher, a current SEC employee could seek enforcement compromises through settlements rather than pursue prosecution actions. Such an outcome might result in more desirable terms for the securities firm, which might lead to a more favorable reputation of the SEC employee within the industry, while still successfully bringing to conclusion an enforcement action for SEC.  Appearance of undue influence. Personal contact between current and former SEC employees may create the appearance of conflicts of interest. For example, even without direct evidence that undue influence has affected an enforcement action, the appearance of a conflict of interest could undermine confidence in the enforcement process and SEC. According to SEC officials, SEC has controls to address these challenges, as described in the next section of this report. Although SEC Has Multiple Controls Related to Conflicts of Interest, Documentation of Ethics Issues Varies SEC Provides Information to Employees on Post- Employment Requirements and Restrictions but Has Not Consistently Documented Ethics Advice SEC has a number of controls for managing post-employment and conflict-of-interest issues. These include training and information for employees, staffing decisions, work process controls, ethics advice, exit requirements for departing employees, and supplemental post- employment rules for certain employees. According to federal ethics regulations, federal agencies must have an ethics training program to educate employees about ethics laws and rules and how to obtain ethics advice. SEC requires its new employees to attend initial training that includes ethics-related issues and provides new employees printed information that outlines post-employment restrictions and provides contact information for agency ethics officials. SEC also requires that new employees submit financial disclosures, as applicable, to identify any personal financial interests they may have and determine if any potential financial conflicts of interest exist. In addition to providing initial training and information to new employees, SEC makes training available and provides information to all employees on an ongoing basis, including information about post-employment rules and conflict-of-interest issues. SEC’s 2011 training plan includes both in- person and online training sessions that cover topics such as conflicts of interest, employment seeking, post-employment issues, and SEC supplemental rules. The SEC Ethics Office currently provides information about ethics rules and regulations (as well as conflict-of- interest and post-employment restrictions) to employees through the SEC intranet and by e-mail. For example, the Ethics Office recently completed an SEC ethics manual that summarizes post-employment and conflict-of- interest rules and regulations (both federal and agency-specific). The manual is available to employees through the SEC intranet. SEC divisions and offices we reviewed take steps during their staffing processes that are designed to manage, or that may have the effect of managing, potential conflicts of interest involving current employees. While individuals are ultimately responsible for identifying conflicts of interest, the divisions and offices we spoke with take additional steps to help manage these issues. For example, offices within the Division of Corporation Finance, which reviews company filings and disclosures in 12 groups organized by industry, often rotate staff assignments for different stages of the file review process each year to provide a fresh look at the disclosures or for training purposes. This rotation process also helps prevent employees from becoming too close to specific companies. Additionally, the Division of Enforcement has a 1-year recusal policy that prohibits new employees from working on matters that involve their former employers or clients of their former employers, regardless of the employees’ previous involvement in a particular matter. Division of Enforcement officials told us supervisors generally were aware of matters from which their staff recuse themselves, and would use that information in future staffing decisions to further avoid potential conflicts of interest involving division employees. According to SEC managers and employees with whom we spoke, systems for documenting key decisions, multiple levels of review, and controls for staff involvement and communication reduce the likelihood that any individual employee could exert undue influence on SEC decisions related to examinations and investigations. For example, within OCIE, work papers document decisions and actions related to examinations, and a tracking system documents higher-level data such as examination dates, participants, findings, and actions taken. Similarly, the Division of Enforcement documents investigations using an electronic case management system that, among other things, identifies and documents individuals with substantial involvement in particular matters or cases and documents key decisions such as the closing of investigations. This information is available to division managers to research particular conflict-of-interest issues involving specific employees or to support requests for information by the Ethics Office. The division also has a multilayered review process. For example, according to SEC officials, numerous staff and supervisors participate in decisions to recommend whether an enforcement case should be litigated or settled, and if settled, what the specifics of the settlement terms should be. These decisions then are reviewed by staff in other SEC divisions and offices, the Office of General Counsel, and individual commissioners and their counsel. The Division of Enforcement also recently updated its controls for handling tips, complaints, and referrals to better manage and document referrals it receives from other SEC divisions and offices. The division has developed training to remind employees of their responsibilities regarding impartiality when performing their official duties and to instruct employees where they can find additional information about impartiality. Finally, to help ensure the division maintains its independence and transparency, the Division of Enforcement has an external communication policy that outlines best practices for senior officials’ communications with outside parties related to ongoing, active investigations. The policy encourages senior officials to include the enforcement staff working on an investigation in any material communications with outside parties. It also directs senior officials to consider notifying staff not included in such communications and to consider documenting such events through written notes, emails, or workpapers. Some of these controls were implemented by SEC in response to SEC IG reviews and recommendations related to potential conflict-of-interest issues. The Ethics Office manages issues related to conflicts of interest involving SEC employees. Employees are encouraged to seek guidance from the Ethics Office and to notify supervisors of conflict-of-interest issues, particularly if they have a conflict of interest that requires a recusal from matters to which they have been assigned. According to the SEC Ethics Counsel, ethics officials frequently advise current and former employees about issues related to their involvement in SEC matters. Since 2009, employees have been able to use an internal, online system on a voluntary basis to document their recusal information, as SEC lacks discretionary authority to require employees to document recusal information. Additionally, ethics officials provide written and oral advice to employees about potential conflicts of interest. Although we found that Ethics Office officials may document their advice through e-mail or other methods, documentation has not been done consistently or routinely and SEC lacks standards for documenting ethics advice about conflicts of interest and post-employment issues to current and former employees. According to Standards for Internal Control in the Federal Government, federal agencies’ internal control steps and key events—which in this context could include ethics advice provided— should be clearly documented and readily available. Without standards for documenting ethics advice, SEC currently relies on institutional memory and the ability of individuals still working at the agency to recall past ethics advice and documentation they may have kept. These documentation practices may create challenges, particularly in situations in which an ethics official who provided advice has separated from SEC. Further, the lack of standards for documenting ethics advice may impair SEC’s ability to clearly demonstrate that such advice was provided. According to the SEC Ethics Counsel, the nature of ethics issues, specifically the way that each situation involves circumstances and experiences unique to each employee, makes it difficult to standardize documentation or advice. However, the movement of SEC employees to the private sector presents unique risks to SEC relating to its management of documentation of ethics advice. Findings in a recent SEC IG report highlight these potential risks. The SEC IG reviewed issues involving a former associate director in the Division of Trading and Markets who left SEC to work for a high-frequency trading firm. While at SEC, the employee’s division examined a market event in which the role of high-frequency trading firms was being explored. The SEC IG found that the former employee took appropriate steps to recuse herself after a potential employment offer was initiated by a high-frequency trading firm; however, SEC’s lack of documentation resulted in an unclear record of the projects from which she recused herself and the projects on which she continued to work. While the SEC IG’s report concluded that there was no evidence suggesting the former associate director had violated any post-employment restrictions, this case highlighted the potential risks of inadequate documentation, which could raise questions about the appearance of conflicts of interest and might harm SEC’s reputation. SEC also has controls in place for managing an employee’s separation from the agency. When employees leave SEC, they must complete an exit process that includes counseling on post-employment restrictions and receiving information about post-employment rules. As mentioned previously, starting in December 2010, the SEC Ethics Office began administering mandatory exit interviews for all departing employees that includes a question asking for the separating employee’s next employer, which respondents are asked to provide voluntarily. This information then can be used as part of the exit interview to advise departing staff about potential conflicts of interest related to their SEC experience they may encounter in their new positions. The Ethics Office maintains hard copies of these employee exit forms. SEC also requires senior employees to obtain post-employment counseling from the Ethics Office prior to seeking outside employment, as a way to provide advice about post-employment rules and regulations and help protect SEC and employees from potential conflicts of interest or misconduct. In addition to agencywide controls and office- or division-specific practices, SEC has supplemental rules, developed under the agency’s authority, that affect the post-employment activities of certain former employees. These rules, under specific conditions, require former employees or firms that hire them to receive permission to appear before SEC regarding particular matters. More specifically:  As discussed previously, former employees wishing to appear before SEC within 2 years of separating from the agency must request approval from SEC by filing a notice of appearance letter (an 8b letter). An 8b letter would include the name of the former employee’s current employer, previous position at SEC, and the matter for which the former employee was seeking to appear before SEC.  Similarly, firms participating in a matter—or with an interest in participating in a matter—that have hired a former SEC employee who is prohibited from working on that matter must provide to SEC in writing (referred to as an 8d letter) that the firm has appropriate controls in place to separate, or “wall off,” the disqualified individual. SEC reviews the firm’s statements about controls and determines whether the firm can participate in the matter. SEC refers to this rule as its “imputation of disqualification” rule. SEC ethics officials review 8b and 8d letters. For 8b letters, they determine whether any conflicts of interest exist concerning the former employee and the matter for which he or she wishes to appear. Ethics officials consult with former SEC supervisors and peers of the individual, and possibly the former employee, regarding the matter. SEC stamps 8b letters when approved or issues a response to a former employee when an 8b letter is not approved. For 8d letters, the SEC General Counsel forwards the letters to ethics officials, who conduct research and recommend a response. In turn, the General Counsel issues a written response to firms based on the Ethics Office’s review. SEC maintains hard copies of the 8b and 8d letters and the agency’s 8d letter responses. While Select Agencies Have Controls Similar to SEC’s to Help Manage Post-Employment and Conflict-of-Interest Issues, Differences Exist SEC’s controls to help manage post-employment and conflict-of-interest issues are similar to the controls of the other agencies we reviewed. We spoke with representatives of seven agencies and found that the agencies shared several types of controls similar to those of SEC, such as training and exit requirements for departing employees (see fig. 2). Much like SEC, all the agencies train and educate employees about post- employment restrictions and conflict-of-interest issues and collect financial disclosures from certain employees. Similar to SEC, five agencies reported they had mandatory exit procedures for departing employees, although the form and substance of these procedures may vary. For example, CFTC withholds an employee’s last paycheck until the employee has completed a clearance checklist and requires all senior employees to complete an ethics briefing. No other agency we contacted said they used this approach to ensure employee participation in the exit process. Additionally, similar to SEC, three agencies have agency-specific supplemental rules related to post-employment. For example, CFTC has a supplemental rule that requires former employees who intend to represent clients before CFTC within 2 years of leaving the agency to notify CFTC in writing before beginning representation. FTC has a supplemental clearance rule that requires former employees to receive clearance to communicate with, appear before, or work behind-the- scenes on any FTC matter or proceeding that was pending while they were employed at FTC, even if their participation in the matter or proceeding at their new place of employment is solely in a behind-the- scenes capacity. Further, members of the Federal Reserve’s Board of Governors are prohibited from holding any position with a member bank of the Federal Reserve System for 2 years after they leave the Board, though only if they have not completed the term to which they were appointed. While SEC’s controls are similar to many of those of other agencies, there are some differences. Within the Federal Reserve System, the Federal Reserve Banks have a system for tracking their examiners’ prior employment and banking relationships to help manage potential conflicts of interest. Specifically, Federal Reserve Banks (which combine both public and private elements) have a system available to compare examiners’ prior employment and banking relationships with staffing assignments to verify that examiners are sufficiently independent of potential impairments. Further, certain former employees of Federal Reserve Banks and NCUA are subject to additional statutory post- employment rules. The Intelligence Reform and Terrorism Prevention Act of 2004 provides that former senior examiners from Federal Reserve Banks and NCUA, as well as former senior examiners of other federal agencies that examine financial institutions, are prohibited for 1 year from accepting compensation from certain banks or credit unions they examined during their last year of employment. Finally, SEC’s recently implemented practice of collecting and documenting new employer information during exit interviews is unique among the other federal agencies we reviewed. FINRA, a self-regulatory organization, began requesting new employer information by e-mail from departing employees on a voluntary basis in September 2010, and began compiling the information into a database in November 2010. While many of the agencies we reviewed informally may ask employees the name of their new employer, none but SEC and FINRA systematically document such information. While Stakeholders Identified Additional Options for Managing Potential Conflicts of Interest, Each Involves Advantages and Disadvantages Stakeholders with whom we spoke identified additional options for managing potential conflicts of interest, and existing controls at the other agencies provide examples of other options. These options include improving documentation of employee recusals, developing a database to identify potential conflicts, tracking employees’ participation in SEC matters, and the extension or expansion of cooling-off periods. Each of these options has advantages and disadvantages. Better documentation of recusals. Establishing better documentation of employee recusals and related matters may provide SEC with additional information that it could use to screen for potential conflicts of interest. While SEC currently has an online system in which recusals can be documented, employee use of the system is optional. According to the SEC IG, better documentation of recusals and the related matters would help in creating a history of steps employees have taken to avoid potential conflicts of interest and would provide supervisors with information on matters for which certain employees have recused themselves and on which they cannot work. However, according to SEC officials, supervisors are generally aware of the matters from which their employees have recused themselves. Further, requiring documentation of recusals would require SEC supervisors or ethics officials to develop a method to enforce the requirement and ensure that recusals are in fact being documented. Some SEC employees stated that documenting recusals may have a limited impact on further managing potential conflicts of interest. Specifically, they stated that it is in an employee’s interest to avoid potential conflicts of interest regardless of whether or not recusals are documented. Lastly, according to the SEC Ethics Counsel, SEC does not have the discretionary authority to require documentation of recusals. Developing a database to help identify potential conflicts of interest. Developing a database that contains information on each SEC employee’s prior employment, financial interests, and work history while at SEC could help manage potential conflicts of interest involving current and former employees. SEC managers could use the information when considering staffing decisions, such as those related to SEC examinations or investigations. As previously mentioned, the Federal Reserve Banks use a system to track their employees’ prior employment and banking relationships to identify potential conflicts of interest. According to Federal Reserve officials, the system is updated on an annual basis or as necessary based on such events as changes in an employee’s investments. In SEC’s case, such a database could also be used when employees separate from the agency, to document matters for which they were personally and substantially involved while an SEC employee. However, setting up such a database would require employees to identify and self report potential conflicts of interest to SEC. Thus, the system would not help identify any potential conflicts or issues that employees do not report. Establishing such a database also would go beyond the current online recusal system SEC has in place, and thus likely would require SEC to either enhance that system to include additional information or develop a new system entirely. Further, while the system would provide additional transparency about potential conflicts of interest, a few SEC employees and academics with whom we spoke suggested that such documentation would not deter an individual from violating conflict-of-interest restrictions if the individual has intentions to do so. Tracking employees’ participation in SEC matters. Maintaining a list of matters in which employees participate, such as enforcement cases or examinations, may help to promote transparency by documenting what employees have worked on prior to separating from the agency. Such a list could help SEC identify potential conflicts of interest. For example, the list could be maintained by employees and then provided to the Ethics Office during their exit interview so that ethics officials could review the list of matters and discuss any potential issues that might be related to an employee’s post-SEC employment. According to representatives from citizen advocacy groups with whom we spoke, documentation of matters SEC employees participate in may help to provide transparency on potential conflicts when they leave SEC to work for law firms or financial firms. Current systems in the Division of Enforcement, Division of Corporation Finance, and OCIE do not track employee participation in all matters, so SEC would need to evaluate methods to determine the best manner in which to document this information. For example, while providing a list of matters in which employees have participated might be sufficient for a review during their exit interview, documenting this information in a system may provide more benefits, such as the ability to readily search for the information in the future. Further, the level of participation in a matter also would need to be determined before establishing whether employee participation in a specific SEC matter was personal and substantial and therefore subject to specific post- employment restrictions. Lastly, according to SEC officials, such documentation may not be necessary because the Ethics Office can coordinate with SEC managers to determine in which matters an employee participated, and their level of participation. Extending cooling-off periods. Extending cooling-off periods beyond the current limits placed on federal government employees under section 207 would further limit former SEC employees, including former senior- level employees, from communicating with or appearing before the SEC for certain matters they participated in while at SEC. According to academic researchers with whom we spoke and representatives from citizen advocacy groups, extending these cooling-off periods would allow for additional time to pass so that the impact of a former SEC employee then working on an SEC-related matter would be greatly diminished. Once the former employee is able to work on these matters, their knowledge of and familiarity with specific SEC matters would be limited, and thus the impact of participating in such matters would be reduced. However, representatives from law firms and financial firms stated that existing cooling-off periods are sufficient to diminish the impact or influence that a former SEC employee might have on a matter. Representatives from law firms, including some with former SEC employees, stated that any useful information former SEC employees take with them when they separate from SEC likely would be of little value by the time current cooling-off periods expire. Some SEC employees with whom we spoke also stated that extending cooling-off periods would place significant limitations on the ability of SEC employees to obtain employment outside of the agency. For example, employers might not find it feasible to hire SEC employees that are not able to represent their company or communicate with SEC for an extended period of time. Lastly, an extension of cooling-off periods under section 207 would require legislative action, because federal agencies, including SEC, do not have authority to extend cooling-off periods. Expanding cooling-off periods. Expanding cooling-off periods to include behind-the-scenes activity may provide an additional mechanism to manage potential conflicts of interest. While section 207 places restrictions on communication and representational activities, it does not bar behind-the-scenes activity. Including behind-the-scenes assistance as part of the post-employment restrictions would help manage situations, such as those identified in a recent SEC IG report, in which a former SEC employee can work on a matter shortly after leaving SEC as long as he or she is not communicating with SEC or representing a firm or client before SEC. For example, a senior-level SEC employee could leave SEC and obtain employment with a regulated firm and, shortly after separating from SEC, would be able to assist the firm with developing a comment letter or a defense strategy regarding an SEC matter so long as that individual does not sign the comment letter or appear before or communicate with SEC. However, similar to the extension of cooling-off periods, expanding restrictions to include behind-the-scenes assistance would require revisions to governmentwide post-employment statutes. Finally, behind- the-scenes assistance may already be addressed in professional association ethics standards or rules for attorneys and accountants. For example, state bar professional conduct rules generally would prohibit former government attorneys from providing behind-the-scenes assistance if they previously participated personally and substantially in that matter. Conclusions SEC has established a number of controls to address potential post- employment and conflict-of-interest issues, including providing training to current employees about post-employment restrictions and imposing post-employment requirements and restrictions. However, SEC has not consistently documented ethics-related advice. Better documentation of ethics advice could improve SEC’s ability to demonstrate that its officials are providing appropriate advice to current and former employees, and that the agency is taking steps to minimize the potential for post- employment violations or conflicts of interest. It would also add transparency to SEC’s implementation of agency-specific controls related to post-employment and conflict-of-interest issues, which could better protect the agency from concerns about its employees and their movement between SEC and SEC-regulated firms or firms that represent them. Conversely, without standards for documenting ethics advice, inconsistent documentation prevents SEC from being able to readily determine the extent to which previous conversations or requests occurred regarding specific employees’ post-employment or conflict-of- interest issues, particularly in situations where the relevant ethics official who provided the advice has separated from SEC. Further, without such documentation, SEC lacks evidence of steps it has taken when providing ethics advice to current and former employees about post-employment or conflict-of-interest issues. Recommendation for Executive Action To promote transparency and help strengthen SEC’s procedures for documenting events related to potential current and post-employment issues associated with the movement of employees between SEC and other employers, we recommend that the SEC Chairman establish standards for documentation of ethics advice. Agency Comments We provided a draft of this report to SEC for review and comment. In its comment letter, which is reprinted in appendix II, SEC generally agreed with our findings and recommendation. SEC also stated that, pursuant to our recommendation, it has started to draft standards concerning the documentation of ethics advice relating to the issues identified in this report. SEC also provided technical comments that we incorporated where appropriate. We are sending copies of this report to the appropriate congressional committees and the Chairman of the Securities and Exchange Commission, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your 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. Appendix I: Scope and Methodology To determine how many individuals separated from the Securities and Exchange Commission (SEC), we obtained and analyzed SEC separation data for employees who left the agency between October 1, 2005 and September 17, 2010. We identified 2,127 employees who had left the agency during that time. We assessed the reliability of the data we obtained from SEC by verifying that date ranges were consistent with our data request, that data elements were consistent with agency descriptions, and that occupation types were reasonable for the nature of SEC’s mission. Additionally, we verified that occupation codes matched job descriptions and verified justifications for duplicate entries. We determined that the data were sufficiently reliable for purposes of this report. For reporting on these data, we developed occupation categories relevant to SEC’s examination and investigative efforts—accounting, legal, economists, and examination—based on our review of occupation codes reflected within SEC attrition data and the Office of Personnel Management (OPM) job series codes: accounting and budget group (OPM codes 0500–0599); legal and kindred group (OPM codes 0900– 0999); economists (OPM code 110); and the inspection, investigation, enforcement, and compliance group (OPM codes 1800–1899), respectively. We excluded occupations (such as information technology specialist, human resource specialist, and secretary) not consistent with the categories we developed. We also considered selected separation types for our analysis. We included resignations, removals, select terminations, and most retirements. We excluded transfers to other government agencies, retirements due to disability, death, termination during a probationary period, and expiration of term appointments. As shown in table 1, a total of 784 individuals met the selected criteria for type of separation and occupation type. The following table provides the number of individuals who fit in one of the selected separation types from each occupation category: To determine where some former SEC employees obtained employment after separating from SEC, we obtained and analyzed notice of appearance requests (also referred to as 8b letters). Specifically, we obtained and analyzed a total of 825 letters filed by former SEC employees requesting approval to appear before SEC from October 3, 2005 through October 4, 2010. These letters typically included the name of the former employee, their former position with SEC, and their current employer at the time they filed the letter, among other information. We also conducted Internet-based searches on a nonprobability sample from the 784 individuals who met the selected criteria for types of separation and occupation types described previously. We selected the sample of 150 individuals by selecting the 50 most recently separated employees in our data set (May 21, 2010 to September 10, 2010), the 50 who separated from SEC in the median period of time in our data set (April 5, 2007 to July 13, 2007), and the 50 least recently separated SEC employees in our data set (October 1, 2005 to December 30, 2005). We searched for the 150 selected individuals using the Web-based information sources Linkedin.com and Martindale.com, which are a professional networking site and a site containing profiles for lawyers and firms in the United States, respectively. We also reviewed Internet search results including employer Web sites and trade journal articles. We considered our Internet search results to be sufficiently reliable for purposes of this report if the search result source specifically referenced the individual’s name, former SEC position, and approximate separation time, as indicated in SEC’s attrition data. When approximate separation time was not included, we considered other publicly available information such as location or education. Lastly, we conducted an interview with the Association of SEC Alumni to obtain officials’ perspectives on where former SEC employees obtain employment after separating from SEC. To describe the advantages and disadvantages of employee movement between SEC and regulated firms or firms that represent them, we conducted in-person and telephone interviews with SEC officials, representatives of three securities firms and three law firms, four academic researchers who have conducted research on the financial industry and government regulators, and representatives of three citizen advocacy groups that conduct work on government ethics issues. We selected securities firms to interview based on reported total sales revenue. Specifically, using Nexis.com’s Company Dossier file, we identified total annual sales revenue for firms with North American Industrial Code 523120, which corresponds to security brokerage firms, or code 523110, which corresponds to investment banking and securities firms. Total sales revenues reflected the most recently reported information for the individual financial institutions. We selected the three firms with the highest total annual sales revenue based on the results of this search. We selected law firms to interview based on our analysis of 8b letters filed with SEC from October 3, 2005 to October 4, 2010. We identified and selected firms that were represented most frequently in terms of total number of 8b letters filed by employees, total number of employees that filed 8b letters, and total number of times a firm was in the list of most 8b letters filed by employees across individual years during the time period. To describe internal controls SEC has in place to manage potential conflicts of interest associated with the movement of employees to the private sector, we obtained documentation on controls related to managing potential post-employment and conflict-of-interest issues. We reviewed SEC-specific post-employment guidance and policies, and interviewed managers and employees of relevant SEC divisions and offices. We selected SEC divisions and offices to review based on our analysis of SEC separation data. Starting with the 784 individuals who met the selected criteria for types of separation and occupation types described above, we categorized individuals as senior or nonsenior based on an employee’s pay plan and grade at the time of his or her separation. Based on this group of 289 senior and 495 nonsenior individuals, we identified four divisions and offices with the highest attrition of senior and nonsenior employees. They were the Division of Corporation Finance (127 separations: 26 senior employees and 101 nonsenior employees); the Division of Enforcement (92 separations: 40 senior employees and 52 nonsenior employees); the Office of Compliance Inspections and Examinations (45 separations: 11 senior employees and 34 nonsenior employees); and the Office of the Chief Accountant (44 separations: 35 senior employees and 9 nonsenior employees). We interviewed management-level staff in each of these four divisions and offices. We also obtained documentation from the SEC Ethics Office and interviewed the SEC Ethics Counsel about controls and practices the Ethics Office has in place and perspectives on post- employment and conflict-of-interest issues. Furthermore, we reviewed Standards for Internal Control in the Federal Government to identify any controls that may help manage potential post-employment and conflict-of- interest issues. We interviewed SEC employees in three of the divisions and offices we selected. To collect perspectives from SEC employees on issues related to movements of SEC employees to the private sector and controls SEC has in place to manage these issues, we obtained and analyzed current SEC employee data as of January 24, 2011, for the Divisions of Corporation Finance and Enforcement and for the Office of Compliance Inspections and Examinations. In analyzing these data for 2,573 current employees, we examined current nonsenior employees in two assigned categories—newer employees (employees with 2 to 4.3 years of SEC experience) and more experienced employees (employees with more than 7 years of SEC experience). Based on SEC separation data, 4.3 years was the median amount of time an employee had spent at SEC prior to separating from the agency. Using these data, we then randomly selected 10 employees to interview based on the following criteria: 1) one new and one experienced employee from each of the three divisions and offices we reviewed (six employees) and 2) two field-based employees— one new and one experienced—from each division or office with a field office location (four employees). To compare SEC’s controls with controls across other agencies, we obtained documentation on internal controls related to managing potential conflicts of interest and post-employment issues and interviewed officials from seven agencies. We selected enforcement and regulatory agencies with missions similar to SEC’s and another agency with experience managing post-employment issues. These agencies were the Commodity Futures Trading Commission, the Department of Defense, the Federal Communications Commission, the Board of Governors of the Federal Reserve System, the Federal Trade Commission, the Financial Industry Regulatory Authority, and the National Credit Union Administration. We also obtained documentation and interviewed officials from the Office of Government Ethics for perspectives on federal rules, restrictions, and controls related to conflict-of-interest and post-employment issues. To identify additional options available to manage post-employment and conflict-of-interest concerns, we interviewed officials from the seven agencies identified above, academic researchers, and representatives from law firms, including some with former SEC employees, financial firms, and citizen advocacy groups. We also reviewed existing governmentwide, post-employment restrictions and obtained perspectives on the extent to which extensions or expansions of these restrictions would help to better manage post-employment and conflict-of-interest concerns. We also examined controls and post-employment restrictions specific to other agencies. We conducted our work between August 2010 and July 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. Appendix II: Comments from the Securities and Exchange Commission Appendix III: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments In addition to the contact named above, Andrew Pauline (Assistant Director), Heather Chartier, Chase Cook, James Lager, Tarek Mahmassani, Marc Molino, Luann Moy, Linda Rego, and Jennifer Schwartz made key contributions to this report.

Many Securities and Exchange Commission (SEC) employees leave the SEC each year, and some of these former employees go to work for firms regulated by SEC or the law or consulting firms that represent them. This practice raises questions about the potential impact on SEC's ability to effectively carry out its mission, including the potential for undue influence by former SEC employees on SEC matters or cases. The Dodd-Frank Wall Street Reform and Consumer Protection Act required GAO to examine the movement of former SEC employees to regulated firms and the associated concerns. Among other things, this report examines (1) the extent to which employees leave SEC to work for or represent regulated entities and the potential issues associated with such movements and (2) internal controls SEC has in place to manage potential conflicts of interest and how these controls compare across other agencies. To address these objectives, GAO analyzed data on former SEC employees, reviewed SEC's and other agencies' internal controls, and interviewed current and former SEC officials. Because SEC historically has not collected future employer information from separating employees on an agencywide basis, complete information on where former SEC officials obtained employment is not currently available. Based on available SEC attrition data, about 37 percent of the more than 2,000 employees who separated from SEC between October 2005 and September 2010 were in occupation categories that included examiners, accountants, economists, or attorneys--occupations particularly relevant to SEC examinations and investigations. GAO analyzed notice of appearance requests--which are required when former SEC employees wish to appear before SEC, within 2 years of their separation, for purposes of representing their firm or client--submitted between October 2005 and October 2010. Sixteen entities, consisting primarily of law and consulting firms, accounted for approximately 35 percent of the individuals filing these notices. GAO also selected a nongeneralizable sample of 150 former employees from occupation categories relevant to SEC's examination and investigative efforts and searched publicly available sources for information about their post-SEC employment. These individuals frequently obtained positions with financial, consulting, or law firms that represent firms regulated by SEC. According to SEC officials, representatives from law and financial firms, and academic researchers with whom GAO spoke, the potential benefits of employees moving between SEC and the private sector include bolstering SEC's ability to attract experts to help fulfill its mission and increasing understanding of SEC rules and regulations among industry participants. Academic researchers and citizen advocacy groups described potential challenges of such movements, such as the appearance of potential conflicts of interest when former SEC staff work for or represent regulated firms. SEC has a number of controls for managing post-employment and conflict-of-interest issues, and many of SEC's controls are similar to those of other agencies. For example, the SEC Ethics Office provides information to employees about ethics rules and regulations as well as agency-specific conflict-of-interest and post-employment restrictions. Also, some SEC divisions and offices take steps through staffing and work processes to manage potential conflicts of interest and have multiple levels of review and systems for documenting key decisions, such as closing SEC investigations. As previously recommended by GAO, SEC also recently began collecting future employer information from separating employees. This information can be used as part of SEC's mandatory exit interviews to advise departing staff about potential conflicts of interest they might encounter in their new positions related to their SEC experience. While SEC ethics officials routinely advise current and former employees on post-employment and conflict-of-interest issues, SEC has not consistently documented this advice. The agency's lack of documentation standards could limit SEC's and employees' ability to demonstrate that appropriate consultation occurred and could contribute to questions about the movement of employees between SEC and the private sector.

Background Army Transformation and the FCS Concept A decade after the cold war ended, the Army recognized that its combat force was not well suited to perform the operations it faces today and is likely to face in the future. The Army’s heavy forces had the necessary firepower but required extensive support and too much time to deploy. Its light forces could deploy rapidly but lacked firepower. To address this mismatch, the Army decided to radically transform itself into a new “Future Force.” The Army expects the Future Force to be organized, manned, equipped, and trained for prompt and sustained land combat. This translates into a force that is responsive, technologically advanced, and versatile. These qualities are intended to ensure the Future Force’s long-term dominance over evolving, sophisticated threats. The Future Force is to be offensively oriented and will employ revolutionary operational concepts, enabled by new technology. This force is to fight very differently than the Army has in the past, using easily transportable lightweight vehicles, rather than traditional heavily armored vehicles. The Army envisions a new way of fighting that depends on networking the force, which involves linking people, platforms, weapons, and sensors seamlessly together. The Army has determined that it needs more agile forces. Agile forces would possess the ability to seamlessly and quickly transition among various types of operations from support operations to warfighting and back again. They would adapt faster than the enemy thereby denying it the initiative. Agile forces would allow commanders of small units the authority and high quality information to act quickly to respond to dynamic situations. To be successful, therefore, the transformation must include more than new weapons. It must be extensive, encompassing tactics and doctrine as well as the very culture and organization of the Army. The FCS Solution FCS will provide the majority of weapons and sensor platforms that comprise the new brigade-like modular units of the Future Force known as Units of Action. Each unit is to be a rapidly deployable fighting organization about the size of a current Army brigade but with the combat power and lethality of the current larger division. The Army also expects FCS-equipped units of action to provide significant warfighting capabilities to the overall joint force. The Army is reorganizing its current forces into modular, brigade-based units akin to units of action. FCS is a family of 18 manned and unmanned ground vehicles, air vehicles, sensors, and munitions that will be linked by an information network. These include, among other things, eight new ground vehicles to replace current vehicles such as tanks, infantry carriers and self-propelled howitzers, four different unmanned aerial vehicles, several unmanned ground vehicles, and attack missiles that can be positioned in a box-like structure. The manned ground vehicles are to be a fraction of the weight of current weapons such as the Abrams tank and Bradley fighting vehicle, yet are to be as lethal and survivable. At a fundamental level, the FCS concept is replacing mass with superior information; that is, to see and hit the enemy first, rather than to rely on heavy armor to withstand a hit. The essence of the FCS concept itself—to provide the lethality and survivability of the current heavy force with the sustainability and responsiveness of a force that weighs a fraction as much—has the intrinsic attraction of doing more with less. The FCS concept has a number of progressive features, which demonstrate the Army’s desire to be proactive in its approach to preparing for potential future conflicts and its willingness to break with tradition in developing an appropriate response to the changing scope of modern warfare. If successful, the program will leverage individual capabilities of weapons and platforms and will facilitate interoperability and open system designs. This is a significant improvement over the traditional approach of building superior individual weapons that must be netted together after the fact. Also, the system-of- systems network and weapons could give managers the flexibility to make best value tradeoffs across traditional program lines. This transformation of the Army, both in terms of operations and equipment, is underway with the full cooperation of the Army warfighter community. In fact, the development and acquisition of FCS is being accomplished using a collaborative relationship between the developer (program manager), the contractor, and the warfighter community. FCS Program Has Been Restructured During the Last Year The FCS program was approved to start system development and demonstration in May 2003. On July 21, 2004, the Army announced its plans to restructure the program. The restructuring responded to direction from the Army Chief of Staff and addresses risks and other issues identified by external analyses. Its objectives include: Spinning off ripe FCS capabilities to current force units; Meeting Congressional language for fielding the Non-Line of Sight Cannon; Retaining the system-of-systems focus and fielding all 18 systems; Increasing the overall schedule by 4 years; and Developing a dedicated evaluation unit to demonstrate FCS capabilities The program restructuring contained several features that reduce risk— adding four additional years to develop and mature the manned ground vehicles; adding demonstrations and experimentation; and establishing an evaluation unit to demonstrate FCS capabilities. The program restructuring also adds scope to the program by reintroducing four deferred systems, adding four discrete spirals of FCS capabilities to the current force, and accelerating the development of the network. About $6.1 billion was added to the system development and demonstration contract and the Army has recently announced that the detailed revision of the contract has been completed. Objectives, Scope, and Methodology To develop the information on whether the FCS program was following a knowledge-based acquisition strategy and the current status of that strategy, we interviewed officials of the Office of the Under Secretary of Defense (Acquisition, Technology, and Logistics); the Secretary of Defense’s Cost Analysis Improvement Group; the Assistant Secretary of the Army (Acquisition, Logistics, and Technology); the Army’s Training and Doctrine Command; Surface Deployment and Distribution Command; the Program Manager for the Unit of Action (previously known as Future Combat Systems); the Future Combat Systems Lead Systems Integrator; and LSI One Team contractors. We reviewed, among other documents, the Future Combat Systems’ Operational Requirements Document, the Acquisition Strategy Report, the Baseline Cost Report, the Critical Technology Assessment and Technology Risk Mitigation Plans, and the Integrated Master Schedule. We attended the FCS Management Quarterly Reviews, In-Process Reviews, and Board of Directors Reviews. In our assessment of the FCS, we used the knowledge-based acquisition practices drawn from our large body of past work as well as DOD’s acquisition policy and the experiences of other programs. We discussed the issues presented in this statement with officials from the Army and the Secretary of Defense, and made several changes as a result. We performed our review from May 2004 to March 2005 in accordance with generally accepted auditing standards. The FCS Program Is An Unprecedented Challenge The FCS program faces significant challenges in setting requirements, developing systems, financing development, and managing the effort. It is the largest and most complex acquisition ever attempted by the Army. The Requirements Challenge The Army wants the FCS-equipped unit of action to be as lethal and survivable as the current heavy force, but to be significantly more responsive and sustainable. For the unit of action to be lethal, it must have the capability to address the combat situation, set conditions, maneuver to positions of advantage, and to engage enemy formations at longer ranges and with greater precision than the current force. To provide this level of lethality and reduce the risk of detection, FCS must provide high single- shot weapon effectiveness. To be as survivable as the current heavy force, the unit of action must find and kill the enemy before being seen and identified. The individual FCS systems will also rely on a layered system of protection involving several technologies that lowers the chances of a vehicle or other system being seen and hit by the enemy. To be responsive, the unit of action must be able to rapidly deploy anywhere in the world and be rapidly transportable by various means—particularly by the C-130 aircraft—and ready to fight upon arrival. To facilitate rapid transportability on the battlefield, FCS vehicles are to match the weight and size constraints of the C-130 aircraft. The unit of action is to be capable of sustaining itself for periods of 3 to 7 days depending on the level of conflict—necessitating a small logistics footprint. This requires subsystems with high reliability and low maintenance, reduced demand for fuel and water, highly effective weapons, and a fuel-efficient engine. Meeting all these requirements is unprecedented not only because of the difficulty each represents individually, but because the solution for one requirement may work against another requirement. For example, solutions for lethality could increase vehicle weight and size. Solutions for survivability could increase complexity and lower reliability. It is the performance of the information network that is the linchpin for meeting the other requirements. It is the quality and speed of the information that will enable the lethality and survivability of smaller vehicles. It is smaller vehicles that enable responsiveness and sustainability. The Development Challenge In the Army’s own words, the FCS is “the greatest technology and integration challenge the Army has ever undertaken.” It intends to concurrently develop a complex, system-of-systems–an extensive information network and 18 major weapon systems. The sheer scope of the technological leap required for the FCS involves many elements. For example: First-of-a-kind network will have to be developed that will entail development of unprecedented capabilities—on-the-move communications, high-speed data transmission, dramatically increased bandwidth, and simultaneous voice, data and video; The design and integration of 18 major weapon systems or platforms has to be done simultaneously and within strict size and weight limitations; At least 53 technologies that are considered critical to achieving FCS’ critical performance capabilities will need to be matured and integrated into the system-of-systems; Synchronizing the development, demonstration, and production of as many as 157 complementary systems with the FCS content and schedule. This will also involve developing about 100 network interfaces so the FCS can be interoperable with other Army and joint forces; and At least an estimated 34 million lines of software code will need to be generated (about double that of the Joint Strike Fighter, which had been the largest defense undertaking in terms of software to be developed). The Financial Challenge Based on the restructured program, the FCS program office initially estimated that FCS will require $28.0 billion for research and development and around $79.9 billion for the procurement of 15 units of action. The total program cost is expected to be at least $107.9 billion. These are fiscal year 2005 dollars. Since this estimate, the Army has released an updated research and development cost estimate of $30.3 billion in then-year dollars. An updated procurement estimate is not yet available. The Army is continuing to refine these cost estimates. As estimated, the FCS will command a significant share of the Army’s acquisition budget, particularly that of ground combat vehicles, for the foreseeable future. In fiscal year 2006, the FCS budget request of $3.4 billion accounts for 65 percent of the Army’s proposed spending on programs in system development and demonstration and 35 percent of that expected for all research, development, test and evaluation activities. As the FCS begins to command large budgets, it will compete with other major financial demands. Current military operations, such as in Afghanistan and Iraq, require continued funding. Since September 2001, DOD has needed over $240 billion in supplemental appropriations to support the global war on terrorism. Current operations are also causing faster wear on existing weapons, which will need refurbishment or replacement sooner than planned. The equipment used by the current force, such as Abrams tanks and Bradley Fighting Vehicles, is expected to remain in the active inventory until at least 2030. The cost to upgrade and maintain this equipment over that length of time has not been estimated but could be substantial. Also, the cost of converting current forces to new modular, brigade-based units is expected to be at least $48 billion. Further, FCS is part of a significant surge in the demand for new weapons. Just 4 years ago, the top 5 weapon systems cost about $280 billion; today, in the same base year dollars, the top 5 weapon systems cost about $521 billion. If megasystems like FCS are estimated and managed with traditional margins of error, the financial consequences are huge, especially in light of a constrained discretionary budget. The Management Challenge The Army has employed a management approach that centers on a Lead System Integrator (LSI) and a non-standard contracting instrument, known as an Other Transaction Agreement (OTA). The Army advised us that it did not believe it had the resources or flexibility to use its traditional acquisition process to field a program as complex as FCS under the aggressive timeline established by the then-Army Chief of Staff. Although there is no complete consensus on the definition of LSI, those we are aware of appear to be prime contractors with increased program management responsibilities. These responsibilities have included greater involvement in requirements development, design and source selection of major system and subsystem subcontractors. The government also has used the LSI approach on programs that require system-of-systems integration. The Army selected Boeing as the LSI for the FCS system development and demonstration in May 2003. The Army and Boeing established a One-Team management approach with several first tier subcontractors to execute the program. According to the Army, Boeing has awarded 20 of 24 first tier subcontracts, to 17 different subcontractors. The One-Team members and their responsibilities are depicted in table 1. Boeing was awarded the LSI role under an OTA which is not subject to the Federal Acquisition Regulation (FAR). Consequently, when using an OTA, DOD contracting officials have considerable flexibility to negotiate the agreement terms and conditions. This flexibility requires DOD to use good business sense and to incorporate appropriate safeguards to protect the government’s interests. The OTA used for FCS includes several FAR or Defense FAR Supplement clauses, many of which flow down to subcontracts. The value of the agreement between the Army and Boeing is approximately $21 billion. It is a cost reimbursement contract. Congress has incrementally expanded the use and scope of other transaction authority since first authorizing its use more than a decade ago. In 1989, Congress gave DOD, acting through the Defense Advanced Research Projects Agency, authority to temporarily use other transactions for basic, applied, and advanced research projects. In 1991, Congress made this authority permanent and extended it to the military departments. In 1993, Congress enacted Section 845 of the National Defense Authorization Act for Fiscal Year 1994, which provided DARPA with authority to use, for a 3-year period, other transactions to carry out prototype projects directly relevant to weapons or weapon systems proposed to be acquired or developed by DOD. Subsequent amendments have extended this authority to the military departments and other defense agencies. Most recently, the National Defense Authorization Act for Fiscal Year 2004 extended the prototype project authority until 2008 and provided for a pilot program to transition some other transaction prototype projects to follow-on production contracting. According to program officials, under the LSI and OTA arrangement on FCS, the Army primarily participates in the program through Integrated Product Teams that are used to make coordinated management decisions in the program about issues related to requirements, design, horizontal integration and source selection. FCS Remains At Risk of Not Delivering Planned Capability Within Estimated Resources During the past year, the FCS underwent a significant restructuring, which added 4 years to the schedule for reducing risk, increasing the demonstration of FCS capabilities, and harvesting successes for the current force. Yet, even with these improvements, the FCS is still at significant risk for not delivering planned capability within budgeted resources. This risk stems from the scope of the program’s technical challenges and the low level of knowledge demonstrated thus far. High Levels of Demonstrated Knowledge Are Key to Getting Desired Outcomes Our previous work has shown that program managers can improve their chances of successfully delivering a product if they employ a knowledge- based decision-making process. We have found for a program to deliver a successful product within available resources, managers should build high levels of demonstrated knowledge before significant commitments are made. In essence, knowledge supplants risk over time. This building of knowledge can be described in three levels that should be attained over the course of a program: First, at program start, the customer’s needs should match the developer’s available resources—mature technologies, time, and funding. An indication of this match is the demonstrated maturity of the technologies needed to meet customer needs. Second, about midway through development, the product’s design should be stable and demonstrate that it is capable of meeting performance requirements. The critical design review is the vehicle for making this determination and generally signifies the point at which the program is ready to start building production-representative prototypes. Third, by the time of the production decision, the product must be shown to be producible within cost, schedule, and quality targets and have demonstrated its reliability. It is also the point at which the design must demonstrate that it performs as needed through realistic system level testing. The three levels of knowledge are related, in that a delay in attaining one delays those that follow. Thus, if the technologies needed to meet requirements are not mature, design and production maturity will be delayed. On the successful commercial and defense programs we have reviewed, managers were careful to conduct development of technology separately from and ahead of the development of the product. For this reason, the first knowledge level is the most important for improving the chances of developing a weapon system within cost and schedule estimates. DOD’s acquisition policy has adopted the knowledge-based approach to acquisitions. DOD policy requires program managers to provide knowledge about key aspects of a system at key points in the acquisition process. Program managers are also required to reduce integration risk and demonstrate product design prior to the design readiness review and to reduce manufacturing risk and demonstrate producibility prior to full-rate production. DOD programs that have not attained these levels of knowledge have experienced cost increases and schedule delays. We have recently reported on such experiences with the F/A-22, the Joint Strike Fighter, the Airborne Laser, and the Space Based Infrared System High. For example, the $245 billion Joint Strike Fighter’s acquisition strategy does not embrace evolutionary, knowledge-based techniques intended to reduce risks. Key decisions, such as its planned 2007 production decision, are expected to occur before critical knowledge is captured. If time were taken now to gain knowledge it could avoid placing sizable investments in production capabilities at risk of expensive changes. FCS Strategy Will Not Demonstrate High Levels of Knowledge Consistent With DOD Policy or Best Practices The FCS program has proceeded with low levels of knowledge. In fact, most of the activities that have taken place during its first 2 years should have been completed before starting system development and demonstration. It may be several years before the program reaches the level of knowledge it should have had at program start. Consequently, the Army is depending on a strategy that must concurrently define requirements, develop technology, design products, and test products. Progress in executing the program thus far does not inspire confidence: the requirements process is taking longer that planned, technology maturity may actually have regressed, and a program that is critical for the FCS network has recently run into problems and has been delayed. Figure 2 depicts how the FCS strategy compares with the best practices described above. The white space in figure 2 suggests the knowledge between best practices and the FCS program. Clearly, the program has a tremendous amount of ground to cover to close its knowledge gaps to the point that it can hold the design reviews as scheduled and make decisions on building prototypes, testing, and beginning production with confidence. Several other observations can be made from the figure: A match between mature technologies and firm requirements was not made at program start. The preliminary design review, which ideally is conducted near the program start decision to identify disconnects between the design and the requirements, will be held 5 years into the program. The critical design review, normally held midway through development, is scheduled to take place in the seventh year of a nine-year program. The first test of all FCS elements will take place after the production decision. Requirements and Resources Gap The FCS program entered system development and demonstration without demonstrating a match between resources and requirements, and will not be in a position to do so for a number of years. The Army now expects to have a reasonably well defined set of requirements by the October 2006 interim preliminary design review. The Army has been working diligently to define these requirements, but the task is very difficult given that there are over 10,000 specific system-of-systems requirements that must collectively deliver the needed lethality, survivability, responsiveness, and sustainability. For example, the Army is conducting at least 120 studies to identify the design tradeoffs necessary before firming up requirements. As of December 2004, 69 remain to be completed. Those to be completed will guide key decisions on the FCS, such as the weight and lethality required of the manned ground vehicles. On the resources side, last year we reported that 75 percent of FCS technologies were immature when the program started in 2003; a September 2004 independent assessment has since shown that only one of the more than 50 FCS critical technologies is fully mature. The Army employed lower standards than recommended by best practices or DOD policy in determining technologies acceptable for the FCS program. As a result, it will have to develop numerous technologies on a tight schedule and in an environment that is designed for product development. If all goes as planned, the Army estimates that most of the critical technologies will reach a basic level of maturity by the 2010 Critical Design Review and full maturity by the production decision. This type of technical knowledge is critical to the process of setting realistic requirements, which are needed now. In addition, a program critical to the FCS network and a key element of FCS’ first spiral, the Joint Tactical Radio System, recently encountered technical problems and may be delayed 2 years. We provide more detail on this program later. Late Demonstrations of FCS Performance Could Prove Costly The FCS strategy will result in much demonstration of actual performance late in development and early in production, as technologies mature, prototypes are tested, and the network and systems are brought together as a system-of-systems. A good deal of the demonstration of the FCS design will take place over a 3-year period, starting with the critical design review in 2010 through the first system level demonstration of all 18 FCS components and the network in 2013. This compression is due to the desired fielding date of 2014, coupled with the late maturation of technologies and requirements previously discussed. Ideally, a critical design review should be held midway through development—around 2008 for FCS—to confirm the design is stable enough to build production representative prototypes for testing. DOD policy refers to the work up to the critical design review as system integration, during which individual components of a system are brought together. The policy refers to the work after the critical design review as system demonstration, during which the system as a whole demonstrates its reliability as well as its ability to work in the intended environment. The building of production representative prototypes also provides the basis to confirm the maturity of the production processes. For the FCS, the critical design review will be held just 2 years before the production decision. The FCS program is planning to have prototypes available for testing prior to production but they will not be production-representative prototypes. The Army does not expect to have even a preliminary demonstration of all elements of the FCS system-of-systems until sometime in 2013, the year after the production decision. This makes the program susceptible to “late cycle churn,” a condition that we reported on in 2000. Late-cycle churn is a phrase private industry has used to describe the efforts to fix a significant problem that is discovered late in a product’s development. Often, it is a test that reveals the problem. The “churn” refers to the additional—and unanticipated—time, money, and effort that must be invested to overcome the problem. Problems are most serious when they delay product delivery, increase product cost, or “escape” to the customer. The discovery of problems in testing conducted late in development is a fairly common occurrence on DOD programs, as is the attendant late-cycle churn. Often, tests of a full system, such as launching a missile or flying an aircraft, become the vehicles for discovering problems that could have been found out earlier and corrected less expensively. When significant problems are revealed late in a weapon system’s development, the reaction—or churn—can take several forms: extending schedules to increase the investment in more prototypes and testing, terminating the program, or redesigning and modifying weapons that have already made it to the field. While DOD has found it acceptable to accommodate such problems over the years, this will be a difficult proposition for the FCS given the magnitude of its cost in an increasingly competitive environment for investment funds. The Army has made some concrete progress in building some of the foundation of the program that will be essential to demonstrating capabilities. For example, the System-of-Systems Integration Lab—where the components and systems will be first tested—has been completed. Initial versions of the System-of-Systems Common Operating Environment, the middleware that will provide the operating system for FCS software, have been released. Several demonstrations have taken place, including the Precision Attack Munition, the Non-Line of Sight Cannon, and several unmanned aerial vehicles. The Army has embarked on an impressive plan to mitigate risk using modeling, simulation, emulation, hardware in the loop, and system integration laboratories throughout FCS development. This is a credible approach designed to reduce the dependence on late testing to gain valuable information about design progress. However, on a first-of-a-kind system like the FCS that represents a radical departure from current systems, actual testing of all the components integrated together is the final proof that the system works both as predicted and as needed. Examples of Execution Challenges for Two Key FCS Elements The risks the FCS program faces in executing the acquisition strategy can be seen in the information network and the manned ground vehicles. These two elements perhaps represent the long poles in the program and upon which the program’s success depends. Network The Joint Tactical Radio System (JTRS) and Warfighter Information Network-Tactical (WIN-T) are central pillars of the FCS network. If they do not work as intended, battlefield information will not be sufficient for the Future Force to operate effectively. They are separate programs from the FCS, and their costs are not included in the costs of the FCS. Both JTRS and WIN-T face significant technical challenges and aggressive schedules, which threaten the schedule for fielding Future Force capabilities and make their ultimate ability to perform uncertain. JTRS is a family of radios that is to provide the high capacity, high-speed information link to vehicles, weapons, aircraft, and soldiers. Because they are software-based, they can also be reprogrammed to communicate with the variety of radios currently in use. JTRS is to provide the warfighter with the capability to access maps and other visual data, communicate on- the-move via voice and video with other units and levels of command, and obtain information directly from battlefield sensors. JTRS can be thought of as the information link or network to support FCS units of action and the combat units on the scene that are engaged directly in an operation. In particular, its wideband networking waveform provides the “pipe” that will enable the FCS vehicles to see and strike first and avoid being hit. The WIN-T program is to provide the information network for higher military echelons. WIN-T will consist of ground, airborne, and space-based assets within a theater of operations for Army, joint, and allied commanders and provide those commanders with access to intelligence, logistics, and other data critical to making battlefield decisions and supporting battlefield operations. This is information the combat units can access through WIN- T developed equipment and JTRS. The JTRS program to develop radios for ground vehicles and helicopters— referred to as Cluster 1—began system development in June 2002 with an aggressive schedule, immature technologies, and lack of clearly defined and stable requirements. These factors have contributed to significant cost, schedule, and performance problems from which the program has not yet recovered. The Army has not been able to mature the technologies needed to provide radios that both generate sufficient power as well as meeting platform size and weight constraints. Changes in the design are expected to continue after the critical design review, and unit costs may make the radios unaffordable in the quantities desired. Given these challenges, the Army has proposed delaying the program 24 months and adding $458 million to the development effort. However, before approving the restructure, the Office of the Secretary of Defense directed a partial work stoppage, and the program is now focusing its efforts on a scheduled operational assessment of the radio’s functionality to determine the future of the program. Consequently, the radio is not likely to be available for the first spiral of the FCS network, slated for fiscal year 2008, and surrogate radios may be needed to fill the gap. A second JTRS program, to develop small radios including those that soldiers will carry (referred to as Cluster 5), also entered system development with immature technologies, lack of well-defined requirements, and faces even greater technical challenges due to the smaller size, weight, power, and large data processing requirements for the radios. For example, the Cluster 5 program has a requirement for a wideband networking waveform despite its demanding size and power constraints. In addition, the program was delayed in starting system development last year because of a contract bid protest. Consequently, the Cluster 5 radios are not likely to be available for the first FCS spiral either. The Army has acknowledged that surrogate radios and waveforms may be needed for the first spiral of FCS. The WIN-T program also began with an aggressive acquisition schedule and immature technologies that are not scheduled to mature until after production begins. Backup technologies have been identified, but they offer less capability and most are immature as well. In addition, the schedule leaves little room for error correction and rework that may hinder successful cost, schedule and performance outcomes. More recently, the program strategy was altered to identify a single architecture as soon as possible and to deliver networking and communications capabilities sooner to meet near term warfighting needs. Specifically, the Army dropped its competitive strategy and is now having the two contractors work together to develop the initial network architecture. A plan for how to develop and field capabilities sooner is still to be determined. Manned Ground Vehicles FCS includes eight manned ground vehicles, which require critical individual and common technologies to meet required capabilities. For example, the Mounted Combat System will require, among other new technologies, a newly developed lightweight weapon for lethality; a hybrid electric drive system and a high-density engine for mobility; advanced armors, an active protection system, and advanced signature management systems for survivability; a Joint Tactical Radio System with the wideband waveform for communications and network connection; a computer- generated force system for training; and a water generation system for sustainability. At the same time, concepts for the manned ground vehicles have not been decided and are awaiting the results of trade studies that will decide critical design points such as weight and the type of drive system to be used. Under other circumstances, each of the eight manned ground systems would be a major defense acquisition program on par with the Army’s past major ground systems such as the Abrams tank, the Bradley Fighting Vehicle, and the Crusader Artillery System. As such, each requires a major effort to develop, design, and demonstrate the individual vehicles. Developing these technologies and integrating them into vehicles is made vastly more difficult by the Army’s requirement that the vehicles be transportable by the C-130 cargo aircraft. However, the C-130 can carry the FCS vehicles’ projected weight of 19 tons only 5 percent of the time. In 2004, GAO reported a similar situation with the Stryker vehicles. The 19- ton weight of these vehicles significantly limits the C-130’s range and the size of the force that can be deployed. Currently, FCS vehicle designs are estimated at over 25 tons. To meet even this weight, the advanced technologies required put the sophistication of the vehicles on a par with fighter aircraft, according to some Army officials. This is proving an extremely difficult requirement to meet without sacrificing lethality, survivability, and sustainability. Currently, program officials are considering other ways to meet the C-130 weight requirement, such as transporting the vehicles with minimal armor and with only a minimal amount of ammunition. As a result, vehicles would have to be armored and loaded upon arrival to be combat ready. FCS Cost and Affordability Still to Be Determined The low levels of knowledge in the FCS program provide an insufficient basis for making cost estimates. The program’s immaturity at the time system development and demonstration began resulted in a relatively low- fidelity cost estimate and open questions about the program’s long-term affordability. Although the program restructuring provides more time to resolve risk and to demonstrate progress, the knowledge base for making a confident estimate is still low. If the FCS cost estimate is not better than past estimates, the likelihood for cost growth will be high while the prospects for finding more money for the program will be dim. The estimates for the original FCS program and the restructured program are shown in table 2 below. At this point, the FCS cost estimate represents the position of the program office. The Army and the Office of the Secretary of Defense’s Cost Analysis Improvement Group will provide their independent estimates for the May 2005 Milestone B update review. It is important to keep in mind that the FCS program cost estimate does not reflect all of the costs needed to field FCS capabilities. The costs of the complementary programs are separate and will be substantial. For example, the research and development and procurement costs for the JTRS (Clusters 1 and 5) and the WIN-T programs are expected to be about $34.6 billion (fiscal year 2005 dollars). In addition, by April 2005, the Army has been tasked to provide an analysis of FCS affordability considering other Army resource priorities, such as modularity. This will be an important analysis given that estimates of modularity costs have been put at about $48 billion, and costs of current operations and recapitalizing current equipment have been covered by supplemental funding. As can be seen in table 3, substantial investments will be made before key knowledge is gained on how well the system can perform. For example, by the time of the critical design review in 2010, over $20 billion of research and development funds will have been spent. The consequences of even modest cost increases and schedule delays for the FCS would be dramatic. For example, a one-year delay late in FCS development, not an uncommon occurrence for other DOD programs, could cost over $3 billion. Given the size of the program, financial consequences of following historical patterns of cost and schedule growth could be dire. Alternatives to Current FCS Acquisition Strategy Still Warrant Consideration For any acquisition program, two basic questions can be asked. First, is it worth doing? Second, is it being done the right way? On the first question, the Army makes a compelling case that something must be done to equip its future forces and that such equipment should be more responsive but as effective as current equipment. The answer to the second question is problematic. At this point, the FCS presents a concept that has been laid out in some detail, an architecture or framework for integrating individual capabilities, and an investment strategy for how to acquire those capabilities. There is not enough knowledge to say whether the FCS is doable, much less doable within a predictable frame of time and money. Yet making confident predictions is a reasonable standard for a major acquisition program given the resource commitments and opportunity costs they entail. Against this standard, the FCS is not yet a good fit as an acquisition program. That having been said, another important question that needs to be answered is: if the Army needs FCS-like capabilities, what is the best way to advance them to the point to which they can be acquired? Efforts that fall in this area—the transition between the laboratory and the acquisition program—do not yet have a place that has right organizations, resources, and responsibilities to advance them properly. At this point alternatives to the current FCS strategy warrant consideration. For example, one possible alternative for advancing the maturity of FCS capabilities could entail setting the first spiral or block as the program of record for system development and demonstration. Such a spiral should meet the standards of providing a worthwhile military capability, having mature technology, and having firm requirements. Other capabilities currently in the FCS program could be moved out of system development and demonstration and instead be bundled into advanced technology demonstrations that could develop and experiment with advanced technologies in the more conducive environment of “pre- acquisition” until they are ready to be put into a future spiral. Advancing technologies in this way will enable knowledge to guide decisions on requirements, lower the cost of development, and make for more reasonable cost and schedule estimates for future spirals. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions that you or members of the subcommittee may have. Contacts and Staff Acknowledgements For future questions about this statement, please contact me at (202) 512-4841. Individuals making key contributions to this statement include Lily J. Chin, Marcus C. Ferguson, Lawrence D. Gaston, Jr., William R. Graveline, John P. Swain, Robert S. Swierczek, and Carrie R. 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FCS is the core of Army efforts to create a lighter, more agile, capable force: a $108 billion investment to provide a new generation of 18 manned and unmanned ground vehicles, air vehicles, sensors, and munitions linked by an information network. Although system development and demonstration began in May 2003, the program was restructured in July 2004, including processes to make FCS capabilities available to current forces. GAO has been asked to assess (1) FCS technical and managerial challenges; (2) prospects for delivering FCS within cost and scheduled objectives; and (3) options for proceeding. In its unprecedented complexity, FCS confronts the Army with significant technical and managerial challenges in its requirements, development, finance, and management. Technical challenges include the need for FCS vehicles to be smaller, weigh less, and be as lethal and survivable as current vehicles, which requires (1) a network to collect and deliver vast amounts of intelligence and communications information and (2) individual systems, such as manned ground vehicles, that are as complex as fighter aircraft. Its cost will be very high: its first increment--enough to equip about 1/3 of the force--will cost over $108 billion, with annual funding requests running from $3 billion to $9 billion per year. The program's pace and complexity also pose significant management challenges. The Army is using a Lead System Integrator to manage FCS and is using a contracting instrument--Other Transaction Agreement--that allows for more flexible negotiation of roles, responsibilities, and rights with the integrator. The FCS is at significant risk for not delivering required capability within budgeted resources. Currently, about 9.5 years is allowed from development start to production decision. DOD typically needs this period of time to develop a single advanced system, yet FCS is far greater in scope. The program's level of knowledge is far below that suggested by best practices or DOD policy: Nearly 2 years after program launch and with $4.6 billion invested, requirements are not firm and only 1 of over 50 technologies are mature. As planned, the program will attain the level of knowledge in 2008 that it should have had in 2003, but things are not going as planned. Progress in critical areas--such as the network, software, and requirements--has in fact been slower, and FCS is therefore likely to encounter problems late in development, when they are very costly to correct. Given the scope of the program, the impact of cost growth could be dire. To make FCS an effective acquisition program different approaches must be considered, including (1) setting the first stage of the program to demonstrate a worthwhile military capability, mature technology, and firm requirements; and (2) bundling its other capabilities into advanced technology demonstrators until they can be put in a future stage, which will provide guidance for decisions on requirements, lower the cost of development, and make for more reasonable cost and schedule estimates for future stages.

Background The radiofrequency spectrum is the medium that enables wireless communications of all kinds. Although the radio spectrum spans the range from 3 kilohertz to 300 gigahertz, 90 percent of its use is concentrated in the 1 percent of frequencies that lie below 3.1 gigahertz, because these frequencies have properties that make this portion of the spectrum well suited for many important wireless technologies. Spectrum is used to provide a variety of services in the United States. Companies are licensed to provide mobile telephone, paging, broadcast television and radio, and various satellite services. Additionally, some companies maintain spectrum licenses for a variety of private tasks, including communication in a particular location (such as a large industrial complex) or among remote vehicles of a company. A variety of government users also employ spectrum to provide public safety services and other functions of federal, state, and local government agencies. For example, local and state police departments, fire departments, and other emergency services use spectrum to transmit and receive critical voice and data communications. Federal agencies use spectrum for varied mission needs, such as law enforcement, weather services, aviation communication, and national defense. Since the beginning of radio communications, concern about interference among users has been a driving force in the management of spectrum at the national and international levels. Interference among spectrum users can occur when two or more radio signals interact in a manner that disrupts or degrades the transmission and reception of messages. Spectrum managers have worked to minimize interference through their two primary spectrum-management functions, the “allocation” and the “assignment” of radio spectrum. The allocation process begins with the International Telecommunication Union (ITU), a specialized agency of the United Nations, where member nations identify spectrum bands for about 40 broad categories of wireless services. The Department of State coordinates and mediates the views of FCC and NTIA to reach a U.S. position on spectrum issues for international discussions. Once spectrum-allocation decisions are made at the ITU, regulators within each country will, to varying degrees, follow the ITU decisions when allocating spectrum for particular types of radio services or classes of users to meet domestic needs. In the United States, spectrum allocation is handled primarily by two agencies: FCC—an independent agency that regulates spectrum use for nonfederal users, including commercial, private, and state and local government users—and NTIA, an agency within the Department of Commerce that regulates spectrum for federal government users. NTIA works in consultation with IRAC, which is composed of representatives from federal agencies, to manage the federal spectrum use. Once spectrum is allocated for specific uses, the spectrum-management agencies assign portions of spectrum to specific users. Spectrum assignment has generally been very proscriptive regarding how a specified portion of spectrum can be used. That is, generally a license or assignment specifies the frequencies the license holder may use, the length of time the license covers, the geographic areas the license covers, and the services that may be provided. FCC assigns licenses for commercial enterprises, state and local governments, and others. NTIA makes frequency assignments to federal agencies. In addition to licensed uses for spectrum, FCC authorizes unlicensed use of spectrum in some frequencies. Unlicensed spectrum has traditionally been used for low-powered devices that operate in a limited geographic range, such as cordless phones, baby monitors, and garage door openers, and it is increasingly being used to provide services such as wireless access to the Internet. Over the years, FCC has used a variety of methods to assign spectrum for commercial users. Sometimes spectrum has been assigned on a first-come, first-served basis. When more than one party applies for the same license, FCC has used several alternative approaches to assign the license. FCC historically used comparative hearings, which give competing applicants a quasi-judicial forum in which to argue why they should be awarded a license instead of other applicants. In 1981, partially in response to the administrative burden of the comparative hearing process, the Congress authorized the use of lotteries, which allowed FCC to randomly select licensees from the qualified applicant pool. In the Omnibus Budget Reconciliation Act of 1993, the Congress authorized FCC to use auctions to award spectrum licenses for certain wireless communications services. Auctions, a market-based mechanism, grant a license to the company that has bid the highest price for specific bands of spectrum. Since auctions were put into place, FCC has conducted 42 auctions. Since nearly all of the usable radio spectrum in the United States has been allocated already, accommodating more services and users often involves having more than one user sharing spectrum, or reallocations of spectrum from one use to another. “Spectrum sharing”—one method of accommodating more services and users—enables more than one user to transmit or receive radio signals on or near the same frequency band. Within the United States, about 56 percent of the spectrum is shared by federal and nonfederal users, while about 31 percent is designated exclusively for nonfederal use and about 14 percent exclusively for use by federal agencies. Another method of accommodating new users and technologies is “band clearing,” or reclassifying a band of spectrum from one set of radio services and users to another, which requires moving previously authorized users off of the band. Band-clearing decisions that affect federal and nonfederal users may require coordination between FCC and NTIA to ensure that moving existing users off of a band is technically feasible and meets the users’ needs. Such moves often involve costs because existing users of the band may need to modify or replace existing equipment. In addition to spectrum-management policies directed at the allocation and assignment of spectrum, advances in technology could also help to accommodate more services and users. For example, by compressing pieces of information, digital technologies are able to use less spectrum than would analog technologies to transmit a given amount of spectrum. Also, with appropriate technical standards, ultrawideband devices—which use very low power over very large bandwidths—can operate using spectrum occupied by existing radio services, in some cases, without causing interference. This permits scarce spectrum resources to be used more efficiently, as more than one service can use the same spectrum. See appendix III for more discussion of technological advancements that could help relieve spectrum scarcity. Concerns Exist That Future Needs for Spectrum Will Be Difficult to Meet In the past, the spectrum available to commercial users has accommodated rapid growth in wireless telephone markets and supported a competitive structure in that market. In addition, many government agencies’ spectrum managers say that, in the past, government users’ needs for spectrum have generally been met. However, concerns exist about the ability to meet the growing needs of both commercial and government users. In addition, some observers are particularly concerned that some spectrum is not currently used as efficiently as possible. Many are also concerned that current spectrum-management practices, which generally take a command and control approach—that is, policies wherein government largely dictates how spectrum is used—may not work effectively as spectrum needs rapidly change. Key stakeholders are voicing these concerns as they search for ways to meet these needs. Spectrum Allocated to the Commercial Sector Has Accommodated Rapid Growth and Competitive Structure in Some Wireless Markets Many industries that rely on spectrum to provide services have grown dramatically over the past 20 years, including mobile telephone service and varied satellite-provided services. In particular, the availability of spectrum has accommodated the dramatic growth of mobile telephone service since it was first launched in the 1980s. Between 1985 and 2001, subscribership increased from approximately 340,000 to over 128 million, and wireless use (measured in minutes) grew by almost 800 percent between 1996 and 2001 (fig.1). This growth resulted from an increase in subscribership as well as a marked increase in the average number of minutes used by each subscriber. In terms of revenues, the industry has also mushroomed: in 1985 annual revenues were $482 million, and by 2001 annual revenues stood at over $65 billion. Finally, the number of people employed in the mobile telephone sector grew from about 3,000 in 1985 to over 200,000 by 2001. In addition to the rapid growth in wireless services, most observers believe that wireless phone markets are highly competitive. According to a recent FCC report, 94 percent of the U.S. population lives in counties with access to 3 or more mobile telephone service providers, and 80 percent lives in counties with at least 5 providers. Officials from the wireless companies we spoke with and participants on our expert panel overwhelmingly perceived wireless markets as competitive. Twelve of the 13 wireless service providers that we interviewed said that mobile markets are competitive. Even in rural areas wireless markets appear competitive. For example, officials at the 3 rural companies we spoke with reported that they were among 3 to 6 competitors in the small and rural markets they serve. Similarly, all 10 of the participants on our expert panel reported that wireless markets are “extremely” or “moderately” competitive. A number of policy decisions implemented by the Congress and FCC have helped to accommodate the rapid growth and competitiveness of wireless markets. In the 1990s, the Congress mandated the transfer of over 200 megahertz (MHz) of spectrum from government use to nonfederal use. This provided additional spectrum for commercial wireless services. Since 1994, FCC has conducted 42 auctions for spectrum dedicated to various kinds of wireless services. Additionally, FCC’s licensing scheme for mobile telephone service helped ensure that many providers were available in each market region. In every region, FCC authorized up to eight different mobile telephone licenses. Government Spectrum Managers Say Government Users’ Needs Have Generally Been Met Our survey of the 20 IRAC agencies asked whether agencies were able to meet their critical mission needs, given their current spectrum resources. Of the 16 agencies that responded to this question on our survey, 13 said that all or most of their critical mission needs were being met; 3 agencies responded that some critical needs were not being met. Moreover, officials at FCC and NTIA stated that spectrum needs of government users have generally been met. Officials at three of the four government agencies we interviewed in greater depth told us that their agencies have generally received the spectrum necessary to meet their mission needs. Officials at the Federal Aviation Administration (FAA) told us that their agency has been able to meet aviation requirements with the currently available spectrum. Officials at the Department of Defense (DOD) said that their missions had not yet been compromised because of a lack of spectrum. The Federal Emergency Management Agency (FEMA), which most often uses spectrum allocated to the U.S. Army, also told us that it has been able to obtain spectrum when needed. The Department of Justice (DOJ), however, stated that in just the past few years, as the use of wireless surveillance activities has increased, congestion has increased, resulting in increased occurrences of interference. Agency officials we interviewed noted that they have taken measures to achieve mission requirements in the absence of new spectrum assignments. For example: Officials stated that their agencies share considerable spectrum with other federal agencies, as well as with nongovernmental users. FAA officials noted that spectrum allocated for certain systems, such as radar, is shared among a number of users, including FAA, DOD, the U.S. Customs Service, and the National Weather Service; DOJ officials also noted that they share spectrum in the government bands and are in the design phase of a plan to implement greater sharing with a variety of users having similar missions. FAA and DOD officials noted that they perform internal audits of spectrum use within their agency. FAA told us that the results of these internal audits are used to make more efficient use of the available spectrum; DOD said that it has relinquished use of underutilized spectrum that has been identified during these audits. All four government agencies told us that, when possible, they use commercial vendors—who use spectrum assigned for commercial uses— to provide nonsafety–related spectrum services, such as mobile telephone service. Officials at both DOJ and DOD told us that they attempt to economize on spectrum use by implementing new technologies. DOJ is planning on making greater use of trunking technology; DOD is investigating new technologies that use spectrum more efficiently, or do not depend on spectrum. Commercial and Government Users See Future Spectrum Needs Growing Commercial users have expressed a need for more spectrum in certain highly congested areas, as well as to accommodate new services. This spectrum is needed to accommodate the expected growth in the demand for wireless voice services as well as for additional services that will be provided over telephone handsets, including the transfer of data at higher speeds than current wireless devices are able to do—so-called third- generation wireless services (3G). Also, certain commercial users have argued that additional spectrum should be made available for unlicensed use by low-powered devices. These users, as well as staff at FCC, have stated that more spectrum for unlicensed services is particularly helpful in trying to bring new technologies, such as local area Internet access, to the market. In a recent speech, an FCC Commissioner noted that a research study had predicted that 21 million Americans will be using wireless local area networks—a service that can be provided without a license—by 2007. Officials of the United Telecom Council, an organization that helps utilities and railroads to manage their spectrum needs, told us that these entities also need more spectrum for the wireless communications used by their maintenance personnel. These officials told us that since 1997, utilities have increasingly had to share spectrum assignments with certain other users. Moreover, within these arrangements, no limit exists as to the number of licenses that can be assigned for use on any particular frequency. As a result, they told us, these frequencies are either too congested to be used safely or are in imminent threat of such congestion. In a recently released report, NTIA stated that the events of September 11, 2001 have underlined the importance of these industries and the roles they play in times of disaster response and recovery. Officials at most of the federal government agencies we spoke with also told us that they face increasing needs for spectrum and are concerned that adequate spectrum will not be available in the future. Furthermore, of the 17 IRAC members who responded to our survey, 12 believed that their spectrum needs would at least moderately increase over the next 2 to 3 years. Fifteen of the 17 respondents felt that they would have at least some difficulty meeting their future critical mission needs because of insufficient spectrum, whether or not they were meeting those needs at this time. Two of the four agencies that we interviewed in depth also revealed an expectation of increased spectrum needs. In particular: Officials at DOJ believe that they will need access to additional spectrum to support homeland security, accommodate increased border patrol, and provide for additional surveillance. Defense spectrum use has grown exponentially since Desert Storm in 1991, according to DOD spectrum managers we interviewed. A DOD official testified before the Senate Committee on Commerce, Science, and Transportation in June 2002 that DOD’s spectrum usage is projected to grow by more than 90 percent by 2005—and this estimate was made prior to September 11, 2001. According to DOD officials we interviewed, since September 11th, DOD’s spectrum needs have further increased. Finally, public safety officials with whom we spoke said they needed additional spectrum. In particular, these officials said that small bits of spectrum located in various bands have been allocated for public safety use, and that some of these slices of spectrum have been allocated very close to certain commercial providers. Public safety officials told us that this situation has resulted in there being some interference between public safety users and commercial vendors, and they noted their continued need for more contiguous blocks of spectrum to provide critical safety-of-life services. Concerns Exist about Inefficient Spectrum Use in the Public and Private Sectors Given the concern about the growing need for spectrum, stakeholders are particularly concerned that some users may not be applying the most spectrally efficient technologies. If that is the case, then spectrum scarcity may be exacerbated by this inefficient use. As such, policies to promote more spectrally efficient technologies can help to meet future spectrum needs by freeing up unneeded spectrum. Some observers, including several of our expert panel members, commercial users, and regulators we spoke with in certain other countries, expressed concern that government users do not have adequate incentives to conserve their use of spectrum and therefore may not deploy this valuable resource efficiently. NTIA, which manages federal spectrum, is responsible for promoting the efficient use of that spectrum to the maximum extent feasible. Our September 2002 report noted that it is not clear that NTIA is able to ensure that spectrum is being used efficiently. NTIA currently charges federal government users a small spectrum- management fee for each frequency assignment the government user holds. However, it is not clear how much these fees, which are designed to recover 80 percent of the administrative costs in NTIA’s spectrum- management budget, encourage government users to economize on their use of the spectrum. Officials from two federal agencies that use spectrum noted that the current charges—approximately $55 per assignment—were not high enough to cause them to economize on their use of spectrum. Recently, NTIA has expressed an interest in examining a fee structure that provides a greater incentive to promote efficient use of spectrum than is currently being used by NTIA. Federal agency officials told us that they have some nonfinancial incentives to conserve spectrum. Officials from two of the agencies we interviewed reported that because they are unlikely to get substantial new spectrum from NTIA, they face internal pressures to conserve and reshuffle current spectrum resources to meet new needs. Also, DOD officials stated that the department’s internal goal of being a responsible steward of America’s resources drives it to use spectrum efficiently. Agencies we spoke with noted that NTIA requires that federal agencies review their assignments every 5 years. However, in our first report, released in September 2002, we noted that one agency official said that these reviews are often perfunctory, there is no independent verification of the reviews, and there is no other evidence that these reviews are effective. Those we spoke with for this report did cite other audits of spectrum use in the federal government—including spectrum reviews by the White House—as incentives to use spectrum efficiently. Finally, NTIA has required the adoption of certain technologies—such as narrowbanding and trunking—that conserve spectrum. However, NTIA officials told us that, in practice, it is difficult for NTIA to invoke its enforcement authority because its primary enforcement tool is the ability to remove frequency assignments from agencies not complying with certain requirements. Because license removal is a radical measure that could interfere with government agencies’ ability to carry out important missions, it is difficult for NTIA to use this approach. Some of those we spoke with also expressed concern that public safety users do not employ the most efficient technologies and are therefore wasteful with their spectrum. The head of a commercial wireless organization noted that public safety communications equipment is often antiquated. One public safety official we interviewed stated that public safety officials often do not have adequate funding to update their equipment to be more spectrally efficient. Concerns also exist that some nongovernmental users do not have incentives to be efficient. In August 2001, FCC commenced an audit of private land mobile radio stations licensed on frequencies below 512 MHz. These license holders included industrial/business users and public safety users. As part of the audit, FCC sent letters to over 260,000 licensees seeking information to determine whether they (1) were meeting required construction deadlines and (2) were operational. As of October 2002, FCC had received responses from over 228,000 licensees, and these licensees reported that over 33,000 licenses (7.9 percent of licenses) were not being used and could be canceled. FCC officials told us that they would like to undertake more spectrum audits such as this. Additionally, some concerns exist that certain commercial users may not employ spectrally efficient technologies. Members of the expert panel and government users have stated that they believe the television broadcasting industry does not employ spectrally efficient technologies. Several stakeholders noted that in part this is attributable to a lack of receiver standards. Some expert panel members and some government users also noted that mobile satellite services, radio broadcasters, and the mobile telephone industry are also not necessarily using the most spectrally efficient technologies. Concerns Exist That Primary Reliance on Administrative Management May Not Be Effective in Today’s Rapidly Changing Environment For most of the history of wireless transmissions, the national governments of the countries we reviewed have used centralized administrative techniques—often called command and control—to allocate and assign spectrum. An important focus of this regulatory approach has generally been to minimize interference among users. Using the ITU allocation tables as a starting point, individual countries have traditionally allocated spectrum for particular uses and assigned spectrum to particular users by licensing them to use the spectrum in specific ways. Until the past 10 to 15 years, when some countries started using auctions to assign spectrum, countries throughout the world assigned spectrum on a first-come, first-served basis, or used some other administrative device (such as comparative hearings) to decide among applicants who wanted the same spectrum. In the United States, FCC used comparative hearings and, later, used lotteries to assign spectrum to competing commercial carriers. One of the benefits of using market forces to allocate and assign spectrum resources is that these methods help to ensure that spectrum moves into the services that are most highly valued by consumers, as measured by their willingness to pay higher prices for those services. When resources move to more valued uses, a form of efficiency known as “allocative efficiency” is advanced. For example, if, because of the development of cable and satellite television, broadcast television were to lose viewers and its spectrum were to become more valuable for other uses in higher demand, such as mobile telephone service, then market forces—that is, market mechanisms in spectrum management—would naturally lead to a reallocation of some of that spectrum to these other uses. However, without market forces helping to direct resources, spectrum managers would have to predict the most valued use of the resource in order to make decisions designed to allocate spectrum to the services that would best serve society’s interests. Because of the growing demand for spectrum and the inability to predict where technology will lead, spectrum managers in some countries, as well as many other interested parties, are questioning the continued appropriateness of relying largely on traditional command and control methods for allocating and assigning spectrum. In October 2001, FCC’s Chairman underlined the need to move away from reliance on command and control methods when he stated that it is becoming an “impossible task” for government officials to determine the best use for spectrum and to repeatedly adjust allocations and assignments of spectrum to accommodate new spectrum needs and new services. Similarly, in June 2002, the Assistant Secretary of Commerce for Communications and Information at NTIA indicated her support of market-oriented approaches for commercial users when she stated that NTIA is hoping that FCC will move forward fairly rapidly with its efforts to promote secondary markets for spectrum. Key Stakeholders Are Discussing Ways to Meet Future Spectrum Needs Because stakeholders are concerned that the current system may not be able to meet the country’s future needs for spectrum, they have been having discussions and looking to find solutions for these concerns. These forums and initiatives are indicative of a general sense among many interested parties that managing spectrum is difficult, complex, and challenging, and that significant reforms to the current processes may be needed. These initiatives include a variety of task forces and working groups, including: FCC: In June 2002, the Spectrum Policy Task Force, composed of senior FCC staff, was announced. The task force’s mission was to identify and evaluate changes in spectrum policy to increase public benefit. The task force released its report in November 2002, with four key recommendations: (1) To provide an incentive for spectrum holders to be technically innovative and economically efficient, FCC should move toward more flexible, market-oriented policies, which would require FCC to clearly define spectrum users’ rights and responsibilities. (2) FCC should adopt a new standard for judging acceptable interference, to be called the “interference temperature.” (3) FCC should increasingly consider the dimension of time to make allocation and assignment decisions, so that spectrum users could better share unused and underused spectrum. (4) FCC should begin basing its spectrum policy on the “commons” and exclusive use models rather than on the command and control model, except in cases where there is a compelling public interest, such as public safety. NTIA: In April 2002, NTIA held a Spectrum Management and Policy Summit. The purpose of this conference was to discuss how spectrum management could be more effective and to find ways of meeting future spectrum needs. Additionally, NTIA included in the Department of Commerce’s fiscal year 2003 budget a proposal for an NTIA Spectrum Management Reform initiative. The fiscal year 2003 appropriation request for the program, which is expected to take about nine years to be implemented, was $1.425 million. The purpose of this initiative would be to review the management processes that are currently being used to allocate and distribute spectrum, including those used by NTIA, FCC, and the individual federal agencies that manage spectrum. Public Safety Wireless Advisory Committee: This committee, established by FCC and NTIA in response to concerns voiced by the Congress that the agencies’ individual reporting of public safety’s spectrum needs may be insufficient, outlined public safety’s spectrum needs through the year 2010. The committee suggested focusing on obtaining new spectrum allocations for public safety, implementing technologies to allow more efficient spectrum use and sharing, and encouraging public safety users to utilize commercial services when possible. The Center for Strategic and International Studies (CSIS): Recognizing increasing demands on the spectrum allocation process, CSIS conducted a series of roundtable discussions in the past 2 years on spectrum allocation and long-term spectrum-management needs and goals for the U.S. government and economy. In addition, CSIS has convened a Commission on Spectrum Management to further examine the issue and expects to release a report on spectrum management in mid-2003. In addition, both the Senate and the House of Representatives are looking at ways to better meet future spectrum needs. Issues being examined include creating funds for reallocating spectrum from one use or user to another and setting aside unlicensed spectrum for broadband use. Hearings have been held to examine the current process and the impact of this system on the implementation of 3G technologies—which include transferring data at higher speeds than current technologies generally permit. Also, a variety of bills introduced in the 107th Congress addressed diverse spectrum-related issues. Many Countries Are Adopting Market- Based Mechanisms to Help Meet Future Spectrum Needs There appears to be general agreement among many regulators and experts that a more dynamic system for allocating and assigning spectrum is needed. To promote the movement of spectrum to those uses where it is most highly valued, the United States and some other countries have adopted some market-based mechanisms in their management of the spectrum. According to spectrum managers we spoke with in various countries, some have adopted these mechanisms for both government and commercial users, while others have adopted mechanisms only for commercial users. Spectrum managers in the remaining countries we studied said that they were not using these market-based mechanisms, but some reported that they were exploring using these mechanisms. Many Countries Identified Advantages to Using Market-Based Mechanisms for Spectrum Management While spectrum users have been shielded historically from the normal workings of the marketplace, market-based approaches to spectrum management invoke mechanisms or policies that leverage the information normally available in markets—such as prices of goods or services—to promote the efficient use of spectrum. Regulators can implement market- based mechanisms in a variety of ways. They can: Create a market where none previously existed. For example, markets for spectrum have been created over the past 10 to 15 years by adopting auctions as a method for assigning spectrum licenses to mobile telephone and other wireless service providers. Remove or relax rules and regulations that created barriers to the full functioning of spectrum markets. For example, some countries reported that they are considering rules and regulations to permit users to more readily purchase or lease spectrum from other license holders, allowing a more robust secondary market. Similarly, with more flexibility, spectrum licensees can more readily make business decisions to change how they use their assigned spectrum without having to get regulatory approval. Implement a policy that artificially mimics the functions of a market. For example, in some countries, regulators have developed fees that are based on information about prices for spectrum that would likely exist under a free market. These “incentive-based fees” differ from other regulatory fees that are assessed only to recover the cost of the government’s management of spectrum. Incentive-based fees are designed to promote the efficient use of spectrum by compelling spectrum users to recognize the value to society of the spectrum that they use. Mechanisms such as these might have the most applicability for users that do not function within a commercial context. According to the spectrum managers in the 13 countries we reviewed (see fig. 2), many have adopted a variety of market-based mechanisms including auctions and incentive-based fees, more flexible licenses, and secondary markets. Managers in many countries told us that they are moving away from administrative processes and adopting market-based mechanisms for a variety of reasons. Spectrum managers in the countries we studied shared their views on the advantages of market-based policies, which included their usefulness in facilitating the reallocation and reassignment of spectrum to its most efficient use; allowing the market to handle the assignment and allocation of spectrum, which some believe the market can do better than managers can; requiring government agencies to pay market prices for spectrum just as they do for other resources, such as land and electricity; and addressing the challenges of spectrum management under conditions of increasing demand and rising unpredictability of new opportunities for using spectrum. Some Countries Have Adopted Market-Based Mechanisms for Government and Commercial Users According to spectrum managers in Australia, Canada, and the United Kingdom, these countries have adopted market-based mechanisms as part of their spectrum-management approaches for both government and commercial users. As table 1 shows, in addition to holding auctions, these countries have instituted incentive-based pricing—which is designed specifically to provide an incentive to conserve on spectrum—for commercial and government spectrum. These countries have also introduced greater flexibility and secondary markets for spectrum holders. Of these three countries, Australia was the first to institute market mechanisms, adopting auctions in 1994 and incentive-based pricing in the early 1980s. Canada and the United Kingdom started using auctions at a later time—in 1999 and 2000, respectively. With regard to incentive-based pricing, Canada has been using this mechanism since the late 1980s and the United Kingdom since 1998. See appendix V for more information on spectrum management in all of the countries we reviewed. The incentive-based pricing systems in these countries were designed to encourage government spectrum users to recognize the market value of the spectrum they use. Although officials told us that these fees have been successful in providing incentives for government agencies to use spectrum efficiently, part of that success was attributed to other factors. In particular, political pressures and budgetary policies were key to helping promote efficient spectrum use. In Australia, the fees paid by government and nongovernmental users (including the military) are based on a formula that includes factors such as the demand for frequency, amount of spectrum assigned, geographic location, and power of transmission. Australian officials report that government users appear to be able to fulfill their missions despite having to pay for spectrum. When asked to explain the mechanism by which these fees provide an incentive for government users to conserve on spectrum, the spectrum manager we spoke with told us that the impact in Australia is largely the result of synergy between the spectrum fees and declining government agency budgets. Since the 1970s, budgets have been constrained because of the government’s attempt to recover some of the benefits of the gains in efficiency arising from various government management reforms. The official we spoke with believes that this budgetary pressure, combined with more appropriate pricing of spectrum licenses, leads government users to be more efficient with their spectrum. This greater efficiency may manifest itself in government users’ relinquishing spectrum that they do not currently need. Spectrum managers in Canada reported that they charge incentive-based fees for most uses of spectrum, including many government uses. Although the fees are currently based on the amount of equipment in use, Canada is considering changing its fee structure to be based more on other factors such as bandwidth, geography, and the degree to which spectrum is shared. Spectrum managers in Canada reported that the fees have helped some government agencies to use spectrum more efficiently and that a number of licenses have been returned as a result of the fees. They reported that some of these results might also have come about because of their close working relationship with licensees. The United Kingdom developed an approach for determining spectrum fees for all users, except those who had purchased their spectrum at auction and certain providers of exempted services (such as certain military functions). The approach considers alternative means to provide a service that is currently being provided with certain assigned spectrum. Then, an evaluation is made of how that service could be provided by using alternative spectrum, or without any spectrum at all, if possible. A key evaluation is made of the difference in cost between the current means of providing the service and the next best means. Adjusted for certain other factors, this difference represents the “opportunity cost” of the spectrum to the user—that is, the value of the spectrum to that user. As such, this dollar value is the basis for the incentive-based portion of the fee the user must pay. Officials in the United Kingdom believe that spectrum fees are working to improve the efficiency of government spectrum use because agencies are generally facing budgetary restrictions and therefore cannot easily finance spectrum fees through the budgetary process. For commercial users, these countries are working to provide more flexibility in licensing and to establish or improve secondary markets for spectrum. In Australia, licenses may be traded, sold, or sublet. Some of these can also be traded, sold, or sublet in portions based on geography, time, or bandwidth. Australian spectrum managers have not been satisfied with the speed of development of secondary markets in that country, however, and spectrum managers are considering measures to stimulate these markets. Payments among users are also allowed as part of the spectrum-clearing process. Although government funding for moving incumbent spectrum holders to alternative spectrum is not provided, new spectrum licensees are allowed to pay incumbent license holders to induce more rapid clearing of spectrum. In Canada, licenses acquired through auctions have greater flexibility of use than those acquired in other ways, which enables spectrum licensees to more freely decide to modify how they use their assigned spectrum. For example, licenses gained through the auction process have a broader class of services that can be provided with the spectrum than licenses gained through other assignment mechanisms. According to officials there, Canada is planning to extend this flexibility to spectrum obtained in comparative hearings as well. Although holders of auction-based licenses can also participate in the secondary market, officials report that secondary markets are not well developed. The United Kingdom is in the process of increasing the flexibility allowed by its spectrum licenses. Its recent major review of spectrum management recommends allowing more flexibility in the services that spectrum users can provide and the technologies they use. The United Kingdom is planning to issue future licenses with as much flexibility as possible, while recognizing that international coordination and interference management may sometimes limit flexibility. The United Kingdom also sees the development of a robust secondary market as a valuable tool for ensuring that spectrum flows to its most valued use. United States and Certain Other Countries Have Adopted Some Market- Based Mechanisms for Commercial Users Only According to the spectrum managers we spoke with in each country, the United States, New Zealand, Mexico, Italy, and Hong Kong have adopted market-based mechanisms for the commercial sector only (see table 2). For various reasons, these countries do not charge government users more than cost recovery for their use of the spectrum. In the United States, NTIA and FCC do not have the authority to impose fees that exceed the costs of spectrum management. Similarly, managers in Italy are currently prohibited from charging fees above a cost-recovery level. Officials in New Zealand reported that they had considered charging government users an incentive-based value for spectrum, but decided against it because they were concerned that determining the value of spectrum not bought and sold in a commercial market would be too difficult. The United States has used auctions since 1994, shortly after congressional legislation first authorized auctions to be used for commercial spectrum assignment. FCC has also adopted rules that afford companies more flexibility regarding various license provisions—such as the technologies that a company may use or the services that it may provide with its licensed spectrum. FCC plans to increase the flexibility of its licenses, and it is considering liberalizing the right to engage in secondary markets. In recent congressional testimony, an FCC official noted that flexible spectrum rules, which allow companies to respond to market conditions without government intervention, are essential in today’s dynamic world of wireless communications. With regard to secondary market activity, spectrum trades in the United States generally require regulatory approval from FCC. Despite this requirement, a majority of companies we spoke with in the United States have either purchased spectrum licenses from another company or traded spectrum licenses with another company. FCC has an ongoing proceeding looking at ways to encourage the growth of secondary markets. For example, FCC is seeking to institute policies that would allow commercial users to sublease slices of spectrum covered by a license for variable lengths of time. With regard to the use of market-based mechanisms for commercial users in other countries, spectrum managers told us the following: New Zealand was the first country to implement a market-based mechanism to assign spectrum. Today, New Zealand assigns “management rights” to some spectrum it auctions. A winner of such a license is allowed to assign the spectrum in various configurations to itself or others. As such, auction winners essentially have a profit motive that gives them an incentive to assign spectrum to its most valued use. Although licenses are tradable in New Zealand without regulatory approval, spectrum managers reported that because there is not a scarcity of spectrum in that country, there is very little market activity. More recently, Italy has begun to use auctions to assign spectrum, but as with many other European countries subject to certain restrictions on the regulation of spectrum under European Commission law, Italy is moving more slowly than Canada, Australia, and New Zealand to adopt certain market mechanisms. At this time, Italy issues very restricted licenses and has a very limited secondary market for spectrum. Spectrum managers in Hong Kong reported that they assigned spectrum for 3G services in 2001 using a royalty-based auction, which is unique among the countries we reviewed. Unlike most auctions in other countries in which participants bid the total fixed cash price they are willing to pay for spectrum, bidders in Hong Kong bid on the percentage of future revenues—that is, a royalty rate—that they would pay to the government on an ongoing basis. Officials in Hong Kong told us that they chose the royalty method so that the government could share some of the risk inherent in paying for spectrum in future years. They explained that the risk exists because 3G services are new and their full potential cannot be estimated accurately. They also reported that they were concerned that requiring companies to spend large amounts of capital in a cash auction requiring an up-front payment for spectrum would result in too large a financial burden for potential bidders, who also require capital to roll out their networks. Spectrum managers told us that the royalty auction resulted in four incumbent providers of traditional wireless services offering the minimum bid allowable (5 percent of revenue) for the four licenses to provide advanced wireless services. We further discuss Hong Kong’s use of royalty auctions in appendix II. Several Countries Have Not Adopted Market-Based Mechanisms at This Time, but Some May in the Future Spectrum managers from five of the countries in our study—Japan, France, Finland, Spain, and Sweden—reported that they have not used mechanisms that we have defined as being market-based in managing their spectrum. Some of these countries, however, reported that they are considering changing laws and regulations in the future to encourage more efficiency. France, which imposes a large fee to participate in comparative hearings, reported that it has legislation pending to require most users— including government users but not broadcasters—to pay for spectrum. Similarly, managers from Finland reported that they are currently reviewing their policies to extend spectrum fees to more users. Finally, Sweden reported that a committee has proposed changes to Swedish law to allow greater use of market-based mechanisms. Market Mechanisms May Not Be Effective in All Contexts and May Be Difficult to Implement While a move to market-based mechanisms could help to meet future spectrum needs by encouraging users to better utilize spectrum, these mechanisms may not be effective in some contexts and may be difficult to implement. In particular, the context in which certain government users function may not be conducive to the influence of market-based mechanisms. For commercial users, implementing market-based mechanisms may heighten concerns about interference among users. Moreover, market-based mechanisms can work well only when license holders have clearly defined “rights” regarding their use of spectrum. Greater Reliance on Market-Based Mechanisms for Government Users May Be Undesirable, Ineffective, or Difficult to Implement in Some Circumstances Greater reliance on market-based mechanisms may not be desirable or effective for some government users or uses. The purpose of market-based mechanisms is to provide users with an incentive to use spectrum as efficiently as possible. This may result in users’ considering alternative methods of providing services by adopting technologies that either (1) use less spectrum, (2) use less congested parts of the spectrum, or (3) do not require spectrum at all. Because of the primacy of certain government functions—such as homeland security and national defense—charging government users for these functions may not be desirable. In addition, if particular users are unable to adopt any alternative method in a reasonable time frame, market-based mechanisms, such as incentive- based spectrum fees, are not likely to result in reduced spectrum use. In other words, market-based mechanisms can create an incentive for spectrum conservation only if users can actually choose to undertake an alternative means of providing a service. Government users provided several examples of circumstances in which market-based fees might not provide incentives: Spectrum used for certain functions, such as air traffic control, has been allocated internationally—the same bands of spectrum are allocated for this service around the world. The benefit of this in the context of air traffic control is that airplanes on international flights can use the same radio equipment and systems in every country, making air travel safer and less costly than it would be if countries provided services on different bands. If FAA wanted to use bands that are different from those allocated in these international agreements, airplanes from the United States that are making international flights would require multiple communications systems and procedures, which would impose considerable additional costs on carriers. In fact, the United Kingdom charges government users incentive-based fees but exempts spectrum used for air traffic control from these fees. It may also be inappropriate to apply market-based mechanisms for defense systems that involve international agreements. For example, the United Kingdom does not charge the Ministry of Defence for spectrum identified for North Atlantic Treaty Organization use. In addition, DOD has publicly stated that the ability to operate certain systems depends on international agreements with other countries that allow DOD to use certain frequencies within other countries’ borders. DOD officials note that it is important for DOD to employ the same systems, and thus the same portions of spectrum, inside the United States as it does overseas. DOD officials said that it would be very difficult to renegotiate these arrangements in response to spectrum reallocations, or to the implementation of incentive-based fees for spectrum in the United States. Many government defense systems that use spectrum—such as large weapons systems, or satellite systems—not only involve complex international agreements, but are also large and complex from an engineering perspective. These systems usually require years of development, and spectrum may be only a small part of the total resources used by a given system. Thus, once a system is designed and operational, any benefits of conserving spectrum by redesigning these systems are likely to be outweighed by the costs of making such modifications. Consequently, imposing an incentive-based fee for spectrum employed in projects with a long time horizon may not result in spectrum conservation. In some cases, charging government users a market-based fee for spectrum may have the potential to make spectrum use more efficient, such as in situations where a government user is providing a service similar to that of a commercial vendor. Nevertheless, implementing market-based incentives may still be challenging, for several reasons: It is difficult to place prices on goods and services that are not traded in the marketplace. For commercial users, spectrum prices are reflective of the value of the services provided with that spectrum, as measured, in part, by what consumers will pay for the service. Some government services are unique and provide safety-of-life or national defense services. For example, FAA’s air traffic control services and DOD’s precision weapons–guidance systems rely on spectrum, yet there are no equivalent commercial services. Government spectrum users have said that services without a direct commercial corollary cannot be easily valued. One government representative noted that the value to the nation of spectrum allocated to government services is difficult to measure through market mechanisms. If government users can obtain any needed funding for spectrum fees through the budgetary process, market-based incentives are not likely to be effective in conserving spectrum. Two of the three countries that believed that their incentive-based pricing systems were providing some financial incentives for government users to conserve on spectrum reported that one factor contributing to this conservation was a requirement for agencies to reduce their overall budgets while paying for spectrum. Thus, agencies could not easily finance the increased cost of spectrum through the budgetary process. In the United States, most of the limits or caps on discretionary spending contained in the Budget Enforcement Act of 1990 expired in fiscal year 2002. These limits or caps would have constrained discretionary spending, including amounts available for using the spectrum, if government users were charged for that use. In the commercial sector, the profit motive typically provides an incentive for individuals and companies to use spectrum efficiently. Government users do not have a similar financial incentive to conserve on spectrum, because spectrum efficiency is not directly rewarded within government agencies. Thus, imposing fees may create some pressure, but does not mimic a profit motive. Linking spectrum-efficient decisions to performance contracts and individual awards could create greater individual efforts to make such decisions. Another impediment to implementing market-based incentives for government users may be the views of those users. Our survey of IRAC agencies found that 7 of the 17 agencies responding to this survey did not support greater flexibility of use for government spectrum users, 13 did not support the practice of allowing agencies to buy or sell spectrum, 12 were opposed to allowing agencies to lease spectrum, and 13 were opposed to paying fees for spectrum that exceeded regulatory costs. However, 9 agencies were “greatly” or “moderately” supportive of allowing commercial users to pay government license holders to relocate to alternative spectrum, and 11 greatly/moderately supported creating a trust fund to pay for spectrum reallocation. Impediments Have Limited Implementation of Market- Based Mechanisms for Commercial Users Despite the potential benefits of adopting market-based mechanisms for spectrum management, some impediments have limited the implementation of these methods for commercial users. Even though both FCC and NTIA support the use of market-based mechanisms for commercial users, FCC’s implementation of these tools has been limited. Impediments to more widespread implementation of market-based mechanisms—such as auctions, secondary markets, and flexibility of use—include statutory restrictions, the degree to which the most highly- valued spectrum is already assigned, and the sometimes conflicting interests of commercial entities. Auctions: FCC has auctioned off only a limited amount of the spectrum it oversees. Because most of the spectrum is already assigned, the amount of spectrum that could be auctioned without reallocating spectrum is quite limited. Also, FCC has attempted to auction additional spectrum by relocating some users to other parts of the spectrum. Relocation can impose significant costs on the incumbent spectrum holder and sometimes on the new entrant who may be required to fund the relocation. In addition, FCC officials told us that there are statutory limits to their ability to use auctions. Secondary markets: Further implementation of secondary markets in the United States will require that the rights of licensees with regard to their assigned spectrum be more clearly specified. In other resource markets— such as those for land—commercial entities usually have the right, without regulatory approval, to buy or sell the resource, or to lease the resource from another entity that owns it. Although the Communications Act of 1934 prohibits the ownership of spectrum, companies have generally been able to buy and sell spectrum licenses with FCC’s approval. However, according to an FCC official, it is unclear at this time whether, in general, license holders can legally lease all or part of their spectrum rights to other users for some limited period of time. The opposition of some stakeholders, who are concerned that conferring any specific spectrum rights will make it more difficult to release spectrum for new services and technologies that might develop in the future, further complicates providing rights to spectrum users. For over 2 years, FCC has been considering these issues under a Notice of Proposed Rulemaking on secondary markets and hopes to resolve some of these issues shortly. Flexibility of use: Granting greater flexibility in the use of spectrum would enable license holders to behave like other resource owners in having the opportunity to make economic decisions that put their resource to its most highly valued use. Although FCC is examining ways to improve access to spectrum by providing additional flexibility, an FCC official told us that only a small portion of the spectrum it assigns is held under licenses that allow for considerable flexibility of use. FCC’s ability to introduce additional flexibility has been limited because most of the desirable spectrum has already been assigned, making it more difficult to change the rules embodied in these licenses. Moreover, there are considerable disagreements among commercial users over the appropriate degree of flexibility. In particular, some interested parties are concerned that allowing greater flexibility could result in more interference among users. In its report, the FCC Spectrum Policy Task Force made a number of recommendations for handling this potential interference, including the promotion of receiver requirements and creation of a new standard for quantifying acceptable levels of interference, the “interference temperature.” Diversity of Views among Stakeholders and Current Regulatory Structure Are Barriers to Meeting Future Spectrum Needs While a number of discussions and activities are under way to help ensure that future spectrum needs can be met, stakeholders appear to be having difficulty finding consensus that balances the needs of various interest groups. Regulatory actions aimed at providing solutions are often protracted. Moreover, because of the bifurcated regulatory structure in the United States, an examination of whether an overarching redesign of spectrum management is required may best be undertaken by an entity independent of the two regulatory agencies currently involved. In the past, Presidents and the Congress have appointed bipartisan commissions to address difficult policy issues such as this. Stakeholders Have Major Disagreements on Spectrum Policy Stakeholders have been actively searching for ways to improve spectrum management and, thus, to alleviate concerns about meeting future spectrum needs. However, certain conflicts among the stakeholders make it difficult to find workable solutions that balance the needs of various spectrum users. Many conflicts arise because of divergent economic interests among users. For example: Concerns about the cost of reallocation. Incumbent users are often opposed to relocations of current users to new bands, because such moves are likely to require the purchase of new equipment and may thus impose significant costs and disruption on incumbents—although some of this cost may be shared with the firms receiving licenses to use the cleared spectrum. But firms with new services view reallocations as being essential for bringing the benefits of wireless services, including Internet services, to the American public. Concerns about interference. Many conflicts with regard to spectrum decisions arise over concerns about interference. A good example of this concern arises with regard to unlicensed spectrum users. Many licensed spectrum users, both commercial and government, have expressed concern that allowing certain unlicensed uses—wherein devices operating at low power and in fairly limited range use the same frequencies as licensed providers—may create interference that compromises the quality of services provided by licensed users. Conversely, those wanting to introduce certain new technologies view access to unlicensed spectrum as beneficial to the public interest and maintain that the degree of interference created by certain unlicensed uses is not “harmful.” Concerns about policies that influence markets’ competitiveness. Many policy initiatives can have an effect on the competitiveness of wireless markets. For example, allowing greater flexibility for spectrum holders to use spectrum in a variety of ways could create opportunities for firms to enter markets for certain services, increasing the competitiveness of those markets. In fact, some experts have noted that, at times, incumbent firms oppose certain spectrum policies, in part, because of concerns about the effect on competition in the market. Another area where conflicts among spectrum stakeholders have arisen relates to difficulties in determining how to balance the needs—or a process to ensure a balancing of needs—between public-sector and private-sector spectrum users. Government users have said that because they offer unique and critical services that are not comparable to those provided in the commercial sector, a dollar value cannot be placed on the government’s provision of spectrum-related services. FCC officials, commercial users, and others have stated that the ability of commercial users to acquire adequate spectrum is also critical to the welfare of society, because the commercial wireless sector makes important contributions to a healthy, robust economy. FCC and Department of Commerce officials acknowledge the difficulty of balancing the critical needs of government and commercial spectrum users. To illustrate this point, they refer to the difficulties experienced in negotiating two recent agreements: the reallocation of spectrum from government to commercial users for 3G services and the rules under which ultrawideband devices will share spectrum with federal users. Regulatory Environment Results in Protracted Policy Development and Implementation Under the divided management framework, no one entity has been given ultimate decisionmaking authority over all spectrum use. There must be coordination and cooperation in order to determine how best to accommodate users of spectrum. While any decisions involving spectrum can be difficult, those involving spectrum allocations can be particularly protracted. Because most of the desirable spectrum has already been allocated, allocating spectrum for a new technology or service usually requires that some existing users be moved to another part of the spectrum. Since existing users are likely to experience costs for relocating but little, if any, benefit, they are often reluctant to make a move. Even within the jurisdiction of a single spectrum-management agency, reallocations of spectrum may require lengthy negotiations. Moreover, decisions involving the reallocation of spectrum between federal and nonfederal users, and thus between regulatory jurisdictions, can be even more difficult. Some examples of protracted spectrum decisions both within and across regulatory jurisdictions include: The reallocation of spectrum in the 700 MHz band. In 1997, the Congress directed FCC to reallocate to public safety services the 24 MHz of the spectrum that will be recovered from the transition to digital television, and to put up for auction the remaining recovered spectrum. In 1999, the Congress directed that the proceeds from these auctions were to be deposited with the Treasury by September 30, 2000. Auctions for spectrum in the 700 MHz band have been rescheduled several times. Several mobile telephone companies supported a postponement of these auctions. Those in favor of postponing the auction believed that because it was unclear when the spectrum would be vacated, it would be difficult for companies to determine the value of the spectrum. On June 18, 2002, the Congress passed legislation removing the former statutory auction deadlines but requiring FCC to auction, before September 19, 2002, 18 MHz of spectrum, some of which was desired by rural carriers. This auction was completed in September 2002. The auction of the remaining spectrum in the 700 MHz range has been postponed indefinitely. The narrowbanding initiative for federal spectrum users. In 1992, the Congress directed NTIA to adopt and implement a plan for federal agencies with existing mobile radio systems to use more spectrum- efficient technologies. In 1993, NTIA responded to the Congress with a report that included a plan for implementing narrowbanding—a technology that would use about half as much bandwidth as agencies are currently using. NTIA set interim deadlines for the narrowbanding requirements, which are to be fully implemented by 2008. The plan required that some agencies move to spectrum occupied by another agency. As a result, the plan provided a time line according to which each agency would adopt narrowbanding because, as NTIA officials pointed out, the implementation of narrowbanding by any given agency depends, in part, on whether the other agencies have adhered to the schedules laid out by NTIA. We recently asked NTIA about the progress of agencies in meeting their narrowbanding requirements. NTIA was not able to tell us how many agencies have complied with the interim deadlines, because some agencies had not yet responded to NTIA’s June 2002 request for information on compliance with narrowbanding requirements. NTIA officials noted that while they can legally remove frequency assignments from spectrum users that are not complying with the plan, in reality it is difficult for the agency to exercise its authority in overseeing the adoption of narrowbanding. Allocation of spectrum for 3G wireless services. Spectrum managers first considered the need for spectrum to accommodate these new services in 1999, when FCC released its spectrum policy statement. In October 2000, President Clinton directed that a plan be developed to select spectrum for 3G services, but this initial attempt was unsuccessful. In a letter in June 2001, FCC’s Chairman wrote to the Secretary of the Department of Commerce, “It is apparent that additional time is necessary to allow the Commission and the Executive Branch to complete a careful and complete evaluation of the various possible options” for making spectrum available for 3G. FCC’s Chairman stated that the public interest would best be served by providing additional time for informed consideration, even if this resulted in some delay in reaching allocation decisions. Finally, he requested relief from the 2002 statutory deadline for spectrum to be auctioned. A task force was established, which included officials at the Department of Commerce, FCC, Department of Defense, and other federal agencies. In July 2002 the task force released a study concluding that 90 MHz of spectrum could be allocated to 3G without disrupting communications services critical to national security. The deadline set for the band clearing to occur is now 2008, although certain provisions need to be met before DOD would be expected to relinquish its portion of those frequencies. On November 7, 2002, FCC officials released a Notice of Proposed Rulemaking that suggests service rules for the reallocated spectrum. FCC officials stated that they would likely adopt an order establishing the service rules by mid-2003 and would likely hold an auction in 2004. Despite these developments, FCC officials have stated that additional spectrum would need to be allocated to fully support 3G services. FCC and NTIA Are Attempting to Work in a More Coordinated Fashion to Address Difficulties in Spectrum Management, but Jurisdictional Responsibilities Differ Recognizing that the absence of a generally agreed upon national spectrum strategy can make it difficult for FCC and NTIA to avoid contentious, protracted negotiations when providing for future spectrum needs, we recommended in our September 2002 report that the Secretary of Commerce and FCC should establish and carry out formal, joint planning activities to develop such a strategy to guide decisionmaking. Both FCC and NTIA responded positively to this recommendation, and they have recognized the need to address concerns about current spectrum-management policies and procedures by establishing task forces and working groups within their own agencies. For example, the FCC Spectrum Policy Task Force addressed some of these issues and released a report in November 2002, and NTIA held a Spectrum Summit in April 2002 to gather information from stakeholders on the current problems with the spectrum-management process. In response to our previous report, FCC stated that a cornerstone of both these efforts is to improve coordination between FCC and NTIA, to conduct joint planning, and to develop a national spectrum-management strategy. NTIA officials told us that their request for funding for spectrum reform as part of the President’s fiscal year 2003 budget is also a result of their view that the United States needs to take a broad view of the organizational structure and processes for spectrum management. Despite the increased amount of communication between FCC and NTIA, their different jurisdictional responsibilities appear likely to result in piecemeal efforts that lack the coordination to facilitate major policy changes. In particular, FCC and NTIA’s recent policy evaluations and initiatives tend to focus on the issues applicable to the users under their respective jurisdictions. Thus, while these current efforts may be beneficial within the current regulatory environment, an analysis of whether there is a need for comprehensive reforms—such as changes in the structure of spectrum management—may best be undertaken by an independent body. Some Stakeholders Have Suggested That Changes to the Structure of Spectrum- Management Functions May Be Needed As we discussed in our September 2002 report, the current structure of spectrum-management functions within the U.S. government has been in place for many years. In particular, the bifurcated system was put into place with the Radio Act of 1927, and in 1934 the Federal Communications Commission was created to, among other things, oversee nonfederal licensing of spectrum. The federal oversight of spectrum has moved within the executive branch several times and has been the responsibility of NTIA since it was created in 1978. Although the organization of spectrum management has been static for many years, the application of spectrum in providing services has evolved dramatically. In particular, a plethora of new services and applications has emerged in the past 25 years, including various types of mobile telephone service, paging services, wireless video and data services, wireless local area networks, and Internet access. On the government side, the past 25 years have seen untold new wireless applications for public safety, national defense, and other key missions. Additionally, new technologies, such as ultrawideband and software- defined radio, would use radio spectrum in new ways. Recognizing that the United States may not have an adequate regulatory structure to address spectrum-management concerns, commercial and government spectrum license holders, as well as other stakeholders, have suggested various changes in the domestic spectrum-management structure. The ideas range from temporary solutions to overarching systemic changes, but they all aim at improving the efficiency of the way spectrum is managed. Stakeholders’ proposals for improving the process include: Creation of spectrum allocation assessment commission: Several stakeholders have suggested the creation of a politically independent entity that would audit current spectrum allocations and make a comprehensive reallocation proposal. Some have suggested using the Base Realignment and Closure process as a model for creating an independent commission to look at spectrum allocations and assignments. Move NTIA out of the Department of Commerce: Some government agencies that we interviewed suggested that NTIA would be better positioned as a voice for all government spectrum users if it were moved outside of the Department of Commerce. It has been suggested that making NTIA either a commission or an executive office would provide it with a level of independence it does not currently have within another government agency. Eight out of 12 IRAC-member agencies that answered this question on our survey were greatly or moderately supportive of making NTIA an independent agency outside the Department of Commerce. Create a spectrum oversight committee: Along with several government spectrum license holders and a commercial user, a majority of those on our expert panel who responded to a poll felt that creation of a formal entity to provide FCC/NTIA oversight may be appropriate. They said that setting up an oversight committee would create an office where disputes could be settled. It would also serve as a place to create a uniform spectrum policy that both FCC and NTIA could follow. Merging FCC and NTIA into one agency: Some expert panel members suggested the merging of FCC and NTIA into one regulatory agency. Merging the responsibilities would allow a single agency to create one policy for the management of spectrum and create a single voice to address problems when they arise between parties. Undertake an independent review of spectrum-management practices: Seven of our 10 panelists said they favored an independent review of current spectrum-management practices, similar to that recently completed in the United Kingdom. Spectrum-Management Structures in Some Other Countries Differ from Those in the United States, but These Alternative Structures May Not Be Applicable in the United States The structure for managing spectrum in the United States is unlike those in most countries that we examined. According to information obtained from interviews with spectrum managers in other countries, most of the countries have a single government entity that manages spectrum for all users. For example, Industry Canada makes all final decisions about spectrum for all Canadian users, and its decisions are not subject to judicial review. Similarly, in New Zealand, the Ministry of Economic Development is responsible for both government and nongovernmental users of spectrum. Also, some countries have committees or advisory boards that analyze conflicting requests and help spectrum managers make decisions. For example, the United Kingdom Spectrum Strategy Committee prioritizes spectrum needs and makes final decisions when any major conflicts arise. Also, the Radio Advisory Board of Canada attempts to garner consensus on issues so that Industry Canada does not have to analyze many different filings with opposing views. While other countries have adopted alternative spectrum-management systems, they may have limited applicability for the United States for a few key reasons. First, the role of the military in the United States is unique in the world. Second, the divided structure in the United States reflects the President’s responsibility for national defense and the fulfillment of federal agencies’ missions, along with the U.S. government’s long-standing encouragement and recognition of private investment in developing commercial radio and other communications services. While alternative structures may not be fully pertinent to our domestic structure, it is interesting to note how other countries have organized their spectrum- management functions. For more information on spectrum-management structures in other countries, see appendix V. In the United States, Commissions Have Been Used to Look at Major Policy Change When Complex Policy Disputes Arise In the past, commissions have been established to look at certain difficult policy issues. As table 3 shows, in the United States both the Congress and the Executive Branch have created commissions to examine a variety of issues. To ensure that various views and opinions are incorporated, many of the past commissions have been set up so that their members include a broad variety of stakeholders. In a majority of the commissions highlighted in table 3, the right to appoint commission members was divided between the executive and legislative branches, and in several cases further divided in the Congress between majority and minority party appointments in each house. Furthermore, when creating commissions, the Congress has chosen, at times, to stipulate certain requirements for panel members. For example, the legislation setting up the Amtrak Reform Council stipulated that presidential appointments should include representatives from both labor and management. The commissions above were generally made up of between 8 and 15 members. In addition to the commissions discussed above, there is a historical precedent for having a commission examine the spectrum-management process; the First National Annual Radio Conference was established in 1922 by Secretary of Commerce Herbert Hoover. The group, made up of manufacturers, broadcasters, amateur radio representatives, civilian and military government radio communications personnel, and others, was charged with studying radio interference caused by the rise of radio broadcasting and the limitations of the Radio Act of 1912. The conference made recommendations to alleviate the overcrowding of the radio waves. Three subsequent conferences were held in each of the following years, and legislation was introduced to implement various recommendations of the conferences throughout this period. In 1927 a compromise was reached that led to a bifurcated framework for the management of radiofrequency spectrum by the federal government. As spectrum management becomes more complex and difficult around the world, several other countries we examined are also finding a need to undertake a major reevaluation of their spectrum policies. Several countries we reviewed are engaged in high-level examinations of their spectrum-management systems. Canada is currently updating its 1993 Spectrum Policy Management Framework; spectrum managers there told us that the review will take between 2 and 3 years. In the past few years several other countries have completed comprehensive reviews of their policies. Australia and the United Kingdom have each recently completed a 1-year review and are in the process of addressing some of the recommendations made in these studies. Officials in Finland, Italy, and Japan also told us that they are currently involved in or have recently completed some form of spectrum-management review. Conclusions The availability of spectrum for a myriad of applications is of central importance to the U.S. economy and to the fulfillment of key government functions. In the past, the spectrum-management structure in the United States has served our interests well: spectrum for innumerable applications has been allocated and assigned, government’s many important missions are being fulfilled, and domestic wireless markets have grown considerably. However, technology, consumer demand, and government needs are growing rapidly. And as the world becomes more globally connected, new spectrum needs are putting increased stress on the spectrum-management structure. The need for attention to this problem is becoming acute. We found that many countries have been responding to pressing spectrum- management requirements in recent years by undertaking major reviews of spectrum issues and by instituting new policies and approaches. In the United States, numerous discussions and reviews are underway, and this activity is playing a vital role in drawing attention to and stimulating discussion of options for change to the current spectrum-management system. While spectrum reform is increasingly being discussed, debated, and reviewed, it does not appear likely that timely reforms can be agreed upon amid the diversity of views held by stakeholders. Moreover, no single agency has been given ultimate decisionmaking authority over all spectrum in the United States or the authority to impose fundamental reform. FCC’s recent Spectrum Policy Task Force recommendations illustrate that even a major initiative such as this, when conducted by one regulatory agency, will focus on policies and issues under the jurisdiction of that agency. That is, despite the forward-looking nature of FCC’s recommendations, these policies impact only procedures of FCC and the stakeholders it oversees; none of the task force’s recommendations addresses the overarching structure of spectrum management or the possible need for comprehensive reform. As such, a major independent examination of spectrum-management policies and structure is needed. Recommendations for Executive Action In order to develop solutions to key spectrum-management issues, this report recommends that the Chairman of FCC and the Assistant Secretary of Commerce for Communications and Information, in consultation with officials from the Department of State, Office of Management and Budget, Office of Science and Technology Policy, and pertinent congressional committees, work together to develop and implement a plan for the establishment of a commission that would conduct a comprehensive examination of current U.S. spectrum management. This commission would examine, among other things, whether structural reform of our current system is needed. The commission should be independent and should involve all relevant stakeholders—including commercial interests, government agencies, regulators, and others—to ensure that the diversity of views on key spectrum-management issues are represented. The review should be time-limited and, if change is needed, have as its primary objective the establishment of a framework to implement that change. Although the commission could be established by statute, executive order, or other means, a statutory basis for the commission may provide the most appropriate framework for achieving a wide-ranging review of issues that may ultimately need legislative solutions. In appendix IV, we have presented possible issues and stakeholder concerns that a commission could consider as part of its comprehensive examination. Agency Comments We provided a draft of this report to the National Telecommunications and Information Administration of the Department of Commerce, the Department of State, and FCC for their review and comment. Both the Department of Commerce and FCC stated that they are taking steps to coordinate their spectrum-management processes and that each agency, on its own, is making progress in developing spectrum policies that will be more responsive to the rapidly changing environment. Regarding our recommendation for an independent commission to evaluate the need for overarching spectrum reform, both of these agencies stated that they would take our recommendation into consideration. Additionally, the Department of Commerce and FCC provided technical comments on our report that were incorporated as appropriate. The comments of the Department of Commerce appear in appendix VII and the comments of FCC appear in appendix VIII. The Department of State did not provide comments on this report. Matter for Congressional Consideration Because neither FCC nor the Department of Commerce specifically agreed to implement our recommendation, the Congress may wish to consider taking appropriate actions to address spectrum-management concerns. For example, the Congress may consider holding hearings on this matter or enacting legislation to establish an independent commission that would conduct a comprehensive examination of current U.S. spectrum management. We are sending copies of this report to the appropriate congressional committees. We are also sending this report to the Secretary of State, the Chairman of the Federal Communications Commission, and the Secretary of Commerce. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact me at 202-512-2834 or [email protected]. Key contacts and major contributors to this report are listed in appendix IX. Appendix I: Scope and Methodology To respond to the objectives of this report, we gathered information from a variety of sources. In particular, we gathered information by (1) reviewing economic, legal, and public policy material relevant to spectrum issues; (2) interviewing regulatory agencies at state, local, and federal levels; (3) interviewing experts familiar with spectrum issues; (4) interviewing 17 companies that hold spectrum licenses in the United States; (5) interviewing spectrum managers in 12 foreign countries as well as other spectrum stakeholders in the United Kingdom and Canada; and (6) convening an expert panel to discuss several spectrum-policy issues. To better understand the regulatory process and the differences in how spectrum is managed for commercial companies and government users, we interviewed officials who oversee spectrum allocation at both the Federal Communications Commission (FCC) and the National Telecommunications and Information Administration (NTIA) and obtained relevant documents from both agencies. To acquire a more in-depth understanding of how spectrum is managed within government agencies, we conducted interviews with officials at the Department of Justice (DOJ), Federal Aviation Administration (FAA), Federal Emergency Management Agency (FEMA), and Department of Defense (DOD). We also distributed a survey to the Interdepartment Radio Advisory Committee (IRAC) member agencies’ representatives, excluding NTIA and FCC. The survey asked questions about federal agencies’ ability to meet mission needs, their anticipated spectrum needs, and their views on several policy issues. Of the 20 surveys we distributed at an IRAC meeting, 17 were returned to us. At the state and local levels, we talked to a national trade association representing public safety officials, as well as officials managing state and local public safety systems. To get a more thorough understanding of the spectrum auction process, including how companies value spectrum and determine their bidding strategy, we conducted interviews with two financial companies that specialize in spectrum auction consulting and one that specializes in bringing wireless technologies to market. We also interviewed two academics who have written and published articles on the subject. To better understand how companies value spectrum and whether the cost of their spectrum is a significant factor in setting end-user prices and determining the deployment of new products and services, we interviewed representatives of 17 commercial companies that have spectrum licenses. These companies provide services in both urban and rural markets. Of the 17 companies, 2 were radio or television broadcasters, 11 were wireless communications companies, 2 provided services via satellite, 1 provided local telephone service using wireless rather than wire connections, and 1 was a paging company. The selection of companies was based on those discussed in an FCC report concerning wireless issues. To obtain information about spectrum management in other countries, we interviewed officials in Australia, Canada, Finland, France, Hong Kong, Italy, Japan, Mexico, New Zealand, Spain, Sweden, and the United Kingdom. The criteria we used to select the countries included geographic size, gross national product per capita, population density, level of mobile telephone penetration, primary methods for assigning spectrum, and whether the country uses market incentives to encourage government conservation of spectrum. In choosing the countries, we also consulted with NTIA and Department of State officials. For all countries, we were interested in learning about the regulatory structure governing spectrum management. We asked about the basic aspects of their management of the spectrum, including how the resource is allocated and assigned to government and commercial users, the mechanisms and regulatory structure they have in place for reaching agreement on spectrum- management issues, how they see the level of competition in their wireless industry, and whether they have employed market-based mechanisms in managing the spectrum. For Canada and the United Kingdom, we conducted more in-depth case studies of spectrum management by interviewing not only spectrum managers but also government users and commercial service providers. In these two countries—as well as in the United States—we interviewed officials who manage spectrum for air traffic control, national law enforcement, and local emergency service. We also interviewed commercial wireless providers. For many of the countries studied, the information in this report is based on statements provided by spectrum managers during interviews and could not always be verified through documents or other means. To determine the validity of our preliminary research findings, we assembled an expert panel. To identify potential panelists with recognized expertise in spectrum-management issues, we solicited recommendations from officials at FCC and reviewed research on spectrum-management issues. From a pool of over 35 potential panelists, we selected 10 panelists who represented a cross-section of spectrum experts, including federal regulators, government and commercial users, band managers, financial analysts, economists, and engineers. The name and organizational affiliation of each panel member is listed in appendix VI. During a day-long meeting at GAO headquarters, the panelists discussed six topics that we provided in advance: (1) spectrum assignment and payment methods, (2) flexibility of use and secondary markets, (3) the scarcity of spectrum, (4) incentives for improving the technical efficiency of spectrum use, (5) the competitiveness of wireless and wireless equipment markets, and (6) ways to balance the needs of commercial and government users. After discussing each topic, we asked the panelists to answer specific questions on an anonymous ballot. The meeting was recorded and transcribed to ensure that we had accurately captured the panel members’ statements. In addition to the information collected through the work efforts described above, we also reviewed technical, legal and regulatory, and economic research on relevant spectrum-management issues. Appendix II: Stakeholders’ Views on Auctions and Spectrum Royalties This appendix provides information on (1) the positive attributes of auctions identified by stakeholders; (2) concerns about the effect of auctions on consumer prices for wireless services, the rapidity of deployment of new technology, and the ability of small business to participate in the provision of wireless services; and (3) stakeholders’ views on the merits of spectrum royalties. Stakeholders Identified Several Positive Attributes of Auctions Wireless companies that we spoke with and members of our expert panel generally perceive auctions to be an improvement over comparative hearings and lotteries for the assignment of spectrum. Auctions are generally perceived to be faster and more transparent than comparative hearings. Also, auctions were seen as promoting economic efficiency by assigning spectrum to the party that values it the most. Finally, in contrast with comparative hearings and lotteries, auctions capture part of the value of the spectrum for the government in the form of winning bids. The companies that we spoke with generally characterized auctions as being superior to comparative hearings. Some companies described auctions as quick, efficient, certain, and the best available mechanism. Alternatively, some companies described comparative hearings as slow, arbitrary, and uncertain. Participants in our expert panel also were generally positive about auctions. For example, one participant noted that no one has figured out a better mechanism for the initial assignment of licenses. Despite Success in Wireless Markets, Concerns Have Been Raised about Certain Possible Effects of Auctions Despite the growth and competitiveness of wireless markets, some concerns have been expressed about whether the use of auctions as the primary spectrum-assignment method has had a detrimental effect on certain economic factors. In particular, some observers are concerned that the use of auctions will raise consumer prices for wireless services, will slow the deployment of wireless networks, and will make it difficult for smaller businesses to compete for wireless licenses. The effect of auctions on consumer prices. Some concerns have been raised that the price companies are paying for spectrum under auctions could drive up end-user customer prices. Some economists suggest that one-time license payments—such as those associated with auctions or with participation in comparative hearings—should not influence customer prices, because these fixed costs do not vary with a firm’s output. As such, they do not influence a firm’s decisions about how to set its prices; such decisions are based on the firms’ marginal, or incremental, costs. However, other economists have pointed to reasons why auction payments could influence consumer prices in certain cases. For example, some or all companies might, because of an increased need to borrow funds to participate in an auction, see their cost of financial capital rise. Moreover, these economists argue that while firms may temporarily set prices based on marginal costs, firms cannot survive in the long run without considering fixed costs, and hence auction payments will be reflected in consumer prices. Views among those we spoke with on this issue were mixed. Officials at six of the companies we spoke with said that the assignment mechanism does not influence prices. Similarly, three of the panel members reported that the price paid for spectrum had “little/no” influence on customer prices. Additionally, two FCC studies that examined consumer prices for wireless services found that the introduction of auctions for spectrum assignment did not raise consumer prices. On the other side, officials at eight companies we interviewed suggested that the assignment mechanism does influence prices; three of these companies reported that they must set prices high enough to cover their debt and maintain margins. Additionally, four of our expert panelists said that spectrum price had “some” influence, and three said it had a “great” influence on customer prices. While there is clear disagreement among those we spoke with about the effect of auctions on consumer prices, the competitiveness of the market is generally seen as a very important factor in determining consumer prices. The companies that we spoke with overwhelmingly cited competition as an important factor when setting consumer prices. Competitive factors were more commonly cited as an important influence on price than was the influence of auction payments. Similarly, participants in our expert panel also indicated that competition was an important consideration for companies when determining what prices they would charge consumers. The effect of auctions on the rate of infrastructure deployment. Some observers argue that payment at auction for spectrum licenses would encourage companies to deploy technologies and services faster, because the companies would have devoted their own resources for the licenses and would need to recoup the investment by using the spectrum in a productive and innovative manner. Others, however, argue that the auction payments for spectrum licenses could slow the deployment of new technologies and services by diverting financial resources away from direct investments in infrastructure. Officials at nine of the companies we spoke with said that the assignment mechanism can influence the rate of deployment of new technologies and services, because, for example, high auction prices can affect the firm’s access to financial capital. Alternatively, five companies said that the assignment mechanism does not influence the deployment of new technologies or services. Panel members’ views on whether the rate of deployment of wireless infrastructure is affected by purchase of licenses in an auction were also mixed. Six panelists generally reported that payments for spectrum had “little/no” or only “some” influence on the deployment of new wireless technology, while four panelists reported that these payments could have a greater influence on the rate of deployment. Finally, the United Kingdom’s National Audit Office found that while companies paid unprecedented amounts for 3G spectrum in that country, there was no strong evidence that the level of proceeds from the auction would have a negative impact on the wider economic benefit of 3G. The companies that we spoke with told us that a number of other issues have an influence on the rate of deployment of wireless infrastructures, in addition to the purchase of spectrum licenses through auctions. These issues include (1) difficulty with citing cell towers because of problems associated with local zoning; (2) FCC mandates for items such as emergency 911 service, which require large financial investments that divert resources away from the deployment of the firm’s network; and (3) FCC procedures, such as licensing spectrum that is encumbered (that is, currently used by another licensee), that increase business uncertainty. Finally, the United Kingdom’s National Audit Office noted that the remaining difficulties to be overcome for the roll-out of 3G services in that country are mainly technical: for example, the development of suitable base station and hand-set equipment. The effect of auctions on the ability of small businesses to obtain spectrum licenses. Another concern about the adoption of auctions for the assignment of spectrum licenses is that smaller companies will not be able to compete for licenses with larger businesses. FCC addressed this concern in a few ways. FCC allowed partitioning of some licenses into relatively small pieces to facilitate small business participation in wireless markets. Additionally, for some auctions, FCC provided special bidding credits, allowed long-term installment payments, or designated certain licenses as available only for acquisition by smaller companies, in order to facilitate their participation and increase their opportunity to acquire spectrum licenses. Among the companies and experts that we spoke with, several suggested alternatives to the current spectrum-assignment mechanism to facilitate small business participation. These alternatives included small geographic areas, which can be better suited to the business models of small companies, and revenue sharing. Alternatively, while FCC has taken steps to promote small businesses in certain auctions, some observers do not believe this necessarily leads to viable small business participation in wireless markets. Those who take this view argue that certain wireless services have large economies of scale in their provision because of the large costs associated with constructing wireless networks. Few Stakeholders Favor Royalty System of Spectrum Auctions In response to concerns about auctions, some stakeholders have suggested royalties as an alternative mechanism for assigning spectrum licenses. With a royalty mechanism, a company would pay the government a percentage of revenue on an ongoing basis, rather than pay the government a one-time fee to obtain a spectrum license. For example, Hong Kong spectrum managers reported that they used a royalty auction for 3G spectrum in which companies bid on a percentage of their revenue to be paid to the government. Spectrum managers in Hong Kong told us that a royalty structure enables the financial risk associated with purchasing spectrum at an auction to be shared between the government and commercial sector. We found little support for royalties among the companies that we spoke with, the spectrum managers in other countries, or participants on our expert panel. Officials at only four of the domestic companies that we spoke with thought the royalty method merited consideration. These companies told us that royalties—in lieu of upfront auction payments— could help small businesses enter the wireless market by reducing the financial resources associated with acquiring spectrum licenses in an auction. However, eight companies that we spoke with did not favor royalties. Some of these companies noted that royalties would effectively function as a tax that would raise consumer prices and possibly increase business uncertainty. Participants on our expert panel were uniformly opposed to a royalty mechanism. Finally, officials with most foreign governments that we spoke with told us that their governments had considered and decided against royalties or had not considered royalties at all. Appendix III: Technological Advancements Could Help to Relieve Spectrum Scarcity Because spectrum is a finite resource and demand for it is rising, it is increasingly scarce. The radiofrequency bands most usable for new wireless services in land mobile radio, wireless telephony, and ultrawideband applications are the most congested portions of the radio spectrum. But advances in technology hold promise for enabling greater efficiency in the use of this prime spectrum. The move from analog to digital technologies has already greatly conserved the use of prime spectrum and holds further promise for the future. Digital technologies increase the amount of information that can be transmitted within a given amount of bandwidth. For example, by using certain digital techniques, wireless telephony networks can now handle more calls in a given bandwidth than was possible with analog cellular. These benefits are also spreading to other applications. Similarly, the transition from analog to digital television will eventually release some portion of the broadcast spectrum to be available for other uses. Federal users are also required to adopt narrowbanding techniques by 2008—a move that will economize on the use of spectrum. Ultrawideband technologies also offer opportunities to conserve on spectrum use, by allowing a given band to be allocated to multiple uses. After a number of years of research and development in the use of wideband transmission for surveillance, obstacle detection, and ground- penetrating radars, and after consultation with NTIA, FCC agreed to allow experimental wideband systems on an unlicensed basis. Because these technologies use low power over wide swaths of spectrum, they are able to share bands currently in use by many federal and nonfederal systems that are using higher power levels and compatible transmission techniques. In the more distant future, users and experts are looking to the development of software-defined radios to more effectively use spectrum. As many experts have noted, much of the radio spectrum is not actually being used at a given time. Software-defined radio technology, in which a radio receiver searches for unused frequencies at a given time and tunes to an available channel, offers the opportunity to use temporarily unused spectrum by allowing spectrum to be allocated to various uses and assigned to various users dynamically—minute by minute. Software- defined radio technology promises to offer a way for numerous radio systems that are operating in varied frequency bands and different modes (push-to-talk, broadcast, secure, and so forth) to operate on a common platform. Not only will software-defined radio allow spectrum to be assigned on a minute-by-minute basis, but it may also help solve some of the problems related to the interoperability of various systems, a well- recognized problem in public safety and search-and-rescue applications. Appendix IV: Suggestions for Issues for Consideration by a Commission This appendix discusses issues that would need to be considered in setting up a commission if one is established. This is not intended to be an exhaustive list of possible topics for consideration, nor should it be interpreted as recommending any specific course of action for spectrum management. Commission Structure Considerations When designing a commission to examine the U.S. spectrum-management process, the following should be considered: Appointment authority: Commissions often have both Congress and the President designate members to serve. Several have gone further to achieve political balance, allowing both majority and minority congressional leadership to make appointments. Federal Advisory Committee Act: Consideration should be given to whether the commission will be established as a federal advisory committee. Eligibility: In order to ensure that all of the diverse stakeholders’ opinions are heard, there should be broad representation on the commission. For example, the commission should include representation from the government, commercial, and technical sectors. Staff, timeframe, and budget: The size and qualifications of the staff, the budget for the commission, as well as the time frame of the commission’s work will need to be considered. Commission status: A decision on whether the commission should expire upon the issuance of its report or have a predetermined recurring status should be considered. Potential Goals and Objectives of Commission Promote technically efficient use of spectrum; Promote economically efficient use of spectrum; Ensure that government missions requiring spectrum are accomplished; Promote growth of the private sector; Minimize interference among users; Maximize the rapidity with which spectrum management can respond to Recommend future policy and management structures. Possible Policies to Consider Whether the current policies should be continued; Whether mechanisms that create economic incentives to encourage users to use spectrum more efficiently could be developed: If it is appropriate to apply these mechanisms to all users or only to subsets of users, including government users; Possible mechanisms to consider include: Requiring users to pay for spectrum licenses in the marketplace; Allowing users to sell spectrum in the market place; Allowing users to lease spectrum from other users; Charging an incentive-based fee that is designed to mimic a market where one does not exist; Increasing the flexibility of use embedded in a license; Providing more spectrum for experimental and unlicensed uses; Increasing the use of band managers. Increasing the information available to policy makers and regulators regarding spectrum use by: Auditing its use on a regular basis; Measuring its value through some form of accounting. Making spectrum conservation a high level policy goal throughout the Funding research on technologies that are spectrally efficient; Establishing rules for determining spectrum-use priorities; Setting up a formal spectrum-planning process; Determining whether there should be a major one-time reallocation of Developing rules for reallocating spectrum both within and across regulatory jurisdictions. Potential Regulatory Structure Options to Explore Determining whether the current regulatory structure should be Creating a mechanism for better coordination of NTIA, FCC, and IRAC functions by any of the following means: Requiring agencies to develop a single spectrum plan that would be Making coordination among spectrum-management agencies a critical objective in the strategic plan of each agency; Establishing other policies and procedures that require ongoing Creating a single agency to manage spectrum; and Letting the federal agencies manage their own spectrum. Lessons Learned When examining landmark commissions that led to government reforms in the past, we have cited three main lessons learned that those looking to examine the spectrum-management structure should keep in mind: Successful commissions have established useful goals for what is to be achieved and have had a narrow focus; Reorganization efforts need to recognize the unique federal government purpose/structure (that is, that policies have political, legal, and organizational facets to them); and Efforts have to be made for the congressional and executive branches to reach agreement about the need for and type of reform. Furthermore, it is best when the Congress and executive agencies work in cooperation to implement these reforms. Appendix V: More Details on Spectrum Management in Foreign Countries Studied Each of the 12 foreign countries we studied was asked a variety of questions relating to its management of the spectrum. We asked each country general questions about its spectrum-management structure and methods for resolving conflicts, about how it assigns spectrum to government and commercial users, and for specific details of other aspects of its spectrum-management system. Some of the information gathered from these countries has been reported in the body of this report and thus is not included in this appendix. Spectrum Management and Conflict Resolution Table 4 lists the government entities primarily responsible for the management of the spectrum in each country. We asked spectrum managers how they resolve conflicts that arise regarding spectrum allocations and assignments. Many countries told us that they have one agency that makes all final spectrum decisions. Other countries reported that they have advisory boards or committees that help resolve disputes. Table 5 summarizes responses to this question. We asked spectrum managers whether spectrum users in their country have been forced to move to different bands and if the government provided funding for relocating users. Countries reported many examples of moving certain users to make room for new services or uses of the spectrum. These cases often involved moving government users out of spectrum to make room for new technologies. Table 6 includes information on government funding for moves, as well as other information about funding arrangements. We asked spectrum managers whether they were in the process of completing or had recently completed a review of spectrum management in their country. Some countries were undergoing or had recently conducted comprehensive reviews and others were involved in more focused studies. Table 7 summarizes the responses to our question on spectrum-management reviews. Appendix VI: Participants in GAO’s Expert Panel on Spectrum Issues Rudy Baca Vice President & Global Strategist, Precursor Group (a company providing investment research) Diane Cornell Mark Crosby President, Access Spectrum (a company providing band-management services) Michele Farquhar Attorney, Hogan & Hartson (a law firm with expertise in government regulation and policy) Dale Hatfield Glen Nash Robert Pepper Steven Price David Salant Fred Wentland Appendix VII: Comments from the Department of Commerce Appendix VIII: Comments from the Federal Communications Commission Appendix IX: Key Contacts and Major Appendix IX: Key Contacts and Major Contributors Contributors GAO Contacts Staff Acknowledgments In addition to those named above, Steve Brown, Michael Clements, Randall Fasnacht, Lynn M. Musser, Rebecca L. Medina, Hai Tran, Mindi Weisenbloom, and Nancy Zearfoss made key contributions to this report.

The radiofrequency spectrum--a natural resource used for wireless communications--is a critical input to various commercial and government functions. Because of expanding commercial and government demand for spectrum, there is increasing debate on how best to manage this resource to meet current and future needs. GAO was asked to examine whether future spectrum needs can be met, given the current regulatory framework; what benefits and difficulties have arisen with the application of market mechanisms to spectrum management; and what barriers exist to reforming spectrum management. In the past, the United States relied primarily on a command and control approach to spectrum management, wherein the federal government largely dictated the use of spectrum. This approach generally met commercial and government users' needs for spectrum. However, increased use of commercial wireless services, such as mobile telephones, and expanding government agency missions have created growing demand for spectrum resources. GAO found that concerns exist as to whether the current spectrum-management approach can adequately meet future needs for spectrum. The United States and most other countries that GAO spoke with are incrementally adopting market-based mechanisms for spectrum management. By invoking the forces of supply and demand, market-based mechanisms can help promote the efficient use of spectrum, especially in an environment with increasing and unpredictable demand. A prominent example of a market-based mechanism is the requirement for commercial spectrum users to bid at auction for the right to use spectrum. However, because of mission and system requirements, there is some question as to whether these mechanisms can or should be applied to certain government functions. Also, legal and technical limitations can, in some instances, hinder the application of these mechanisms to commercial users. GAO found several barriers to reforming spectrum management in the United States. While active dialogue among key stakeholders is ongoing, differing priorities have led to little consensus on appropriate reforms. In addition, the current spectrum-management structure--with multiple agency jurisdictions and a slow decisionmaking process--has hindered consideration of whether fundamental reform is needed. In the past, commissions--such as the Defense Base Closure and Realignment Commission--have been used to look at major policy change when complex problems arise.

Background Employment-based health insurance is the leading source of private health insurance in the United States. In 1996, about 64 percent of the population under 65 years old had employment-based health insurance. This employer-based system of health insurance is almost entirely voluntary. The majority of private business establishments in the United States are small, but most workers are employed by medium and large employers. A business establishment is a single location where economic activity is conducted. As shown in figure 1, establishments with fewer than 20 workers constituted about 88 percent of the total but accounted for only about 26 percent of the U.S. employment in 1996. In contrast, medium and large establishments, with 50 or more employees, represented about 5 percent of the total but accounted for about 58 percent of U.S. employment. Figure 1 also shows that more than one-quarter of all employees work for establishments employing 250 or more people, but these businesses represent less than 1 percent of all establishments. Three industries—services, retail trade, and manufacturing—accounted for the majority (about 73 percent) of all private sector employment in 1996. (See fig. 2.) Medium and Large Employers Have Nearly Universal Access to Health Insurance Survey data that we analyzed and our interviews with brokers indicated that virtually all medium and large firms have access to health insurance coverage. Their estimated offer rates of more than 90 percent show that these firms typically take advantage of their access by offering coverage. While the estimated health insurance offer rates between large and small employers differ markedly, the offer rates among medium and large employers vary moderately by firm size and industry and somewhat more widely by state. As shown in table 1, the estimated percentage of medium and large employers that offered health insurance in 1996 ranged from 91 to 99 percent, with larger firms more likely to offer health insurance than medium firms. In contrast, the estimated offer rate among employers with fewer than 50 employees averaged less than 50 percent, according to a recent KPMG Peat Marwick health benefits survey. Medium employers that do not offer health coverage generally have access to health insurance but may decide for various reasons that they do not need to offer health benefits as part of their employee compensation package or may consider the cost of providing health coverage to be too high relative to their profits or employees’ wages. The most recent data available that permit analysis of health insurance offer rates by industry sector and states across firm sizes come from the 1993 National Employer Health Insurance Survey (NEHIS), managed by HHS’ National Center for Health Statistics (NCHS). These data show modest variation in the percentage of employers offering health insurance across industry sectors. Among medium and large employers in different industries, the estimated offer rates in 1993 ranged from 88 to 99 percent. The industries with the highest estimated offer rates (more than 95 percent) were wholesale trade; mining; manufacturing; finance, insurance, and real estate; and transportation, communications, and utilities. As shown in figure 3, slightly lower offer rates (between 88 and 94 percent) prevailed in the retail trade; construction; services; and agriculture, forestry, and fishing industries. The industries with estimated lower offer rates are characterized by higher rates of labor turnover and prevalence of temporary and part-time workers. A similar relationship between offer rates and type of industry was found among small employers, but small employers’ offer rates were markedly lower across all industries, ranging from 29 to 56 percent. Variation by state is wider than by industry. At the state level, the estimated offer rate among medium and large employers ranged from a low of about 72 percent in Wyoming and Texas to almost 100 percent in 14 states. The higher offer rates were concentrated in the Northeast, including the six New England states, New Jersey, and Pennsylvania. Because these estimates are based on survey data, the estimate derived from the sample may be higher or lower than the true percentage of all employers in the state that offer health insurance. Because of the small number of establishments surveyed in certain states, the degree of imprecision for these estimates, as measured by their confidence intervals, can be quite large. Details on the estimated offer rates by firm size in each state and associated confidence intervals for each firm size grouping are in appendix II. Survey data on offer rates presented above estimate the extent of realized access to insurance, but employers that do not offer health coverage often have potential access. That is, such employers have a choice. According to insurers, insurance brokers, and employers that we interviewed, employers with more than 50 workers generally can get an insurer to write a policy covering their workforce. However, insurers and brokers we interviewed pointed out that the price of such coverage for employers that have close to 50 employees might differ substantially—from employer to employer and from insurer to insurer. Survey data, studies, and interviews with market participants indicate that variations in health insurance offer rates by firm size, industry, and state reflect decisions that medium and large employers make about offering health coverage, not difficulties they face in obtaining access to health insurance. As discussed below, multiple factors, including the characteristics of a firm and its workforce and the cost of health insurance, influence employers’ health insurance decisions. Differences in Offer Rates Reflect Firms’ Wage Levels and Other Traits Although the likelihood of a firm’s offering health insurance is strongly linked with its size, whether an employer offers health coverage to its workers also depends on the characteristics of its workforce, the cost of providing health insurance, the firm’s financial condition, and the competitive environment in which it operates. Many of these factors are interrelated, and while research studies we reviewed do not estimate the separate effect of these factors, our analysis of survey data and research studies illustrates the relationship between offer rates and certain characteristics of a firm’s workforce such as employee earnings and labor turnover. Our analysis of 1993 NEHIS data supports other studies’ findings that employers’ offer rates are lower when their workforces are characterized by low wages and high labor turnover. In addition, the price of health coverage is likely to contribute to decisions that some medium firms make regarding whether to offer health insurance. The Role of Wages NEHIS data show that employers with predominantly low-wage employees—those earning less than $10,000 per year—are less likely to offer health insurance to their workers. The effect is generally stronger the smaller the firm. The difference in estimated health insurance offer rates between employers whose workers typically earned less than $10,000 and those whose workers typically earned $10,000 or more a year in 1993 ranged from 10 percentage points among employers with more than 200 employees to 33 percentage points among employers with 51 to 100 employees. (See table 2.) The relatively low offer rate among employers with typically low-wage employees is partly because the cost of health insurance represents a substantial expense for both employers and employees. According to Mercer/Foster-Higgins’ 1997 national survey of employers, the nationwide average cost of providing health insurance to an employee ranged from $3,200 per year for a health maintenance organization plan to about $3,500 per year for an indemnity plan. For the employer, paying a significant portion of such premiums would add considerably to the compensation of lower-wage workers or could lead the employer to offset the cost of health insurance by reducing wages. For employees earning lower wages, paying the required share of premium costs may be prohibitive. Contributions employers make toward employees’ health benefits are excluded from employees’ taxable income. However, this tax exclusion is of lesser value to lower-wage employees who have a lower tax rate than to high-wage employees. Because low-wage workers do not benefit as much as high-wage workers from the tax advantage associated with employer-sponsored health insurance, many low-wage workers are likely to prefer cash wages over health coverage. As a result, lower-wage workers may decline to enroll in an employer-based plan if one is offered. If few workers choose to participate in a plan, the firm may decide not to offer coverage. The Role of Labor Turnover Although NEHIS data do not measure the degree of labor turnover, various studies have cited it as predictor of the likelihood that a firm will offer health insurance. Some research literature indicates that firms with high labor turnover rates are less likely to offer health insurance. Quantitative analyses of the link between labor turnover and firms’ decisions to offer health insurance are rare, but several health insurance industry experts we interviewed indicated that this relationship exists. Because labor turnover varies by industry, this relationship can be illustrated by examining industry data. U.S. Bureau of the Census data show that industries that have labor turnover rates higher than the national average such as agriculture, forestry and fishing; services; construction; and retail trade had lower offer rates than industries with low turnover rates. This relationship is illustrated in figure 4, which shows that industries with average monthly labor turnover rates around 10 percent or more had health insurance offer rates below 55 percent. In contrast, industries with average monthly turnover rates below 7 percent had offer rates greater than 60 percent. The Role of Premium Costs In health benefits surveys that examine reasons some employers (especially those in smaller firms) do not offer health insurance, employers have frequently cited high premium costs as a key factor in their decisions. However, data needed to determine the extent to which costs affect the decisions medium and large employers make regarding health coverage are lacking. Although data are available on premiums charged to employers who offer health coverage, data are lacking on premium rates that firms not offering health insurance would face if they sought to offer health coverage. To address the lack of data on actual premiums faced by non-offering firms, researchers have developed various indirect methods but have applied them only to data on small employers, the group with the lowest percentage of employers offering health insurance. Moreover, available data on average premiums may mask important differences in the premiums charged to some medium firms that share some of the characteristics of small employers. For example, recent data collected by a health benefits consulting firm show that health insurance premiums do not vary greatly by employer size. By contrast, some older studies found that insurance companies charged higher premiums to small companies because of the higher risks and higher cost of marketing and claims administration involved in providing coverage to small companies. In addition, research based on data from the 1980s showed that smaller employers have less power to negotiate price discounts than larger employers. However, some studies that report recent data generally do not adjust for differences in the depth and breadth of health benefits offered. Although smaller firms may be paying premiums similar to those paid by larger firms, smaller firms (including those near the 50-employee threshold) generally have less-generous health benefit packages with higher deductibles. In effect, these smaller firms are paying more per dollar of benefits provided or claims reimbursed. Some insurance brokers we interviewed said that some medium employers (those closer to the 50-employee threshold) face greater variability in health insurance claims cost and in premiums than larger employers. The extent of premium variation depends on how premiums are set. For example, a firm with 55 employees whose premiums are based on experience rating—the group’s historical medical costs—may be charged higher per capita premiums in the future if an employee or dependent were to incur catastrophic medical costs than a firm with 500 to 1,000 employees that also had a single very expensive case. In practice, the extent to which the premium increases for such a firm depends, among other things, on whether the firm can negotiate with its insurer for lower premium costs, the pressures of state regulation that may limit premium variation or restrict premium increases, and the rating practices of the insurer. Gaps in Eligibility Limit Many Employees’ Access to Health Insurance From Their Employers Although most medium and large businesses offer health coverage, many employees lack access to the health benefits their employers sponsor. In particular, part-time employees or those with a temporary work arrangement are not eligible for their employer-sponsored health insurance plans. Although more than half of such employees obtain health coverage from other sources, such as through their spouses, Medicare or Medicaid, or the individual insurance market, the uninsurance rates for part-time and temporary employees are high—25 and 33 percent, respectively. Most Part-Time Workers Ineligible for Employment-Based Health Coverage Rely on Other Sources but Many Are Uninsured Part-time employees, who constitute about 19 percent of the total workforce, are much less likely to be eligible for health insurance than full-time employees, even though their employers offer coverage. As table 3 shows, in 1997, 31 percent of part-time employees were eligible for their employer-sponsored health insurance compared with 82 percent of full-time employees. Moreover, the percentage of firms in which part-time employees were eligible for coverage declined from 55 percent in 1994 to 47 percent in 1997, according to KPMG Peat Marwick data. Despite their relatively low eligibility rate, about three-quarters of part-time employees had health insurance coverage in 1997. The main reason for the discrepancy between eligibility and coverage rates is that over half of part-time employees were able to obtain health insurance coverage through other sources, such as other jobs, family members, the individual insurance market, and Medicare or Medicaid. Nonetheless, about one-fourth of the part-time workforce (or 5.4 million employees) was uninsured as of February 1997, according to data from BLS. Uninsured part-time employees accounted for about 27 percent of the 19.9 million uninsured wage and salary workers in 1997. The majority of the uninsured part-time employees were between the ages of 16 and 34, a group that generally has lower earnings compared with most older workers. Similar disparities between the eligibility of part-time and full-time workers are observed when looking at data for different firm sizes. Agency for Health Care Policy and Research (AHCPR) data for 1996 show that full-time employees were offered health insurance from their current main employers at more than twice the rate of part-time employees for firms with up to 200 employees. For firms with more than 200 workers, the ratio of full-time to part-time rates of eligibility is about 1.7 to 1. (See table 4.) Temporary Employees Are Less Likely to Be Offered Health Insurance Than Permanent Employees In addition to work schedule, anticipated job duration—short-term or temporary versus more long-term or permanent—affects the likelihood that employees will be eligible for their employer-provided health benefits. Temporary employees are less than half as likely to be eligible for health coverage than permanent workers. Specifically, of the 5.1 million temporary employees in the U.S. workforce in 1997, only 35 percent were eligible to participate in their employers’ health insurance. In contrast, 74 percent of permanent employees were eligible for their employers’ health insurance. The percentage of temporary workers eligible for their employers’ health insurance varies across industries. Private-sector industries with the lowest eligibility rates for temporary employees in 1997 were agriculture (18 percent), retail (23 percent), and construction (29 percent). By contrast, eligibility rates for temporary employees were highest among the manufacturing and transportation industries (45 and 46 percent). In general, the data show a direct relationship between the eligibility rates for temporary workers and the offer rates for all employees within a particular industry sector. For example, industries characterized by low rates of eligibility for temporary workers (agriculture, retail trade, and construction) also had relatively low offer rates for all employees, as shown in figure 3. Although eligibility rates for temporary workers were lower than for permanent workers, two-thirds of temporary workers had health insurance from a variety of sources (often through family health coverage). Nonetheless, the uninsurance rate for temporary workers was about 33 percent (or 1.7 million people) in 1997 compared with 17 percent for permanent workers. Moreover, temporary workers generally earn less than permanent workers. The median weekly earnings of temporary workers in 1997 was $266 compared with $444 for permanent workers.Consequently, many temporary workers might not be able to afford their share of health insurance cost even if they were eligible for their employer-sponsored health plans. Conclusions Under HIPAA, insurers cannot deny coverage to a firm with 50 workers or less, but some have questioned whether firms just past this threshold escape the difficulties that small firms used to face. As the evidence presented above shows, virtually all medium and large firms have access to health insurance. However, health coverage is not universal. Despite access to insurance, about 10 percent of firms with 50 to 99 workers (and a small proportion of larger firms) choose not to offer it, and some firms may be deterred by what they see as unfavorable or unaffordable premiums. Perhaps more important, even when an employer offers health insurance, the offer may not extend to all the firm’s workers. Part-time and temporary employees often are not eligible for an employer’s plan, and lower-wage workers may not find it affordable. In the market for health insurance, employers’ and workers’ decisions are voluntary. Consequently, a reversal of an employer’s decision to forgo offering coverage or an employee’s decision to decline an offer hinges on coverage becoming more attractive and affordable. Comments From Outside Reviewers We obtained comments on a draft of this report from a number of experts on private health insurance including those with NCHS, the Employee Benefit Research Institute, and the Health Insurance Association of America. The reviewers agreed with the contents of the report and suggested a number of technical corrections that we incorporated where appropriate. We are sending copies of this report to interested congressional committees and are making copies available to others on request. Please call me at (202) 512-7114 if you or your staff have any questions about this report. Other GAO contacts and staff acknowledgments for this report are listed in appendix III. Methodology The Health Insurance Portability and Accountability Act of 1996 (P.L. 104-191, Aug. 21, 1996) directed us to examine the extent to which classes of large employers in the different states have access to health insurance and the circumstances for the lack of access, if any. In consultation with the offices of the committees interested in the subject matter, we agreed to report on (1) the extent to which medium and large employers in different states and categories have access to health insurance and the barriers (if any) that these employers face in obtaining health insurance; (2) major factors, including health insurance costs, that affect employers’ decisions to offer health insurance; and (3) the extent to which employees are eligible for and covered by their employers’ health insurance. Medium and Large Employers’ Access to Health Insurance Because direct measures of access do not exist, we used available data on employers that offer health insurance as a proxy for the extent of access. This may understate the true level of employers’ access to insurance because it excludes employers that have access to health insurance but decide not to offer it to their employees. To analyze employers’ access to health insurance in different states and classes, we used data covering 1993 (the most recent source for state-level estimates) from the National Employer Health Insurance Survey (NEHIS) and from KPMG Peat Marwick’s survey of employers for 1996. NEHIS was managed by the National Center for Health Statistics (NCHS), a component of the Centers for Disease Control and Prevention of the Department of Health and Human Services in partnership with the Agency for Health Care Policy Research and the Health Care Financing Administration. This survey had usable responses from about 35,000 private business establishments. The sampling unit for NEHIS was the establishment, defined as “an economic unit, generally at a single physical location, where business is conducted or where services or industrial operations are performed.” A primary reason that NEHIS sampled establishments rather than firms is that establishments are confined within state borders, allowing state estimates. NEHIS included a probability sample of employers in each state and the District of Columbia, and we used these data because the data set was large enough to allow us to group establishments into categories by number of employees, such as firms with 50 or fewer employees, 51 to 100 employees, 101 to 200 employees, and more than 200 employees, report state-level information; and group establishments into categories, such as type of industry. Businesses in all states and the District of Columbia are represented in the survey. The minimum number of participating establishments was 383 in Alaska; the maximum number was 1,083 in California. Respondents were asked to describe the characteristics of their firms and their health insurance programs as of December 31, 1993. The results from NEHIS included in this report are for private sector establishments only. NCHS staff performed certain data analyses for us at our request. We did not independently verify the data entry or data analysis work NCHS performed, although we confirmed that the results of its analyses for us were consistent with results contained in a report NCHS prepared under its own name. Survey data based on samples of populations are subject to sampling errors, which can be expressed as confidence intervals around a point estimate. The estimated percentage of establishments that offered health insurance in the states, the District of Columbia, and nationwide are shown with the corresponding confidence intervals for those point estimates in appendix II. Those data are depicted as bars, showing the relative position of the estimated offer rates and the confidence interval for those estimates at the 95-percent confidence level. NEHIS data were also used in other tables describing features of establishments that offered health insurance. The estimated sampling errors (at the 95-percent confidence level) for the percentage of establishments offering health insurance are by industry type and firm size, in figure 3, plus or minus 1 percent to plus or minus 9 percent and by general wage level, by firm size and nationwide, in table 2, plus or minus 1 percent to plus or minus 8 percent. KPMG Peat Marwick KPMG Peat Marwick conducts and publishes its results from surveys on employee compensation and benefits. We used data from KPMG Peat Marwick (some published and some unpublished) to provide more current estimates of the percentage of business firms in various size categories that offered health insurance in 1996. These survey data included the company’s annual survey of firms employing 200 or more employees, supplemented by an additional survey of firms with fewer than 200 employees. The surveys were stratified random surveys of a total of about 2,600 employers nationwide. While more current than the 1993 NEHIS data, KPMG Peat Marwick did not report state-level estimates from its survey. Thus, we used these data to compare with the NEHIS data at the national level. We did not independently verify the KPMG Peat Marwick data, but these data are widely used by researchers. Factors Involved in Employer Decisions to Offer Health Insurance To examine the reasons that employers who had access to insurance decided not to offer health insurance to their employees, we reviewed recent studies on health insurance published by health insurance researchers and our earlier reports and interviewed a broad range of people who were knowledgeable about the insurance market and employers’ behavior. We interviewed benefit consultants and health policy researchers; representatives of employers in California, Pennsylvania, and Virginia who employed from 80 to 185 employees; insurance agents and brokers in California, Maine, Massachusetts, and Oregon; representatives of the Health Insurance Association of America and insurance companies; and state insurance regulators in Oregon, Pennsylvania, Utah, and Wisconsin. We selected the persons we interviewed to provide a geographical cross-section of the nation. Employee Access to Employer-Sponsored Health Insurance Another aspect of access to health insurance is the employee’s view. Both an employer and employee may have access to insurance. The employer may decide to offer insurance, but an employee may decline to enroll. People may decline to enroll for a variety of reasons, including not being able to afford the insurance or having coverage through another source, such as another family member’s coverage. Our data sources for employee access to health insurance included the Agency for Health Care Policy and Research and NCHS’ Medical Expenditure Panel Survey (MEPS) Household Component, which provides current information on health insurance offers and coverage from a sample of about 25,000 persons, and the Bureau of Labor Statistics’ (BLS) 1994, 1995, and 1997 surveys of small, medium, and large employers. The MEPS data are the source of our estimate of the percentage of employees eligible for their employer-based health insurance plans in 1996, by firm size and work schedule, included in table 4. The sampling errors for those estimates are plus or minus 1 percent to plus or minus 8 percent. Estimates of sampling errors for data we obtained from BLS were not available to us. Although we did not independently verify the accuracy of the data, the MEPS and BLS data that we used were published or made available for others’ use by the sponsoring agencies. Health Insurance Offer Rates by Firm Size and State, 1993 Staff Acknowledgments Roger Hultgren, Senior GAO Evaluator, assisted in the design and implementation of the study. Paula Bonin, C. Robert DeRoy, and Elsie Picyk provided analyses of computerized databases. Related GAO Products Private Health Insurance: Declining Employer Coverage May Affect Access for 55- to 64-Year-Olds (GAO/HEHS-98-133, June 1, 1998). Health Insurance Standards: Implications of New Federal Law for Consumers, Insurers, Regulators (GAO/T-HEHS-98-114, Mar. 19, 1998). Health Insurance Standards: New Federal Law Creates Challenges for Consumers, Insurers, Regulators (GAO/HEHS-98-67, Feb. 25, 1998). 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). Retiree Health Insurance: Erosion in Employer-Based Health Benefits for Early Retirees (GAO/HEHS-97-150, July 11, 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 Tradeoffs (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 Portability: Reform Could Ensure Continued Coverage for Up to 25 Million Americans (GAO/HEHS-95-257, Sept. 19, 1995). Employer-Based Health Plans: Issues, Trends, and Challenges Posed by ERISA (GAO/HEHS-95-167, July 25, 1995). Health Insurance Regulation: Variation in Recent State Small Employer Health Insurance Reforms (GAO/HEHS-95-161FS, June 12, 1995). Employer-Based Health Insurance: High Costs, Wide Variation Threaten System (GAO/HRD-92-125, Sept. 22, 1992). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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Pursuant to a legislative requirement, GAO reviewed the extent to which classes of large employers in different states have access to health insurance and the circumstances surrounding the lack of access, if any, to coverage, focusing on: (1) the extent to which medium and large employers in different categories and states have access to health insurance and the barriers, if any, these employers face in seeking health insurance; (2) major factors that affect employers' decisions to offer health insurance; and (3) the extent to which employees are eligible for their employer-provided health plans. GAO noted that: (1) virtually all medium and large employers have access to group health insurance, and about 90 percent actually offer health coverage to their employees; (2) the larger the firm the more likely it is to offer health insurance; (3) employers that do not offer health insurance are likely to be influenced by a variety of factors such as firm size, the wage level, and health insurance premiums; (4) sponsorship of health insurance by medium and large employers varies moderately by industry sector and somewhat more widely by state; (5) across the states, estimated offer rates among medium and large employers ranged from 72 percent in Wyoming to close to 100 percent in 14 states in 1993; (6) the highest offer rates were concentrated in the Northeast, including the six New England states, New Jersey, and Pennsylvania; (7) the propensity of an employer to offer health insurance depends not only on the firm's size but on other, often interrelated workforce and firm characteristics, including employee earnings, labor turnover, and health insurance cost; (8) by contrast, some medium employers may be less likely to offer coverage if they believe that lower-wage employees would not enroll in the plans; (9) in addition, medium employers may be less likely to offer coverage if insurers charge high premiums to cover the higher administrative costs of handling smaller groups or the greater variability of a smaller group's costs due to a catastrophic medical case; (10) data on the prevalence of these circumstances are not available; (11) some employees of medium and large firms do not have access to their employers' sponsored health plan because of eligibility requirements; (12) the eligibility rate of part-time employees was about 31 percent in contrast to a rate of more than 80 percent for full-time workers in 1997; (13) although the majority of part-time employees nationwide have coverage--mostly through another family member's job or nonemployment sources--5.4 million were uninsured in 1997; and (14) uninsured part-time employees represented about 27 percent of the roughly 19.9 million uninsured wage and salary workers that year.

Background Medicare part B pays for most medical equipment and supplies using a fee schedule system. The fee schedules specify a Medicare allowance for each of about 1,900 groups of products, and each product group is identified by a HCFA Common Procedure Coding System (HCPCS) code. All the products grouped under a HCPCS code have the same fee schedule allowance and are intended to be similar items. When suppliers bill Medicare, they use the HCPCS code they believe best describes the specific product provided to the patient. Suppliers and manufacturers may also petition HCFA to establish new HCPCS codes for products they believe are not adequately described by existing codes. Various types of DME are covered by different fee schedules. For inexpensive, routinely purchased items, such as walkers, canes, glucose test strips, and ostomy and urological products, Medicare has a separate fee schedule for each state. These fee schedules are based on the average charges that Medicare allowed in each state in 1986 and 1987. To reduce variation in Medicare fees among the states, the state fees are subject to national floors and ceilings. The national floor for each HCPCS code is 85 percent of the median of all the state fees, and the ceiling is the median of all state fees. The state fees are usually adjusted annually for inflation using the consumer price index, but the BBA amended Medicare law to freeze the fee schedule allowances for medical equipment and supplies for 5 years, beginning in 1998. For orthotic and prosthetic devices, including off-the-shelf items that do not require custom fittings and adjustments, Medicare uses 10 regional fee schedules. Each regional fee schedule is based on a weighted average of the charges Medicare allowed in 1986 and 1987 for each state in the region. Similar to the fee schedule for inexpensive and routinely purchased items, the orthotic and prosthetic fee schedules are subject to national floors and ceilings. The national floor for each HCPCS code is 90 percent of the average of all regional fees, and the ceiling is 120 percent of the average. The orthotic and prosthetic fee schedules are also usually adjusted annually for inflation using the consumer price index, but the BBA amended Medicare law to limit the increases to 1 percent per year for 5 years, beginning in 1998. Four HCFA contractors, called durable medical equipment regional carriers (DMERC), process and pay claims for medical equipment and supplies. A fifth contractor is responsible for analyzing DME claims and answering questions from the carriers and suppliers regarding use of the HCPCS codes. Claims Do Not Adequately Identify Products Billed to Medicare HCFA does not know specifically what Medicare is paying for when its contractors process claims for DME. We identified the products billed under some HCPCS codes and found that the Medicare fee schedule allowance was appropriate for a few of the products but grossly excessive for many of the products billed under the same code. Without more specific product identifiers on Medicare claims, HCFA cannot systematically determine if the fee schedule allowances are appropriate. HCPCS Codes Are Not Sufficient for Medicare Reimbursement Products that differ widely in properties, use, performance, and price are being billed under the same HCPCS code and reimbursed at the same fee schedule allowance. For example, more than 200 short-term, medium-term, and long-term catheters are billed under one HCPCS code for latex Foley catheters. According to a major manufacturer of Foley catheters, specialized coatings affect the durability, function, and price of the catheters within this group. The wholesale prices of these catheters range from about $1 for a short-term catheter to almost $18 for a long-term catheter. The 1997 Medicare fee schedule allowance for all the catheters in this group was between $9.95 (the national floor) and $11.70 (the national ceiling). Since Medicare pays the same fee for all the products billed under the same HCPCS code, suppliers have a financial incentive to provide patients the least costly product covered by the code—they can bill Medicare the full fee schedule allowance regardless of the product provided. For the latex Foley catheters discussed previously, information we gathered from some suppliers showed that the basic short-term catheter, which wholesales for about $1, was the most commonly provided catheter. Since Medicare claims do not identify specific products, HCFA would have to undertake a special study to discover, as we did, that suppliers are usually providing $1 catheters for products with a Medicare fee schedule allowance of about $10 to $12. Without product-specific identifiers on Medicare claims forms, HCFA cannot effectively review the mix of products billed under a HCPCS code to (1) identify the need to regroup similar products under existing or new billing codes, (2) adjust the code descriptions and the guidance to suppliers advising them which HCPCS codes to bill, (3) identify claims billed under inappropriate HCPCS codes, and (4) adjust the fee schedule allowance for a HCPCS code so that it reflects the costs of the products covered by the code. Product-Specific Codes Are Available to Better Identify Products Universal product numbers (UPN) and associated bar codes are increasingly available to identify specific medical equipment and supplies, similar to the way universal product codes are used in supermarkets. Manufacturers can use bar codes for each product to identify characteristics such as the manufacturer, product type, model, size, and unit of packaging (for example, 10 per carton). Industry standards organizations have created two UPN formats for medical equipment and supplies: (1) an alphanumeric standard that provides very detailed product information and (2) an all-numeric standard that is more consistent with international coding standards. Both these UPN formats can be used interchangeably in automated claims-processing systems. The Department of Defense and some hospital purchasing groups are already setting deadlines for their vendors to use UPNs as the standard product identification on all transactions involving medical equipment and supplies. UPNs will enable these government and private purchasers to develop standard product groups, track market prices, and use prudent purchasing methods—paying for medical equipment and supplies that meet quality standards at competitive market prices. Also, a state Medicaid agency is developing a claims processing system that would require UPNs on claims for medical supplies billed to the state. If suppliers were required to include UPNs as well as HCPCS codes on Medicare claims, HCFA could routinely gather the information it needs to group similar products under the same HCPCS code and set an appropriate reimbursement rate for each code. For example, according to a product expert with a manufacturer of urological products, the HCPCS code used for latex Foley catheters is too broad and could be split into three separate codes and reimbursement rates—one each for short-term, medium-term, and long-term catheters. After implementing these adjustments, HCFA contractors could use their automated claims-processing systems to check the UPNs on claims and determine if suppliers are billing for these catheters under the appropriate HCPCS codes. Section 262 of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) amended the Social Security Act to require the Secretary of HHS to adopt standards for the electronic exchange of health information. These standards are expected to incorporate a medical product coding system. Although HCFA officials acknowledge the limitations of coding under HCPCS, HHS plans to designate HCPCS as the national standard to be implemented in the year 2000, based on the belief that this would be less disruptive to the health care industry. However, industry groups and suppliers we contacted said they find the HCPCS difficult to use, and industry surveys show that many manufacturers already label their products with UPNs and bar codes to track their inventories. Industry groups contend that Medicare, the nation’s largest health care insurer, should be leading the effort to require the use of UPNs, especially since this coding system would enable HCFA to exercise better control over Medicare payments for medical equipment and supplies. HCFA officials said they are willing to consider implementing changes to the national coding standards after the year 2000, when the industry has had more time to consider a uniform coding approach for medical equipment and supplies. Medicare Fees Do Not Reflect Current Market Prices or Discounts Obtained by Large Suppliers Medicare’s fee schedule allowances for DME are often out of line with current retail prices paid by individual beneficiaries and with competitive marketplace prices paid by large suppliers. Section 4316 of the BBA amended the Medicare law to permit HCFA to use a streamlined process to adjust fee schedule allowances up or down by as much as 15 percent in one year. This new authority can help HCFA bring the historical, charge-based fees into line with marketplace prices, but some obstacles remain: (1) HCFA and its contractors do not have sufficient current product or pricing data on the thousands of items covered by the DME fee schedule and (2) the fee schedule reimburses large suppliers who buy at volume discounts the same fee schedule allowances as individuals who buy single items at retail prices. A number of options are available for setting more appropriate reimbursement rates. Medicare Fees Are Often out of Line With Current Prices Since the current Medicare fee schedule is based on supplier charges that Medicare allowed in 1986 and 1987, some Medicare fees have little correlation with today’s market prices for medical equipment and supplies. Competition has led many suppliers to increase their purchasing power and lower their product costs by consolidating with similar businesses or joining purchasing cooperatives. On the other hand, new products that use more expensive materials to better meet the needs of some patients may be more highly priced than the Medicare fee schedule allowances for those products. For example, a HCFA contractor found that in 1996 the average retail price for an irrigation tray with bulb (HCPCS code A4320) was $2.83, while Medicare’s 1996 floor and ceiling for the item were $4.20 and $4.94, respectively; the average retail price for an intermittent urinary catheter with straight tip (HCPCS code A4351) was $0.87, while Medicare’s 1996 floor and ceiling for each item were $1.43 and $1.68, respectively; and the average retail price for a one-piece ostomy pouch (HCPCS code A5061) was $3.37, while Medicare’s 1996 floor and ceiling for each item were $2.46 and $2.89, respectively. Medicare payments for some orthotic devices are excessive because even though improved technology and materials have made some orthotics less costly, some of these less costly products are not listed in the Medicare fee schedule. Moldable plastic, velcro closures, and prefitted sizes have eliminated the need to individually design and fabricate many orthotic devices, but as the HHS OIG recently reported, even though orthotic devices are increasingly available off the shelf, the HCPCS codes still reflect the more costly, custom-fabricated products. For example, a prefabricated, self-adjusting hand/wrist brace can be purchased from a supplier’s catalog for $120, but the only similar item listed in the current Medicare fee schedule is a custom-fabricated brace with an allowance of up to $290.92. HCFA’s contractors said that for items not listed in the fee schedule, suppliers should bill a “miscellaneous” HCPCS code and submit documentation describing the item. However, such claims must be processed manually, and the HHS OIG reported that the outdated fee schedule leads some suppliers to bill Medicare for these items using codes and allowances for the custom-fabricated orthotics. Medicare Fees Do Not Reflect Volume Discounts Obtained by Large Suppliers Medicare pays the same fees to individuals and to large institutional suppliers, even though large suppliers obtain substantial discounts. For example, information we obtained from one large nursing home supplier showed that over a 12-month period the supplier billed Medicare for over 37,200 latex Foley catheters. The supplier’s weighted average cost for the catheters was less than $1 each, but Medicare’s fee schedule allowance was between $9.95 and $11.70 for each catheter. The same supplier billed Medicare for 78,100 bedside drainage bags in a 12-month period. The supplier’s weighted average cost was about $2.24 per bag, but Medicare’s fee schedule allowance was between $7.65 and $9.00. Suppliers who bill Medicare incur administrative costs in addition to product costs, but administrative costs do not account for the disparity between large suppliers’ unit costs and Medicare’s fee schedule allowances. Administrative costs are largely attributable to documenting the medical necessity for the initial claim; subsequent claims to reorder items for the same patient involve less time and cost. Suppliers have estimated that the average administrative cost for filing a Medicare claim for a reordered product is about $10. We did not verify that estimate, but it should be noted that suppliers typically include several related supplies on a single claim, and allocating the estimated $10 administrative cost among the three or four items would reduce the administrative cost to between $2.50 and $3.35 per item. For some products a few large suppliers account for a substantial number of the claims paid by Medicare. For example, for one particular type of catheter, 10 suppliers accounted for almost 55 percent of the charges billed to Medicare between July 1, 1996, and September 30, 1996. For five other HCPCS codes in our study, 10 suppliers accounted for 24 percent or more of total allowed charges. These large suppliers include firms that billed Medicare directly for equipment and supplies provided to Medicare beneficiaries in nursing homes. As discussed in the next section, the amendments in the BBA now require nursing homes, rather than their suppliers, to bill Medicare. HCFA Has the Opportunity to Develop New Strategies for Setting DME Fees Until enactment of the BBA, HCFA used an “inherent reasonableness” review process, illustrated in appendix II, that was lengthy and cumbersome to adjust Medicare fees for medical equipment and supplies. HCFA successfully used this process in only one case—it took HCFA almost 3 years to adjust the Medicare fee schedule allowance for blood glucose monitors. The BBA provides HCFA the opportunity to develop new strategies for setting DME fees; other approaches that also merit consideration may require additional statutory authority. Section 4316 of the BBA allows HCFA to use a more flexible, streamlined process to adjust Medicare fees by as much as 15 percent in one year.HCFA plans to implement this authority by having its contractors (1) consider relevant pricing information, such as prices listed in supplier catalogs and prices paid by the Department of Veterans Affairs (VA), and other factors in proposing changes to the fee schedule allowances; (2) notify suppliers and state Medicaid agencies of the factors used to establish the proposed fees and solicit comments; and (3) adjust the fee allowances after considering the comments. On January 17, 1998, HCFA published an interim final rule with comment period to implement these plans. HCFA and its contractors have to overcome some problems to effectively implement these plans—the same problems encountered when HCFA asked a contractor to review the reasonableness of Medicare fees for products billed under 100 HCPCS codes. According to HCFA staff, its contractor (1) could not readily identify the specific products billed under each HCPCS code and (2) encountered problems obtaining information on market prices. Requiring UPNs on Medicare claims, as previously discussed, would help solve the first problem. To address the second problem—obtaining information on competitive marketplace prices—the contractors could use commercial pricing databases and prices set through Department of Defense competitive contracts to supplement prices obtained from catalogs and VA competitive contracts. HCFA should then require the contractors to routinely review and adjust fee schedule allowances for those HCPCS codes that account for the largest proportion of Medicare spending for DME. On June 18, 1997, HCFA proposed a regulation that offers another strategy for paying more appropriate prices for DME. In part, the proposal would, by defining actual charges, set Medicare part B reimbursements at the lower of the fee schedule allowance or the lowest amount a provider has agreed to accept from other payers. This proposal essentially states that Medicare, as the largest single health care payer, should pay no more than the lowest amount a provider charges other payers. We believe that implementing this proposal for medical equipment and supplies could allow Medicare to pay large suppliers at rates that reflect the discounts they obtain, since those suppliers are also likely to have competitive contracts with hospital chains, nursing homes, and managed care organizations. However, a HCFA official stated that many suppliers oppose HCFA’s efforts and that they would challenge HCFA’s statutory authority to implement such a regulation. HCFA is reconsidering this proposal. Subsection 4432(b) of the BBA amended Medicare law to require, in effect, nursing facilities, rather than DME suppliers and other nonphysician providers, to bill Medicare directly for DME and nonphysician services provided to their patients under Medicare part B. This requirement will enable HCFA to identify DME supplied to Medicare beneficiaries in nursing facilities. Institutional suppliers such as those servicing nursing homes obtain DME at substantial discounts; establishing a separate fee schedule for DME provided to nursing home patients would allow Medicare to pay fees that reflect the institutional discounts, rather than paying retail prices. Pursuing this strategy could require new statutory authority for HCFA. The use of competitive contracting for high-volume medical equipment and supplies also has merit. Section 4319 of the BBA directs the Secretary of HHS to undertake up to five competitive acquisition demonstration projects, in three competitive acquisition areas, and to complete these projects by the end of 2002. Under this arrangement, medical equipment and supplies billed to Medicare part B would be reimbursed at rates set through competition. HCFA has completed the plans to administer this project but has not finalized the demonstration sites. Conclusions Medicare spends billions of dollars on medical equipment, supplies, and prosthetic and orthotic devices, but the prices Medicare pays reflect historical charges and, in some cases, outdated products. Similar to previous studies, our work indicates that Medicare grossly overpays for some products. Although the BBA gives HCFA greater flexibility to more quickly adjust Medicare fee schedule allowances, some underlying problems need to be resolved for HCFA to most effectively use its new authority. Medicare overpays some claims for DME because it does not know specifically what it is paying for. Resolving this problem is fundamental to making sure that Medicare fees are reasonable. Although UPNs offer a solution to the problem, HCFA and HHS are reluctant to require UPNs on Medicare claims. The current HCPCS codes and the fee schedule allowances do not reflect changes in products and prices brought about by improved technology and a more competitive marketplace. Some products that were once custom-made are now available as lower-cost, off-the-shelf items, but in some cases the Medicare fee schedule lists only the more expensive, custom-fabricated product. Finally, Medicare pays institutional suppliers and retailers the same fee schedule allowances, even though large suppliers benefit from lower product acquisition costs. Medicare does not currently have a mechanism to set separate fees for large institutional suppliers and retailers so both types of providers could be fairly reimbursed for their costs. Matters for Congressional Consideration In order to help ensure that Medicare fees for DME are reasonable, the Congress may wish to consider enacting legislation directing the Secretary of HHS to reimburse providers of medical equipment, supplies, and devices at the lower of the Medicare fee schedule allowance or the lowest payment suppliers agreed to accept from other payers; and establish a separate fee schedule to reimburse nursing homes for the medical equipment, supplies, and devices provided to their patients. Recommendations to the Administrator of HCFA In order for HCFA to gather information needed to adjust Medicare fees for DME, we recommend that the Administrator of HCFA require suppliers to identify the specific medical equipment, supplies, and devices they bill to Medicare by including UPNs on their Medicare claims; and ensure that HCFA’s contractors systematically gather and analyze market prices for medical equipment, supplies, and off-the-shelf orthotic devices billed to Medicare by using commercial pricing databases and considering competitive prices paid by VA, the Department of Defense, and other large payers. We also recommend that the Administrator of HCFA use the authority provided by the BBA to adjust Medicare fee schedule allowances, setting a priority on items that account for the highest Medicare expenditures. Agency Comments and Our Evaluation We gave HHS and HCFA an opportunity to comment on a draft of this report. HHS did not provide us comments in the time required. HCFA provided us written comments, which we have included as appendix III. HCFA agreed that Medicare overpays for some DME and stated that the revised inherent reasonableness review authority and the competitive bidding demonstration authority provided by the BBA give HCFA the tools needed to begin to address long-standing payment issues. HCFA noted that it published an interim final rule on use of its inherent reasonableness authority, is currently identifying the first items for which it will use this authority, and will announce the first site for the competitive bidding demonstration project this spring. However, HCFA raised concerns about statements in the report regarding (1) the current HCPCS billing codes, (2) Medicare fees for prefabricated orthotics, (3) the potential use of UPNs, and (4) the information available to set DME fee schedule allowances. Current HCPCS Billing Codes Our report states that HCFA does not know specifically what products Medicare is paying for because the same HCPCS code can be used for a broad range of product types, quality, and market prices. HCFA commented that this statement may be misleading because the HCPCS codes represent unique product categories. We disagree that our statement may be misleading. Our report notes that over 200 different catheters can be billed under HCPCS code A4338 (indwelling Foley latex catheter) and that the prices for these catheters range from about $1 to about $18 each. HCFA acknowledged that a wide variety of catheters fit this description and said that this problem could be addressed by an expansion of the single code into multiple codes if medical evidence indicates that the catheters are not functionally equivalent. However, HCFA cannot routinely perform the analysis needed to determine whether the single HCPCS code should be split into multiple codes with different fee schedule allowances. More specific product identifiers are needed to determine (1) the variety of catheters billed under the HCPCS code, (2) the quantity of each kind of catheter billed to Medicare, and (3) the marketplace prices of each kind of catheter. Medicare Fees for Prefabricated Orthotics Our report and a 1997 HHS OIG report noted that even though orthotic devices are increasingly available off the shelf, the HCPCS codes still reflect more costly, custom-fabricated devices. As an example, our report states that a prefabricated, self-adjusting hand/wrist brace can be purchased from a supplier’s catalog for $120, but the only similar item listed in the current Medicare fee schedule is a custom-fabricated brace with a fee schedule allowance of up to $290.92. HCFA commented that HCPCS codes L3800 and L3805 can be used for off-the-shelf hand/wrist braces and that the price comparison is flawed because the $120 price is a wholesale not a retail price. HCFA also noted that its Statistical Analysis Durable Medical Equipment Regional Carrier oversees suppliers’ use of the HCPCS codes to ensure that the correct codes are used. We consulted with HCFA’s statistical analysis carrier about this example during our review, and the HCPCS coordinator told us that codes L3800 and L3805 should be used for custom-fabricated hand/wrist braces. We could not reconcile the conflicting statements by HCFA and its contractor regarding which codes should be used for the prefabricated braces, and this conflicting information further illustrates our point that HCFA does not know specifically what products are being billed under the HCPCS codes. Also, if HCFA rather than its contractor is correct (that is, that HCPCS code L3805 can be used to bill Medicare for a prefabricated, self-adjusting hand/wrist brace), Medicare could be paying over a 140-percent markup over the catalog price—an amount we believe warrants review. Potential Use of UPNs HCFA stated that it recognizes UPNs may be useful to improve the Medicare payment system; is considering the use of UPNs; and will be looking closely at California’s efforts to use UPNs in its Medicaid claims processing system. However, HCFA did not specify any project or timetable for its own efforts to evaluate the use of UPNs. As discussed below, HCFA also raised several logistical and implementation issues. HCFA identified the need to establish a database to link functionally equivalent UPNs with HCPCS codes. To make these linkages, HCFA said that it would need to collect detailed product information for about 1.7 million products, such as the product features, the purpose and uses of the product, the number of items per package, and the manufacturer’s price. HCFA also commented that it does not have the authority to require manufacturers to reveal this information and that implementing UPNs would require additional financial and personnel resources. While implementing UPNs may require additional HCFA resources, it should be noted that HCFA and its contractors are already responsible for many of the activities HCFA described. For example, HCFA’s contractors have to gather detailed information on product characteristics and prices to (1) classify products into functionally equivalent groups, (2) advise suppliers which HCPCS codes to use when billing Medicare, and (3) set an appropriate Medicare fee schedule allowance for items billed under the HCPCS codes. Without any change in HCFA’s authority, it can continue to gather information on product characteristics and prices and one additional data element—the UPN associated with the product. Similarly, suppliers can continue to bill Medicare using existing HCPCS codes as they have in the past, but also supplying one additional data element on the claim—the UPN. Then, using the claims data with the UPNs, HCFA can build a database that identifies the specific products being billed under each HCPCS code and use this database to analyze the appropriateness of the HCPCS product groupings and the Medicare fee associated with each HCPCS code. Our report also noted that requiring UPNs on claims could help identify claims billed under inappropriate HCPCS billing codes. Such claims could be identified by using the database described to establish computerized claims processing screens of valid HCPCS/UPN combinations. In contrast, suppliers currently can claim that a low-cost product “fits” a broad HCPCS description for a higher-cost product; since the claim does not specifically identify the product, the claim may never be questioned. Contrary to one of HCFA’s comments, we did not suggest that UPNs could prevent outright falsification of the information required on DME claims. HCFA also expressed concerns that manufacturers have wide discretion in how they assign UPNs to their products; that there are no mandatory standards for UPNs; and, therefore, UPNs have no uniform meaning. We disagree that manufacturers have wide discretion in how they assign UPNs to their products. The coding councils for each of the two UPN standards strictly define how the UPN is used to represent the manufacturer, the product, and the packaging level. The two UPN standards can be used interchangeably in claims processing systems, since a portion of the UPN identifies which of the two UPN standards is being used. Information Available to Set DME Fee Schedule Allowances Our report recommends that HCFA ensure that its contractors systematically gather and analyze market prices for medical equipment, supplies, and off-the-shelf orthotic devices billed to Medicare by using commercial databases and considering competitive prices paid by VA, the Department of Defense, and other large payers. HCFA commented that it has explored and will continue to explore prices paid by other payers, such as VA, but that comparisons among market prices, commercial pricing databases, other competitive prices, and Medicare fees are difficult because (1) HCFA holds a unique position in the marketplace as a payer rather than a purchaser and (2) DME suppliers who deal directly with Medicare beneficiaries, especially those in the home, have a different cost structure than suppliers to hospitals or VA. Our report does discuss the fact that suppliers servicing Medicare patients incur administrative costs associated with documenting medical necessity and filing claims—costs they might not incur in doing business with purchasers rather than insurers. As noted in the report, we agree that these additional costs should be taken into consideration when setting Medicare fees. Our report also notes that institutional suppliers, such as those that provide DME to patients in nursing homes, obtain substantial discounts, but those discounts are not reflected in the Medicare payments because Medicare pays the same fees to large institutional suppliers that it pays to other suppliers. Our report identifies some options for setting lower Medicare fees for institutional providers. As arranged with your office, unless you publicly release its contents earlier, we plan no further distribution of this report for 30 days. At that time, we will make copies available to other congressional committees and Members of Congress with an interest in these matters, and to the Secretary of Health and Human Services and the Administrator of HCFA. We will also make copies available to others on request. This report was prepared by William Reis, Teruni Rosengren, Suzanne Rubins, and Thomas Taydus, under the direction of William J. Scanlon, Director, Health Financing and Systems Issues. Please call me at (202) 512-6806 or Mr. Scanlon at (202) 512-7114 if you or your staff have any questions. Scope and Methodology To determine how Medicare part B pays for medical equipment, supplies and orthotics—products referred to as durable medical equipment (DME)—we reviewed the federal statutes governing the fee schedules and the inherent reasonableness process for adjusting Medicare fees. We also reviewed the Balanced Budget Act of 1997 (BBA) to determine how provisions of that legislation change the process for adjusting Medicare part B fees for DME. We met with officials from the Health Care Financing Administration (HCFA) and representatives from HCFA’s statistical analysis contractor to discuss how they apply Medicare’s payment rules to set and adjust fee schedule allowances for the items in our study. In discussions with HCFA’s claims processing contractors, called durable medical equipment regional carriers, we obtained information on their practices for adjusting state base fees and for establishing Medicare fees for new Health Care Financing Administration Common Procedure Coding System (HCPCS) codes. We analyzed Medicare fee schedule payments for some commonly purchased medical equipment and supplies. Before deciding which products to include in our study, we reviewed listings of the top 100 HCPCS codes by total allowed charges and by total units allowed by Medicare for the first quarter of fiscal year 1996. We discussed many of these products with HCFA contractors and then selected the following for our review: blood glucose test or reagent strips for home blood glucose monitor, per 50 strips (A4253); lancets, per box (A4259); irrigation tray with bulb or piston syringe, any purpose (A4320); indwelling catheter, Foley type, two-way latex with coating—Teflon, silicone, silicone elastomer, or hydrophilic, etc. (A4338); indwelling catheter, Foley, two-way, all silicone (A4344) ; intermittent urinary catheter, straight tip (A4351); bedside drainage bag, day or night, with or without anti-reflex device, with or without tube (A4357); stoma cap (A5055); pouch, drainable with barrier attached—one piece (A5061); pouch, drainable for use on barrier with flange—two-piece system skin barrier with flange—solid, flexible, or accordion, any size (A5123); cane, quad or three-prong, includes canes of all materials, adjustable or fixed, with tips (E0105); walker, folding (pickup), adjustable or fixed height (E0135); rigid walker, wheeled, with seat (E0142); commode chair, stationary, with fixed arms (E0163); vacuum erection system (K0163); tracheostomy care kit for established tracheostomy (K0165); and intermittent catheter with tray (code A4353). We also reviewed Medicare payments for selected off-the-shelf orthotic devices. We reviewed the laws and regulations pertaining to the fee schedules for orthotic and prosthetic devices and discussed Medicare payment practices for orthotic devices with an official from HCFA, HCFA’s statistical analysis contractor, and a representative from a medical supply distributor. We also reviewed the Department of Health and Human Services (HHS) Office of the Inspector General (OIG) and GAO reports on billing practices and payment policies for orthotic devices. We selected the following orthotic devices for review: wrist-hand-finger orthosis, long opponens, no attachments (L3805); wrist-hand-finger orthosis, addition to short and long opponens, thumb abduction “C” bar (L3810); and wrist-hand-finger orthosis, addition to short and long opponens, adjustable metacarpophalangeal and interphalangeal flexion control (L3860). We also reviewed the HCPCS for DME. We discussed the products grouped under the HCPCS codes with officials from HCFA and HCFA’s statistical analysis and claims-processing contractors. To identify products billed under various HCPCS codes, we analyzed product lists obtained from wholesalers, suppliers, and a commercial medical products database. We also discussed with manufacturers and distributors of medical equipment and supplies and their industry groups their perspectives on the use of HCPCS codes. We gathered information on the use of universal product numbers (UPN) from a manufacturer, suppliers, their industry groups, hospital groups, two standards-setting organizations, the Department of Defense, and a state Medicaid agency. We met with HCFA officials to discuss the uses of UPNs and the feasibility of adopting UPNs as a national coding standard under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) legislation. We obtained Medicare’s national floor and ceiling payment limits for selected products for the years 1995, 1996, and 1997, and we gathered comparative price information from wholesalers and manufacturers. HCFA’s claims processing contractor also provided us with a comparison of retail prices and Medicare’s floor and ceiling payment rates for selected items. We also obtained product acquisition costs for selected items from some large suppliers. To identify the suppliers, we reviewed reports from HCFA’s statistical analysis contractor. The reports listed the 30 suppliers who received the highest total Medicare payments for selected products during the fourth quarter of fiscal year 1996. From some of these suppliers we were able to gather information on the specific products billed to Medicare, the suppliers’ product acquisition costs, administrative costs, purchasing and distribution arrangements, and Medicare billing arrangements. Our discussions with suppliers also covered administrative costs, industry trends regarding cooperative buying groups, and other efforts to lower product acquisition costs. Overview of Inherent Reasonableness Review Process Related GAO Products Medicare: Home Oxygen Program Warrants Continued HCFA Attention (GAO/HEHS-98-17, Nov. 7, 1997). Medicare: Problems Affecting HCFA’s Ability to Set Appropriate Reimbursement Rates for Medical Equipment and Supplies (GAO/HEHS-97-157R, June 17, 1997). Medicare: Comparison of Medicare and VA Payment Rates for Home Oxygen (GAO/HEHS-97-120R, May 15, 1997). Nursing Homes: Too Early to Assess New Efforts to Control Fraud and Abuse (GAO/T-HEHS-97-114, Apr. 16, 1997). Medicare Post-Acute Care: Home Health and Skilled Nursing Facility Cost Growth and Proposals for Prospective Payment (GAO/T-HEHS-97-90, Mar. 4, 1997). Fraud and Abuse: Providers Target Medicare Patients in Nursing Facilities (GAO/HEHS-96-18, Jan. 24, 1996). Medicare Spending: Modern Management Strategies Needed to Curb Billions in Unnecessary Payments (GAO/HEHS-95-210, Sept. 19, 1995). Durable Medical Equipment: Regional Carriers’ Coverage Criteria Are Consistent With Medicare Law (GAO/HEHS-95-185, Sept. 19, 1995). Medicare: Excessive Payments for Medical Supplies Continue Despite Improvements (GAO/HEHS-95-171, Aug. 8, 1995). Medicare: Adapting Private Sector Techniques Could Curb Losses to Fraud and Abuse (GAO/T-HEHS-95-211, July 25, 1995). Medicare: Separate Payment for Fitting Braces and Artificial Limbs Is Not Needed (GAO/HRD-93-98, July 21, 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 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 Medicare's payments for commonly purchased, off-the-shelf durable medical equipment (DME), focusing on the need to: (1) better identify products billed to Medicare; and (2) bring Medicare fees more in line with current marketplace prices. GAO noted that: (1) there are two underlying problems with Medicare's DME payment system; (2) the Health Care Financing Administration (HCFA) does not know specifically what products Medicare is paying for when its contractors process claims for DME; (3) the only product identifiers on the claims are the HCFA billing codes that cover a broad range of product types, quality, and market prices; (4) without more specific product identifiers on Medicare claims, HCFA cannot routinely determine what products are being billed under each billing code, which products should be grouped together under the same billing code, or whether the Medicare payment for all the products grouped under a billing code is reasonable; (5) the health care industry is increasingly using bar-coded, product-specific identifiers for medical products, but HCFA does not have any plans to require these identifiers on Medicare claims; (6) the second underlying problem with Medicare's DME payment system is that the fee schedule allowances for DME are often out of line with current market prices; (7) most Medicare fees are based on historical supplier charges updated using the consumer price index; (8) the Balanced Budget Act of 1997 (BBA) gave the Department of Health and Human Services (HHS) the authority to use a streamlined inherent reasonableness review process to adjust Medicare fees by as much as 15 percent in one year; (9) this streamlined authority should help HCFA bring the historical, charge-based fees into line with marketplace prices, but some obstacles remain; (10) HCFA and its contractors do not have sufficient, current product and pricing data for the thousands of DME items covered by Medicare; (11) another obstacle to appropriate reimbursement is that the fee schedule allowances are the same for individuals and for large institutional suppliers, even though large suppliers buy at substantial discounts; and (12) although the BBA gives HHS the authority to more quickly adjust fees, addressing these underlying problems may require additional statutory authority.

Background Students with disabilities are a complex and diverse group. These students can have a wide range of physical and psychological disabilities, from severe cognitive delays or emotional disorders to specific learning disabilities that can affect their ability to learn. In addition, students with the same disability may demonstrate different levels of academic aptitude and achievement. Individual students with disabilities may demonstrate grade-level or above achievement in some academic areas, while at the same time demonstrating lower academic achievement in other areas. Finally, students with disabilities may require different approaches to assess their performance. Two federal laws specifically require states to administer assessments for students with disabilities: NCLBA and the Individuals with Disabilities Education Act (IDEA) last amended in 2004. NCLBA, which reauthorized the Elementary and Secondary Education Act, was designed to improve academic achievement for all students. NCLBA requires that students with disabilities be included in statewide assessments that are used to determine whether schools and districts meet state goals. Further, NCLBA requires that all students, including students with disabilities, be measured against academic achievement standards established by the states. Specifically, NCLBA requires annual participation in assessments in third through eighth grades and one high school grade for reading and mathematics by the 2005-6 school year. To be deemed as making progress, each school must show that the school as a whole, as well as each of designated groups such as students with disabilities, met the state proficiency goals. Schools must also show that at least 95 percent of students in grades required to take the test have done so. Further, schools must also demonstrate that they have met state targets on another measure of progress – graduation rates in high school or attendance or other measures in elementary or middle schools. Under NCLBA, states are required to participate in NAEP for reading and math assessments in grades four and eight, although student participation continues to be voluntary. The purpose of this requirement was to use NAEP scores as confirmatory evidence about student achievement on state tests. According to Education, confirming state test results represented a new formal purpose for the NAEP. Also called “The Nation’s Report Card,” the NAEP has been conducted regularly since 1969. Since then, this assessment has provided a national measure of student achievement. The NAEP can be used to track trends in student achievement over time or to compare student performance in a particular state with the national average. In 1996, Education developed a new inclusion policy that provided for accommodations allowing most students with disabilities to participate meaningfully in the NAEP. This policy was developed in response to increases in the numbers of students with disabilities, the attention paid to their needs, and a corresponding demand for information about their academic progress. Under the old policy, far fewer students with disabilities had been included in testing. IDEA is the primary federal law that addresses the educational needs of children with disabilities, including children with significant cognitive disabilities. The law mandates that a free appropriate public education be made available for all eligible children with disabilities, requires an individualized education program (IEP) for each student, the inclusion of students with disabilities in state and district assessments, and requires states to provide appropriate accommodations for students who can take the regular assessment and to develop alternate assessments for students who cannot participate meaningfully in the regular assessment. The IEP team, which develops the IEP, also decides how students with disabilities participate in assessments, either without accommodations, with accommodations, or through alternate assessments. Accommodations alter the way a regular assessment is administered. They provide students with disabilities the opportunity to demonstrate their academic achievement on a regular assessment without being impeded by their disabilities. For example, a student may need extended time to finish the assessment or someone to read the instructions aloud. Another example of an accommodation is taking the assessment in a small group setting. Alternate assessments are designed for the relatively few students with disabilities who are unable to participate in the regular statewide assessment, even with appropriate accommodations. For example, a student with the most significant cognitive and physical disabilities may be able to communicate only through moving her eyes and blinking. An alternate assessment for this student could include teacher observation reports and samples of student work. Similar to the regular assessments, NCLBA requires that alternate assessments be aligned with the state’s achievement standards. However, these assessments may be scored against grade-level or below grade-level achievement standards. See table 1 for examples of assessment types and achievement standards. An alternate assessment based upon grade-level achievement standards reflects the same standards as the regular assessment. For example, a student with an emotional disability, who might do her best work while being supervised, could solve an algebraic problem for a missing variable that is similar to items on the regular assessment while her teacher observed her perform the task correctly. Because the items are similar in complexity, the alternate assessment—observing the student performing the academic task correctly—would measure the same grade-level achievement standard as the regular assessment. For some students who could not be accommodated on the regular assessment, this method allows them to demonstrate their knowledge of grade-level academic content. An alternate assessment based upon below grade-level achievement standards reflects standards that are less complex than those on the regular assessment. In contrast to a student solving an algebraic problem for a missing variable, a student with a cognitive disability could determine which coin is missing from a set of coins while his teacher records his efforts on a videotape. For some students, the alternate assessment allows them to demonstrate their knowledge of academic content at their individual developmental levels. Education’s guidance states that these below grade-level standards are appropriate only for students with the most significant cognitive disabilities. The guidance placed no limit on the number of students that could be assessed against these standards. Under NCLBA, states and districts can count the proficient scores of students taking assessments with below grade-level standards as meeting state achievement goals provided the number of these students does not exceed 1 percent of all students. In addition, Education announced a new policy in April 2005 allowing states additional flexibility in assessing some students with disabilities— those who are not significantly cognitively disabled, but face considerable challenges in their academic development. For example, some students with disabilities may be 3 to 5 years behind their peers academically. The additional flexibility allows states to assess more students using less complex or below grade-level achievement standards. Further, qualified states were allowed to count the scores of these students as meeting state achievement goals, as long as the number of proficient scores for these students did not exceed 2 percent of all students. Most Students with Disabilities Participated in Statewide Reading Assessments in the 2003-04 School Year Most students with disabilities participated in statewide reading assessments in the 2003-04 school year. Students with disabilities were usually included in the regular reading assessments and sometimes were included in alternate assessments. Two states that we visited, Massachusetts and Oregon, had developed innovative approaches to including students with disabilities in statewide assessments. According to Education, 5 percent of students with disabilities were excluded from the NAEP, but state exclusion rates varied. This was in part because the assessment does not allow accommodations that are permitted on some statewide assessments. Most Students with Disabilities Participated in Reading Assessments, and Participation Rates Were Similar to Those of Nondisabled Students Most students with disabilities participated in statewide reading assessments in the 2003-04 school year according to state reports to Education. Forty-one states reported that they met NCLBA’s participation requirement by having at least 95 percent of students with disabilities participate in statewide reading assessments. Seven states and the District of Columbia reported participation rates below 95 percent for students with disabilities. Two states did not provide participation rate data for students with disabilities in a usable format. The participation requirement is part of what is considered to determine whether states, districts, and schools demonstrate adequate yearly progress. There are programmatic implications for not demonstrating progress goals. Two states, Indiana and Michigan, did not provide these data in a form that we could report. Figure 1 presents the distribution of participation rates on statewide assessments. State participation rates for students with disabilities were generally similar to those for all students. Most states reported that an equal or slightly higher percentage of the total student population participated in statewide assessments compared to students with disabilities. Differences in the participation rates were usually minor. Connecticut, Georgia, and Oklahoma reported that the participation rate among students with disabilities in statewide reading assessments was higher than among all students. An official in one state said that the state had made efforts to boost the participation rate of students with disabilities, including issuing state guidance and holding regional workshops. The official also said that, because students with disabilities are a small subset of the state’s student population, it is easier to boost participation among students with disabilities than among all students. Participation rate data by state can be found in appendix I. Most Students with Disabilities Were Included in Regular Reading Assessments, and Relatively Few Were Included through Alternate Assessments In 49 states and the District of Columbia, most students with disabilities who were tested in the 2003-04 school year were included through regular reading assessments. In over two-thirds of these states, more than 90 percent of students with disabilities were included in the regular reading assessment. In the four site-visit states, most students with disabilities were included in the regular reading assessment. In three of the four site-visit states, the majority of students with disabilities who were included through regular reading assessments received accommodations in the 2003-04 year. These data ranged from 58 percent in Florida to 89 percent in Massachusetts. Data from one state that we visited, Florida, showed that additional time and other scheduling changes and changes of setting were the most frequent accommodations. Although the other 2 states did not provide data on the most frequently used accommodations, small group settings and extended time were the most frequent accommodations on the NAEP reading assessment which reflects the accommodations students receive in statewide assessment systems. Alternate reading assessments with grade-level standards were used by nine states. In six of these states, less than 10 percent of students with disabilities were included in these assessments. In the other three states, 14 percent to 21 percent of students with disabilities were included in these assessments. Two of the four states that we visited, Massachusetts and Oregon, reported including students with disabilities in alternate reading assessments that measured grade-level standards. For information about the percentage of students included in this type of assessment, see figure 2. For state-by-state use of different types of assessments, see appendix I. Alternate reading assessments with below grade-level standards were used by 49 states and the District of Columbia. In most of these states less than 10 percent of students with disabilities were included in these assessments. However, Texas included 60 percent of students with disabilities in alternate assessments that measured below grade-level standards. Officials in Hawaii, the only state that did not include any students in this type of assessment, reported that the state is developing an alternate assessment that measures below grade-level standards. All four states that we visited reported including students with disabilities in these assessments. For information about the percentage of students included in this type of assessment, see figure 2. We examined data in Florida and Massachusetts to determine the relationship between the disability and type of assessment used. About 40 percent of autistic students received alternate assessments in Massachusetts, the highest of any type of disability. Students with physical disabilities had the highest percentage of students receiving regular assessments without accommodations in Massachusetts. In Florida, over 60 percent of students with autism received alternate assessments measuring below grade-level standards. Table 2 shows assessment data based on disability type for Massachusetts. Few differences existed in how students were included in assessments based on their year in school according to data from the two states we visited that provided data. In both Massachusetts and Iowa, a similar percentage of students were given accommodations and alternate assessments across several different grade levels. Massachusetts and Oregon Used Innovative Approaches to Assess the Performance of Students with Disabilities Two of the four states that we visited, Massachusetts and Oregon, used what experts described as innovative assessment approaches to measure the performance of students with disabilities. Massachusetts developed an alternate assessment system that can measure grade-level and below grade-level standards. State officials have developed a resource guide that details the alignment between the curriculum and achievement standards. For each content area, the state has identified a progression of increasingly rigorous standards, with grade-level standards as the most rigorous, through which students can demonstrate knowledge of the same content. The performance of all students is measured with the same content, but the progression of standards let students with widely varying abilities demonstrate their understanding of the content. Example: 3a- b, for a = 3, b= 7 “as written” Oregon’s assessment allows all students, disabled and nondisabled, to use certain accommodations when taking the regular assessment. This is considered innovative because it recognizes that any student may need accommodations, regardless of whether they have recognized disabilities, and offers them certain accommodations, such as changes in test settings or timing. In this way, students with and without disabilities are not considered differently in their use of accommodations. Nationwide 5 Percent of Students with Disabilities Are Excluded from NAEP, but State Exclusion Rates Varied The NAEP began offering students with disabilities accommodations in 1996, and some of the more commonly used accommodations included extended time to complete the assessment, testing in small-group sessions, and reading the directions aloud. Other accommodations included, for example, explanation of directions, scribes, large print, and the use of word processors or similar devices. NAEP has provided some accommodations, but nationwide about 5 percent of students with disabilities have been excluded from the assessment. Education officials discussed several reasons students with disabilities were excluded from the assessment including: (1) the student had such a severe disability that the student could not meaningfully participate; (2) the principal and the IEP team decided that the student should not participate; and (3) the student’s IEP required that the student be tested with accommodations that NAEP does not allow. At the state level, the percentage of students with disabilities who were excluded varied in 2002. For example, over 10 percent of students with disabilities were excluded from the 2002 NAEP reading assessment in three states, and only 2 percent to 3 percent of students with disabilities were excluded in a handful of other states. According to Education officials, the inclusion of students with disabilities in the NAEP assessments is affected by sampling issues as well as by the limitations of accommodations that are appropriate for the content covered by the NAEP. Research suggests that NAEP results for some states may be affected by exclusion rates. A 2003 report commissioned by Education found that different state exclusion rates affected NAEP’s rankings of states on student reading achievement. One purpose of the NAEP is to provide a basis for comparing states, each of which has its own standards and assessment system. These state rankings are often used by states and other organizations to compare states and determine how well states are educating their students. Additionally, state rankings are viewed by parents and state and local officials as important indicators of the quality of their states’ education systems. The report examined how state rankings would change under two different assumptions about how excluded students would have performed on the assessment if they had been included. The report found that state rankings changed for over half of the states on both the fourth and eighth grade NAEP with both assumptions. In one scenario, two states fell 6 places and one state fell 7 places in the state rankings. In addition, a 2003 report that was commissioned by the National Assessment Governing Board, an independent, bipartisan body appointed by Education, concluded that changes in state achievement on the NAEP between 1998 and 2002 could be partially explained by changes in exclusion rates. Changes in state results on the NAEP are frequently used by states and researchers to gauge which states have successfully raised student achievement. The study examined the 36 states that participated in both the 1998 and 2002 NAEP reading assessments. The report concluded that “a substantial portion of variation in states’ achievement score changes can be accounted for by changes in their rates of exclusion. A report released by Education, the 2002 NAEP Report Card, found similar associations and said that there is a moderate tendency for exclusion rates to be associated with achievement gains but that exclusion rates do not entirely explain score gains. Some students with disabilities are excluded from the NAEP because it does not allow some accommodations that are permitted by on statewide assessments. Education officials said that certain accommodations would interfere with the NAEP’s measurement of the knowledge being assessed. For instance, in the reading assessment, reading the passage and questions aloud to a student was not permitted because the assessment is intended to measure the student’s ability to read the written word as well as understand the meaning of the passage. Education officials also said that some accommodations could not be administered with the assessment for logistical reasons. For example, extending testing over several days was not allowed because NAEP testing administrators are in each school only one day. Education has not developed alternate assessments for the NAEP. Table 3 lists accommodations that are allowed on some statewide assessments but not on the NAEP. Another reason why states' exclusion rates for could vary on NAEP may relate to state policies and requirements regarding student participation of students with disabilities. Although states are required to participate in the NAEP, student participation in this assessment is voluntary. Whether students with disabilities take the NAEP depends primarily on the recommendation of the student's IEP team, along with the availability of appropriate accommodations. Team decision criteria could vary across states, leading to differences in exclusion rates. Education officials said they are implementing a new policy for how students with disabilities should be included in the NAEP assessment that will reduce variability in the inclusion of students with disabilities. Previously, the student’s IEP team and principal had to decide whether a student could participate in the NAEP assessment, leaving room for interpretation. The new policy will require schools to include students in the NAEP assessment if the students took the regular statewide assessments (with or without accommodations) and the students’ IEPs do not specify that they be provided accommodations that NAEP does not allow. In addition, the new policy will require schools to include students with disabilities who took the state’s alternate assessment, if the school believes that the students can participate meaningfully in the NAEP assessment. The new policy will first be used with the 2006 NAEP assessments. States Faced Challenges in Designing and Preparing Teachers to Administer Alternate Assessments States faced challenges in designing alternate assessments (for grade- and below grade-level standards) and helping teachers to administer them for this small group of students with widely varying abilities. Officials from the four states we studied in depth, assessment companies, and national education organizations told us that designing and implementing alternate assessments that measured student achievement on state standards was difficult. These officials also told us that special education teachers needed training over a period of up to 3 years to administer alternate assessments properly. National Education Organizations and Some State Officials Reported Difficulties Designing Alternate Assessments Designing alternate assessments posed difficulties, in part because of states’ inexperience with these types of assessments. Education officials and representatives from national education organizations told us that many states did not begin to design alternate assessments until required to do so by IDEA 1997 for the 2000-01 school year. Education officials noted that states’ alternate assessments generally had not been aligned to state standards. Specifically, many states designed their alternate assessments to measure functional skills, such as using public transportation independently, rather than academic achievement. Consequently, designing alternate assessments that measured academic achievement was relatively new for many states. Widely Varying Abilities of Students with Disabilities The widely varying abilities of students was identified by experts and officials as a key factor that made designing alternate assessments to measure academic achievement challenging. For example, some students with significant cognitive disabilities can communicate verbally or through using technology such as boards with pictures to which the student can point, while others can communicate only through moving their eyes or blinking. Further, some students may best show their achievement through working with their teacher, while others have the ability to create work samples independently. Still other students may be able to take portions of the regular assessment in one subject, but require a different approach for another subject. National assessment and education experts told us that measuring these students’ achievement often required an individualized approach. Design Process Took Time Efforts to design alternate assessments that measured academic achievement as required by NCLBA took about 3 years, according to federal education officials and assessment experts. The process for designing alternate assessments involved a number of steps and decisions, such as choosing a format and revising or modifying assessments. In the four states we studied, two offered the portfolio format as their alternate assessment, and the other two offered a number of options, including the portfolio. See table 4 for a description of these assessments. A collection of student work gathered to demonstrate student performance on specific skills and knowledge, generally linked to state content standards. Portfolio contents are individualized and may include, among other evidence, samples of student work, test results, and video records of student performance. A direct measure of student skills or knowledge, usually in a one-on-one assessment. These can be highly structured, requiring a teacher or assessment administrator to give students specific items or tasks, similar to regular assessments or based on student needs. A regular assessment for a lower grade level. Creating alignment between these assessments and the curriculum and achievement standards, as required by NCLBA, was challenging and labor intensive, according to officials in our study states, representatives from national education organizations, and assessment experts. Specifically, the curriculum should include subject matter outlined in the achievement standards, and the alternate assessment should properly determine whether students have mastered the standards. For example, if the standard were to understand written English, the curriculum might include reading and understanding grade-level text. An alternate assessment with below grade-level standards might include a student reading one- or two-word items and matching them to familiar people, places, or things. Because states generally had not designed alternate assessments nor assessed students with disabilities on academic achievement before 2000, aligning standards with alternate assessments was relatively new. Further, alignment was difficult because of the need to provide a way for students with widely varying abilities to display their achievement. Individualized and Standardized Assessments and Reliability of Assessments Further, officials explained that it can be difficult to reconcile the need to administer individualized assessments under IDEA and the need to provide standardized assessments under NCLBA for these students. These concerns were also reflected in a recent report on NCLBA from a national education organization. Specifically, standardized alternate assessments may not be appropriate for all students who need an alternate assessment because they may not be flexible enough to accommodate all students’ abilities. However, experts and officials noted that individualized assessments, such as portfolios, can also present challenges. For example, because individualized assessment approaches often rely heavily on the participation of the person administering the assessment, that person can affect how students demonstrate their performance. Teachers may select work samples that demonstrate exceptional performance of their student, even though the student does not typically perform that well. Officials in one state told us that a team of education officials determined that their alternate assessment needed to be more reliable in both implementation and scoring, a sentiment shared by officials and teachers in other states as well. Scoring in the states we studied was done by the student’s teacher, teachers from other districts, or officials from the local education agency. Officials in the state in which teachers score their own students said that no independent reviews determined whether the scores were accurate or unbiased, and teachers from two other states told us that scores for similar portfolios sometimes varied. Start-Up Issues and Ongoing Costs A number of states used advisory committees to help them design their alternate assessments, according to assessment experts and state officials. These committees can be composed of experts in the field of assessment, and they provide guidance to state officials. For example, officials in one state told us that a series of three advisory committees helped them make decisions about their alternate assessment, including its format. Officials in another state told us that they met with a working group for 2 years in preparation for assessing students with disabilities on alternate assessments. Information reported by officials in all states to Education for the 2003-4 school year indicated that many states are currently revising or modifying their alternate assessments. Officials in two of the four states also reported that they were not using alternate assessments based on grade-level standards because they were unaware of models that appropriately measured achievement. National assessment and education experts said that education officials from many states had expressed similar views. In two of the four states we studied not using these assessments, some local officials told us that they would like to use this assessment option. Finally, assessment experts and state officials told us that designing and implementing these assessments was costly for this small group of students. They also said that there were start-up costs in addition to the annual cost for implementation. For example, officials in one state we studied estimated that they spent approximately $591,000 in the first year of implementation. These costs included designing the assessment, training teachers to administer the assessments and training scorers to score the assessments. These officials told us that costs have decreased to approximately $164,000 in the third year of implementation. Assessment experts estimated that the annual cost for alternate assessments per student ranged from $75 to $400, compared with $5 to $20 for regular assessments. A prior GAO report similarly associated lower costs with assessments scored by machine—a paper and pencil test with answers marked on a bubble sheet—and greater costs for assessments scored by people, as alternate assessments often are. Extensive Training and Implementation Posed Challenge for Teachers Teachers responsible for administering alternate assessments needed training on the use, administration, and scoring of these assessments— which could take 2 years to 3 years plus some ongoing training—according to federal and state officials, as well as education and assessment experts. Assessing students with disabilities was a relatively new role for veteran teachers and different from overseeing a classroom of students for regular assessments during class time. In addition, new teachers needed additional training because they had limited course work on assessment issues in their teacher preparation programs. Assessment experts and officials in the states we studied told us that these programs generally provided one course in assessment, but that the course did not provide enough training in how to administer alternate assessments, interpret results, or use results to improve their instruction. Teachers needed to become familiar with these assessments, including portfolio assessments, which may involve many hours of creating, compiling, and documenting samples of student work both during and outside of class. Further, some ongoing refresher training was needed, particularly when alternate assessments were modified from year to year and when teachers did not administer alternate assessments every year. Special education teachers also needed to learn the regular academic curriculum and state standards upon which alternate assessments are based. Historically, special education teachers had little exposure to this curriculum and its associated standards because they have taught functional skills, such as shopping independently in stores. Officials in one state told us that their teachers faced a learning curve to become familiar with the academic curriculum and how to create appropriate ways for their students to access that curriculum. For example, the grade-level curriculum might teach students to determine the meaning of unknown words from their context for the fourth grade reading assessment. A special education teacher would need to learn the grade-level curriculum and then match a student’s skills with an appropriate task to demonstrate mastery for the student’s individual level. For example, a highly functioning special education student might demonstrate mastery by using a dictionary to determine the meaning of unknown words. A student with significant cognitive disabilities might demonstrate mastery by associating a picture with a familiar object, action, or event. Finally, despite the challenges of implementing alternate assessments, teachers and state officials shared success stories for students with disabilities. For example, officials who developed a guide matching grade- level and below grade-level standards told us that this investment was worthwhile because it helped teachers become better teachers by identifying a progression of standards for students with disabilities to access grade-level academic curriculum. In addition, officials in some states noted that it was valuable that special education teachers were encouraged to teach academic curriculum to students with significant cognitive disabilities under NCLBA. Teachers told us many stories of student achievement, which exceeded their expectations. For example, one teacher described teaching the difference between sweet and sour to a student with severe and multiple disabilities. The student, after tasting both, consistently signaled “sweet” by looking toward the sweet item repeatedly when asked which she preferred. Experts, officials and teachers were generally positive about raising academic expectations for students with disabilities and attributed this directly to NCLBA. Education Disseminated Information to States on Assessing Students with Disabilities, but Some State Officials Reported the Need for Alternate Assessment Examples Education’s efforts to help states implement assessment requirements for students with disabilities included a variety of activities. However, state officials said that additional information, such as examples of alternate assessments, would be helpful. We presented states’ concerns to Education in March 2005. Education announced in May 2005 that it was developing guidance and planned to provide comprehensive technical assistance to states on this topic as early as the Fall of 2005. We also found that it was difficult to locate assessment information on Education’s Web site because there was no Web link that associated the alternate assessment information on the site’s NCLBA section with related information on the research, development, and use of these assessments that is available on other sections of the site. Education Provided Many Types of Assistance, but Officials Said Examples of Alternate Assessment Approaches Would Be Helpful Education provided a broad range of assistance to help states implement assessment requirements for students with disabilities, such as disseminating guidance that included technical information on alternate assessments, reviewing state assessment plans, awarding grants to help states improve their assessment systems, and conducting on-site visits. Further, Education has conducted outreach efforts to states to communicate the requirements for the inclusion of students with disabilities under NCLBA and to improve state data systems to ensure they capture the true achievement and participation of students in these assessments. For example, the department’s Office of Special Education Program’ Regional Resource Centers and other technical assistance projects have collaborated with states through teleconferences, preconference training sessions, and by providing technical assistance materials and resources. Education also made extensive use of its NCLBA Web site, newsletters, and attendance at national education-related conferences to disseminate guidance to states on NCLBA’s assessment requirements for all students, including students with disabilities. The department also funded two national centers that had, as part of their focus, the assessment of students with disabilities—the National Center on Educational Outcomes and the National Alternate Assessment Center. The National Center on Educational Outcomes examined the participation of students in national and statewide assessments, including the use of accommodations and alternate assessments and conducted research in the area of assessment and accountability. In addition, the National Alternate Assessment Center established principles of technical soundness for alternate assessments and techniques for aligning alternate assessments with grade-level content standards. Despite Education’s efforts to assist states in this area, experts and some state officials identified challenges in designing and implementing alternate assessments. As noted above, many states had limited experience with these assessments. Representatives from a national education organization and officials in two of the four study states, specifically the two states not using these assessments, said that they did not know how alternate assessments that measured grade-level standards would look, and that examples would be helpful. Further, only nine states reported using these assessments in the 2003-04 school year. According to Education officials, the department has made information on alternate assessments available during preconference workshops at national education-related conferences and through the National Center on Educational Outcomes’ Web site. Education officials also reported that the department participated with state officials in a group including state officials and national education experts that discussed and researched alternate assessments. However, information provided to state officials often included brief descriptions of alternate assessments but not illustrative examples to help states. In March 2005, we told Education about states’ alternate assessment concerns. In May 2005, Education announced additional efforts to help states use alternate assessments. Under these efforts, which are being conducted by a department task force and funded by $5 million from the department’s Office of Special Education and Rehabilitative Services, Education plans to provide comprehensive technical assistance to states that lack alternate assessment plans as early as the fall of 2005. According to Education officials, plans for providing assistance to states in this area were still being developed. As a result, we were unable to review Education’s plans, and the extent to which the department’s efforts will address states’ concerns about alternate assessments is unknown. Information on Assessment of Students with Disabilities Not Easily Located on Education’s Web Site According to Education officials, information concerning the inclusion of students with disabilities in statewide assessments has been primarily disseminated through the department’s Web site. Our review of Education’s Web site, however, disclosed that certain information on the development and use of alternate assessment for students with disabilities was difficult to locate. For example, the NCLBA section of Education’s Web site provided extensive information about the regulatory requirements for alternate assessments. However, information on the research, development, and use of these assessments was generally accessed through a series of non-assessment-related Internet links on the Office of Special Education Programs (OSEP) section of Education’s Web site. Moreover, there was no Web link that associated the alternate assessment information on the NCLBA section of the Web site with related information on the OSEP section of the Web site. In addition, accessing alternate assessment information on the OSEP Web site was complicated because it required the user to have a working knowledge of OSEP’s programs, knowledge that some statewide assessment officials may not have. Conclusions NCLBA seeks to make fundamental changes in public education by challenging federal, state, and local education officials to improve student performance. In particular, NCLBA focused attention on the academic performance of all students, requiring that the performance of groups, such as students with disabilities, be considered in determining whether schools meet state goals. IDEA has also emphasized the importance of assessing the academic achievement of students with disabilities. Education has provided much guidance to states on how to include students with disabilities in statewide assessment systems. Despite their efforts, some state and local officials as well as national organization representatives reported they lacked alternate assessment examples or models, particularly at grade-level standards, and were uncertain about how to design and implement them. This uncertainty may have contributed to some states not using alternate assessments with grade- level standards. As a result, some students with disabilities may not have been provided the most appropriate type of assessment to measure their achievement. In May 2005, Education announced additional efforts to help states use alternate assessments. According to Education officials, plans for providing assistance to states in this area were still being developed. As a result, we were unable to review Education’s plans, and the extent to which the department’s effort will address states’ concerns about alternate assessments is unknown. Given that Education has relied heavily on its Web site to provide information on assessing children with disabilities and our finding that this information was not very accessible, the effectiveness of this communication may be limited. As a result, state and local officials may not have all the necessary information available to guide decisions about appropriately including students with disabilities in statewide assessments. Finally, NCLBA requires that students, including those with disabilities, periodically participate in the NAEP to gain a national picture of student achievement. Although most students with disabilities participated in the NAEP, the percent of students who were excluded from the assessment varied across the states. Consequently, the results of this assessment may not fully reflect student achievement, thus comparisons of student achievement across states may have limitations. Recommendations for Executive Action We recommend that the Secretary of Education take the following two actions to increase the participation of students with disabilities in assessments. We recommend that the Secretary of Education explore ways to make the information on the inclusion of students with disabilities in statewide assessments more accessible to users of its Web site. Specifically, information on the NCLBA section of Education’s Web site concerning alternate assessment requirements for students with disabilities should be linked to information on the research, development, and use of these assessments that is available on other sections of Education’s Web site. Finally, we recommend that the Secretary of Education work with states, particularly those with high exclusion rates, to explore strategies to reduce the number of students with disabilities who are excluded from the NAEP assessment. Agency Comments and Our Evaluation We provided a draft of this report to Education for review and comment. In their letter, Education officials noted that they were taking actions that would address the recommendations in this report. For example, in response to the first recommendation, the department will explore the use of “hot buttons” and links among the Web pages maintained by different Education offices to further increase access to information regarding the assessment of students with disabilities. Similarly, in response to the second recommendation, Education officials acknowledged that there is still much work to be done in increasing the participation and inclusion rates of students with disabilities in the NAEP assessment. As part of this effort, the department is exploring strategies for enhancing the inclusion of students with disabilities in the NAEP assessment. We have also included some additional information the department provided to us on outreach and technical assistance efforts on the assessment of students with disabilities and how students with disabilities participated in the NAEP. Education officials also provided technical comments that we incorporated into the report where appropriate. Education’s written comments are reproduced in appendix II. Copies of this report are being sent to the Secretary of Education, relevant congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be made available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202)512-7215 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. Other contacts and major contributors are listed in appendix III. Appendix I: Percent of Students with Disabilities Participating in State Reading/Language Arts Assessments in the 2003-04 School Year, by State Did not provide usable data Sum of the number of students with disabilities participating in the three different types of reading assessments was greater than figure the state provided for the total number of students participating in reading assessments. Appendix II: Comments from the Department of Education Appendix III: GAO Contact and Staff Acknowledgments GAO Contact Staff Acknowledgments Harriet Ganson (Assistant Director) and Arthur T. Merriam Jr. (Analyst-in- Charge) managed all aspects of the assignment. Katharine Leavitt and Scott Spicer made significant contributions to this report, in all aspects of the work. In addition, Sheranda Campbell contributed to the initial design of the assignment, Carolyn Boyce provided technical support, Daniel Schwimer provided legal support, and Scott Heacock assisted in the message and report development. Related GAO Products Charter Schools: To Enhance Education's Monitoring and Research, More Charter School-Level Data Are Needed. GAO-05-5. Washington, D.C.: January 12, 2005. No Child Left Behind Act: Improvements Needed in Education's Process for Tracking States' Implementation of Key Provisions. GAO-04-734. Washington, D.C.: September 30, 2004. No Child Left Behind Act: Additional Assistance and Research on Effective Strategies Would Help Small Rural Districts. GAO-04-909. Washington, D.C.: September 23, 2004. Special Education: Additional Assistance and Better Coordination Needed among Education Offices to Help States Meet the NCLBA Teacher Requirements. GAO-04-659. Washington, D.C.: July 15, 2004. No Child Left Behind Act: More Information Would Help States Determine Which Teachers Are Highly Qualified. GAO-03-631. Washington, D.C.: July 17, 2003. Title I: Characteristics of Tests Will Influence Expenses; Information Sharing May Help States Realize Efficiencies. GAO-03-389. Washington, D.C.: May 8, 2003.

The No Child Left Behind Act of 2001 has focused attention on improving the academic achievement of all students, including more than 6 million students with disabilities and requires that all students be assessed. Students with disabilities may be included through accommodations, such as extended time, or alternate assessments, such as teacher observation of student performance. To provide information about the participation of students with disabilities in statewide assessments, GAO determined (1) the extent to which students with disabilities were included in statewide assessments; (2) what issues selected states faced in implementing alternate assessments; and (3) how the U.S. Department of Education (Education) supported states in their efforts to assess students with disabilities. In the 2003-04 school year, at least 95 percent of students with disabilities participated in statewide reading assessments in 41 of the 49 states that provided data. Students with disabilities were most often included in the regular reading assessment, and relatively few took alternate assessments. Nationwide, the percentage of students with disabilities who were excluded from the National Assessment of Educational Progress (NAEP) was 5 percent, but varied across states, ranging from about 2 percent to 10 percent in 2002. Among the reasons for exclusion were differences in accommodations between states and the NAEP and variation in decisions among states about who should take the NAEP. National experts and officials in the four states we studied told us that designing and implementing alternate assessments was difficult because these assessments were relatively new and the abilities of students assessed varied widely. Officials in two states said they were not using an alternate assessment measured on grade-level standards because they were unfamiliar with such assessment models or because of concerns that the assessment would not appropriately measure achievement. In addition, learning the skills to administer alternate assessments was time-consuming for teachers, as was administering the assessment. Education provided support to states on including students with disabilities in statewide assessments in a number of ways, including disseminating guidance through its Web site. However, a number of state officials told us that the regulations and guidance did not provide illustrative examples of alternate assessments and how they could be used to appropriately assess students with disabilities. In addition, our review of Education's Web site revealed that information on certain topics was difficult to locate.

Background VA and DOD have distinct missions and health care systems to provide services to their respective beneficiaries. VA and DOD provide some similar services in locations where they have facilities near each other, and have established an organizational structure to plan and carry out a variety of joint projects. In addition, there are several options for VA and DOD collaboration to deliver health care services jointly. VA and DOD Health Care Systems In addition to having separate missions—VA’s to serve America’s veterans, and DOD’s to provide the military forces needed to deter war and protect the country’s security—the departments have distinct health care systems through which they provide a range of health care services In addition, each has a framework that to their respective beneficiaries.outlines its vision and goals for the care and services they deliver. VA’s health care system includes a network of approximately 150 hospitals, 130 nursing homes, 800 community-based outpatient clinics, as well as other facilities to provide care to veterans. VA also purchases care from outside its network as needed to provide services for its beneficiaries. VA estimates it will serve 6.3 million patients in the VA health care system in fiscal year 2013 and has requested $52.7 billion for its health care services for that year. VA’s “I CARE” framework broadly outlines the department’s goals for delivering health care services and in particular, cites the importance of access to, and the quality and cost of, VA health care. DOD’s health care system—known as the Military Health System— serves about 9.6 million beneficiaries. According to a 2011 Congressional Budget Office report, DOD’s health care costs are projected to reach $59 billion by 2016 and nearly $92 billion by 2030. DOD provides care through its system of approximately 60 military treatment facilities that provide diagnostic, therapeutic, and inpatient care; hundreds of clinics; and by purchasing care from a network of private-sector civilian providers. Each of the military services, under its respective surgeon general, is responsible for managing its own military treatment facilities. The Military Health System’s “Quadruple Aim” outlines the department’s vision for delivering health care services and—similar to VA’s I CARE framework—emphasizes health care access, quality, and costs. VA and DOD Organization for Collaboration and Joint Strategic Planning VA and DOD have an organizational structure in place to plan and carry out a variety of joint projects and collaboration efforts. (See fig. 1.) Specifically, the Joint Executive Council—co-chaired by the Deputy Secretary of VA and the Under Secretary of Defense for Personnel and Readiness—is made up of senior VA and DOD officials and provides broad strategic direction for interagency collaboration between the two departments. The Health Executive Council, a subcouncil of the Joint Executive Council, provides oversight for the specific cooperative efforts of each department’s health care organizations. The Health Executive Council has organized itself into a number of work groups to carry out its responsibilities. For example, Health Executive Council work groups focus on issues such as financial management, pharmacy, and IT, among several others. In addition to this interagency structure, there are department-level coordination offices—VA’s VA/DOD Sharing Office and DOD’s DOD/VA Program Coordination Office. These offices coordinate with, but do not have a direct reporting relationship to the Joint Executive Council and the Health Executive Council. The Joint Executive Council and the Health Executive Council also provide oversight to the 10 joint ventures by providing some level of direction and support for their activities. (See fig. 2 for the locations of the current joint ventures.) Further, the Joint Executive Council has developed the Joint Strategic Plan, which conveys the direction and goals for collaboration efforts for the two departments. The plan outlines the departments’ primary goals, which include developing a health care system that delivers quality, access, satisfaction, and value, consistently across the departments, and establishes a national model for effective and efficient delivery of benefits and services through collaboration. The plan also outlines specific initiatives designed to ensure leadership, commitment, and accountability for VA and DOD’s collaboration activities. Options for VA and DOD Collaboration to Deliver Health Care Services There are three primary options for collaboration that VA and DOD may pursue to jointly deliver health care services: sharing agreements, joint ventures, and Joint Incentive Fund (JIF) projects (see table 1). Collaboration sites can pursue a combination of these sharing options. For example, a site with sharing agreements in place can pursue joint venture status or JIF project funding. In addition to these collaboration options, the departments are required by law to consult with each other regarding certain potential joint construction projects. Department-level officials from VA and DOD identify opportunities for joint construction and coordinate through their respective budgeting and construction planning processes. VA and DOD Do Not Require Participants in All Types of Collaboration to Develop Performance Measures to Assess Their Effectiveness and Efficiency We have reported extensively on the importance of developing and using performance measures for effective management and strategic planning, as well as for measuring the achievement of projected cost savings, and other performance goals. Furthermore, we have noted that such performance measurement information can assist decision makers in assessing progress and identifying areas for improvement. In addition, the VA and DOD health care collaboration statute, as well as VA and DOD’s own health care goals, all highlight access, quality, and costs as important considerations in the delivery of health care. Finally, VA and DOD department-level officials said it is important to consider costs as a part of both departments’ responsibilities to ensure their collaboration efforts are financially sound and improve care. Performance measures are important to show the extent of progress made in improving access and quality of care, in addition to cost savings achieved, if any, from collaborations. For example, although VA and DOD department-level officials believe that some savings occur when collaboration sites adopt sharing agreements in which partners pay each other less for care than they would otherwise pay community providers, the overall savings are unclear because sites are not required to develop performance measures to assess the extent of their savings. The importance of performance measures regarding costs is highlighted by our prior work on the consolidation and integration of federal facilities—in particular, how such activities can result in unexpected costs that may affect overall results. For example, the North Chicago Federal Health Care Center joint venture experienced unanticipated costs associated with its integration of VA and DOD services, such as hiring the equivalent of 23 full-time staff to manually perform work that was originally expected to be automated. The impact of these additional costs on that integration overall, however, is unknown, because VA and DOD have not established cost-related performance measures. Without performance measures in place to assess VA and DOD’s collaboration efforts, the overall value of these efforts is unclear. According to VA and DOD department-level officials, the departments do not require that all collaboration sites develop and use performance measures to assess the collaborations’ effectiveness and efficiency, in particular to measure their progress in meeting the departments’ shared goals of improved health care access, quality, and costs. Officials from both departments cited several reasons why VA and DOD do not require all collaboration sites to develop and use performance measures related to the departments’ shared goals. In particular, VA officials told us they do not want to overburden sites with performance measures and monitoring requirements, which they said may discourage future collaborations. VA officials also told us that department-level VA and DOD collaboration offices do not have direct control over medical facilities and are not required to provide oversight or monitoring of performance. Finally, DOD officials said that because each collaboration is unique, performance measures appropriate for one location might not be appropriate for another location. Although VA and DOD do not require all collaboration sites to develop and use performance measures, the departments do require some limited performance information for certain collaboration options. For example, to receive JIF project funding, sites must estimate the return on investment and propose performance measures related to that estimate and other projected benefits, such as improved access or quality of care. Sites that receive such funding must then periodically use and report on those performance measures during and at the conclusion of the project. In addition, beginning in fiscal year 2013, joint ventures and other selected collaboration sites will be required to report on performance measures to indicate areas where sites have achieved at least a 5 percent reduction in costs or other improvements in efficiency that result from health care collaborations. VA officials told us these measures are not meant to represent overall savings achieved as a result of collaborating, but rather savings from specific, self-selected areas the collaboration sites choose to measure. Although these efforts represent initial steps toward better understanding of the performance and progress of collaboration sites, officials acknowledged that more work remains to be done. VA and DOD officials told us that both departments are working to develop criteria to determine the success of the 10 joint ventures, which they anticipate will be based on the departments’ shared goals. As of July 2012, VA department-level officials told us that a set of proposed criteria were still being reviewed internally. They noted that the time frame for implementing those criteria would still need to be determined, in part because the departments would need to resolve data collection and analysis issues—such as ensuring that collaboration partners had access to reliable and timely information—before any resulting measures could be developed and used to assess sites’ progress. In the absence of a department-level requirement for performance measures for all collaboration sites, some sites we reviewed have developed their own performance measures. Although this information may assist local medical facility leaders to understand the progress and areas for improvement at their sites, the fragmented nature of these efforts does not provide department-level decision makers with information about overall performance or results of VA and DOD collaborations. For example: Officials from the Biloxi VA and one of their DOD collaboration partners, Naval Hospital Pensacola, told us that their established discounts for the inpatient services that DOD provides to VA patients through a sharing agreement—the standard 10 percent discount from fiscal years 2009 through 2011, changed to a larger 25 percent discount beginning in June 2012—had resulted in a reported cumulative savings of about $200,000 for VA since fiscal year 2009, as of July 2012. Honolulu joint venture officials reported that they assess efficiency by tracking the amount of time it takes to schedule appointments for patients who were referred to them by their collaboration partner. Additionally, they measure quality of care using measures derived from patient feedback information. Officials told us that by assessing these measures they are able to identify trends and help ensure that patients are accessing health care. VA and DOD Face Several Significant Barriers That Hinder Collaboration, Despite Taking Some Actions to Address Those Barriers VA and DOD face a number of significant barriers that hinder their collaboration efforts. We have previously reported that federal agencies can facilitate and enhance their collaboration efforts by establishing compatible policies, procedures, and other ways of operating across boundaries. Some problems VA and DOD face are inherent to the differing missions of the two departments. However, we also identified several important areas where VA and DOD’s lack of compatible policies and practices at the department level and at local collaboration sites hinders collaboration efforts. These incompatible policies and practices fall into four areas: (1) IT systems’ ability to share health information, (2) business and administrative processes in place at current collaboration sites, (3) procedures for veterans to access medical facilities on military bases, and (4) joint VA and DOD planning for construction of medical facilities. Although VA and DOD officials at the department and local levels have taken some steps to address issues in these areas, significant barriers remain. Without additional department-level actions to address incompatible policies and practices, those barriers will continue to hinder collaboration efforts and lead to inefficiencies at the local level. IT Systems’ Ability to Share Health Information As we have reported for over a decade, VA and DOD lack IT systems that permit the electronic exchange of comprehensive patient health Access to information, a significant barrier in their collaboration efforts.comprehensive health information is important to providing optimal care to patients who receive health care services from both VA and DOD. However, because VA and DOD collect, store, and process health information in different IT systems, providing access to the information needed to best treat those patients has proved problematic. At collaboration sites, the departments’ IT barriers hinder ongoing efforts in many ways. As we have previously reported, a health care provider who lacks access to comprehensive health information about a patient may be challenged to make the most informed treatment decisions, potentially putting the patient’s health at risk. The provider also might unknowingly order diagnostic tests that have already been performed, leading to added health care costs. In addition, providers’ inability to use their own facility’s IT system to easily view the health care records of their collaboration partner’s patients can lead to costly inefficiencies. For example, the North Chicago Federal Health Care Center joint venture hired five full-time pharmacists specifically to conduct manual checks of patient records to reconcile allergy information and identify possible interactions between drugs prescribed by providers in both VA and DOD systems. Similarly, Biloxi joint venture officials reported having to rely on inefficient and time-consuming approaches to share information, including manually copying or transferring medical information such as diagnostic images between VA’s and DOD’s IT systems, or faxing information to their collaboration partner, where it must be entered into the partner’s IT system. Collaboration sites have taken steps to facilitate information sharing, but officials noted that those efforts had limitations and that IT barriers remained. For example, Honolulu joint venture officials developed an IT tool—called “Janus”—that allows providers to view their patients’ VA and DOD health care records on a single screen. Officials said this tool has helped providers treating shared patients in a number of ways, providing clinical benefits and allowing providers to work more efficiently. Officials said, for example, that Janus gives providers a more efficient way to view and share diagnostic images taken by collaboration partners and to compare clinical information in both partners’ systems, such as patients’ medication allergies and laboratory results. However, they noted that it is a “read only” tool that doesn’t allow providers to enter data into the other department’s IT system; as a result, there are some inefficiencies when providers must take time to separately perform data entry steps outside of their Janus IT tool. At the Biloxi joint venture, staff in some clinical areas use side-by-side dual computers: one to access VA health care records and another to access DOD health care records. (See fig. 3.) Biloxi officials reported that although this approach helps, it is time-consuming and costly, and does not allow staff to share information as efficiently as they would like; for example, there are costs to set up the dual computers and it takes providers extra time to access both IT systems to review information and share information with their collaboration partners. Biloxi officials also are working with VA and DOD at the department level to test a way of electronically sharing diagnostic images between facilities. At the department level, VA and DOD have worked for many years to improve the ability of their IT systems to share medical information, and have spent millions of dollars on those efforts, but those efforts have not yet led to a comprehensive solution. As we have reported, VA and DOD have increased their ability to electronically share information through a patchwork of initiatives. In April 2009, the President announced that the departments would define and build the Virtual Lifetime Electronic Record to streamline the transition of electronic medical, benefits, and administrative information between the departments. Over the past few years, the departments also began working to develop IT capabilities to facilitate information sharing at the North Chicago Federal Health Care Center joint venture that were intended to be “exportable” for use at other VA and DOD collaboration sites. However, those efforts have been delayed, in some cases indefinitely, resulting in costly and inefficient workarounds. Most recently, the departments began work on a new common integrated electronic health record (iEHR) that both VA and DOD would use for their beneficiaries. In March 2011, the Secretaries of VA and Defense committed the two departments to developing this new health record and in May 2012 announced their goal of implementing it across the departments by 2017. Officials from the joint DOD/VA Interagency Program Office (IPO), which is leading the iEHR effort, told us they have substantial financial resources for the iEHR effort, reporting funding of nearly $550 million across both VA and DOD for iEHR in fiscal year 2012 alone. They also said they have made some key decisions about the project. For example, IPO officials plan to begin work at the Honolulu joint venture in September 2012 on IT tools that would be part of the larger iEHR effort, and test initial elements of iEHR at two pilot sites in 2014. However, the implementation time frame for the new iEHR effort is uncertain. IPO officials told us in April 2012 that they planned to implement elements of iEHR in a phased approach over time, but that full implementation may not occur for at least 4 to 6 years, and that this estimated time frame was both optimistic and uncertain. They said the IPO office was not yet fully staffed, nor did they have final plans for how iEHR would be developed and implemented given that many decisions had yet to be made. For example, they had not yet determined what clinical applications iEHR would include, the time frame for implementing different elements of iEHR across all VA and DOD sites, or the order in which they would implement iEHR at collaboration sites. IPO officials noted that once they complete their work at the iEHR pilot sites they will have a better sense of how the project would proceed. They added that they might select a limited number of other sites to use elements of iEHR as part of their early work on the project; they noted that although they had not yet developed criteria for selecting those additional sites, the joint venture sites would be among those considered. Overall, given the uncertainty about when and how iEHR will be implemented, it is not clear when collaboration sites could expect to see benefits from this new effort. Although local officials have expressed interest in obtaining IT tools from the departments in the short term to help address their IT barriers, IPO officials said their focus is on developing iEHR rather than implementing separate IT tools at individual facilities. In their view, separate interim efforts to improve the interoperability of facilities’ existing health IT systems would take time and resources away from the larger effort to replace those existing systems with iEHR, and it might only be beneficial to invest in local IT efforts that inform the IPO’s iEHR work. Until collaboration sites receive IT support from the departments, they will continue to face IT barriers. In addition, sites will continue to rely—and expend resources on—their own solutions to address those barriers. Without information from the departments regarding the plans for iEHR—specifically, the time frame for when joint ventures and other collaboration sites might begin to have iEHR solutions implemented—local officials will not know when they could begin to see changes due to this new effort and be able to plan accordingly. Collaboration Sites’ Business and Administrative Processes VA and DOD collaboration sites face a number of barriers with business and administrative processes that hinder collaboration and are important to their daily operations: reimbursement, capturing information on care provided to patients, credentialing of providers, and computer security training. Reimbursement for services provided to patients. Aspects of the reimbursement process—such as assigning diagnostic and procedure codes to episodes of care (coding), and authorizing and paying for services—can pose problems, particularly when VA and DOD practices differ. These problems can result in inefficient workarounds at the local level, and difficulties such as backlogs of unpaid bills. Honolulu joint venture officials shared several examples of reimbursement-related difficulties including that the collaboration partners do not use the same coding and billing standards, which can lead to discrepancies that can be difficult to quickly resolve. Staff at DOD’s Tripler Army Medical Center code and bill care provided to veterans based on Military Health System standards, while VA staff reviewing those bills apply VA’s standards,which can lead to difficulties reconciling the two approaches. Honolulu officials said that differences in how VA and DOD treat same-day surgeries, for example—VA considers them outpatient services while DOD considers them inpatient services—lead to the need to manually handle those bills, which takes time. Honolulu VA and DOD officials agreed that reimbursement difficulties have had a substantial impact on their collaboration efforts, including on their finances. A January 2012 Army review of billing issues at this collaboration site found that there was more than $20 million in bills from Tripler unpaid by VA for fiscal years 2009 through 2011, which included bills that had not yet been processed or had been denied by VA. A July 2011 VA coding audit of bills submitted by Tripler Army Medical Center stated that, as compared to VA’s coding standards, DOD’s coding was accurate for about 80 percent of the codes used in the sample of bills reviewed. The audit made recommendations to reduce the number of bills needing manual review and expedite VA’s payment of bills submitted by Tripler. However, Honolulu VA and DOD officials did not always agree with each other on the specific extent or the causes of their reimbursement difficulties. Biloxi officials also shared examples of reimbursement issues. They noted that differences in VA and DOD coding practices temporarily led to delays in VA paying bills for care provided at Keesler Air Force Base, because some VA and Air Force staff involved with billing and paying for care were not initially familiar with the other collaboration partner’s reimbursement practices. In addition, they sometimes have needed to negotiate solutions when VA and DOD’s reimbursement practices differ. For example, they had to agree on a reimbursement rate that would apply when Keesler billed VA for certain ambulatory procedures in a way that followed DOD guidance but was new to VA staff. Honolulu and Biloxi officials have taken some steps to address problems with reimbursement, though difficulties remain. Honolulu officials said implementing an IT tool called “eDR”their business processes and that bills are now submitted in a faster automated way rather than through the time-consuming manual method has improved several aspects of previously used. Biloxi officials created the Joint Venture Business Office to help standardize and streamline their collaboration site’s business processes. Officials reported that this office facilitates communication about issues such as coding and billing and helps resolve any difficulties that arise. At the department level, VA and DOD officials said VA and DOD have taken some steps to address reimbursement issues, but that sites will still need to find ways to bridge VA and DOD’s differences. VA and DOD department-level officials have worked with Honolulu officials to address their difficulties. For example, a group of VA, Army, and other DOD officials began meeting in September 2011 to address coding issues at the Honolulu joint venture; as of June 2012 their work was still ongoing. In addition, the departments supported the eDR effort at the Honolulu joint venture by providing more than $3 million through JIF project funding. Also, VA officials told us that VA has been working since 2009 to implement the Intra-Governmental Payment and Collection System—a federal government effort to provide a standardized interagency fund transfer mechanism for federal agencies—which should help streamline how VA receives and pays bills from DOD, although it would not specifically address coding. Officials noted, however, that work on this system has been halted or delayed several times, due in part to a lack of funding; as of June 2012 VA officials were discussing when and how to proceed but no final decisions had been made. Honolulu VA officials said that this system would help improve their reimbursement process. DOD officials told us that while some coding difficulties occur at collaboration sites other than at the Honolulu joint venture, the extent of the problem in Honolulu is unique and is in part due to the large volume of care that the Army provides to VA at that location. evaluate and to justify the resources needed for their collaboration efforts. These officials also noted that workload information can affect facilities’ future funding. For example, leaders may be reluctant to support new JIF project funding for additional providers if a collaboration site’s current providers seem underutilized due to the lack of workload information. Among the collaboration sites’ difficulties collecting workload information, Biloxi VA officials said that, until recently, they were unable to capture workload information when Biloxi VA surgeons treated veterans at one of their DOD collaboration partners—Naval Hospital Pensacola—because that information was not captured through the billing process or in VA’s IT systems. DOD has faced similar problems when its providers care for patients at the Biloxi VA facility. In addition, Honolulu VA officials said reimbursement difficulties have led to delays in getting and paying bills from Tripler, which has hindered their ability to capture workload information through the billing process in a timely way. Biloxi and Honolulu officials have taken some steps to better collect workload information. Biloxi officials reported a recent approach in which Biloxi VA staff already located at Naval Hospital Pensacola collect information about the care VA surgeons provide there; that information is later entered into VA’s IT system. Officials said this new solution seems to work well, but takes time and resources, and is not as efficient as if their IT systems allowed an easier way to collect this information. In addition, some DOD providers who treat patients at the Biloxi VA facility now separately enter workload information into DOD’s IT system. Biloxi DOD officials said this solution is a work in progress, but it would be preferable if the IT systems allowed them to capture workload information, as some clinical staff have said they don’t have time for this extra data entry step. Honolulu officials said that while they still have difficulties capturing workload information as quickly as they would like, that their eDR IT tool improved their ability to capture workload information in a more timely way by automating aspects of the reimbursement process. At the department level, VA officials told us that the Intra-Governmental Payment and Collection System effort related to bill payment would help VA capture information when its providers deliver care at DOD facilities, so that those providers and the VA facilities can get credit for the workload. Honolulu VA officials said this system would improve their ability to collect workload information because that information would automatically be captured when they paid bills from DOD. As of June 2012, there had been no DOD-wide efforts to deal with workload capture issues. Dual credentialing of providers. Providers who deliver care in both VA and DOD facilities as part of collaboration efforts must be “credentialed” by both facilities. Credentialing is a process in which health care providers are systematically screened and evaluated for their qualifications and other credentials, including their licensure, education, training, and current competence. Biloxi and Honolulu joint venture officials said that the credentialing process is time-intensive and that dual credentialing creates some duplication of effort as staff members repeat many credentialing steps already completed by their collaboration partner. Honolulu VA officials added that dual credentialing also can create delays between the time new providers join their facility and when they can begin clinical work at their collaboration partner’s facility, because the extra credentialing steps must first be completed. They said that it also complicates staffing. For example, if a dually credentialed VA social worker who works at Tripler Army Medical Center is on vacation or is ill, VA cannot send a non-dually credentialed social worker to take that person’s place. At the department level, to address concerns about dual credentialing, a Health Executive Council review resulted in a December 2010 memorandum of understanding between VA and DOD that was intended to facilitate credentialing and reduce the time and costs associated with dual credentialing. The memorandum established guidelines for how credentialing information collected and verified by one department can be shared with the other department. Under these guidelines, VA and DOD facilities can share a range of information about providers as part of the credentialing process, such as details about providers’ education and training. However, VA and DOD facilities must still independently verify information that can expire or go out of date, such as providers’ licensure and board certification status. Biloxi officials told us that the ability to use credentialing information collected by their collaboration partner has helped facilitate the credentialing process, but noted that there is still a fair amount of overlapping credentialing work to conduct. VA and DOD department-level officials told us, in their view, the departments have done all they can to streamline dual credentialing. Overlapping computer security training. According to VA and DOD, staff involved with collaboration efforts have to complete both VA and DOD computer security training to access both departments’ IT systems, which leads to some overlap in effort and loss of productivity because of the time it takes staff to complete the dual training. The Health Executive Council began work in June 2009 on a demonstration project examining how to reduce the overlapping mandatory training taken by VA and DOD staff, and selected computer security training as one of four high priority focus areas. In August 2011, VA formally accepted three of the four DOD courses reviewed as part of this demonstration, and as a result, will grant reciprocity when DOD staff complete those courses and will not require DOD staff to take VA’s corresponding training courses. Although VA developed a strategy for implementing this decision, as of May 2012 the department had not made any progress in implementing the strategy, according to VA officials. They cited a number of delays and said that VA training of management staff would begin work on this effort once a separate VA computer security initiative had been fully implemented; however, they did not have an expected time frame for when implementation would occur. In contrast to VA, DOD decided not to grant reciprocity to VA staff for their VA computer security courses because, according to DOD, officials decided that VA’s courses were not similar enough to DOD’s to warrant reciprocity. Accessing Medical Facilities on Military Bases According to VA and DOD officials, the procedures DOD uses to maintain security at military base entrances can hinder access to medical facilities located on bases for veterans and those accompanying them. Base access procedures are critical to protecting DOD personnel and assets; they are established locally by military leaders at each base on the basis of factors such as that base’s specific security needs and guidance from the department and the military services. The need to ensure base security may add some complexity and time for veterans and their escorts accessing care on the base, as DOD personnel perform security checks as part of their base access procedures. Such procedures may include determining whether veterans and their escorts have sufficient identification, and proof of vehicle insurance and registration; as well as inspecting the vehicles transporting the veterans. (See fig. 4.) In some cases, base personnel may require veterans to provide documentation of their health care appointment or may conduct background screening in which the veteran is vetted against government databases, such as the National Crime Information Center. Access procedures can change over time because of changes in local military leadership, guidance, and other factors such as security threat levels. Officials told us these base access procedures can take time and in some cases—such as during specific episodes of heightened security—may prevent veterans from accessing care in a timely manner. Veterans who are late to health care appointments due to access difficulties might be unable to receive care and have to return for rescheduled appointments. Such missed appointments can lead to lost revenue for the military treatment facility, which will not receive reimbursement as expected, as well as inefficiencies, when staff time allotted for seeing patients goes unused. In addition, VA department-level officials told us that base access issues could dissuade some local VA officials from partnering with DOD medical facilities. Base access procedures also can lead local officials to spend time and resources developing and implementing approaches to try to facilitate veterans’ access to care. Collaboration sites have taken some actions to mitigate the impact of base access procedures on veterans and their escorts and facilitate access to care. In some locations, base access issues have factored into officials’ efforts to build facilities on base with unique security arrangements. For example, VA’s outpatient clinic is on the perimeter of the Navy base that houses Naval Hospital Pensacola, and is separated from the rest of the base by a security fence, which Biloxi VA and Navy officials said facilitates easy public access for both veterans and Navy personnel. Officials implemented a similar approach at Eglin Air Force Base, also in Florida, where a VA clinic on Air Force property is separated from the rest of the base by a gate that requires fingerprint verification to allow entry. Officials noted that while these approaches improve veterans’ access to these VA outpatient facilities located on DOD property, difficulties can still arise when veterans seek emergency, inpatient, or other care from the military facilities located on base. Biloxi officials started a shuttle service to transport veterans from the VA medical center to Keesler Air Force Base to facilitate access for veterans and their escorts, including those who may not otherwise meet certain requirements for base entry; for example, veterans and their escorts avoid the need to meet vehicle registration and inspection requirements. This shuttle, however, requires added staff and resources. According to officials, as a separate effort, staff call to remind patients of the documentation needed to access the base; however, patients still sometimes fail to bring the required documentation, which can result in extra time needed to access the base and sometimes lead to missed health care appointments. In Honolulu, Army officials decided to accept VA’s Veteran Identification Card as a valid form of identification for veterans going to Tripler Army Medical Center for health care services, which officials said improved access for veterans although not their escorts. Despite this action, it can still take a lengthy amount of time for veterans and their escorts to access the base because there is only one entry point for all individuals entering the base, including VA and DOD staff, and as a result long lines at the gate are common. (See fig. 5.) Honolulu VA officials told us that base access considerations have factored into their efforts to work with DOD to expand health care services through a new medical facility elsewhere in the community rather than by adding to the existing facilities on the base. Although collaboration sites have been pursuing base access solutions at the local level—and the departments have been aware of base access issues for some time—the departments recently initiated their first joint effort to identify potential strategies for facilitating veterans’ access to care on military bases while also meeting base security needs, according to VA and DOD officials. Specifically, the Joint Chiefs of Staff initiated a new workgroup composed of VA and DOD officials to assess the military services’ current base security guidance and determine potential actions that could facilitate veterans’ access. As of July 2012, this workgroup had met once to discuss the issues and to begin its review of relevant guidance. One potential action the workgroup is considering is addressing how military bases treat the Veteran Identification Card as part of base access procedures. Currently, the military services have different guidance regarding the use of the card by veterans for base access purposes. VA department-level officials said that broader, more uniform acceptance of the card across the military services would be a useful step in facilitating access for veterans, but noted that it would not be a comprehensive solution, because it would not apply to people accompanying veterans to their appointments. VA and DOD could face some difficulties identifying base access solutions that meet the security needs of military leadership, given the varied and changing security needs at the local level. However, without a sustained joint effort at the department level to explore ways to remove barriers to care across collaboration sites, veterans’ ability to access medical care will vary considerably. In addition, local officials will continue to spend time and resources developing and implementing workarounds to try to appropriately balance DOD’s need to maintain base security with veterans’ need to access care. In addition, given the base access difficulties that can arise, it is important for sites to consider base access issues when they are considering new or expanded collaboration. Both DOD and VA department-level officials noted that base access is a critical consideration for collaboration efforts, and VA officials added that they raise the issue with local officials who are planning new collaborations. However, officials acknowledged that current guidance from both departments about VA and DOD collaboration efforts—such as memoranda of agreement and understanding between the departments, and key department-specific handbooks and instructions—does not explicitly address base access or encourage local officials to prospectively identify potential base access issues and ways to address them. Joint VA and DOD Planning for Construction of Medical Facilities VA and DOD department-level officials reported that several barriers hinder their efforts to jointly plan construction of medical facilities to serve both departments’ beneficiaries, and sometimes lead to missed opportunities to collaborate. For example, VA’s and DOD’s separate processes for reviewing proposed projects—including joint projects—are not well aligned. The processes occur on different timelines and use different criteria to rate and rank proposed projects, and in the past there has been no formal mechanism for the departments to systematically share information to identify opportunities for joint projects, according to officials. As a result, a potential joint project may not move forward if it is not deemed high priority by both departments,departments cannot secure approval and funding for it in the same time frame. Further, local officials may do a substantial amount of planning for a project before contacting the other department about a potential collaboration, and by then it may be too late to collaborate as efficiently as possible. Officials also said that legal considerations can sometimes affect their joint construction efforts. Efforts to collaborate at Ft. Benning in Georgia illustrate some of the difficulties VA and DOD have experienced in jointly planning for construction of new medical facilities. Although VA and DOD officials saw benefits—including the opportunity to potentially save costs and improve patient care—to building a VA clinic that would either be part of the new Army hospital currently under construction at Ft. Benning or on Army property near the new hospital, the departments’ misaligned construction planning and funding processes were barriers to this effort, according to VA and DOD officials. Despite discussions within the departments about a potential joint effort at Ft. Benning, officials could not align the funding and approval processes for such an effort. Officials have also considered another option—colocating a new VA clinic with a new Army clinic elsewhere in the community, but have not been able to move forward with that option either. Local VA and DOD officials noted that the inability to build a VA clinic at the new Army hospital site or to colocate the clinics in the community likely reduced some opportunities to avoid costs and improve access to care. For example, VA officials said having a VA clinic at the new hospital site likely would have allowed VA and DOD to share the same laboratory and radiology services and could have improved access by having VA and DOD resources on one campus. VA department-level officials noted that the inability to move forward with joint construction at this location does not preclude local officials from collaborating through sharing agreements.explored establishing its new clinic in another location in the community, not colocated with the Army clinic, but as of May 2012 no final decisions had been made about where VA will locate its new clinic. Most recently, VA has As an example of how legal considerations can affect joint construction efforts, officials from VA in Biloxi and one of its DOD collaboration partners, Naval Hospital Pensacola, wanted to build a joint VA/DOD clinic on Navy property in Panama City, Florida, but due to legal considerations ultimately decided to instead build two separate clinics in close proximity. Specifically, officials said they changed their plans after learning that combining VA and Navy funds for a single joint clinic would have exceeded VA’s statutory limit for minor construction projects because the total funding amount—not just VA’s contribution—would count toward the statutory limit. Officials said if they had reduced the project’s scope to fall within VA’s minor construction limit, it would not have met their needs for clinical care, so they instead opted to build two separate clinics. Officials were not certain of the cost impact of providing services in two clinics rather than one, but believed doing so would be less efficient and potentially more costly. For example, they said a single clinic would have allowed for some logistical streamlining and avoided the need to duplicate building services like electrical utilities. The departments could have pursued this project as a major construction project rather than as a minor construction project, but would have needed to obtain congressional authorization to do so, since major construction projects generally must be specifically authorized by Congress. VA and DOD department-level officials added that potential major construction projects must compete internally for approval; as a result, the departments would not necessarily have approved this joint project to proceed as a proposed major construction project. VA and DOD have taken several steps that have the potential to help overcome some of the departments’ differences and improve joint planning for medical facility construction. For example, VA and DOD officials participate in each other’s construction planning processes, so they can provide insight on each department’s projects under consideration and on other potential collaboration projects; officials said that doing so has helped their collaboration efforts. The departments have also worked together on legislative proposals that, in their view, could enhance their ability to collaborate on joint efforts. For example, VA, in its fiscal year 2013 congressional budget submission, stated that it would propose legislative changes that would allow VA to transfer funds to—and receive funds from—another federal agency to use for the planning, design, or construction of a shared or joint medical facility, or to lease space for such a facility; in June 2012, VA department-level officials told us they were working on VA’s legislative proposal. DOD is exploring similar legislative changes. In addition, the departments are improving their information sharing to better inform their planning processes. As an initial step, VA and DOD department-level officials identified several types of data to be shared between the departments to help identify collaboration opportunities early in the construction planning process. As a result, as part of the most recent round of VA’s planning process, local VA officials had access to information such as DOD population and workload information to help them identify opportunities for joint construction and leasing. Department-level DOD officials said they would share VA population and workload data with the military services during the next round of DOD’s planning process as well. Officials from both departments said they plan to build on these initial efforts by refining their data sharing processes. For example, officials are exploring sharing additional types of data to inform their departments’ construction planning processes and have identified the need to institute a more formalized process for sharing data with local officials. VA and DOD Do Not Have a Fully Developed Process for Systematically Identifying New and Enhanced Collaboration Opportunities VA and DOD do not have a fully developed process for systematically identifying opportunities for new or enhanced collaboration that could facilitate the departments’ shared goals of improving access, quality, and costs. Instead, the identification of new or enhanced collaboration opportunities is largely left to local medical facility leadership. Although the departments do have a process for jointly identifying a select number of sites where there are opportunities for new or expanded collaboration, that process does not address all options for collaboration across both health care systems, nor is there a requirement that the sites identified by that process move forward with collaboration. Until VA and DOD fully develop a joint process to systematically identify and pursue potential collaboration opportunities, the departments may miss opportunities to improve patients’ access to and quality of care, and to reduce costs, such as by addressing overlap and duplication of services that may exist between the two health care systems. we reported on ways In our previous work on interagency collaboration,for agencies to facilitate and enhance their collaboration efforts, including ways to reduce the costly government duplication and overlap that can cost taxpayers billions of dollars each year. Our prior work has found that strategic direction is required as the basis for collaboration. As such, defining roles and responsibilities and mechanisms for coordination can help agencies clarify who will lead or participate in which activities, organize their joint activities and individual efforts, and facilitate decision making. In addition, agencies can facilitate and enhance their collaboration efforts by establishing compatible ways of working together across agency boundaries. However, VA and DOD do not have a fully developed process and a sufficient strategic direction to work across agency boundaries to fully identify collaboration opportunities. Specifically, the departments have not fully developed and formalized a systematic process to review all possibilities for new and expanded collaboration, but instead largely leave the identification of new or enhanced collaboration opportunities to leaders at local VA and DOD medical facilities. For example, the decisions to pursue sharing agreements, JIF project funding, and joint venture status are at the discretion of local leadership. Neither departmental or joint VA and DOD guidance describe a systematic department-level process for the identification of all potential collaboration opportunities that may exist between the departments. DOD’s instruction that governs health care collaboration with VA states that the leaders of DOD’s military treatment facilities are to monitor emerging opportunities for collaboration and to conduct financial analyses and negotiate sharing agreements with local VA medical facilities, among other things. Similarly, VA’s handbook that defines procedures for health care collaboration with DOD medical facilities states that leadership of VA medical centers may decide to pursue collaboration options with DOD such as sharing agreements, JIF project funding, and joint venture status.said these decisions are largely left to local leaders because they do not have authority over local facilities; rather they can only offer guidance. Further, officials said local-level officials have more direct knowledge of their locations, and as such, are better positioned to assess their unique circumstances and determine what types of collaboration make the most sense. DOD, DOD and Department of Veterans Affairs Health Care Resource Sharing Program, DOD Instruction 6010.23 (Jan. 23, 2012). departments acknowledged that collaboration is dependent on local leaders’ personalities and willingness to collaborate; some leaders may be greatly interested in exploring collaboration opportunities, while others may not. Moreover, given the regular changes in military treatment facility leadership, local leaders’ interest and commitment to collaborating can change over time. One additional difficulty with decisions made outside of a broader systematic process is that local medical facility leadership may not have readily available access to information necessary to examine what health care services could benefit from collaboration. For example, local leaders may not know when providing certain health care services through collaboration efforts rather than by purchasing care from non-VA or non-DOD providers would be likely to result in significant cost savings. Without comprehensive information on such purchased care, officials may be hindered in their efforts to identify areas or services that could be purchased from or provided to a partner facility at a lower negotiated rate, thus reducing costs to the federal government and possibly providing additional nonfinancial benefits. Some local officials we spoke with said they encountered difficulties obtaining purchased care information from their collaboration partner, and in one case encountered some resistance internally regarding sharing such information with their partner. In an effort to facilitate more department-level direction and systemize the identification of collaboration opportunities, the departments implemented a process to identify a select number of sites where there are opportunities for new or enhanced collaboration, and designate them as Joint Market Opportunities (JMO) sites. However this process has limitations, because it does not identify all opportunities; is not formalized in guidance; and is not enforceable, as local officials still have discretion about which opportunities to pursue. Since 2009, a Health Executive Council work group—composed of VA and DOD department-level officials and representatives from the military services—has designated a few new using criteria that have changed over time, but have JMO sites annually,included the proximity of VA and DOD facilities to each other, the size of local VA and DOD beneficiary populations, current working relationships of local facility leadership, current and possible collaboration initiatives, and current or planned construction or renovation. This work group visits JMO sites to meet with local officials, explore collaboration options, and make recommendations about new or enhanced sharing agreements. VA and DOD officials define JMO sites as areas that have opportunities for sharing resources and risk that should be explored. Currently, the departments have identified 15 JMO sites. Several JMO sites have resulted in new or enhanced sharing agreements as an example of improved collaboration, according to VA and DOD officials. For example, the Charleston, South Carolina, area was designated as a JMO, and in subsequent years after designation, medical facility partners within that JMO jointly constructed a new facility and obtained joint venture status. However, the JMO process is limited as it does not involve a systematic approach to reviewing and identifying all new or enhanced collaboration opportunities that exist. Given that only a few JMOs are identified each year, the departments may be missing opportunities to encourage collaboration at other locations. Further, officials from both departments stated there is no requirement that sites designated as JMOs pursue greater collaboration. The work group does not have the authority to require—or provide oversight of—implementation of their recommendations regarding collaboration; rather, it serves in an advisory and support function only. For example, Columbus, Georgia, was previously considered a JMO site because of potential joint construction between VA and the Army at Ft. Benning. An official from VA stated that the work group performed a site visit to examine options for collaboration and provide support and advice to local medical facility leadership, but VA’s and DOD’s construction planning processes did not align and, as we noted earlier, proved to be barriers to joint construction at this location. VA officials stated the work group has not performed follow-up work to review ongoing collaboration at this location. Conclusions Although they share a clear recognition of the potential benefit that exists when the departments collaborate to jointly provide health care services, VA and DOD may be missing additional opportunities to meet their shared goals of improving the access to, and the quality and costs of, health care, such as by reducing duplication and overlap of services. In particular, the departments have not taken sufficient actions to: develop and use performance measures to assess the effectiveness and efficiency of collaboration, overcome key barriers to collaboration, and identify new or enhanced collaboration opportunities. Specifically, the lack of comprehensive department-wide performance measures related to access, quality, and costs related to collaboration efforts may limit key decision makers’ ability to adequately assess the effectiveness of those or other future health care collaborations. Similarly, while collaboration sites need some flexibility to implement local solutions that best meet their needs, given that they have different characteristics and can encounter different problems, department-level efforts to address key barriers—such as those we identified with IT systems, business and administrative processes, base access, and joint planning for construction of medical facilities—could facilitate collaboration, as well as help reduce time and resources spent by local officials developing and implementing their own solutions. For example, additional departmental guidance about base access could help ensure that local officials consider these issues early in their discussions about new or expanded collaboration. Similarly, without comprehensive department-wide solutions or assistance, collaboration sites will continue to face significant IT challenges and spend resources on local solutions. Finally, VA and DOD lack a fully developed process for systematically identifying opportunities for new and enhanced collaboration; rather they largely leave such identification to local medical facility leadership. Without more systematic, department- level approaches to collaboration in all of these areas, opportunities to meet their shared goals for collaboration may be out of the departments’ reach. Recommendations for Executive Action To help assess progress, identify areas for improvement, and make informed decisions about health care collaborations, we recommend that the Secretaries of Veterans Affairs and Defense require collaboration sites to develop and implement a process for using performance measures to gauge their progress in achieving goals related to access, quality of care, and costs. To facilitate the departments’ current collaboration efforts, we recommend that VA and DOD systematically identify areas where department-level actions could help address significant barriers that hinder collaboration. Specifically, we recommend that the Secretaries of Veterans Affairs and Defense take the following three actions: expedite and communicate a plan with time frames for when iEHR solutions will be made available to joint ventures and other collaboration sites; take steps to resolve problems with collaboration sites’ incompatible business and administrative processes, including reimbursement for services, collection of workload information, dual credentialing, and computer security training; and clarify, as part of the newly initiated joint efforts to address base access, departmental guidance regarding collaboration to include a discussion of base access issues that local officials should consider when discussing and planning collaboration efforts; this could include a discussion of successful approaches that current collaboration sites have adopted to facilitate base access for veterans and their escorts. To fully identify potential opportunities to improve access to and quality of care—and reduce costs as well as duplication and overlap between the VA and DOD health care systems—the departments should further develop a systematic process for identifying and furthering collaboration opportunities, such as through sharing agreements and joint ventures. This process should review the portfolios of the departments’ health care facilities; ensure information necessary to identify collaboration opportunities is available; identify both new and expanded opportunities for collaboration; and assign responsibility to ensure identified opportunities are explored and implemented if appropriate. Agency Comments and Our Evaluation DOD and VA each provided comments on a draft of this report. In their comments, both departments generally concurred with each of the recommendations to the Secretaries of Defense and Veterans Affairs. (DOD’s comments are reprinted in app. I; VA’s comments are reprinted in app. II.) In addition, both DOD and VA provided technical comments, which we have incorporated as appropriate. The departments’ specific responses to each of our recommendations are as follows: To develop and implement a process for using performance measures to gauge collaboration sites’ progress in achieving goals related to access, quality of care, and costs, DOD and VA stated that their 2011- 2013 Joint Strategic Plan established a cost efficiency measure for joint venture sites and noted that the Health Executive Council plans to expand this cost efficiency measure and develop additional measures for other collaboration sites. VA stated that a Health Executive Council work group would develop a plan to address this issue within 6 months of the publication of this report. To expedite and communicate a plan with time frames for when iEHR solutions will be made available to joint ventures and other collaboration sites, DOD and VA stated that the IPO Advisory Board has approved an incremental plan for development of iEHR capabilities that results in achieving capabilities by the end of fiscal year 2017 and that the IPO will work with a Joint Executive Council work group to ensure stakeholders are informed of this incremental schedule. To take steps to resolve problems with collaboration sites' incompatible business and administrative processes, DOD and VA stated that the Health Executive Council will work to address issues related to reimbursement, workload capture, and computer security training. In addition, both departments indicated they will continue to work with The Joint Commission to address issues related to dual credentialing of health care providers. To clarify departmental guidance regarding collaboration to include a discussion of base access issues that local officials should consider when discussing and planning collaboration efforts, DOD and VA stated that they will disseminate within their respective departments the outcomes of the joint effort to address base access. Specifically, DOD stated it would disseminate those outcomes to all the organizations within the Military Health System, and VA stated it would disseminate those outcomes to all VA medical facilities. To further develop a systematic process for identifying and furthering collaboration opportunities, DOD and VA stated that they would continue to work together to hone their joint market selection criteria process. Both departments generally concurred with this recommendation, but stressed the importance of the role of local leaders in the development of collaboration. Specifically, they emphasized that involvement of local officials is critical since they have the best sense of their specific health care markets, which GAO also recognizes as an important aspect of identifying and furthering collaboration. We are sending copies of this report to the Secretary of Veterans Affairs, Secretary of Defense, and appropriate congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact us at (202) 512-7114 or [email protected] or (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 III. Appendix I: Comments from the Department of Defense Appendix II: Comments from the Department of Veterans Affairs Appendix III: GAO Contacts and Staff Acknowledgments GAO Contacts Staff Acknowledgments In addition to the contacts named above, Lori Atkinson, Assistant Director; Marcia A. Mann, Assistant Director; Robin S. Burke; Jill K. Center; Suzanne M. Perkins; and Leigh Ann E. Sennette made key contributions to this report. Lisa A. Motley and Michael Willems provided legal support, and Jennie F. Apter assisted in report development.

VA and DOD operate two of the nation's largest health care systems at estimated annual costs of about $53 billion and $49 billion, respectively, for fiscal year 2013, and have established collaboration sites to deliver care jointly with the aim of improving access, quality, and cost-effectiveness of care. In addition, collaborations could help reduce duplication and overlap between the two health care systems, potentially saving tax dollars and helping VA and DOD provide more efficient and effective services. A committee report accompanying the Consolidated Appropriations Act, 2012, directed GAO to report on aspects of VA and DOD collaboration. This report examines the extent to which (1) VA and DOD assess effectiveness and efficiencies at collaboration sites; (2) barriers exist that affect collaboration; and (3) VA and DOD identify opportunities for collaboration. GAO conducted site visits to selected VA and DOD collaboration sites; reviewed VA and DOD documents such as sharing agreements; and interviewed VA and DOD officials. The Department of Veterans Affairs (VA) and Department of Defense (DOD) do not require that all collaboration sites--locations where the two departments share health care resources through hundreds of agreements and projects--develop and use performance measures to assess their effectiveness and efficiency. Officials cited several reasons for this, including not wanting to overburden sites with measures and monitoring requirements. Although VA and DOD require some limited performance information--such as the return on investment for pilot projects--without comprehensive performance measures, they lack information that could help decision makers assess collaboration sites' overall progress in meeting the departments' shared goals of improved health care access, quality, and costs; identify areas for improvement; and make informed decisions. Also, the departments cannot document the overall cost effectiveness of their collaboration efforts. In the absence of required measures for all sites, some have developed their own, but these fragmented efforts do not provide sufficient information about the overall results of collaborations. The departments face a number of key barriers that hinder collaboration efforts. In particular, GAO identified incompatible policies and practices in four areas: Information technology (IT) systems . Because VA and DOD collect, store, and process health information in different IT systems, providing access to information needed to best treat patients has proved problematic. Business and administrative processes . Different billing practices, difficulties capturing patient workload information, and overlapping efforts in credentialing providers and computer security training reduce efficiency. Access to military bases . Balancing base security needs with veterans' needs to access medical facilities on base creates some difficulties. Medical facility construction . Misaligned construction planning processes hinder efforts to jointly plan facilities to serve both VA and DOD beneficiaries. Although VA and DOD officials have taken some steps to address these areas, such as efforts to improve data sharing, without additional department-level actions, barriers will continue to hinder collaboration and lead to inefficiencies. VA and DOD do not have a fully developed process for systematically identifying all opportunities for new or enhanced collaboration. Instead, the identification of those collaboration opportunities is largely left to local medical facility leadership. Although the departments have a process for jointly identifying a select number of sites with opportunities for new or expanded collaboration, that process does not address all opportunities for collaboration across both health care systems and there is no requirement that sites identified by that process move forward to implement collaboration. Without a fully developed process to systematically identify and select additional collaboration opportunities, the departments may miss opportunities to achieve their shared goals and reduce duplication of services, such as through additional sharing agreements.

Background Section 6159 of the Internal Revenue Code authorizes IRS to allow taxpayers to pay their taxes in installments, with interest, if this would facilitate collection of the liability. IRS procedures allow taxpayers to enter into an installment agreement any time during the collection process, which involves sending notices to taxpayers, contacting them by telephone and in person, and using enforcement tools such as liens against their property and levies against their financial assets. In 1992, IRS changed its installment agreement program by allowing (1) most IRS staff with taxpayer contact to approve agreements up to a certain dollar level, (2) taxpayers to obtain agreements up to a certain dollar level without providing financial information to demonstrate the need for an agreement, and (3) taxpayers to request agreements when they file their tax returns. As of September 30, 1997, IRS had about 2.9 million installment agreements outstanding, worth about $13.2 billion, thus averaging about $4,600 per agreement. To request an installment agreement, a taxpayer completes an optional Form 9465: Installment Agreement Request. In January 1996, IRS revised the form by providing space for taxpayers to add the information needed to set up an EFT agreement, based on a recommendation we made. Before the form was revised, taxpayers could make arrangements to pay their installment payments by EFT, but few did. For each month that an agreement is in effect, IRS prepares and mails a statement to the taxpayer. Taxpayers with non-EFT agreements are to mail the payment coupons back with their payments. These documents must be processed monthly in order to update the taxpayers’ accounts. According to the National Automated Clearing House Association (NACHA), a national electronic banking trade association, electronic payment transaction volumes are growing faster than check volumes. The clearinghouse association reported that EFT transactions in 1996 rose 15 percent, to nearly 4 billion transactions that represented over $12 trillion, which was 9 percent higher than the amount in 1995. By comparison, check volumes rose by about 1 percent during this period. Also, in 1995, more than 500,000 companies across the nation used the Automated Clearing House (ACH) Network for EFTs, involving payment transactions such as payroll, pensions, and dividends and to collect consumer payments. Large businesses and corporations are currently required to use EFT to make federal and state tax deposits. EFT use should increase further as provisions in the North American Free Trade Agreement (NAFTA) are implemented that will eventually require most employers to pay their federal tax deposits electronically. Further, the Debt Collection Improvement Act of 1996 requires that most federal benefit checks be disbursed electronically beginning in 1999. Objectives, Scope, and Methodology Our objectives were to (1) describe some of the uses and benefits of EFT, (2) discuss the experiences of two states that use EFT in their tax installment agreement programs and the benefits they have obtained, and (3) discuss the potential benefits IRS might realize by increasing EFT usage in its installment agreement program. To address the first objective, we judgmentally selected a limited number of financial institutions, including 8 banks, 1 credit union, and 14 mortgage companies, to obtain information on their use of EFT and its benefits to them and their customers. In addition, we spoke with officials from NACHA and the National Credit Union Association about the uses and benefits of EFT to financial institutions and their customers. We also contacted officials from FMS, which is ultimately responsible for collecting most of the nontax delinquent debts owed the federal government. FMS is also involved in the government’s overall efforts to maximize the use of EFT as required by the Debt Collection Improvement Act of 1996. We obtained from FMS, but did not independently verify, information on IRS’ cost to process installment agreement payments by paper processes and by EFT. To address our second objective, we identified two states—Minnesota and California—that have made changes to their installment agreement programs that resulted in most delinquent taxpayers using EFT to pay their installments. We visited these states because we had consulted with them in our previous work on ways to improve federal tax collection efforts. On that basis, we were aware of their efforts to undertake innovative practices to improve tax administration. Also, we contacted the Federation of Tax Administrators—an organization of state and municipal tax and revenue agencies—to identify state tax departments that are recognized as having successful collection programs, and both states were mentioned by the Federation. To assess the potential benefits IRS might realize by increasing EFT usage in its installment agreement program, we obtained data on its existing program and analyzed its installment agreement default rates. We did not independently verify the statistical data we obtained on IRS’ installment agreement program. The information we obtained on IRS’ current use of EFT helped us determine the feasibility of IRS’ making changes to its program similar to those that Minnesota and California have made. We interviewed IRS Collection officials at the National Office to obtain current information on the processes and procedures IRS uses in collecting delinquent federal taxes to ensure that our comparisons between IRS and others were based on the most recent IRS practices. We did not perform an independent analysis to estimate the cost savings IRS might receive from additional EFT use. Lastly, we discussed the changes Minnesota and California have made to their program with IRS officials to obtain their perspectives on how similar changes might affect IRS’ program. We requested comments on a draft of this report from the Commissioner of Internal Revenue. His comments are discussed at the end of this letter and are reprinted in appendix I. We did our work between October 1996 and December 1997, according to generally accepted government auditing standards. Uses and Benefits of EFT Private sector financial institutions and government agencies use EFT for a variety of transactions. They do so because EFT has lower default rates and is less expensive, faster, and more reliable than paper transactions. Benefits, such as the convenience of EFT, also extend to the customers of these organizations. EFT transactions involve the paperless transfer of funds between accounts in financial institutions, which allows for transactions such as the direct deposit of payroll checks, mortgage payments, and installment payments. According to a NACHA official, most financial institutions can both make and receive EFT transactions, although some smaller institutions sometimes restrict the type of payment transactions they make. Information from NACHA shows that, relative to paper transactions, EFT provides lower loan defaults, better accuracy, and reduced mailing and processing costs. A credit union loan official, for example, said defaults of loans, usually defined as missed payments, are lower with automated payments. In addition, EFTs are about one-third less expensive to handle than paper transactions, according to one banking official with whom we spoke. Exact savings, though, vary by individual financial institution, depending on its internal processing systems and costs. Representatives from financial institutions and FMS told us that the benefits of EFT for customers as well as financial institutions are many. The financial institution officials told us that the cost savings from EFT were great enough for them to offer incentives to customers who use direct deposit and other electronic transactions. A credit union, for example, provides a 1-percentage-point discount on home equity lines of credit that are repaid using EFT. Officials from two banks told us that they waive monthly checking account fees for customers whose paychecks are directly deposited into their accounts. Another bank offers a discount on consumer loans that are repaid by EFT as a way of keeping existing customers and attracting new ones. Customers could also benefit from the reliability and accuracy of electronic payments and deposits. FMS data, for example, showed that direct deposit recipients are 20 times less likely to have a problem, such as lost checks, with EFT than with deposits by check. Some of the other benefits for customers were the convenience and savings by not having to go to a bank to deposit checks or to write a check and use postage to mail it. Congress passed the Debt Collection Improvement Act of 1996 requiring the use of EFT for most federal benefit payments (tax refunds are excluded) by January 1, 1999, because it recognized the advantages of electronic transactions. According to Treasury data, about 60 percent of all federal benefits are now paid electronically, and Treasury estimates that the government could save more than $500 million over the next 5 years by switching the remaining payments to EFT. However, EFT generally requires individuals to have bank accounts to access the funds, and some recipients of government checks do not have bank accounts. Congress is considering what it might do to mitigate the adverse effects of the 1996 legislation—for example, allowing recipients who do not have bank accounts to access their payments by other electronic means, such as automated teller machine cards from an account held by a disbursing agency. Two States’ Use of EFT for Installment Tax Payments and Its Benefits One use of EFT, as it relates to tax administration, is for installment tax payments. The two states we visited, Minnesota and California, made changes to their installment agreement programs that make EFT the primary means taxpayers use to pay their taxes in installments. Both states promoted the changes to make their installment agreement programs more effective and efficient, and officials in both states attributed reductions in their default rates and administrative costs to EFT use. Overview of Minnesota’s Program The Minnesota Department of Revenue (MDOR) is that state’s primary tax collection agency and, as such, administers the installment agreement program covering delinquent taxes owed by individuals and businesses. In 1995, MDOR tested the use of EFT in its installment agreement program. EFT was available in the installment agreement program before the test, but it was not used extensively. The results of the test were compared with MDOR’s non-EFT program. MDOR officials told us the test showed that by requiring EFT payments, their installment agreement program could be made more efficient and effective. This led MDOR to revise its policy on installment agreements to require EFT for tax payments beginning in July 1995, with a few exceptions. One exception was for cases where the EFT requirement would create an undue hardship on a taxpayer. For example, if a taxpayer did not have a bank account, which is necessary for electronic transactions, the requirement could be waived. Also, payment agreements of less than 4 months’ duration may be exempt from EFT. The policy also allowed taxpayers with existing installment agreements to continue with their non-EFT arrangements or convert to EFT. The state required that taxpayers continue to comply with their current tax obligations as a condition for gaining approval to pay delinquent taxes by installment, regardless of whether EFT is used. According to information obtained from MDOR, Minnesota taxpayers may be given about 1 year to pay off their installment agreements. MDOR reported to us that, as of mid-November 1997, about 90 percent of MDOR’s 4,200 installment agreements were EFT agreements, representing about 90 percent of the delinquent taxes in the state’s installment agreement program. Taxpayers with waivers and those continuing their non-EFT arrangements accounted for the other 10 percent. Overview of California’s Program The California Franchise Tax Board (FTB) is that state’s agency responsible for collecting income taxes. Taxpayers owing delinquent personal income taxes may be granted approval to pay their debts in installments. Previously, EFT was not available in the installment agreement program, but in April 1997, following MDOR’s success with EFT usage, FTB implemented procedures for taxpayers to make installment agreement payments by EFT. According to the procedures, taxpayers who have been approved to pay their tax liabilities in installments must usually pay by EFT. As in Minnesota, FTB allows taxpayers waivers to using EFT in certain circumstances—for example, a taxpayer has no bank account, a low dollar amount is owed, or EFT would create a hardship. Taxpayers must also comply with their current tax obligations as a condition of paying delinquent taxes in installments, regardless of whether EFT is used. A state official told us that FTB revised its installment agreement application form to include space for an EFT authorization. If the taxpayer provided the necessary information for the state to process the EFT authorization, the installment agreement request was usually approved. If a taxpayer did not complete the EFT authorization, state officials said that they would encourage EFT use by specifically discussing its benefits with the taxpayer. FTB officials would inform applicants about the potential benefits of using EFT—for example, they would not have to worry about writing and mailing checks or money orders or be concerned that their payments did not arrive on time. If a taxpayer still did not elect EFT, the state would require a more strenuous review of the taxpayer’s application, including a review of their financial status. At the time of our study, approximately 8,000 of the 13,000 agreements made since April 1997—about 60 percent—were set up to use EFT. These 8,000 EFT agreements represented about 90 percent of the delinquent taxes owed in the new agreements. EFT Has Lowered the Default Rates of Installment Agreements in Minnesota and California According to state officials in Minnesota and California, one of the benefits they have realized by promoting EFT use in their installment agreement programs has been a substantial reduction in the programs’ default rates. These officials said that the benefits of lower default rates included more timely payments and increased collection of taxes owed. While the precise definition may vary, generally an installment agreement is in default if payments are not made. Some of the amounts owed in defaulted installment agreements are subsequently paid after further collection actions by the states. Some are never paid. EFT was available, but not used extensively, in MDOR’s installment agreement program before the July 1995 requirement was implemented. The program’s default rate was then about 50 percent. Since the requirement was implemented, most of the state’s taxpayers with installment agreements have used EFT, and according to MDOR officials, the default rate for EFT installment agreements dropped to between 3 and 5 percent. The California FTB’s overall installment agreement default rate also decreased sharply after EFT use was promoted. Officials told us that before EFT was available, the default rate for installment agreements was about 40 percent. As of October 1997, about 6 months after FTB implemented its EFT procedures, the default rate for new EFT agreements was about 5 percent. FTB officials told us that although their EFT procedures had only been in effect for a relatively short time, they expect their default rate to continue to remain lower than before EFT use. Recurring EFT payments are generally set up to be made on a specific day of the month, which reduces some of the problems related to non-EFT arrangements, such as taxpayers’ forgetting to send in their payments or sending in the wrong amount. Officials in both states said that, because these problems were reduced, some of the amounts owed were received sooner and without the need for follow-up collection actions, such as letters, telephone calls, liens, levies, or seizures. Officials in both states also said that they experienced increased collections from installment agreements after changing their programs to promote EFT. Collections increased if payments made through EFT would not have otherwise been made. However, the states had not measured the dollar amounts that directly related to changing their programs. Also, they found it difficult to determine if other effects, such as economic conditions, were a factor; and in California, the program was less than a year old when we completed our field work. The officials from both states told us, however, that they had not made any other changes to their installment agreement programs that would account for the increased collections. EFT Has Reportedly Reduced the Administrative Costs of Installment Agreements in Minnesota and California In discussing the benefits of EFT with officials in California and Minnesota, we were told that EFT use reduced the administrative costs of their installment agreement programs. Officials in both states said that the greater use of EFT has reduced the amount of paper processing and mailing costs related to their installment agreement programs. Additional administrative cost savings have occurred because fewer resources were needed to follow up on defaulted agreements. Administrative cost savings from EFT stem from not having to process and handle paper relating to the financial transactions. With EFT, much of the personnel costs used to generate and process documents and the mailing costs generally associated with paper financial transactions can be reduced or eliminated. Officials in California and Minnesota said that they reduced their installment agreement programs’ administrative costs by eliminating most of the paper documents they previously sent taxpayers, which also reduced taxpayers’ need to send paper documents back to the states for processing. Before changing their installment agreement programs to promote EFT, Minnesota and California had procedures that required sending taxpayers monthly statements. Taxpayers sent back their remittances, such as paper coupons and checks and money orders, which had to be manually processed. Under their current programs, the two states do not send monthly statements to taxpayers using EFT. This is because state officials said that the taxpayers’ bank statements show that the EFT payment was made, and the statement provides the taxpayer with notification. Although precise estimates were unavailable, officials in both states said that administrative cost savings have resulted from EFT use, which has streamlined the administrative operations of their installment agreement programs. According to data collected during MDOR’s pilot test of EFT, for example, several thousand work hours were saved by not having to prepare and process the paperwork typically needed for manual agreements. Further savings stemmed from reduced paper and postage costs, which officials estimated to be about 50 cents per agreement per month. Another benefit from reducing the amount of paper used in the programs was the reduced paperwork burden for taxpayers. Officials in both states said that fewer resources are being used to follow up on defaulted agreements because there are fewer defaults with EFT. Defaulted agreements generally require follow-up actions, such as contacting the taxpayers and using enforcement actions, such as liens, levies, and seizures. In general, contacting taxpayers and using enforcement actions would increase administrative costs. Increasing EFT Usage Offers Potential Benefits to IRS IRS has the potential to achieve benefits by expanding the use of EFT in its installment agreement program. At the time of our review, IRS had EFT payment arrangements with only 1.5 percent of taxpayers who had installment agreements. The reported experiences of Minnesota and California, whose former programs were similar to IRS’ current program, showed that encouraging greater EFT use has resulted in fewer defaulted agreements and administrative cost savings. Many private and other public organizations have reported that they, too, have benefited from electronic financial transactions. For fiscal 1997, IRS had about $6.5 billion in defaulted agreements, nearly half its $13.2 billion inventory of 2.9 million outstanding agreements. Table 1 shows IRS’ installment agreement defaulted dollars and our estimated default rates for fiscal years 1994 to 1997. Even a slight reduction in IRS’ default rate could lead to faster and increased collection of many tax dollars because IRS’ defaulted agreements are in the billions of dollars annually. Of the total agreements in 1997, about 41,500—or 1.5 percent—were being paid by EFT. Another benefit IRS might achieve is administrative cost savings if more of the payments it now receives by check (and other paper documents) were made by EFT. Administrative cost savings could result from (1) lower costs to process taxpayers’ remittances, (2) lower postage and handling costs, and (3) lower collection enforcement costs. Administrative cost savings would result even if the default rate remained the same, but based on the reported experience of others who use EFT, lower default rates are also likely to occur. According to NACHA, the published literature, and the organizations we contacted that used EFT, electronic payments are less expensive to process than payments made by check, and default rates are lower. For example, a 1993 study for NACHA reported that the average processing cost for a payment through the ACH system was about 46 percent less than the average processing cost for a check. Routinely, IRS uses lockboxes for installment agreement payments. Under the lockbox concept, taxpayers are to mail payments to a lockbox, which is a postal rental box serviced by a commercial bank. The bank is to process the payments and transfer the funds to a federal government account, record the payment and payer information on a computer tape, and forward the tape to IRS for use in updating taxpayers’ accounts. FMS, which pays the lockbox fees, reported to us that the average cost in fiscal year 1997 to process an IRS installment agreement payment through lockboxes was 76 cents per transaction versus 48 cents per transaction to process a payment by EFT. Thus, FMS data show that IRS’ EFT costs are 28 cents lower or about 37 percent less than its lockbox costs. This shows that IRS has the potential to reduce the costs it pays banks to process installment agreement payments by increasing the number of EFT payments and decreasing the number of lockbox payments. By promoting EFT use, IRS could further reduce the administrative cost of its installment agreement program. IRS could achieve additional cost savings by not sending taxpayers who make EFT installment payments a monthly statement, as it currently does for all taxpayers with installment agreements. This would save IRS postage and handling costs and would be similar to the practices for EFT installment agreements in Minnesota and California. It is also similar to practices used by many private sector organizations, especially for recurring EFT payments of the same dollar amount. In addition, administrative cost savings pertaining to collection enforcement would be lower as fewer resources would be needed to pursue fewer taxpayers in default. IRS Has Concerns About Requiring EFT Use in Installment Agreements In 1995, we reported on ways IRS could make administrative improvements to its installment agreement program. IRS officials then agreed that EFT had advantages over the standard installment agreement. According to officials at that time, EFT agreements (1) are cheaper to service than the standard agreement, (2) eliminate the chance that a taxpayer will forget to make a payment or send less than the agreed-upon amount, (3) result in quicker deposit of funds to Treasury accounts, and (4) may reduce default rates. During this review, we met with IRS Collection officials, including the Assistant Commissioner (Collection), to obtain their views about expanding EFT use in the installment agreement program and to determine if there were any barriers or concerns in doing so. The officials generally agreed with the comments IRS officials made in our 1995 report, but they expressed concerns about requiring EFT use, which is one option for expanding its use. The Assistant Commissioner told us that IRS had considered expanding EFT use for installment agreements in the past but did not develop definite plans to do so. With regard to making EFT a requirement, he said that this raises many issues for IRS, including policy, legal, and operational concerns. From a policy perspective, the Assistant Commissioner said that IRS attempts to treat all taxpayers the same, and he was uncertain whether requiring or suggesting to taxpayers that they use a certain payment procedure would be fair unless all taxpayers had to abide by it. In this regard, we note that IRS now routinely requires taxpayers to use a specified method to pay taxes. For example, compliant taxpayers whose federal tax deposits are over $50,000 are required to use EFT. Thus, requiring delinquent taxpayers, such as those with installment agreements, to use EFT would not appear to be contrary to existing IRS procedures on specifying payment methods for certain taxpayers. In addition, there are circumstances in which IRS can impose even stricter payment procedures on delinquent taxpayers. For example, IRS can require a delinquent employer to file returns and pay the applicable tax monthly rather than quarterly. The IRS officials were not certain what legal issues would have to be dealt with, and they did not provide specifics at our meeting with them. Also, because IRS is attempting to be more customer-service oriented, the Assistant Commissioner felt that imposing a requirement that delinquent taxpayers use EFT to make installment payments might contradict the current customer service emphasis. In this regard, we noted that many organizations, as in California, promote EFT use by specifically informing their customers of the benefits it offers them, which includes enhanced customer service and convenience. The IRS Collection officials articulated operational concerns about expanding EFT use. Regarding making EFT a requirement, they said that IRS would probably have difficulty handling the potentially large number of taxpayer inquiries that might occur from changing its program. In particular, the Assistant Commissioner felt that the service centers would be unable to manage the expected large number of waivers for potential hardships that could result if EFT payments were required. We realize that provisions would be necessary to handle hardship waivers if EFT is to be required, and one way would be to provide taxpayers with waivers without their having to verify the hardships. This would be similar to the way IRS currently approves taxpayers’ applications for streamlined installment agreements without verification of their ability to pay in full. Another concern expressed by the Assistant Commissioner was that many taxpayers pay installments in cash and that to require EFT would probably make this group of taxpayers, who essentially manage their finances on a cash basis, even less compliant in paying their taxes. We could not verify the extent of this potential concern because IRS had no specific data on how many taxpayers currently pay installments in cash. We note, however, that such taxpayers could be granted automatic waivers. Conclusions The reported successful practices of two states in using EFT for installment agreement payments appear to offer IRS the potential to make its installment agreement program more effective and efficient. In Minnesota and California, EFT is now the method used by most taxpayers to make their installment payments. With EFT, the two states reported they have reduced the percentage of taxpayer defaults and decreased the administrative costs of their installment agreement programs while achieving higher and faster collections. The benefits reported by these states were achieved with programs that included waivers in certain circumstances. Other users, such as banks, have also acknowledged the benefits of EFT, and the federal government has taken steps to promote greater usage for other nontax payments. Agency Comments and Our Evaluation In his letter dated April 15, 1998, the Commissioner of Internal Revenue concurred with our report findings that greater use of EFT might increase the efficiency and effectiveness of IRS’ installment agreement program. Our draft report included a recommendation that IRS develop a strategy to increase EFT usage for installment payments, and the Commissioner stated that IRS is amenable to pursuing a voluntary program that promotes EFT installment payments. IRS agreed to revisit its procedures and training materials “to ensure there is sufficient emphasis on educating taxpayers on the benefits of EFT and encouraging taxpayers to sign up for EFT agreements.” IRS also reiterated the concerns it has about requiring EFT usage for installment agreements, as discussed in this report (see pp. 13 and 14). As we were finalizing our report, the IRS Commissioner announced major structural and organizational changes for the agency, and congressional leaders were considering legislation calling for one of the most far-reaching overhauls of IRS in decades. The proposed changes most likely will affect IRS’ administrative operations and processes and future interactions with taxpayers. The proposals include, among other things, ways to improve the service IRS provides to taxpayers and expand taxpayers’ rights in their dealings with IRS. Given the complexities of the proposed IRS restructuring and the need to prioritize the necessary changes to IRS’ administrative processes, we are not making a recommendation regarding EFT to IRS at this time. However, as it continues to develop strategies to improve tax administration and the services it provides to taxpayers, IRS may want to review the potential benefits that greater use of EFT for installment payments can offer it and taxpayers. We are sending copies of this report to the Ranking Minority Members of the House Ways and Means Committee and the Subcommittee on Oversight, the Chairman and Ranking Minority Member of the Senate Committee on Finance, various other congressional committees, the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties. We also will make copies available to others upon request. Please contact me at (202) 512-9110 if you or your staff have any questions. The major contributors to this report are listed in appendix II. Comments From the Internal Revenue Service Major Contributors to This Report General Government Division, Washington, D.C. Chicago Field Office Thomas D. Venezia, Core Group Manager David R. Lehrer, 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. 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Pursuant to a congressional request, GAO reviewed the best practices being used by delinquent debt collectors, and if they offer the Internal Revenue Service (IRS) any prospects for improving collection efforts, focusing on the: (1) uses and benefits of electronic funds transfer (EFT); (2) experiences of two states that use EFT in their tax installment agreement programs and the benefits they have obtained; and (3) potential benefits IRS might realize by increasing EFT usage in its installment agreement program. GAO noted that: (1) EFT is widely used by various types of organizations in receiving and transferring money; (2) it is used for various payment transactions and for collecting consumer payments; (3) relative to paper transactions, EFT provides better accuracy, lower mailing and processing costs, and fewer delinquencies and defaults; (4) because of these benefits, some financial organizations routinely offer incentives to consumers who enter into EFT arrangements; (5) both Minnesota and California changed their installment agreement programs to promote tax payments by EFT; (6) Minnesota has required taxpayers entering into new installment agreements since July 1995 to pay by EFT, with some exceptions; (7) in April 1997, California initiated procedures to let taxpayers make installment agreement payments by EFT; (8) as of mid-November 1997, EFT usage was about 90 percent in Minnesota and about 60 percent in California; (9) according to state officials, Minnesota and California both have seen a sharp decrease in their installment agreement default rates, in part due to EFT; (10) in Minnesota, officials said that default rates were reduced from about 50 percent to between 3 and 5 percent; and in California, officials said that they were reduced from about 40 percent to about 5 percent; (11) officials in both states said that the lower default rates have resulted in collecting revenues from installments faster; (12) officials in both Minnesota and California said they have achieved administrative cost savings from greater use of EFT, which has reduced the amount of paper processing and mailing costs related to their installment agreement programs; (13) additional administrative cost savings have occurred because fewer resources have been needed for follow-up collection enforcement on defaulted agreements; (14) IRS' installment agreement program has not taken advantage of the benefits of EFT to the extent that Minnesota and California reported, as only about 1.5 percent of IRS' delinquent taxpayers were using EFT for installment agreements as of September 30, 1997; (15) because its current program is similar to these states' non-EFT programs, it seems likely that IRS could expect to achieve a reduction in its installment agreement default rates and lower administrative costs if more taxpayers paid their installments by EFT; and (16) in fiscal year 1997, IRS' costs to process EFT installment payments were 37 percent lower than the cost to process non-EFT installment payments.

Background In 1999 the Army announced its intentions to transform its forces over a 30-year period into a more strategically responsive force that could more rapidly deploy and effectively operate in all types of military operations, whether small-scale contingencies or major theater wars. Army transformation plans call for the ability to deploy a brigade anywhere in the world in 4 days, a division in 5 days, and five divisions within 30 days. The first step in this transformation is to form and equip six Interim Brigade Combat Teams, now called Stryker Brigade Combat Teams, as an early-entry force that can be rapidly deployed, supported anywhere in the world, and capable of conducting combat operations immediately upon arrival into a theater of operations, if required. Initially, the Army established a requirement for Stryker brigades of being capable of deploying anywhere in the world within 4 days after first aircraft liftoff. The Army has since made it a goal or target for the Stryker brigades, rather than a requirement, to help set a vision and design metric for developing the brigades. According to the Army’s organizational and operational concept for Stryker brigades, the brigades are designed to have higher levels of strategic and tactical mobility than existing Army forces. Strategically, the brigades are being organized, equipped, and configured to meet a 96-hour deployment standard. To help achieve the envisioned rapid deployability, the Army is developing logistical support plans and concepts that will permit Stryker brigades to deploy with fewer quantities of supplies and smaller numbers of support personnel and equipment than currently exists in heavier brigade-size units. At the tactical level, the brigades are to be capable of intratheater deployment by C-130 air transport. Key to their increased mobility is their primary combat platform, the Stryker armored vehicle. According to the Army, the Stryker armored vehicle will fulfill an immediate requirement for a vehicle that is air transportable any place in the world, arriving ready for combat. The Stryker is an eight-wheeled armored vehicle that will provide transport for troops, weapons, and command and control. The Stryker vehicle weighs about 19 tons, substantially less than the M1A1 Abrams tank (68 tons) and the Bradley fighting vehicle (33 tons), the primary combat platforms of the Army’s heavier armored units. The Army selected one light infantry brigade and one mechanized infantry brigade at Fort Lewis, Washington, to become the first two of six planned Stryker brigades. The Army completed a congressionally mandated operational evaluation of the first of these brigades at the end of May 2003, and it plans to report the results of the evaluation by November 2003. At that time, the Secretary of Defense is to certify to Congress whether or not the results of the operational evaluation indicate that the Stryker brigade’s design is operationally effective and operationally suitable, at which time this brigade can be deployed overseas for the first time. The Army plans to complete the formation of the second of the two Fort Lewis brigades in 2004 and to form four more Stryker brigades from 2005 through 2010. The planned locations of the next four brigades (see fig. 1) are Fort Wainwright/Fort Richardson, Alaska; Fort Polk, Louisiana; Schofield Barracks, Hawaii; and a brigade of the Pennsylvania Army National Guard. Based on defense planning guidance, the Army is planning for the relocation of one Stryker brigade to Europe in fiscal year 2007. Progress Has Been Made, but the Army Cannot Currently Achieve Its Deployment Goal of 4 Days Although Stryker brigades will be more rapidly deployable than Army heavy armored brigades, the Army cannot currently achieve its goal of deploying a Stryker brigade anywhere in the world within 4 days. The Army has achieved close to a 50 percent reduction in the Stryker brigades’ deployment requirements compared to that of a heavier armored brigade, but the Stryker brigade’s airlift requirements—which include moving about 1,500 vehicles and pieces of equipment and 3,900 personnel—are still sizable. Deployment times for Stryker brigades from their planned continental United States, Alaska, and Hawaii home stations to any one of several potential overseas locations would range from 5 to 14 days, depending on destinations. While the Army set out to design Stryker brigades to be a rapidly air deployable force, Army officials now recognize that airlift alone will not be sufficient and that some combination of airlift and sealift will likely be used to deploy the brigades. However, if sealift were used to deploy the Stryker brigades, deployment times to many global regions would be significantly longer than the 4-day goal the Army has set for itself. Stryker Brigades’ Deployment Requirements One-Half of Heavy Armored Brigades’ but Still Sizable By equipping Stryker brigades with armored vehicles weighing about 19 tons, the Army has achieved close to a 50 percent reduction in the Stryker brigades’ deployment requirement compared to that of a heavy armored brigade equipped with 68-ton Abram tanks and 33-ton Bradley fighting vehicles, along with their larger numbers of support vehicles, equipment, and personnel. Deploying a heavy armored brigade would require airlifting almost 29,000 tons of armored vehicles, equipment, and supplies and about 4,500 personnel. Deploying a Stryker brigade would require airlifting about 15,000 tons of vehicles, equipment, and supplies and about 3,900 personnel. Consequently, the amount of airlift that would be needed to deploy a Stryker brigade would be about one-half of the airlift aircraft needed to deploy a heavy armored brigade. Based on deployment planning assumptions the Army uses, about 243 C-17 strategic airlift sorties would be needed to airlift a Stryker brigade, compared to about 478 C-17 sorties needed to airlift a heavy armored brigade. While the airlift requirement of a Stryker brigade is significantly less— about one-half that of a heavy armored brigade, moving a brigade’s over 300 Stryker armored vehicles, over 1,200 trucks, utility vehicles, and support equipment, and 3,900 personnel is about twice the deployment requirement of an Army light infantry brigade. Deploying an Army light infantry brigade would require airlifting about 7,300 tons of materiel and about 3,800 personnel, requiring about 141 C-17 airlift sorties. Figure 2 shows a comparison of Stryker brigades’ airlift requirements to that of Army heavy armored and light infantry brigades. Airlift Not Sufficient to Meet Army’s Four-Day Worldwide Deployment Goal for Stryker Brigades The Army will likely not have the amount of airlift it would need to meet its goal of deploying a Stryker brigade anywhere in the world within 4 days. Deployment times from any one of the four planned Stryker brigade locations in the continental United States, Alaska, and Hawaii to selected representative locations in South America, the Balkans, South Asia, South Pacific, and Africa would range from about 5 days to destinations in South America to about 14 days to destinations in Africa. The minimum time it would take to airlift a Stryker brigade would be about 5 to 6 days to South America and the Balkans, 7 days to South Asia and South Pacific regions, and 13 days to Africa. While these timelines are short of the Army’s 4-day deployment goal, meeting them would offer joint task force commanders or theater combatant commanders more rapidly deployable forces than currently exists in heavy armored brigades and more lethal and mobile forces than currently exist in light infantry brigades. Figure 3 shows estimated ranges of Stryker brigade air deployment times from the four current and planned Stryker brigade locations to selected global regions. (See app. III for a summary of Stryker brigade deployment times by origins and destinations.) According to the U.S. Transportation Command’s Stryker brigade air mobility deployment analysis, the Army’s deployment goal for Stryker brigades has significant implications for the U.S. Transportation Command and the defense transportation system. According to this analysis, the Army must reduce its transportation requirements and simultaneously work with the U.S. Transportation Command and the services to improve deployment timelines. A 2002 Rand report of Stryker brigade deployment options, sponsored by the U.S. Air Force, also concluded that Stryker brigades cannot be deployed by air from the continental United States to distant overseas locations in 4 days. The study found that it is possible to achieve global air deployment timelines on the order of 1 to 2 weeks by using a combination of continental United States based brigades, a Stryker brigade forward- based in Germany, and regional preposition sites. According to the study, prepositioning of equipment or overseas basing of forces is the single most effective way to increase the responsiveness of Army forces for operations in key regions. Under the 2002 Defense Planning Guidance, the Army is planning for the relocation of one Stryker brigade to Europe in fiscal year 2007. By air, a brigade based in Germany, for example, could reach some global regions in less time than it could from the four currently planned brigade locations. From Ramstein Air Base in Germany, minimum air deployment times to sub-Saharan Africa would be 7 to 9 days, compared to a minimum of 13 days to 14 days from the other brigade locations. From Germany to the Balkans, it would take 5 days to airlift a Stryker brigade, compared to about 6 days to 7 days from the other locations. Although the Army recognizes that some prepositioning of Stryker brigade equipment overseas would add to a brigade’s strategic responsiveness and is considering it as a future option, Army officials told us that it would be too costly to do so at this time. Based on our analysis of the U.S. Transportation Command’s air deployment planning factors and airlift allocation assumptions, achieving the 5 to 14 day air deployment timelines would be difficult because it would require the Air Force to dedicate about one-third of its projected 2005 primary strategic airlift aircraft fleet of C-17s and C-5s for transporting only one Stryker brigade. Obtaining this amount of airlift for deploying one Stryker brigade would require allocating 31 percent of the Air Force’s total 2005 inventory of C-17 aircraft and 38 percent of its C-5 aircraft inventory. Obtaining an airlift allocation larger than this would be possible—if airlifting a Stryker brigade is a National Command Authority top priority and absent competing demand elsewhere for airlift aircraft. Table 1 shows the U.S. Transportation Command’s estimated airlift allocation and the percentages of the projected 2005 total airlift inventory of C-17 and C-5 aircraft needed to strategically airlift one Stryker brigade. Army Plans to Use a Combination of Airlift and Sealift to Deploy Stryker Brigades Because it may not always be possible to obtain sufficient airlift to deploy an entire Stryker brigade, Army officials anticipate using a combination of airlift and sealift to deploy the brigades, although sea deployment time would be slower than the Army’s 4-day worldwide deployment goal to most locations. Army officials told us that current plans are to deploy about one-third of a Stryker brigade by air and the remainder of the brigade would be deployed by sea. While some areas in South America could be reached by a Stryker brigade located at Fort Polk, Louisiana, via gulf coast ports in about 4 days, sea deployment times to South America and other global regions from the three other planned Stryker brigade locations would take longer. For example, sailing time for a Fort Lewis-based Stryker brigade from Seattle/Tacoma, Washington, would be about 10 days to ports in northern regions of South America and more than 2 weeks to ports in West Africa. From Alaska, sailing time to any of the eight overseas destinations we included in this analysis would take from 12 days to 24 days. Similarly, sailing times to the Balkans from any one of the four planned Stryker brigade locations would take a minimum of 2 weeks to over 3 weeks. With a Stryker brigade forward based in Europe, sea deployment times to the Balkans from seaports in Germany, for example, could be reduced to about 7 days. Figure 3 shows estimated ranges of Stryker brigade sailing times from the four current and planned Stryker brigade locations to selected global regions. (See app. IV for a summary of sea deployment times by origins and destinations.) In addition to the sailing times needed to reach overseas destinations, it would take days to transport a Stryker brigade and all of its vehicles and equipment from its home installation to a seaport. For example, the Stryker brigade to be located in Alaska would need to travel about 350 miles by rail or highway from Fort Wainwright, near Fairbanks, to seaports in or near Anchorage. In addition, loading and unloading cargo transport ships take much longer than loading and off-loading aircraft. According to Army deployment planning data, it would take about 2 days for loading ships and another 2 days to unload them after arrival, compared to hours for loading and unloading aircraft. Furthermore, many areas of the world in which Stryker brigades are anticipated to operate have no access to a seaport, and not all seaports would have the capacity to handle large deep-draft vessels. Additional time would also be needed for Army forces deployed by sea to move from a seaport to an in-land area of operations, although a Stryker brigade would be able to move to in-land locations faster than a heavy armored brigade because Stryker armored vehicles can be driven while heavier armored vehicles and tanks might require rail or truck transport. Also, a deployed Stryker brigade would need less time than a heavy armored brigade would need to unload at a seaport, assemble, and begin operations: Stryker brigades are organized and equipped to begin operations soon after arrival in an operational theater, carrying up to 3 days’ supplies of the fuel and ammunition and sustainment items, allowing the brigades to immediately conduct a combat mission. This contrasts with an Army armored or mechanized brigade, which would need days to draw the fuel, ammunition, and other supplies it would need before it can begin operations. Army’s Plan for Supporting and Sustaining Stryker Brigades in Combat Operations Is Still Evolving The Army’s plan for supporting and sustaining Stryker brigades in combat operations is still evolving and cannot be considered finalized until a number of issues are resolved. These issues include the results from the operational evaluation of the first brigade, funding questions, and decisions relating to implementing some of the plan’s logistical support concepts. The Army will not be able to finish its support plan until November 2003, when results from the operational evaluation of the first Stryker brigade will be issued. The Army conducted the operational evaluation in April and May 2003 to assess the first Stryker brigade’s overall operational effectiveness and suitability. The operational evaluation included the logistical support plan and processes that augment the brigade’s limited capabilities to perform basic maintenance, supply, and transportation services. To make Stryker brigades easier to deploy and support, the Army designed the brigades with a support structure that is only about one-third the size of that found in a heavy armored brigade. Thus, Stryker brigades do not have the capability to sustain operations without the assistance of external support organizations and resources. Contractors will provide a key part of this external support to service and maintain newly fielded Stryker armored vehicles and complex digital command, control, communications, and computer equipment. Contractor logistics support will be needed to support the Stryker vehicles and digital systems at least until these systems are fully fielded. Also, instead of transporting large inventories of ammunition spare parts, and other supplies into an area of operation—as a heavy armored brigade would do—Stryker brigades are to sustain themselves in extended operations by having these items delivered from numerous locations outside the area of operation, such as Army depots and theater support bases, where they will be stored and configured for rapid shipment and distribution to the brigades as they are needed. Because these support and sustainment processes are new concepts and key elements of the Army’s support plan for Stryker brigades, the Army will complete the plan after it has reviewed the results and lessons learned from the operational evaluation. Based on the results, the Army plans to make any adjustments or modifications it determines are necessary before the plan becomes final. Before it can fully implement the support plan, the Army will need to determine the cost and decide whether it will fund the acquisition of vehicles and equipment replacement reserves. The brigades are designed to do only limited maintenance for vehicles and equipment on the battlefield; therefore, the Army’s support plan calls for rapidly evacuating and replacing items needing major maintenance or repair with what the Army calls ready-to-fight replacements. The plan depends on having in reserve and readily available sufficient numbers of vehicles and essential equipment, such as digital components, for rapid shipment into an area of operation. Before the Army can make a final funding decision, it will first need to determine the types, amounts, and total cost of the ready- to-fight replacements that would be needed. As of May 2003, the Army had not made a final decision as to the number, types, and configuration of the ready-to-fight vehicles, nor the method of their delivery to an area of operations. Additionally, to reduce the amount of materiel that is deployed and stockpiled within an operational theater, the Army’s Stryker brigade support plan includes measures for rapidly distributing directly to the brigades pre-configured loads of essential sustainment supplies such as food, repair parts, and ammunition, as they are needed. Before the Army can implement the plan, it will need to finish the instructions and guidelines that will identify the types and amounts of supplies to be distributed in configured loads and the locations and facilities (including defense supply depots, Stryker brigade installations, and theater support bases) where configured loads are to be built and stored. The Army also still will need to identify the personnel and obtain the equipment, supplies, and funding that will be needed to manage and carry out its planned configured load distribution system. Army’s Plans for Deploying and Sustaining Stryker Brigades Could Change The Army’s current plans for deploying and sustaining Stryker brigades could change after the Office of the Secretary of Defense (OSD) reviews options it directed the Army to provide for enhancing the brigades’ capabilities. OSD wants the Army to modify the brigades to be more like the Objective Force units the Army is developing. OSD has directed the Army to present a plan by July 8, 2003, that provides options for adding to the brigade’s enhanced combined arms capabilities. Currently, the brigades do not have capabilities such as aviation and air defense. Such changes would enhance the overall organizational effectiveness of the brigades, but they also could increase deployment and support requirements, potentially making the brigades more difficult to deploy by air and to support. OSD directed the Army to provide options for enhancing the Stryker brigades to ensure that they would provide a higher level of combat capability and sustainability across a broader spectrum of combat operations than those for which they were originally conceived, along with the capability of being employed independently of higher-level command formations and support. According to OSD, this additional capability will result in Stryker brigades that are more prototypical of the combined arms Objective Force units the Army is developing and would enhance the transformation of the Army by fielding added capabilities sooner. OSD has directed the Army not to expend funds in fiscal year 2004 for the fifth and sixth Stryker brigades until the Army presents a plan to provide options for enhancing all but one of the brigades. OSD wants the Army to remodel the brigades to be distinctively different than their original design, with enhanced combined arms capabilities that might include aviation, air defense, sensors, and armor. Many factors—including the numbers, size, and types of equipment— affect the Stryker brigades’ deployment and logistical support requirements. Based on the U.S. Transportation Command’s deployment- planning factors, every additional 1,000 tons of weight to be airlifted reduces aircraft range by 250 nautical miles and adds another 15 aircraft loads. If Stryker brigades were redesigned to include an aviation unit, for example, transporting the unit’s helicopters from the continental United States to overseas destinations would most likely need to be done by sea, and it would take days to unload them after arrival into a theater of operations. In addition, adding aviation maintenance personnel and the equipment that is needed to support an aviation unit would also substantially increase deployment requirements. Once deployed, the requirements for logistical support, such as fuel and spare parts, would increase well beyond that for which the Army’s current Stryker brigade support plan anticipates. Furthermore, the Stryker brigades’ support structure as currently designed does not have the levels of supply and support personnel or the necessary equipment to move and distribute the fuel, spare parts, and ammunition a brigade would need to support an aviation unit in combat operations. Conclusions With the Stryker brigades, the Army has achieved its intent to create rapidly deployable yet lethal forces, but currently the brigades’ requirements for airlift are too large for airlift alone to be a practical option for strategically deploying an entire brigade within its goal of 4 days. The Army plans to use some combination of strategic airlift and sealift, but it has not established strategic deployability timelines for a Stryker brigade that reflect the modes of transportation to be used, the wide range of deployment times that vary in terms of the size of the deployed force, and the brigades’ location and destination. In addition, deployment goals may need further modification should the brigade’s organizational and operational design significantly change in response to direction from OSD to enhance the brigade’s capabilities. While the 4-day deployment goal has created a strategic purpose and vision, and is serving as a constructive design metric for developing the brigades, such a goal is not a realistic standard by which to measure the considerable progress the Army is making toward creating more rapidly deployable forces. Without deployment goals that reflect the wide range of deployment variables and alternatives, the Army does not have a reasonable baseline from which to measure its progress toward achieving desired deployment timelines for Stryker brigades as well as for the future Objective Force; nor do the theater combatant commanders have information on expected deployment capabilities they would need in order to plan for the use of a Stryker brigade in their theater. Before the first Stryker brigade is certified for overseas deployment, the Army will need to complete its support plan and make any necessary adjustments or modifications to the plan based on the results of the operational evaluation. Recommendations for Executive Action We recommend that the Secretary of the Army examine alternatives to the 96-hour worldwide deployment goal for Stryker brigades and work with the U.S. Transportation Command and its components to set realistic deployment timelines for the brigades that reflect the use of both airlift and sealift, the size of the deployed force, a brigade’s location, and its destination and take into account any organizational or operational changes to the brigades resulting from modifications and enhancements directed by OSD. Agency Comments and Our Evaluation In commenting on a draft of this report, the Department of Defense generally concurred with the report and stated that the Army continues to maintain 96-hour worldwide deployment as an overall program goal for Stryker brigade deployment, and is working with the U.S. Transportation Command to reduce constraints that limit the Army’s ability to meet the goal. In responding to our recommendation that the Secretary of the Army examine alternatives to the 96-hour worldwide deployment goal for Stryker brigades and work with the U.S. Transportation Command to set realistic deployment timelines, the department stated that the Army is committed to its 96-hour goal as a target that it needs to continue to work toward in order to provide the necessary capabilities to combat commanders within required response times. The department noted that achieving this goal requires a concerted effort on the part of all services and the U.S. Transportation Command to ensure that enroute constraints are reduced. We agree that the 96-hour goal is a useful longer-term target and that the Army should continue to work in concert with the Transportation Command and the other services to achieve it. However, we continue to believe other alternatives to the 96-hour goal should be considered for measuring progress in the near-term. As we noted in the report, the Army cannot currently air deploy a Stryker brigade anywhere in the world within 96 hours and if sealift were used to deploy the Stryker brigades, deployment times would be significantly longer than the 96-hour deployment goal. We believe that without deployment timelines reflecting near-term deployment variables and alternatives, such as brigade locations and the use of sealift, the Army does not have a reasonable baseline from which to measure its progress toward achieving its 96-hour deployment goal; nor do the combatant commanders have information on expected Stryker brigade deployment capabilities. Thus, we continue to believe our recommendation has merit. In responding to our recommendation for setting realistic deployment timelines for Stryker brigades that take into account organizational or operational changes to the brigades resulting from any modifications and enhancements directed by OSD, the department said the Army should maintain its 96-hour deployment goal, as it is a goal and not a deployment standard. The department also noted that when the results of the OSD- mandated study are approved and published, the Army would work with the combatant commanders and the U.S. Transportation Command to update the standing contingency plans. We agree the Army should work with the combatant commanders and the U.S. Transportation Command to update contingency plans based on the final outcome of the OSD- mandated study. However, if the results of the study significantly increase the Stryker brigades’ deployment and logistical support requirements, the Army would need to reexamine brigade deployment goals as we have recommended. Appendix I contains the full text of the department’s comments. Scope and Methodology To assess the Army’s progress in meeting its 96-hour deployment goal for Stryker brigades, we obtained documents and interviewed officials from the U.S. Transportation Command, the Air Mobility Command, and the Military Traffic Management Command. To determine Stryker brigade air deployment times and airlift allocation estimates, we used data from a U.S. Transportation Command’s air mobility deployment analysis conducted for the Army in April 2002. To determine sea deployment times, we analyzed data from the Military Traffic Management Command’s Transportation Engineering Agency. In addition, we interviewed officials and obtained documents from the Army’s Deployment Process Management Office and from Army headquarters staff elements responsible for operations and plans and logistics. We performed site visits to Stryker brigade home installations at Fort Lewis, Washington, and Fort Richardson and Fort Wainwright, Alaska; we also interviewed U.S. Army I Corps and U.S. Army Alaska and Garrison Command officials at these locations. We also toured deployment processing and airfield facilities and obtained information about infrastructure improvements planned at these locations to validate key assumptions of the U.S. Transportation Command’s air mobility analysis regarding air deployment infrastructure capabilities. We did not visit Fort Polk, Louisiana; Schofield Barracks, Hawaii; or the Pennsylvania National Guard. These locations are the last three of the six-planned Stryker brigades that are to be formed from 2006 through 2010. Because it is not planned to become operational until 2010, we excluded from our review the planned Pennsylvania National Guard Stryker brigade. We also did not consider possible future developments in lift assets such as High Speed Vessels or Ultra Heavy Lift Aircraft in our assessment of Stryker brigade deployability. To obtain information on the Army’s plan for supporting Stryker brigades in combat operations, we analyzed Army information on the organizational design and operational concepts for Stryker brigades to gain an understanding of the logistical challenges of supporting and sustaining the brigades. We interviewed officials at Fort Lewis and U.S. Army Alaska for information relating to support and sustainment plans for the first three Stryker brigades. In addition, we reviewed documents and interviewed officials from Army headquarters staff elements responsible for operations and plans, logistics, and force development. We also interviewed and obtained documents from the Army’s Forces Command, the Combined Arms Support Command, and the Tank-automotive and Armaments Command to learn about support and sustainment options for the Stryker brigades. Our review was conducted from April 2002 through March 2003 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretary of Defense, the Secretary of the Army, and the Director of Management and Budget. 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 staffs have any questions about this report, please call me at (202) 512-8365. Major contributors to this report were Reginald L. Furr, Jr.; Kevin C. Handley; Karyn I. Angulo; Pat L. Seaton; Frank C. Smith; and Susan K. Woodward. Appendix I: Comments from the Department of Defense Appendix II: Stryker Brigade Locations and Planned Initial Operational Capability Dates Location Fort Lewis, Washington Fort Lewis, Washington Fort Wainwright/Fort Richardson, Alaska Fort Polk, Louisiana Schofield Barracks, Hawaii Pennsylvania National Guard Appendix III: Stryker Brigade Air Deployment Times By Origin and Destination Appendix IV: Stryker Brigade Sea Deployment Times by Origin and Destination Related GAO Products Military Transformation: Army’s Evaluation of Stryker and M-113A3 Infantry Carrier Vehicles Provided Sufficient Data for Statutorily Mandated Comparison. GAO-03-671. Washington, D.C.: May 30, 2003. Army Stryker Brigades: Assessment of External Logistic Support Should Be Documented for the Congressionally Mandated Review of the Army’s Operational Evaluation Plan. GAO-03-484R. Washington, D.C.: Mar. 28, 2003. Military Transformation: Army Actions Needed to Enhance Formation of Future Interim Brigade Combat Teams. GAO-02-442. Washington, D.C.: May 17, 2002. Military Transformation: Army Has a Comprehensive Plan for Managing Its Transformation but Faces Major Challenges. GAO-02-96. Washington, D.C.: Nov. 16, 2001. Defense Acquisition: Army Transformation Faces Weapons Systems Challenges. GAO-01-311. Washington, D.C.: May 21, 2001.

The Army is organizing and equipping rapidly deployable Stryker brigades as the first step in its planned 30-year transformation. Stryker brigades are to help fill a gap in capabilities between current heavy and light forces--heavy forces require too much time to deploy, and light infantry forces lack the combat power and mobility of the heavy forces. The Army has a goal to be able to deploy a Stryker brigade anywhere in the world with 4 days. As part of a series of ongoing reviews of Army transformation, GAO assessed the Army's progress in (1) meeting its deployment goal for Stryker brigades and (2) supporting and sustaining a deployed Stryker brigade in combat operations. The Army has made significant progress in creating forces that can be more rapidly deployed than heavy forces with its medium weight Stryker brigades, but it cannot deploy a Stryker brigade anywhere in the world within 4 days. Meeting the 4-day worldwide deployment goal of a brigade-size force would require more airlift than may be possible to allocate to these brigades; at present, it would take from 5 to 14 days, depending on brigade location and destination, and require over one- third of the Air Force's C-17 and C-5 transport aircraft fleet to deploy one Stryker brigade by air. Because airlift alone may not be sufficient, the Army is planning to use a combination of airlift and sealift to deploy the brigades. However, if sealift were used to deploy the Stryker brigades, deployment times to many global regions would be significantly longer than the 4-day goal the Army has set for itself. The Army's plan for supporting and sustaining Stryker brigades in combat operations is still evolving. The Army will not be able to finish its support plan until November 2003, when the results from an operational evaluation of the first Stryker brigade will be issued. Before it can fully implement the support plan, the Army will also need to make funding and other decisions relating to implementing some of the plan's logistical support concepts. Deployment goals may need modification should the brigades' design significantly change in response to direction from the Office of the Secretary of Defense to enhance the brigades' capabilities.

Background Interior is responsible for the safety of 70,000 employees and 200,000 volunteers, 1.3 million daily visitors, and over 507 million acres of public lands that include a number of sites of historical or national significance (national monuments and icons), and the security of dams and reservoirs. The Park Service’s mission is the unimpaired preservation of the natural and cultural resources and values of the national park system for the enjoyment, education, and inspiration of current and future generations. According to Interior officials, the Park Service cooperates with various partners to extend the benefits of natural and cultural resource conservation and outdoor recreation throughout this country and the world. Within Interior, the Park Service is responsible for managing and protecting some of the nation’s most treasured icons, including the Washington Monument, the Lincoln and Jefferson Memorials, the Statue of Liberty, Independence Hall and the Liberty Bell in Philadelphia, and Mt. Rushmore in South Dakota. The Park Service welcomes 428 million visitors to its 388 national park units each year throughout the United States, American Samoa, Guam, Puerto Rico, and the Virgin Islands. The Park Police provides security and law enforcement services to Park Service monuments and memorials in the District of Columbia, New York City, and in conjunction with Park Service rangers in San Francisco. Park superintendents and rangers manage and provide security and law enforcement services at the other parks throughout the United States in conjunction with their other duties. These other duties include management of public use, dissemination of scientific and historical information, and protection and management of natural and cultural resources. Among Interior’s other bureaus, BOR has an important role in protecting critical infrastructure because of its responsibilities related to dams. BOR’s core mission is to manage, develop, and protect water and related resources in an environmentally and economically sound manner. It is the largest wholesale water supplier in the nation, delivering 10 trillion gallons of water to over 30 million people each year. According to information from BOR, it manages 471 dams, making it the nation’s second largest producer of hydropower; the dams generate approximately 42 billion kilowatt hours each year. BOR, among other things, is responsible for managing and protecting well-known assets, such as Hoover Dam in Arizona and Nevada. While Interior is responsible for protecting icons, monuments, and dams, GSA serves as the federal government’s landlord and designs, builds, and manages facilities to support the needs of other federal agencies throughout all three branches of government. GSA is responsible for managing over 8,000 owned and leased buildings that comprise roughly 3 billion square feet of building floor area. FPS was created in 1971 to provide security services and law enforcement to GSA-owned facilities across the United States. FPS has the authority to, among other things; enforce laws and regulations that protect federal property, and persons on such property, and conduct investigations. As a result of the Homeland Security Act, 22 agencies—including FPS—were centralized under DHS, and FPS retained its role related to law enforcement and security at GSA buildings. In accordance with the act, the transfer of FPS from GSA to DHS became effective on March 1, 2003. GSA officials said that GSA still assists FPS and tenant agencies with facility security, implements various security measures that FPS recommends, and incorporates enhanced security measures into new space it constructs or leases. Within DHS, FPS fell under the authority of the Immigration and Customs Enforcement (ICE), which, according to DHS, is its largest investigative arm. DHS also chairs ISC, which has representation from all the major property-holding agencies and was established after the Oklahoma City bombing. ISC has a range of governmentwide responsibilities related to protecting nonmilitary facilities. In July 2004, we reported on issues related to the transfer of FPS from GSA to DHS; and in November 2004, we reported on progress ISC has made and key practices in facility protection. Terrorist Threat Poses a Range of Challenges for Interior in Protecting National Icons and Monuments The September 11 attacks demonstrated the nation’s vulnerability to the threat posed by formidable, well-organized terrorists. As evidenced by the attacks, the terrorists are sophisticated, relentless, and patient in their planning and execution. This new type of threat represents a shift from historical assumptions about national security, where the military, foreign policy establishment, and intelligence community are responsible for protecting the nation, to a new paradigm where others—such as Interior, state and local governments, and the private sector—also have a role in homeland security. National icons and monuments represent the nation’s heritage, tradition, values, and political power. Among Interior assets that could logically be categorized as potential symbolic targets are national icons and monuments such as Mt. Rushmore and the Washington Monument. Destroying these icons would likely have a profound effect on the nation’s morale. In addition, Interior’s portfolio includes assets that are part of the nation’s critical infrastructure, such as the 471 dams it operates that provide hydropower to Western states. Information from Interior shows that these assets are vulnerable to attack in a variety of ways and that Interior faces a range of challenges to improving protection. These challenges include the inherent conflict between security and public access, jurisdictional issues and competing stakeholder issues regarding such matters as access and oversight of enhancements, the effect that the rugged and remote location of some assets has on perimeter security, and the ability to leverage available resources to address vulnerabilities by implementing security enhancements. Balancing Security with Public Access at Icons and Monuments Is a Major Challenge Interior officials and staff at the icons and monuments we visited acknowledged, and the Interior Inspector General (IG) has reported, that balancing security with access is a major challenge facing the department. Implementing appropriate physical protection measures can be a challenge because such measures often run counter to societal values that associate access to icons and monuments with living in a free society. And, the core missions of some of the Interior’s agencies—including the Park Service— reflect a high level of public accessibility and interaction. As reported by the Interior IG and discussed by Interior officials we interviewed, the organizational challenge of shifting to a homeland security focus in a culture rooted in preservation and education is also significant. Overall, the challenge of balancing protection against terrorism with public access is formidable and transcends other challenges Interior faces, including jurisdictional issues and competing stakeholder interests. Security versus Access: The Statue of Liberty The Park Service’s efforts to balance security with access at the Statue of Liberty demonstrate this challenge. The Statue of Liberty is one of the nation’s most treasured sites and is an international symbol of American values. Located on 12-acre Liberty Island in New York Harbor, the Statue of Liberty was a gift of international friendship from the people of France to the people of the United States and is one of the most universal symbols of political freedom and democracy. It is a popular tourist attraction for visitors from around the world. In fiscal year 2003, over 3.2 million people visited the Statue. Park Service management of the Statue of Liberty and Liberty Island also includes Ellis Island and its facilities. The Statue consists of three sections: the Statue, the pedestal, and a base known as Fort Wood. The Park Service and Park Police oversee the monument’s security program, including operation of screening facilities housed at Battery Park in Lower Manhattan in New York and Liberty State Park in New Jersey. Park Service and Park Police officials consider these locations, plus Governor’s Island, part of a 5-point security perimeter that they monitor within New York Harbor. Figure 1 shows the Statue of Liberty, which is surrounded by New York Harbor. Due to concerns about additional terrorist attacks, the Park Service closed Liberty Island and the Statue of Liberty immediately following September 11. The Park Service reopened Liberty Island in December 2001 but refrained from allowing access to the Statue until additional security and fire safety assessments could be done. These assessments identified a number of steps that needed to be taken before visitors could be allowed back into the Statue. In addition, the primary threats included aerial attacks and explosives detonated inside the structure. In August 2004, the Park Service reopened the Statue to visitors with access restricted to the top of the pedestal and the exterior observation deck. The security improvements were primarily aimed at preventing would-be terrorists from gaining access to the interior of the Statue and its grounds. Under this revised plan, visitors are able to tour the Statue of Liberty Museum, see close-up views of the statue from the promenade, view the inside structural elements of the statue, and experience a 360- degree panoramic view of New York Harbor from the observation deck. In addition, the Park Service and Park Police implemented other improvements, including more rigorous visitor screening, better explosive detection capabilities, improved fire safety, and enhanced communications. Park Service officials also noted that new barriers were installed at the Ellis Island service bridge and that Park Service and Park Police staffing has been increased since September 11 to implement the improved security plan. The Park Service reported in mid-2004 that, to make these improvements, it had invested $19.6 million and was anticipating an additional $9 million in future spending. In addition, the Park Service reported that the Statue of Liberty-Ellis Island Foundation, which is a consortium of private donors, had partnered with the Park Service to assist with funding a number of the safety improvements. Figure 2 shows the security checkpoint for Liberty Island. According to Park Service officials, the issue of public access to the Statue received high visibility and publicity while a new security plan was being developed. Some of the editorial press from this time expressed a concern that by closing the Statue, it had “ceded to al Qaeda.” The Mayor of New York was quoted in a newspaper saying that as long as the Statue is closed, “in some sense, the terrorists have won.” Interior and Park Service officials said that it was difficult to communicate the rationale for initially prohibiting, then later limiting, public access to the Statue without revealing the specific vulnerabilities that led to their decisions. A major reason for limiting access to the Statue was the need to adhere to building codes related to fire safety. For example, the Statue did not meet standards for exits and fire suppression capability. However, Interior and Park Service officials were also concerned with the security vulnerabilities of the Statue and the fact that knowledge of these vulnerabilities could make the Statue an even more attractive target. Although many security improvements have been implemented at the Statue of Liberty National Monument and Ellis Island, Park Service officials noted that several key security challenges remain. Security versus Access: Hoover Dam Hoover Dam in Nevada and Arizona is another icon that presents Interior with challenges related to public access. Located approximately 38 miles southeast of Las Vegas, Hoover Dam is a national, historical, hydrological, and structural icon that is part of the nation’s critical infrastructure. Managed by BOR, it receives approximately 1 million paid visitors every year and provides water and electricity for millions of people throughout the Southwest. Its 4.4 million cubic yards of concrete is recognized as a marvel of civil engineering. In addition, nearly 9 million people visit adjacent Lake Mead every year, which is the nation’s largest man-made lake and is a national recreational area managed by the Park Service. Hoover generates electricity for southwestern states through its 17 turbines using water from Lake Mead. Also, Interstate 93 sits on top of the dam, serving as the region’s main vehicular route across the Colorado River. According to BOR officials, following the terrorist attacks of September 11, BOR implemented a range of security enhancements, such as hiring additional security officers and guards and revising and canceling some public tours. In addition, BOR is taking steps to provide a long-term solution for its biggest security concern to visitors—the proximity of Interstate 93 to large crowds of visitors who also have access to the top of the dam. Related to security staffing, BOR nearly doubled the number of federal police officers and added new contract security guards. To help control the flow of tourists and provide additional security, BOR added access doors, and contract guards to certain areas of the visitor center. BOR also improved security at the visitor center by adding blast-resistant films to the windows. In addition, BOR improved gates and fencing in some areas surrounding the dam to improve perimeter security. BOR also installed a series of buoys and linked “boom lines” to serve as a security perimeter at water access points. Figure 3 shows the dam and a linked boom line in the water. To further secure the dam’s perimeter, BOR created two traffic security checkpoints, one in Arizona and one in Nevada, to screen and inspect passenger vehicles crossing the dam. Figure 4 shows a security checkpoint on the Arizona side of the dam. Since September 11, BOR also made other changes to its security operations, including performing additional background checks on contractor personnel, obtaining security clearances for office directors and key personnel, conducting various site security inspections, initiating boat patrols on Lake Mead, contracting for the design of a new integrated security system, and installing additional surveillance cameras to monitor traffic checkpoints and other parts of the dam and visitor areas. To address one security concern as far as visitors are concerned—public access to the top of the dam due to the proximity to Interstate 93—BOR is currently working with Arizona, Nevada, the Federal Highway Administration, and others to construct a new four-lane bridge across the Colorado River approximately 1,500 feet from the dam. This bridge and additional roadways would re-route Interstate 93 off of the dam and improve traffic flow for the thousands of trucks and vehicles that use this road daily and reduce security vulnerabilities for the dam and its visitors. The cost of the project is currently estimated at $234 million, with funding coming through a combination of federal and state sources. Construction has already begun on new highways that approach the bridge, and the project is currently scheduled to be completed in 2008. Nonetheless, although it appears that BOR has taken the necessary steps to address the security concern with the highway, ensuring adequate security while allowing vehicle access will remain a unique and significant challenge for the next few years. Addressing Jurisdictional Issues and Competing Stakeholder Interests Is Another Challenge for Interior Complicating its efforts to balance security and access, balancing jurisdictional issues and competing stakeholder interests represents another challenge facing Interior. Pursuing security improvements that Interior believes are needed often puts the department at odds with other entities—such as planning commissions, private foundations, and local governments—that have jurisdiction over, or input regarding, physical security enhancements. For example, efforts to secure the perimeter of a national monument or icon in an urban setting by closing streets and/or alleyways can be prevented by local governments. Similarly, local planning commissions and other oversight groups can prevent the placement of various protective measures because of aesthetic concerns and other considerations, such as perceived loss of revenue. According to information from Interior, limiting the types of measures it can employ can lead to delays in enhancing security and the use of potentially more costly and/or less effective alternatives. Jurisdictional and Competing Stakeholder Issues: Independence National Historical Park in Philadelphia One location that illustrates the major challenges Interior faces related to jurisdictional issues and competing stakeholder interests is Independence National Historical Park (INHP) in Philadelphia, Pennsylvania. INHP is an open, national park space in the center of a densely populated urban area. Spanning approximately 45 acres, the park has about 20 buildings open to the public, including Independence Hall (site of the signing of the Declaration of Independence) and the Liberty Bell Center. Additionally, INHP houses multiple historically irreplaceable buildings and documents, including Carpenter’s Hall (site of the first Continental Congress), Congress Hall, and an original copy of the Declaration of Independence. Figure 5 shows a security sign near Independence Hall, where the Declaration of Independence and U.S. Constitution were created. Due to its urban location, oversight responsibility at INHP involves several stakeholders. The Park Service and the city of Philadelphia have a memorandum of understanding (MOU) regarding emergency response responsibilities and other jurisdictional issues. Public city streets that carry both pedestrian and vehicular traffic surround the park and its buildings. According to Interior officials, the park is surrounded by local businesses that, along with city officials, are consulted regarding any change in park operations. Complicating oversight, the Park Service owns the land that covers the three blocks known as Independence Mall, and the city of Philadelphia owns the Independence Hall building and the Liberty Bell. The city and the Park Service operate under a cooperative agreement for the management and operation of Independence Mall. Also, the focus on security in this area of Philadelphia is further heightened because of the presence of other federal assets. Within a few block radius of INHP are multiple federal buildings, including the U.S. Mint, the Federal Reserve Bank of Philadelphia, and a federal courthouse that houses the U.S. District Court for the Eastern District of Pennsylvania. Park Service officials reported that prior to September 11, INHP managed its law enforcement and security operation consistently with the majority of urban parks across the nation. After the Oklahoma City bombing, a blast assessment focused primarily on Independence Hall was conducted and influenced the design of the new Liberty Bell Center. Aside from this assessment, no comprehensive risk assessment had been completed that addressed overall threat potential. Following September 11, the Park Service decided to keep the park open but added staff patrols from parks around the country to support INHP staff for approximately 6 to 9 months. A perimeter consisting of temporary fencing and concrete jersey barriers was also placed around the two city blocks containing the Liberty Bell and Independence Hall and, with the approval of city officials, Chestnut Street was closed on December 12, 2001. With these security improvements, staff coverage was roughly doubled, but the Park Service had to have rangers work overtime to allow for 24-hour coverage. The Park Service also implemented security measures that included the use of magnetometers and individual hand searches conducted at Liberty Bell Center and Independence Hall. After September 11, the Park Service also contracted with a private firm to conduct a threat assessment, which used a pre-existing blast assessment. Park Service officials added that the blast assessment, however, was too narrowly focused, and the lack of a comprehensive assessment of threats and vulnerabilities limited their ability to identify the full range of security measures that were needed to fully protect the park. In early 2005, an Interior security official told us that a comprehensive assessment conducted in compliance with HSPD-7 had been completed, and Interior officials are evaluating this assessment to determine additional security enhancements. Interior officials told us that jurisdictional issues at INHP and the political sensitivity of related disagreements have been the greatest challenges in terms of implementing security enhancements since September 11. These officials said that although there is a standing operational agreement between the Park Service and the city of Philadelphia, there is no current MOU regarding law enforcement and security. INHP security officials stated that their ability to effectively secure the park is limited by a lack of authority over Chestnut Street and consensus among stakeholders as to how to provide the best protection. This challenge is evidenced most clearly by the ongoing disagreement between INHP and the city of Philadelphia over the closure of Chestnut Street, the street that carries both pedestrian and vehicular traffic between Independence Hall and the Liberty Bell Center. INHP officials said that the city reopened Chestnut Street on April 1, 2003, after local residents and business owners made the case to the city that the closure would have an adverse impact on business. Chestnut Street currently remains open to pedestrians and traffic with the use of a controlled pedestrian intersection at Sixth and Chestnut Streets managed by Park Service security staff and contract guards to monitor park visitors transiting from the Liberty Bell Center to Independence Hall. Figure 6 shows traffic in front of Independence Hall and park rangers allowing screened visitors to cross Chestnut Street. In addition to addressing jurisdictional issues related to differences with the city, Park Service officials at INHP said that their views on what security measures are needed often put them directly at odds with local stakeholder groups and business owners, specifically the Independence Mall Business and Residents Coalition (IMBARC). IMBARC was created for the purpose of challenging the closure of Chestnut Street. IMBARC’s chairman told us that IMBARC members are united in their belief that the security measures implemented at INHP since September 11 are excessive and aesthetically unappealing. In addition, potential street closures surrounding Independence Mall also affect the Southeastern Pennsylvania Transportation Authority (SEPTA), the regional transit provider. Chestnut and Sixth Street are considered thoroughfares through the city’s downtown, and Park Service officials said that major changes to the traffic patterns would likely meet additional resistance. We did not evaluate the competing views of the Park Service, the city of Philadelphia, or IMBARC regarding the Park Service’s security efforts at INHP. Nonetheless, the situation the Park Service faces at this park illustrates the complex and often differing jurisdictional and competing stakeholder views that Interior faces related to security in the post-September 11 era. Jurisdictional and Competing Stakeholder Issues: Monuments on the National Mall in Washington, D.C. Other national icons where Interior faces jurisdictional and competing stakeholder challenges are the monuments on the National Mall (the Mall) in Washington, D.C. In particular, Interior has responsibility for several major monuments on or near the Mall—including the Washington Monument; the Lincoln, Jefferson, and Roosevelt Memorials; and the World War II, Korean War, and Vietnam War Memorials. The Park Police provides protection for these monuments and icons. Prior to September 11, there was a concern that monuments and icons on or near the Mall could be the focus of a terrorist attack. According to Interior officials, after September 11, Interior worked with a private security firm to assess the risk of terrorist attacks at Mall monuments. This assessment examined potential threats and alternate methods of both prevention and protection. Additionally, the Park Service identified specific protection criteria and designated key areas with the highest vulnerability as priority status for increased security. According to Interior and Park Service officials, they have used the report’s findings to determine where to allocate appropriated funds and implement security upgrades for high-risk structures. The Park Service has pursued a number of security enhancements to the Washington Monument and Lincoln and Jefferson Memorials, which were the focus of our review. Construction is currently under way on a landscape security solution for the grounds of the Washington Monument. When construction is complete, a 30-inch-high granite retaining wall along newly constructed pedestrian pathways will surround the monument. The wall will serve as a vehicle barrier while also providing visitor seating. In addition, the monument grounds will receive nearly 800 new shade and flowering trees, upgraded lighting, and granite paving on the plaza. The Park Service closed the monument to the public in September 2004 to complete the final phase of the security enhancement project and reopened it on April 1, 2005. At the Lincoln Memorial, the Park Service plans to construct a 35-inch-high granite retaining wall at the edge of the roadway around the north, west, and south sides of Lincoln Memorial Circle, and install retractable bollards for a portion of the circle that does not handle everyday traffic. The Park Service is also developing an alternative to a 715- foot line of jersey barriers on the memorial’s east side, facing the Mall. Figure 7 shows the temporary jersey barriers and fencing on the east side of the memorial. For the Jefferson Memorial, the Park Service has proposed the construction of a security barrier, closure of a U-shaped driveway next to the monument to create a pedestrian plaza, and creation of additional parking away from the monument to improve security by limiting vehicular access. The Park Service’s proposal includes the elimination of parking adjacent to the monument. According to the Park Service’s environmental assessment of various options, the options under consideration would have adverse impacts on historic structures and the cultural landscape because the proposed security barrier would introduce a new element within the historic scene. However, the Park Service also said that the historic structures, cultural landscape, and aesthetic and visual quality would benefit due to the removal of the existing security measures that currently compromise the views, vistas, and historic scene. According to the Park Service, safety and security would be improved because the barrier would provide a first line of defense from the potential threat of a vehicle bomb and would serve as a deterrent to terrorists. Figure 8 shows a jersey barrier and temporary snow fencing at the memorial. According to Park Service officials, the snow fencing is used to control pedestrian flow to and from the memorial. In addition to these improvements at the monuments, the Park Service has upgraded its security camera capabilities in and around the Mall. The camera system began its initial test run in July 2002 and was fully operational by the fall of 2002. Park Service officials reported that the system consists of cameras mounted in and around the Mall that digitally record footage. It is designed for redundancy; if one camera fails, another camera could quickly cover the same area. Park Service officials stated that in the near future, they would like to expand coverage and progressively upgrade the camera system. Since September 11, Interior has also established internal security protocols directly tied to the Homeland Security Advisory System. In implementing security enhancements, several entities have an oversight, advisory, or advocacy role for the monuments on the National Mall and have an interest in security enhancements at the monuments. These entities include the National Capital Planning Commission (NCPC), Advisory Council on Historic Preservation (Advisory Council), the U.S. Commission on Fine Arts (CFA), and the District of Columbia’s State Historic Preservation Officer (SHPO). In addition, advocacy groups, including the National Coalition to Save Our Mall and the National Parks Conservation Association (NPCA), are involved in, and offer their views on, security enhancements to the monuments. The roles of the major entities and organizations are as follows: NCPC (www.ncpc.gov) is the central planning agency for the federal and District of Columbia governments in the national capital. Established in 1924 as the National Capital Park Commission and later renamed, NCPC’s responsibilities include conducting comprehensive planning to direct federal activities and protect federal interests, reviewing and approving all federal development projects in the city and outlying region, leading specific initiatives to enhance the region, and preparing an annual Federal Capital Improvements Program. NCPC is composed of three presidential appointees, two D.C. mayoral appointees, the Secretaries of Defense and the Interior, the Chairmen of the Senate Committee on Homeland Security and Governmental Affairs and House Committee on Government Reform, the Administrator of GSA, the Mayor of the District of Columbia, and the Chairman of the D.C. City Council. The Advisory Council (www.achp.gov) is an independent federal agency that promotes the preservation, enhancement, and productive use of the nation’s historic resources and advises the president and Congress on national historic preservation policy. The National Historic Preservation Act (NHPA) established the Advisory Council in 1966. According to the Advisory Council, it seeks to have federal agencies act as responsible stewards of our nation's resources when their actions affect historic properties. The Advisory Council recommends administrative and legislative improvements for protecting the nation’s heritage; advocates full consideration of historic values in federal decision making; and reviews federal programs and policies to promote effectiveness, coordination, and consistency with national preservation policies. CFA (www.cfa.gov) was established by Congress in 1910 as an independent agency to advise the federal and District of Columbia governments on matters of art and architecture that affect the appearance of the nation's capital. CFA’s primary role is to advise on proposed public building projects, but it also reviews private buildings adjacent to important public buildings and grounds. NHPA provides for the designation of a SHPO in each state. SHPOs have duties that include locating and recording historic resources; nominating significant historic resources to the National Register of Historic Places; fostering historic preservation programs at the local government level; reviewing all federal projects for their impact on historic properties in accordance with Section 106 of NHPA; and providing technical assistance on rehabilitation projects and other preservation activities to federal agencies, state and local governments, and the private sector. “defend our national gathering place and symbol of Constitutional principles against threats posed by recent and ongoing proposals—for new memorials, security barriers, service buildings and roads—that would encroach on the Mall's historical and cultural integrity, its open spaces and sweeping vistas, and its significance in American public life.” NCPA (www.ncpa.org) is an advocacy organization whose mission is to protect and enhance the National Park System for present and future generations. According to its Web site, NCPA has been in existence for 85 years and has 300,000 members. NCPA’s objectives are to advocate for the national parks and the Park Service, educate decision makers and the public about the importance of preserving the parks, help to convince Members of Congress to uphold the laws that protect the parks and support of new legislation to address threats to the parks, fight attempts to weaken these laws in the courts, and assess the health of the parks and park management to better inform its advocacy work. Interior and Park Service officials said that implementing security measures can be particularly challenging at monuments on the Mall in Washington, D.C., because of the number of entities and organizations that have jurisdictional, advisory, or advocacy roles regarding changes. These officials said that in gaining the approval for projects from NCPC and incorporating the views of the other organizations, the Park Service tries to strike a balance among the various stakeholders and build consensus. For example, in an effort to streamline the process for gaining approval and input for enhancements at the Washington Monument, the Park Service, NCPC, ACHP, and the D.C. SHPO established a streamlined review process in 2002 that allows for public participation. However, Interior and Park Service officials acknowledged that there is often disagreement over how to balance security with public access and aesthetic beauty. For example, as part of its plans for security enhancements at the Washington Monument, the Park Service gained approval from the NCPC in April 2003 to build an underground visitor screening area and tunnel that would lead to the basement of the monument. However, after meeting significant resistance from NCPA, the Save Our Mall Coalition, and other interested stakeholders, a senior Park Service official told us that the Park Service abandoned this concept in the interest of maintaining support for security enhancements. Due to the high visibility that security enhancements at Mall monuments receive, Interior officials said that addressing jurisdictional issues and competing stakeholder interests on the Mall will remain their biggest challenge. Remote Location of Some Interior Assets Poses a Security Challenge Due to the remote and rugged location of some assets, Interior officials reported that some icons and monuments pose additional issues related to securing perimeters and ensuring an adequate response in the event of an attack. According to information from Interior, although the remoteness of the locations may reduce the threat exposure associated with more “target rich” environments, it can present a significant disadvantage when Interior attempts to implement security measures. Remote Locations: Mt. Rushmore Mt. Rushmore, which is located in the Black Hills of southwestern South Dakota, typifies how difficult it can be for Interior to protect icons and monuments that are located in remote and often rugged environments. Mt. Rushmore is the world’s largest sculpture and is one of the most widely recognized symbols of the United States. In addition to its cultural and symbolic significance, size, and location, Mt. Rushmore hosts a large number of visitors each year, including numerous dignitaries. The monument has a visitor center, restaurant, gift shop, and amphitheatre that are used for various events. Each Fourth of July, the park hosts a holiday celebration with fireworks and other activities that attracts tens of thousands of visitors. The monument is also about 50 miles south of Sturgis, the site of an annual motorcycle rally that can bring over 500,000 tourists to the area—many of whom visit Mt. Rushmore. Approximately 2.9 million tourists visit the monument annually, with up to 40,000 visiting on some days during the summer months. Mt. Rushmore has a history prior to September 11 of security incidents involving domestic terrorists, political demonstrators, and bomb threats, according to Park Service officials. The threats and related incidents have included the following: Between 1970 and 1973 there were multiple efforts by the American Indian Movement to occupy the mountain and deface the monument. In 1975, a bomb was detonated in front of the visitor center—there were no injuries because the detonation occurred early in the morning. In 1987, the environmental group Greenpeace illegally climbed the mountain and attempted to unfurl a protest banner. In 1991, the Park Service received multiple, credible threats to assassinate then-President George H.W. Bush during the 50th anniversary celebration of the monument. In 1999, a Colorado man was arrested for making a threat to blow up Mt. Rushmore. According to Park Service officials, because of these incidents, the Park Service took actions, including a security assessment in 1997 that recommended a range of countermeasures costing approximately $2.9 million, most of which were subsequently implemented. However, Park Service officials told us that prior to September 11, the focus of their security efforts was directed at protecting the monument. In light of the September 11 attacks, Park Service officials are now including visitors and employees in their protection at Mt. Rushmore. With increases in funding for security after September 11, Park Service officials told us in mid-2004 that they were in the process of adding protection park rangers and other employees. In addition, the Park Service made other security enhancements, including the installation of security fencing, lighting, and gates at multiple locations; improvements to existing mechanical systems for dispatch and incident management; and the purchase of all-terrain vehicles for use in patrols and at special events. Figure 9 shows a security camera mounted near the amphitheatre at the base of the monument. Despite these improvements, security at Mt. Rushmore is a major Park Service concern, due to the large area to patrol and large number of visitors. The park has 1,278 acres, 40 acres of which are part of the visitor service area that offers hiking and educational opportunities at the sculptor’s studio and visitor center’s amphitheater, museum, and bookstores. In addition, the area immediately surrounding the sculpture has steep rock faces and a series of canyons. While terrain serves as a natural barrier for most visitors and casual hikers, preventing individuals seeking to climb to the top of the monument for nefarious purposes is difficult. Park rangers at the monument told us that in order to fully secure the monument’s perimeter, rangers must regularly hike and patrol the mountain—a time-consuming and physically challenging task. Figure 10 shows the rugged terrain at the front of the sculpture and a canyon in the area behind the sculpture. In addition, the park relies on backup from state and county law enforcement agencies, as well as the Federal Bureau of Investigation. According to Park Service officials, these agencies also provide support during major events at the park. Leveraging Limited Resources for Security Improvements Is Viewed by Interior Officials as a Challenge In addition to the range of challenges with protecting icons and monuments, Interior officials were also concerned about the department’s ability to leverage limited resources for its protection initiatives in terms of security staffing and funding. These officials said that the increased emphasis on visitor protection and homeland security demands that Interior maintain a well coordinated and highly professional law enforcement capability. However, the department’s law enforcement staff is already spread thin, according to these officials, averaging one law enforcement officer for about every 110,000 visitors and 118,000 acres of land. Funding challenges for Interior homeland security programs have been well documented. According to the August 2003 Interior IG report mentioned earlier, September 11 and the resulting increase in icon park security have had an impact on other parks and law enforcement officers across the Park Service. According to the report, rangers have been detailed from their permanent parks to supplement the icon park forces, leaving many other parks with a diminished protection staff. The Interior IG also reported that law enforcement staff were strained right after September 11 because officers were working 12-hour shifts 7 days a week for several months and with no days off. The Interior IG reported that there is a concern about the long-term effectiveness of the protection staff and the officers who operate under these conditions. At the icons and monuments we visited, concerns about having adequate resources for security were evident. In Philadelphia at INHP, Park Service officials said that law enforcement represents the largest portion of the INHP budget at approximately $8 million per year and accounts for more than one-third of the park’s budget. By comparison, prior to September 11, law enforcement accounted for about $2.4 million per year. At the Jefferson Memorial, Park Service officials told us that they sometimes leave the snow fencing (shown in fig. 8) in place because they lack the staff resources to remove and reinstall the fencing before and after each major event on the Mall. At Mt. Rushmore, the need for additional staff was, as mentioned before, an ongoing concern. Although we did not do a detailed assessment of security funding issues, officials at the sites we visited told us that they were concerned about their ability to implement further security enhancements that they believe are needed. They viewed lack of additional funding as a major challenge. Interior officials with OLES, including the Deputy Assistant Secretary for Law Enforcement and Security, expressed concern about the department’s inability to obtain homeland security funding through DHS. These officials said that state and local governments receive significant funding through DHS. These officials said that there have been discussions within the administration about allowing other federal agencies to receive funding through DHS but such actions have not been taken. Nonetheless, with the establishment of a central office to manage security matters and Interior’s efforts to respond to various governmentwide initiatives, the department has taken some important steps to better position itself to compete for homeland security-related funds. At the individual icons and monuments we visited, steps clearly had been taken to improve security since September 11, such as the Washington Monument perimeter landscaping project, the Lincoln and Jefferson Memorial security projects, the visitor screening system at the Statue of Liberty, increased staffing at Mt. Rushmore, and the rerouting of Interstate 93 at Hoover Dam. Initiatives to Protect National Icons and Monuments Are Part of the National Homeland Security Strategy Initiatives by Congress and the administration since September 11 to improve homeland security have been intended to, among many objectives, address the range of challenges associated with protecting national icons, monuments, and other key assets held by Interior. The September 11 terrorist attacks prompted Congress to pass the Homeland Security Act, which created DHS. DHS’s mission includes preventing terrorist attacks within the United States, reducing the vulnerability of the United States to terrorism, and minimizing the damage and assisting in the recovery from attacks that do occur. The creation of DHS centralized the government’s homeland security efforts, including policy setting with regard to protecting national icons and monuments. As discussed earlier, several of Interior’s assets are highly visible and symbolic icons, monuments, and critical infrastructure such as dams. Due to the prominence of Interior’s assets, protecting them has figured heavily into the broad strategic goals set forth by the administration after September 11. More specifically, the President’s July 2002 National Strategy for Homeland Security recognized the potential for attacks on national icons and monuments, which could be targets for symbolic reasons and whose destruction could profoundly damage national morale. The President’s February 2003 National Strategy for the Physical Protection of Critical Infrastructures and Key Assets provides a statement of national policy to remain committed to protecting critical infrastructures and key assets— including national monuments, icons, and dams that Interior is responsible for—from terrorist attacks and is based on eight guiding principles. These principles include establishing responsibility and accountability and encouraging and facilitating partnering among all levels of government and between government and industry. The strategy also establishes three strategic objectives, which are to (1) identify and ensure the protection of the most critical assets, in terms of national level public health and safety, governance, and economic and national security and public confidence; (2) ensure protection of infrastructures and assets facing specific, imminent threats; and (3) pursue collaborative measures and initiatives to ensure the protection of other potential targets that may become attractive over time. The critical infrastructure strategy identifies Interior as the lead federal entity for taking actions in a number of areas, in conjunction with DHS, related to protecting icons, monuments, and other key assets. These actions include developing guidance and standards for determining criticalities and protection priorities, conducting threat and vulnerability assessments, exploring opportunities for using technology to protect visitors at monuments, and collaborating with state and local governments and private foundations to ensure the protection of symbols and icons outside the federal domain. In our prior work, we assessed these plans and in February 2004 testified that the national strategy related to critical infrastructure contained the most desirable characteristics among the strategic plans for homeland security that the administration has produced since September 11. These characteristics included addressing such areas as purpose, scope, and methodology; problem definition and risk assessment; and organizational roles, responsibilities, and coordination. While the 2002 and 2003 national strategies identified a broad framework for homeland security as it relates to critical infrastructure, HSPD-7, which the administration issued in December 2003, establishes a national policy for federal agencies to identify and prioritize critical U.S. infrastructure and key resources and to protect them from terrorism. The directive identified several critical infrastructure sectors, such as agriculture, water systems, public health, and national monuments and icons. For several of the sectors, the directive identifies lead agencies that have sector-specific knowledge, including Interior for national icons and monuments. SSA responsibilities include collaborating with all relevant federal entities, state and local governments, and the private sector; conducting or facilitating vulnerability assessments of the specific sector; and encouraging risk management strategies to protect against and mitigate the effects of attacks. Section 35 of the directive also requires, on an annual basis, that sector-specific agencies report on their efforts to identify, prioritize, and coordinate the protection initiatives in their respective sectors. In addition, section 34 of the directive requires that all federal departments and agencies develop physical and cyber security plans for the assets they own or operate. Interior’s Actions Have Been Positive, and Further Steps Could Strengthen Its Efforts in the Security Area After September 11, the Secretary of the Interior took steps to address serious organizational and management problems in the law enforcement and security components of the department. Of particular concern, according to Interior’s IG, was the lack of coordination among these components and the absence of a meaningful single point of contact that the Secretary and senior managers could depend upon for reliable information and advice. The Secretary approved a Deputy Assistant Secretary for Law Enforcement and Security in July 2002, established the security office named OLES, and approved the implementation of the additional 24 recommendations from a January 2002 Inspector General report. OLES oversees the department’s security efforts and seeks to ensure consistent application across bureaus and offices. OLES has responsibilities related to (1) coordinating the development of policies and standards, (2) coordinating and overseeing implementation of policies and standards, (3) representing the department externally, (4) conducting compliance reviews, and (5) providing leadership during incidents. Because Interior was designated as an SSA, OLES prepared a sector- specific security plan for icons and monuments, as required by section 35 of HSPD-7. Interior also developed a physical security plan for the assets it owns and operates in response to section 34 of HSPD-7. These plans recognize many of the major challenges facing Interior, including security versus access, jurisdictional considerations, security in remote locations, and security staffing issues. In response to HSPD-7’s requirement that Interior formulate a plan for identifying, assessing, prioritizing, and developing protective programs for critical assets within the national icons and monuments sector, Interior developed a uniform risk assessment and ranking methodology called the National Monuments and Icons Assessment Methodology (NM&I methodology). According to information from Interior, the NM&I methodology is specifically designed to quantify risk, identify needed security enhancements, and measure risk-reduction benefits at icon and monument assets. The NM&I methodology has a consequence assessment phase and a risk assessment phase. During the consequence assessment phase, there is an asset tier ranking process, in which each asset’s iconic significance is subjectively determined. Specific attack scenarios—such as chemical/biological, aircraft, or improvised explosive device—are used to evaluate security at each asset and score attack consequences. Consequence categories include casualties, economic impact, and length of disruption. During the risk assessment phase, Interior uses the methodology to determine the effectiveness of existing security systems for preventing or mitigating the specified attack scenarios. Using risk values calculated from this comparison, Interior assigns asset risk ratings of high, medium, or low, and specific mitigation recommendations are formulated. To date, Interior has applied this methodology to assets that fall under the purview of the Park Service. Interior officials said that BOR has used a risk assessment methodology for dams for several years. These officials said that BOR’s methodology is similar, but also takes into account several factors that are unique to dams, such as downstream population at risk, structural vulnerability, and the economic impact if the asset were to be destroyed. Interior has made significant progress in the risk assessment area, particularly regarding the new methodology for national icons and monuments. Before the development of this approach, Interior did not have a uniform, comprehensive risk management approach for icons and monuments. It relied instead on the judgment of senior officials in determining where resources should be directed, and the risk assessments completed at individual sites were done by a number of external experts using different methodologies. Given the range of challenges Interior faces, particularly with regard to limited resources, it is especially important that Interior’s funding priorities are linked with its risk rankings so that decision makers—including Interior, Office of Management and Budget (OMB), and Congress—can direct resources where they will have an optimal return on investment in terms of better protection. Setting funding priorities for protecting assets using a uniform approach is the foundation of the National Strategy for Homeland Security and the National Strategy for the Physical Protection of Critical Infrastructure and Key Assets. For example, the section of the National Strategy related to critical infrastructure calls for DHS and stakeholders like Interior to develop a uniform methodology for identifying facilities, systems, and functions with national level criticality to help establish priorities. Government agencies often face a variety of interests whose competing demands force policymakers and managers to balance stakeholders’ concerns and other factors such as quality, cost, and customer satisfaction. For Interior, the trade-offs that have to be made between security and its cultural mission are often difficult, which was apparent at the sites we visited. Full transparency regarding the basis for its decisions on security matters could, in our view, improve Interior’s ability to achieve mutually acceptable and consistent outcomes with stakeholders. As Interior continues with the implementation of security measures, a clearly defined set of guiding principles for balancing security with its core cultural mission could also be beneficial due to the complex and often contentious environment in which Interior operates. Such principles could be used in conjunction with the broader guiding principles the administration set forth in the national strategy for critical infrastructure and efforts by the department to define its guiding principles in other areas that are already in place. For example, the Park Service’s strategic plan for fiscal years 2001 to 2005 identifies a set of guiding principles for achieving its mission that include excellent service, productive partnerships, and citizen involvement. Guiding principles have been used by other organizations to improve transparency and thus allow stakeholders to better understand the basis for decisions. For example, the administration has outlined guiding principles for postal reform given the U.S. Postal Service’s financial difficulties and a complex operating environment that involves multiple competing interests and stakeholders. These principles relate to best practices, transparency, flexibility, accountability, and financial self- sufficiency. In another example that relates directly to security, the government of Canada has identified guiding principles that are part of its long-term plan for the Parliament Precinct area in Ottawa. These principles address the issue of balancing openness, accessibility, and security; which, like in the United States, is a concern in Canada. The Threat Against Federal Office Buildings is Significant, and GSA Faces Various Challenges as the Owner and Landlord of These Assets Terrorism is a major threat to federally owned and leased buildings, the civil servants and military personnel who work in them, and the public who visits them. This threat was evidenced by the Oklahoma City bombing in 1995; the 1998 embassy bombings in Africa; the September 11, 2001, attacks on the World Trade Center and Pentagon; and the anthrax attacks in the fall of 2001. Since the attacks on the World Trade Center and the Pentagon, the focus on security in federal buildings has been heightened considerably. More recently, DHS raised the national threat level to Code Orange in some areas in August 2004 because of specific threat information for office buildings with critical missions. According to information from DHS, intelligence reports indicated that al Qaeda was targeting several specific buildings, including the International Monetary Fund and World Bank in the District of Columbia, Prudential Financial in northern New Jersey, and Citigroup buildings and the New York Stock Exchange in New York. GSA owns several federal office buildings on which an attack could seriously disrupt the business of government and harm federal employees and the public. Overall, GSA controls more than 8,000 buildings that it owns and leases nationwide, encompassing about 338 million square feet of space. These properties include office buildings, courthouses, border stations, and other types of facilities, representing about 6 percent of all federally owned space worldwide and 39 percent of all federally leased space worldwide. In addition to most of the major departmental headquarters in Washington, D.C., including the Departments of State, Justice, and Interior, GSA owns most of the key multiagency federal office buildings in major cities, including New York, and Chicago, as well as every federal courthouse in the country. Various potential threats—including large-scale attacks using truck bombs to other breaches and attempts to bring weapons, explosives, or chemical/biological agents into the buildings—pose several challenges for GSA as the owner and landlord of these buildings. These include maintaining a proper level of security without limiting the public’s access to federal offices for services that the government provides and for other business; working with stakeholders and other jurisdictions that have an interest in the type of security that is employed; securing access to privately owned buildings and space where GSA leases space for federal agencies, but where GSA and FPS do not have control over security for the building; and the challenge GSA faces as a result of the transfer of FPS, which has responsibility for providing law enforcement and security related functions, to DHS. Balancing Security with Public Access at Federal Facilities Is a Major Challenge A major challenge in protecting federal buildings is balancing increased security with the public’s access to government offices for services and to transact other business. According to GSA, its intent is to create an environment that reflects an open, welcome atmosphere, but one that challenges those with intent to do harm. In addition, GSA also considers federal workers’ convenience and privacy an important part of these considerations. Nonetheless, striking a balance among these competing factors is an ongoing challenge. It is particularly challenging for federal agencies in GSA-owned buildings that require regular public access such as courthouses, and federal office buildings that have agencies that interact often with the public, such as the Social Security Administration. A GSA- owned and managed federal courthouse in Nevada demonstrates the challenge of balancing public access with security needs and how GSA has fostered this balance. This large courthouse houses multiple tenants requiring heightened security, including the federal courts, the U.S. Attorney’s Office, and the U.S. Marshals Service (USMS). According to GSA officials, the courthouse is unique because it hosts cultural events such as concerts and contains many displays of sculpture, painting, and photographic art that are open to the public. Located in what GSA officials said is a neglected downtown area, the courthouse is also a key part of a business and community revitalization effort that offers free public events and encourages public participation. Balancing the need for securing the facility and public accessibility is especially important given the dual roles of the courthouse. The courthouse has many security features incorporated into its design. It is the first courthouse to be designed with federal architectural blast- resistance guidelines adopted after the Oklahoma City bombing. According to GSA officials, the design of the courthouse incorporated many of the lessons learned from Oklahoma City. Some of these many security features incorporated into the building design include the following: setback from the streets; window glazing and hardened exterior building; bollards around building perimeter; controlled parking for building staff; security barriers entrance to mitigate the danger of high-speed vehicle attempting to enter the parking garage; separate sally port for prisoner transfer and elevators for transfers of unique, unobtrusive design for magnetometer checkpoints at main access card operated doors and nonpublic elevators; and surveillance cameras both within and outside the structure. USMS and FPS provide law enforcement and security functions for federal buildings that house court functions. Given the events of September 11, FPS and USMS made a number of enhancements to their operations and physical security features at the courthouse. For example, FPS and USMS officials told us that they now hold weekly meetings with the buildings’ principal stakeholders to review security issues. In addition, USMS officials told us that they have instituted new gun and hazardous materials training for their officers and have stepped up evacuation drills and training for building employees. FPS and USMS officials said that since September 11 there has been a great deal of cooperation amongst local law enforcement agencies. For example, one local law enforcement agency allowed FPS to link to its radio systems to enhance communication between the entities. The local law enforcement agency also involved USMS in their regionwide security efforts on New Year’s eve 2003, when the national threat alert level was raised to orange. Finally, USMS and FPS have made physical security enhancements, including, among other things, hardening the exterior wall of the courthouse that did not have a setback with a reinforced retaining wall and a rock garden with large boulders, replacing the gates to the vehicle sally port—which is a secure entryway for the loading and unloading of prisoners and protected witnesses—with stronger iron gates, adding surveillance cameras, adding alarms, and constructing a secure gun locker for use by armed officers. The fact that office buildings traditionally have been constructed with an emphasis on ease of access makes security measures difficult to implement. However, as mentioned above, the design of the courthouse incorporated many of the lessons learned from the Oklahoma City bombing with respect to building security and safety, as well as a design that emphasizes openness and accessibility. Nonetheless, according to GSA officials, balancing security design and enhancement with access is an ongoing challenge. Addressing Jurisdictional Issues and Competing Stakeholder Interests Is Another Challenge for GSA In addition to the challenges related to balancing security with public accessibility at GSA buildings, addressing the competing needs of federal agencies, local governments, and private sector entities in securing its buildings is a challenge. For example, local governments get involved when GSA requests permits to implement additional security enhancements that require such actions as closing streets, removing public parking spaces, and installing bollards around the perimeter of the facility. One location that typifies the jurisdictional and stakeholder issues GSA faces is a federal building in New York City. It is a GSA-owned and managed building that houses multiple federal agencies and is visited by thousands of individuals each year conducting business with the government. GSA was focused on security at the federal building before the September 11 terrorist attacks. In coordination with the FBI and the city, GSA had developed a preliminary security upgrade plan, which included improvements such as maintaining street control around the building, increasing the use of building access controls, and hardening the building to protect it from blasts. After September 11, GSA and FPS implemented several additional security enhancements, including further strengthening perimeter security, access control, surveillance, and blast resistance. GSA and FPS took steps to improve the perimeter security of the federal building by accelerating plans to install bollards and barriers around the perimeter and working with city and fire department officials to close some nearby streets to vehicular traffic. In addition, GSA instituted a new building access system employing smart card technology. Smart cards contain the name, title, and picture of the employee; electronic data that can prove the authenticity of the card; and biometric data about the employee. Figure 11 shows the bollards that were installed in front of the federal building. GSA officials said that to implement these and other security enhancements, their greatest challenge has been dealing with competing stakeholder interests and jurisdictional issues. GSA officials indicated that the decision-making process involves multiple stakeholders, steps, and requirements, most of which involve the city of New York. GSA officials noted that in addition to new steps and requirements that arose during the permit process, some requirements changed after permit issuance. In these cases, city officials have retracted some permits for security enhancements, and GSA has had to restart the permitting process. Specifically, GSA officials noted that they encountered delays when trying to install bollards along the building perimeter. Initially, the city Department of Transportation was supportive of the idea; but as the process continued, GSA officials said that issues related to historic preservation arose that needed to be addressed. Moreover, GSA officials also noted that the city has prevented GSA from making some security enhancements that they believed were needed. GSA has also experienced opposition from various groups in trying to close a nearby street due to security concerns. According to GSA officials, the city has asked GSA to prepare an environmental impact statement (EIS), hold public hearings, and consider traffic and economic impacts on the street closure. In contrast with the challenges they have encountered with the city, GSA officials said that the New York Police Department (NYPD) has been supportive of their security efforts. At a recent demonstration near the federal building, GSA officials said that NYPD provided police officers to assist with crowd control. Although GSA has been faced with various jurisdictional issues and the process has been challenging, the city ultimately has also allowed GSA to close streets and make several of the previously mentioned security upgrades. Nonetheless, GSA’s experience at the federal building demonstrates the complexities it faces when attempting to implement security enhancements for large, multitenant buildings in urban settings. The Challenge of Security for Leased Space Securing access to privately owned buildings and space that houses federal tenants is a unique challenge that may put the government at odds with private lessors and other nonfederal building occupants. GSA has reported that its goal and biggest challenge in this area is to provide the same level of security for occupants of leased facilities as it provides for those that GSA owns. However, this is often difficult because GSA has to work with lessors to implement changes and in some instances coordinate with other nonfederal tenants. As a result, GSA may have difficulty getting the lessor to allow security countermeasures in buildings that are not fully occupied by federal employees. This challenge arises because many private owners resisted heightened levels of security because of the adverse impact or inconvenience potentially caused to private tenants. GSA officials also identified negotiating the need and costs of increased security standards in leased properties as a significant challenge in the post-September 11 environment. GSA officials said that negotiating with private owners presents a challenge of determining how to effectively secure mixed-tenant buildings without security being overly burdensome. A GSA official, knowledgeable of leasing issues told us, however, that September 11 changed the perspective of private owners as they realized vulnerabilities and recognized that federal tenants would begin requiring increased levels of security in order to continue to lease space. The D.C. metro area, managed by GSA’s National Capital Region, has a high concentration of federal leases. One such leased building is a 10-story, privately owned facility located in Washington, D.C. The property is a mixed-tenant space with both private sector and federal tenants. The building posts guards and operates screening checkpoints at each entrance and restricts access to elevator banks and stairwells to only those authorized or with escort. In addition, a GSA official said that at the request of the building’s largest federal tenant, every individual entering the building must be screened. Additionally, the building also operates a mail facility to screen all mail, packages, and deliveries. Due to security concerns following the September 11 attacks, FPS, along with GSA and the building’s largest federal tenant, assessed the building’s risk and began to develop and implement a comprehensive security program. FPS conducted a threat assessment of the building and determined the building to be classified as a Level IV property. Once the building had been assessed and classified, agency officials from the building’s largest federal tenant, GSA, and FPS began developing a plan for security program development and implementation. The program plan included armed contract guards manning magnetometers and X-ray machines, random spot checks of vehicles entering the parking garage, and close monitoring of visitor badges. Additionally, a GSA official said that technology advancement has changed since September 11. The leased building’s security program incorporates its newest technology, the E-Pop system. The E-Pop system can be controlled by security officials; in the event of an emergency, it is able to connect to computers in the building and deliver emergency messages communicating evacuation instructions. Furthermore, E-Pop allows tenants to be immediately informed of an incident, thereby increasing their chances of exiting the building safely. The leased building is also considering implementing smart card technology, a building access system that uses plastic identification cards containing an individual’s personal and biometric data. This is the same system used at the federal building in New York City. A GSA leasing official stated that ISC’s development of leased space security standards, which will be discussed later, has been useful in effectively communicating increased physical security needs to private owners and involving them directly in the process of security program development for their buildings. This official said that the standards have established the credibility and validity of increased security measures, where no or few guidelines existed before. A GSA official said that even though the commercial real estate community in the capital area has become attuned to the needs of the federal government in the post- September 11 security environment, challenges still exist. According to GSA and security officials, one challenge in leasing space in property mixed with federal agency and private sector tenants is incorporating increased security standards while balancing occupants’ varying interests and needs. Some private owners and their private sector tenants may not want random car checks conducted or magnetometers placed at the entrances to their buildings because this may, in some way, adversely affect their business. GSA officials also noted that negotiating the need and costs of increased security standards in leased properties is still a significant challenge, as security demands for privately owned buildings are still relatively new. FPS Transfer to DHS Poses a Challenge for GSA The Homeland Security Act transferred FPS to DHS, effective March 1, 2003. FPS’s transfer to DHS was intended to improve law enforcement and related security functions by centralizing building security activities with other homeland security functions. Under the act, DHS became responsible for protecting buildings, grounds, and property owned, occupied, or secured by the federal government that are under GSA’s jurisdiction, as well as other DHS facilities. A March 2003 operational memorandum of agreement between GSA and DHS made FPS responsible for the same types of security services that FPS provided for GSA properties prior to the transfer to DHS. These include, among other things, performing risk assessments, managing the installation of some security equipment, conducting criminal investigations, and managing the contract guard program. Although law enforcement and security related functions were transferred to DHS from GSA, GSA officials said that it still assists FPS and tenant agencies in implementing various security measures that FPS recommends, and incorporating enhanced security measures into new space it constructs or leases. In October 2003, GSA and DHS agreed on a number of interim support services GSA would provide to FPS during the transition in a separate memorandum of agreement. In July 2004, we reported on the challenges FPS was facing related to the transfer, including its expanding homeland security mission and related increase in responsibility; unresolved issues related to how it would be funded, because its funds at that time were tied to the rent GSA charges tenant agencies; and, difficulties with transferring mission-support functions for FPS from GSA to DHS. DHS concurred with our findings and related recommendations and agreed to take action. In addition to the challenges facing FPS, our work for this review showed that GSA is facing its own management challenges because it no longer has control over the law enforcement and related security functions of its properties. GSA officials expressed concern about their ability to track security expenditures and stay informed about FPS protection activities in GSA buildings. These officials also expressed concern about not having a formal mechanism for communicating with FPS and for ensuring that FPS is meeting its responsibilities with regard to security enhancements and services. The Deputy Commissioner of GSA’s Public Buildings Service said that since the departure of FPS, GSA has had difficulty adjusting to not having responsibility for protecting its own buildings and is still trying to define its overall role in security. This official said that GSA’s new role should be that of a coordinator between FPS and the tenant agencies and that GSA was examining the MOU between GSA and DHS to determine if GSA’s role and visibility in facility protection could be enhanced. Concerns about the departure of FPS were identified by GSA’s Office of the Inspector General (IG) in its August 2004 updated assessment of GSA’s major management challenges. The GSA IG identified protection of federal facilities and personnel as one of seven major management challenges facing the agency. The GSA IG said that although FPS was transferred to DHS, GSA will have a continual need to closely interact with security personnel due to GSA’s mission of housing federal agencies. The GSA IG concluded that ensuring federal employees have a secure working environment and that building assets are adequately safeguarded must remain a primary concern of GSA. “Traditionally, what has previously been lacking is a single position at the senior governance level having the responsibility for crafting, influencing, and directing an organization-wide protection strategy. In many organizations, accountability is dispersed, possibly among several managers in different departments; with potentially conflicting objectives….the diversity of today’s risks comes in a complex matrix of interrelated threats, vulnerabilities, and impacts, the safeguards for which must, therefore, be interdependent. The ability to influence business strategy and address matters of internal risk exposure requires a chief security officer at the appropriate level in the organization.” Protecting Government Facilities Is Part of the National Homeland Security Strategy The National Strategy for the Physical Protection of Critical Infrastructures and Key Assets mentioned earlier has clear implications for GSA and its role as the owner and landlord of federal facilities. The strategy identifies a number of actions intended to improve federal facility protection. These included developing a process to screen nonfederal tenants and visitors entering private sector facilities that house federal organizations, determining the criticality and vulnerability of government facilities, developing long-term construction standards for facilities requiring specialized security measures, and implementing new security technology at federally occupied facilities. GSA Actions in Response to the National Homeland Security Strategy and Other Related Initiatives GSA has taken a number of positive actions, as follows: A senior GSA official chaired ISC’s working group on security in leasing; after receiving input from ISC member agencies, ISC issued its policy on security standards for leased space in July 2003. GSA is working with DHS to utilize a risk management process called Federal Security Risk Management (FSRM) for assessing federally owned and leased facilities. GSA worked with ISC to develop security design criteria and is involved with ISC’s ongoing efforts to update the criteria annually. GSA is working with ISC on several technology-related initiatives, including smart card and biometrics access control technology, nonjersey barrier perimeter protection, and indoor air monitoring systems to prevent uncontrolled movement of toxic air substances. In the area of risk assessment, FPS uses a computer-based methodology that allows FPS to evaluate risk and identify countermeasures on an ongoing basis. FPS is able to use a series of input screens and queries to maintain pertinent data that can be adjusted as threats and vulnerabilities change. The tool allows the user to enter information on each asset, identify existing countermeasures, assign an impact of loss and a vulnerability rating to each threat, and input countermeasure upgrade alternatives and their associated costs. As mentioned earlier, HSPD-7 requires, on an annual basis, that sector- specific agencies report on their efforts to identify, prioritize, and coordinate the protection initiatives in various critical infrastructure sectors. Although GSA was not given responsibility for any of the sectors identified in the directive, all federal departments and agencies are required, under the directive, to develop physical and cyber security plans for the assets they own or operate. However, in a July 2004 letter to the Director of OMB, GSA stated that “no GSA owned or leased space meets the definitions for critical infrastructure and/or key resources.” The letter went on to say that “GSA owns and leases many buildings where important activities take place, but GSA is unable to make a determination as to whether these tenant activities are critical infrastructure.” GSA officials said that OMB has not commented on GSA’s response to HSPD-7 regarding a physical security plan. The Executive Director of ISC— which has responsibility for reviewing agencies’ HSPD-7 plans for the administration—said that ISC has not completed its review of agencies’ plans, including GSA’s response to HSPD-7. We are deferring to ISC on whether GSA’s decision not to prepare a physical security plan is reasonable. In the future, a chief security officer position or formal point of contact could aid in determining GSA’s involvement in governmentwide critical infrastructure efforts such as HSPD-7. Conclusions There is a heightened concern that terrorists may again try to exploit the nation’s vulnerabilities. In this environment, Interior has a critical role in protecting our national icons and monuments and ensuring the safety of the millions of people who visit them. National icons such as the Statue of Liberty and Mt. Rushmore could be attacked for symbolic reasons. Since September 11, Interior has made significant progress in improving security by doing vulnerability assessments of high-profile sites that are likely targets and implementing various security measures. For example, at the individual icons and monuments we visited, steps clearly had been taken to improve security since September 11, such as the Washington Monument perimeter landscaping project, the Lincoln and Jefferson Memorial security projects, the visitor screening system at the Statue of Liberty, increased staffing at Mt. Rushmore, and the rerouting of Interstate 93 at Hoover Dam. In addition, Interior has made management changes, including creating a central security office, intended to enhance its homeland security initiatives, and has recently developed a uniform risk management methodology for national icons and monuments. These actions should help Interior address the major challenges it faces—which include balancing security and Interior’s mission related to access and education; addressing jurisdictional and competing stakeholder issues; securing icons and monuments in rugged, remote areas; and leveraging limited staff and funding resources. As Interior moves forward, it could link the results of its risk assessments and related risk rankings to its security funding priorities. This could allow for well-informed decisions by stakeholders—such as Interior, OMB, and Congress—about where to direct resources so that they have an optimal return on investment in terms of better protection. Also, a set of guiding principles for balancing security with its core cultural and educational mission—which Interior lacks but other organizations with complex environments have developed—could help in addressing the challenges. A set of guiding principles could provide decision makers and Interior’s other stakeholders with greater transparency regarding the rationale for security decisions. An approach with these components should yield results that would allow decision makers both within and external to the department to better gauge and consider competing priorities. Since September 11, security at office buildings has remained a concern, as evidenced by threats revealed by DHS in August 2004 that al Qaeda was targeting several office buildings in New York, northern New Jersey, and Washington, D.C. GSA has taken action to address the challenges it faces as the owner and landlord of federal office buildings. These challenges include balancing security and public access, addressing jurisdictional and competing stakeholder issues, securing federally leased space, and adjusting to the transfer of FPS to DHS. These actions have included working with ISC to develop security standards, continuing with upgrades that GSA began implementing after the Oklahoma City bombing, and establishing a memorandum of agreement with DHS related to FPS. Despite these actions, GSA lacks a mechanism such as a chief security officer position or formal point of contact to coordinate security efforts for its federal office building portfolio. As a result, GSA is less equipped to effectively share information with FPS and tenant agencies, ensure that FPS is fulfilling its responsibilities, track security expenditures, and define its overall role in security—capabilities that GSA officials were concerned the agency was lacking. Recommendations for Executive Action We are making two recommendations to the Secretary of the Interior and one recommendation to the Administrator of GSA. First, to ensure that useful information is available for decisions on resources for the protection of national icons and monuments, we recommend that the Secretary of the Interior link the results of the agency’s risk assessments and related risk rankings to its funding priorities. Second, given the complex nature of the challenges Interior faces in protecting national icons and monuments, the Secretary should also develop guiding principles for balancing security initiatives with Interior’s core mission so that decision makers and stakeholders will have a clearer, more transparent understanding of Interior’s rationale for security enhancements at individual assets. Regarding GSA, we recommend that the Administrator establish a mechanism—such as a chief security officer position or formal point of contact—that could serve in a liaison role with FPS and tenant agencies, work to address the challenges GSA faces related to security in buildings it owns and leases, and enable GSA to define its overall role in security given the transfer of FPS to DHS. Agency Comments and Our Evaluation We provided a draft of this report to Interior, GSA, and DHS for their review and comment. Interior did not comment on our conclusions and recommendations. However, Interior provided technical comments, which we incorporated, where appropriate. GSA concurred with the report’s overall findings and stated that it concurs with the recommendation and will address it. GSA comments are contained in appendix II. DHS provided technical comments, which we incorporated where appropriate. We are sending copies of this report to the Secretaries of the Interior, Homeland Security, and the Administrator of GSA. Additional copies will be sent to other interested Congressional Committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me 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. GAO staff who made major contributions to this report are listed in appendix III. Objectives, Scope, and Methodology Our objectives were to (1) identify any challenges that the Department of the Interior (Interior) faces in protecting national icons and monuments from terrorism, as well as related actions intended to address these challenges, and similarly, (2) determine any challenges the General Services Administration (GSA) faces related to the protection of federal office buildings it owns or leases and the actions that have been taken. To determine what challenges Interior and GSA have faced in their efforts, we interviewed Interior and GSA officials to identify the major challenges, and reviewed available reports and other documents. In addition, in consultation with these officials, we identified sites that are illustrative of these challenges. From the sites identified, we selected five Interior sites and three GSA buildings for further analysis of the challenges. These eight sites were geographically dispersed and represented a range of asset types, including office buildings and national icons in both densely populated and remote areas. The sites included, the Statue of Liberty, New York, NY; Independence National Historical Park, Philadelphia, PA; Mt. Rushmore National Memorial, Keystone, SD; Hoover Dam, Boulder City, NV; the Washington Monument and Lincoln and Jefferson Memorials on the National Mall in Washington, D.C.; and three major facilities in the GSA inventory. Collectively, the sites we selected provided examples of the range of challenges Interior and GSA reported facing. We included the Hoover Dam because, in addition to being a source of hydropower, the dam has iconic status and attracts large numbers of tourists. At each site, we interviewed agency officials with primary responsibility for security implementation, operation, and management. We toured each site and observed the physical environment, the facilities, and the principal security elements to gain firsthand insights on the challenges. Furthermore, we interviewed stakeholders with significant interest in the security program, including the National Parks Conservation Association, the Commission on Fine Arts, the National Capital Planning Commission, Independence Mall Business and Residents Coalition, the National Coalition to Save our Mall, the U.S. Marshals Service, a charitable organization, and local government and law enforcement officials. We collected documents, when available, that contained site-specific information on security plans, policies, procedures, budgets and staffing. Finally, we considered prior GAO work on challenges in facility protection and security. To determine what actions have been taken by Interior and GSA to address its challenges, we collected and analyzed documents from, and conducted interviews with Interior and GSA officials. The documents collected provided information on these agencies’ past and present security plans, policies and procedures, organizational structures, funding and staffing. The interviews included officials from GSA’s Public Building Services and Interior’s Office of Law Enforcement and Security, National Park Service, and Bureau of Reclamation. We also interviewed officials from the Federal Protective Service, which is part of DHS and protects leased and owned GSA facilities. We reviewed relevant laws and guidance including the Homeland Security Act of 2002, the Federal Property and Administrative Services Act of 1949, and the Interagency Security Committee Security Standards for Leased Space. Additionally, we reviewed other pertinent reports, including the National Strategy for Homeland Security and the National Strategy for the Physical Protection of Critical Infrastructures and Key Assets. We also considered past GAO work related to facility protection and security issues at Interior and GSA, as well as broader GAO work on homeland security issues. Agency officials and the representatives of stakeholder organizations provided much of the data and other information used in this report. In cases where officials provided their views and opinions within the context that they were speaking for their organization, we corroborated the information with other officials. We requested official comments on this report from Interior, GSA, and DHS. Comments from the General Services Administration GAO Contact and Acknowledgments GAO Contact Staff Acknowledgments In addition to those individuals named above, David Sausville, Casey Brown, Matt Cail, Erika Carter, Roshni Davé, Daniel Hoy, Anne Izod, Donna Leiss, and Susan Michal-Smith were key contributors to this report.

The threat of terrorism has made physical security for federal real property assets a major concern. Protecting these assets can be particularly complex and contentious for agencies whose missions include ensuring public access such as the Department of the Interior (Interior) and the General Services Administration (GSA). GAO's objectives were to (1) identify any challenges that Interior faces in protecting national icons and monuments from terrorism, as well as related actions intended to address these challenges; and similarly, (2) determine any challenges GSA faces related to the protection of federal office buildings it owns or leases and actions that have been taken. Interior faces a range of major challenges in protecting national icons and monuments from terrorism--these include balancing security and public access; addressing jurisdictional and competing stakeholder issues; and securing assets in rugged, remote areas. In addition, there was concern among Interior officials about the department's ability to leverage limited resources for security. Since September 11, 2001, Interior has improved security at high-profile sites, created a central security office to oversee its security efforts, developed physical security plans required by Homeland Security Presidential Directive 7, and developed a uniform risk management and ranking methodology. As Interior moves forward, linking the results of its risk rankings to security funding priorities at national icons and monuments is an important next step. Also, given Interior's complex and often contentious environment, setting forth the guiding principles by which the department balances its core mission with security could have benefits. Other organizations have used guiding principles to foster greater transparency in complex environments. GSA also faces a range of major challenges, some similar to Interior's, that include balancing security and public access, addressing jurisdictional and competing stakeholder issues, securing federally leased space, and adjusting to the transfer of the Federal Protective Service (FPS) from GSA to the Department of Homeland Security (DHS). Actions GSA has taken to address the challenges include working to develop security standards for securing leased space and establishing a memorandum of agreement with DHS on security at GSA's facilities. However, despite these actions, GSA lacks a mechanism--such as a chief security officer position or formal point of contact--that could serve in a liaison role with FPS and tenant agencies, work to address the challenges GSA faces related to security at its buildings, and enable GSA to better define its overall role in security given the transfer of FPS to DHS.

Background Between November 1990 and March 1991, 1,200 members of the ARCOM were sent to the Persian Gulf; most returned between March and August 1991. The ARCOM’s mission was combat service support, and members were not involved in frontline combat. In January 1992, officials of the ARCOM first became aware of members’ medical complaints and symptoms. In February 1992, one ARCOM member, concerned about these health complaints, distributed an unofficial questionnaire asking members if they had health concerns. In March 1992, the ARCOM surgeon examined some of the members who were complaining of health problems. By early spring 1992, the ARCOM was aware of 125 members who had health concerns. Those concerns included fatigue, joint pain, skin rashes, and loss of memory. In response to the Surgeon General’s directive, the Walter Reed team visited the ARCOM headquarters on April 11 and 12, 1992, to examine the soldiers. The ARCOM attempted to schedule appointments for all 125 soldiers; 79 reported for the examination. According to ARCOM officials, the remaining 46 were not examined for a variety of reasons, including scheduling conflicts—the appointments were made on fairly short notice. Military Status Sixty-one of the 89 respondents to our survey reported that they were still in the military on active duty or in a Selected Reserve or National Guard unit; 47 were still in the ARCOM. Of the 28 who indicated that they were no longer on active duty or in units, 20 reported that they had Persian Gulf-related health problems at the time they left their units. Of those, 12 said that these health problems contributed to some extent to their separation from the military; 1 of these reported being denied reenlistment because of weight, and 1 reported being discharged before being eligible for reenlistment. Although the military can discharge a reservist for medical reasons, an ARCOM official said he was unaware of any members discharged involuntarily because of health problems that may have been caused by service in the Persian Gulf. Additionally, in June 1994, the Under Secretary of Defense for Personnel and Readiness asked the Secretaries of the Army, Navy, and Air Force to direct that no service member with symptoms “associated with Persian Gulf illness” be discharged unless he or she requests it in writing or he or she can be medically retired or separated. In October 1994, the National Defense Authorization Act for 1995 (P.L. 103-337, Oct. 5, 1994) provided a presumption that a Persian Gulf veteran who is ill became ill as a result of service in the Persian Gulf, unless medical evidence establishes another cause, and specifies that such a presumption can be used in disability determinations. DOD officials explained that passage of this act allowed service members with illnesses that could not be diagnosed to be medically retired or separated, with appropriate benefits, because of those illnesses; without the new presumption, such members could only receive benefits if a specific diagnosis could be made. Current Health Status Most respondents continued to have health problems and reported having those problems within the 6 months prior to completing our survey. The problems indicated by most respondents are similar to the symptoms reported to the Walter Reed research team. At least two-thirds of the respondents reported chronic fatigue, achy joints, short-term memory loss, headaches, difficulty concentrating, nervousness or irritability, inability to sleep through the night, and depression. Most respondents reported that these health problems limited their activities to some extent. They most frequently cited limitations in vigorous activities; climbing several flights of stairs; or in bending, kneeling, or stooping. They least often cited limitations in less vigorous types of activities, like walking a block or bathing and dressing. Nineteen reported that they were limited to a great extent in performing one or more types of activity. However, most reported that they had worked within the 6 months prior to completing the survey. Fifty-three reported that during that time period they missed no days of work for health reasons, but 9 said they were unable to work at all during that period. Most, but not all, respondents attributed their health problems to Persian Gulf service. Eighty-one reported that they were currently experiencing health problems associated with that service; 76 reported that, overall, their health was worse than shortly before they went to the Persian Gulf.Sixty-nine respondents said that health problems, which they believed were caused to some extent by their Persian Gulf service, limited their physical (56) or social activities (57). Most of those 69 reported that they had worked within the 6 months prior to completing the survey. Thirty-four reported that during that time period they had missed no days of work for health reasons, but four said they were unable to work at all. Additionally, 23 respondents reported that family members or individuals they lived with were experiencing health problems the veteran believed were related to the veteran’s Persian Gulf service. The veterans reported that these individuals had a wide range of problems including fatigue, achy joints, irritability, and depression. One respondent indicated that he believed his child had developed cancer as a result of the respondent’s service in the Persian Gulf. Medical Care Provided to Persian Gulf War Veterans We obtained information about several kinds of medical care that was available to these Persian Gulf War veterans: stress management training recommended by the Walter Reed team for special examinations offered by VA and DOD for Persian Gulf veterans to help identify their concerns and ensure appropriate treatment, and other medical care they may have received in VA and DOD facilities as well as care outside these two medical systems. Because some veterans told us they were unaware of one or more of these services, we also discussed with VA and DOD officials efforts to inform Persian Gulf veterans of the services available to them. Follow-Up to Walter Reed Study The Walter Reed study team recommended that the ARCOM continue to provide stress management evaluation and intervention, which the ARCOM had initiated earlier, to members who had been deployed. In response to our survey, 33 reported receiving stress management counseling from the ARCOM. In total, 45 respondents said that they had received stress management counseling from DOD, VA, or other sources. ARCOM records indicated that medical personnel from the ARCOM’s 55th Medical (Psychiatric) Detachment, assisted by psychiatrists, offered stress management training to three ARCOM units in Lafayette and Scottsburg, Indiana. These units included approximately 360 of the 1,200 who deployed. An ARCOM official told us that the ARCOM had limited resources and offered stress management to these units because they were the first in which concerns were raised. ARCOM records indicated that on May 16, 1992, personnel from the medical detachment met with the 417th Quartermaster Company in Scottsburg, Indiana. Seventy-five members of the company, which deployed 126 reservists, and 8 family members participated in the session. Also, on June 13 and 14, 1992, medical detachment personnel met with the 209th Service and Support Company in Lafayette, Indiana. About 110 members of that unit, which deployed 171 reservists, and 7 family members attended this session. In both cases the format of the meetings included (1) large group discussions with both unit and family members, (2) small group discussions, and (3) individual counseling upon request. Officials also sought help from other sources outside the ARCOM, such as chaplains. Officials could not provide information on participation at a third session they said was held with the 300th Supply and Support Battalion. Special Examinations for Persian Gulf Veterans Many of the veterans who responded to our survey received the special examinations offered by VA and DOD for Persian Gulf veterans. However, some were not aware of these services. The Persian Gulf War Veterans’ Health Status Act (P.L. 102-585, Nov. 4, 1992) directed VA to establish a Persian Gulf War Veterans’ Health Registry, and authorized special health examinations for veterans of the Persian Gulf War. Any veteran who served during the Persian Gulf War is eligible for this examination. VA had begun providing examinations in September 1992, before enactment of the legislation, and by January 1995, about 40,000 had been given. Initial examinations are given at VA medical centers or clinics by physicians specifically charged with conducting these examinations. If after the initial examination the veteran still has an unexplained illness, the veteran may be referred to specialists for additional examinations and, ultimately, to one of three VA Persian Gulf referral centers. Forty-six respondents reported receiving the VA examination; two more had appointments to receive it. DOD began giving examinations, called Comprehensive Clinical Evaluation Program (CCEP) examinations, to Persian Gulf veterans in June 1994. The examination protocol has three phases; the second and third phases are given if additional care or diagnostics are needed. By the end of 1994 DOD reported that 1,000 examinations had been completed and another 8,000 were at various stages. DOD instructions issued in June 1994 indicated that active duty members, certain retirees, and reservists who are on active duty seeking an examination should go to a military medical facility. Other reserve members and retirees have the option of seeking an examination at military facilities or VA medical centers. All other Persian Gulf veterans are to seek an examination at VA medical centers. Fourteen respondents reported receiving the CCEP examination; 1 had an appointment to receive it. Overall, more than half of the respondents (49) had received the VA or DOD examination; 11 reported receiving both. Of the 47 respondents still in the ARCOM, 38 had received the VA or the DOD examination. Respondents gave a variety of reasons for not receiving the examinations. Relatively few (6 for VA and 4 for DOD) said that they could not get an appointment at a convenient time or that the facility was too far away. Most frequently respondents said that they were unaware of the examinations. Of all respondents, 20 were unaware of the VA examination; most (67) were unaware of the DOD examination. Other Care Received From VA, DOD, and Other Sources Sixty-two respondents reported that they had received medical care—other than the VA or DOD special examinations—for health problems they believe were caused by their Persian Gulf service. Some received care from more than one source, but more veterans received care from outside VA and DOD than from VA or DOD facilities. Public Law 103-210 (Dec. 20, 1993) authorized VA to provide health care services on a priority basis to Persian Gulf veterans if VA (1) determines that they may have been exposed to toxins or environmental hazards while serving in the Persian Gulf and (2) does not determine that the veterans’ health problems were caused by factors other than that possible exposure. Before this legislation, these veterans were not eligible for care in VA hospitals without reimbursement unless VA had determined that their health problems were service connected or they met other eligibility requirements such as income criteria. Those on active duty are eligible for care for all health problems in DOD facilities; and those still in the reserves are eligible for health care at DOD facilities only for health-related problems that occurred, or were aggravated, while on active duty. Those no longer in the military are eligible for care from VA but not from DOD. Of the 62 who reported receiving care for health problems they believed to be related to Persian Gulf service, 47 got care in the civilian sector (20 got care only from the civilian sector), and 42 got care from VA (33) or DOD (24). Whatever the source, most veterans received care as an outpatient. Most reported getting less than half of the care they believe they need for their Persian Gulf-related health problems. Sixty-three veterans reported that they need care for these health problems, but fewer than half of these (29) were under a physician’s care at the time of our survey. Thirty-six reported that they were not receiving care from VA but would like to; 44 reported that they were not receiving care from DOD but would like to. The reason most often cited for not receiving care was that they were not aware they were eligible for it—14 did not know they were eligible for VA care; 29 did not know they were eligible for DOD care.Relatively few (7 for VA and 6 for DOD) reported that they had not received care because the facilities were too far away or they could not get an appointment at a convenient time. VA and DOD Outreach Efforts Both VA and DOD have undertaken outreach efforts to publicize the examinations and other services available to Persian Gulf veterans. Some efforts began before our survey, and others are planned or began after our survey was conducted in response to recent legislation and concerns we raised during our study. VA Outreach VA headquarters outreach has been done primarily through veterans service organizations; a computer bulletin board; public service announcements; and published literature, chiefly the Persian Gulf Review. VA officials told us that this newsletter is sent to all veterans who have received the VA exam, to veterans service organizations, and to veterans who ask to be on the mailing list; it is also being placed in waiting rooms in VA medical centers. However, officials said that local efforts are more important in informing veterans of the examinations and care available. Officials at the Indianapolis VA medical center told us that the center’s Persian Gulf Coordinator had visited every National Guard and Reserve unit in Indiana to describe medical care available to Persian Gulf veterans and pass out literature. He also arranged for public service announcements, was interviewed on local radio and television, and conducted a variety of other local outreach activities. Also, in January 1993 the ARCOM Command Executive Officer sent a memorandum to ARCOM unit heads requiring them to notify unit members that the VA examination was available. The Veterans’ Benefits Improvements Act (P.L. 103-446, Nov. 2, 1994) requires that VA implement a program to inform veterans and their families of the medical care and other benefits that may be provided by VA and DOD arising from service in the Persian Gulf War, as well as the results of research related to Persian Gulf illnesses. This program is to communicate information through a toll-free telephone number and a semiannual newsletter to all those on the Persian Gulf War Health Registry. The registry was authorized in November 1992 by the Persian Gulf War Veterans Health Status Act, which specified five groups who were to be included: Persian Gulf veterans who (1) had requested the VA examination, (2) had applied for medical service in VA medical facilities, (3) had filed a claim for compensation for a disability that might be related to Persian Gulf service, (4) had died and are survived by a claimant for VA dependency and indemnity compensation, or (5) had received the DOD special examination and asked to be included in the VA registry. VA is continuing publication of the Persian Gulf Review. However, at the time of our study, VA did not have in one place a registry with the names of all the required veterans in the five groups—although officials indicated they had access to the names in all five groups. The newsletter was being sent to veterans who had received the VA special examination, but not to members of the other groups the law required to be included in the registry. After we discussed these issues with VA officials, they indicated that they were taking steps to consolidate the registry list and to mail the newsletter and other information to an expanded number of veterans. This could have substantial impact. For example, while only about 40,000 veterans had received the VA special examination, and therefore were receiving information from VA, VA indicated that another 110,000 Persian Gulf veterans had received inpatient or outpatient care from VA. VA officials told us that they expected to have a complete registry and to mail required information to all on the registry by the end of May 1995. VA also instituted the toll-free telephone information service, required by the Veterans’ Benefits Improvement Act, in February 1995. Officials reported that about 29,000 veterans had called the number in the first month of operation. They believed that this indicated the outreach mechanism was having a substantial impact. DOD Outreach DOD has also taken steps to publicize services available to Persian Gulf veterans. For example, in May 1994 DOD sent a memorandum to Persian Gulf veterans notifying them that they were eligible for an examination and how to arrange for one. DOD sent the memorandum by mail to retirees and those who had left the military. DOD officials stated that they went to considerable lengths to find up-to-date mailing addresses for these people, including purchasing addresses from a private credit reporting firm. DOD also sent the memorandum to the services for distribution through command channels to active duty and reserve members. However, during our review, DOD officials determined that the services had sent the memorandum to active duty units but not to reserve units, instead relying on public communication channels to inform reservists. Officials of the ARCOM told us that they had not received information about the CCEP from Reserve headquarters. DOD officials indicated that it is often difficult for them to reach members of reserve units because the units are so dispersed nationally. Additionally, in June 1994 DOD initiated a toll-free number for Persian Gulf veterans. Callers to this hotline receive information about the special examinations and other medical care available from VA and DOD and are referred to medical facilities to receive the VA or DOD examination, if they so desire. However, in April 1995 an ARCOM official told us he was unaware of either the DOD or VA hot line. In October 1994 the National Defense Authorization Act for 1995 required that DOD establish an outreach program for those in the military who served in the Persian Gulf. Among other things, DOD is to inform them of (1) illnesses that might be associated with Persian Gulf service, (2) counseling and medical care available to them from DOD and VA, and (3) procedures for being put on the VA registry or another registry, the Persian Gulf War Health Surveillance System, managed by DOD. DOD officials emphasized that, in addition to the memorandums and the telephone hot line discussed, they are continuing extensive contacts with media and with veteran and military organizations. They noted that the toll-free number was receiving about 400 calls per week, indicating, they believed, that outreach efforts are effective. In commenting on a draft of this report, DOD officials outlined other outreach activities they are planning. These include the following: DOD plans to publish research findings in both scientific and medical journals and general media. Specific publication methods have not yet been decided. Agency officials do not expect research findings to be available until early 1996. Another toll-free telephone number will be established to answer questions and provide information to veterans about their individual circumstances, such as unit locations and possible exposures. DOD plans to develop information to send directly to reserve units to inform reservists about available health services, such as the CCEP and hot line. Satisfaction With Care Received Of those who received care through VA and DOD, most were dissatisfied with it. Many of the veterans were dissatisfied with the special examinations they were given. Of the 46 who had received the VA examination, 28 were dissatisfied with it. Likewise, 7 of the 14 who had received the DOD examination were dissatisfied with it. Most respondents were also dissatisfied with the other care they received from VA and DOD medical facilities. Of the 33 who had received other care from VA, 22 were dissatisfied; 13 of 24 were dissatisfied with the other care from DOD. In contrast, more veterans were satisfied than dissatisfied with care received outside VA and DOD. Of the 47 who had received care outside DOD and VA, 7 reported being dissatisfied. The following table compares veterans’ satisfaction with selected aspects of care in VA and DOD, and outside VA and DOD. VA officials told us that dissatisfaction with care does not necessarily mean that the care was of poor quality. They noted, for example, that if these individuals believed they were sick and were not improved or cured, they might be dissatisfied, even if the medical provider had done all that was possible to diagnose and treat the problem. They also noted that satisfaction with physicians’ ability to diagnose problems should not be viewed as an indication of the accuracy of the diagnosis. These officials suggested that the initial assessment by the Walter Reed team—that many of the health problems were caused by stress—was not accepted by many of the veterans examined, and that this initial assessment may also have colored veterans’ overall satisfaction with both DOD and VA health care. Additionally, many of these veterans might have received care in 1992 or 1993, before DOD began the CCEP examination and before VA expanded the protocol for the examination provided at local medical facilities. Agency Comments In a letter dated April 17, 1995, commenting on a draft of this report, the Secretary of Veterans Affairs expressed concern that readers would misinterpret the report findings. (See app. III.) He was concerned that readers would generalize the findings about this small group of Persian Gulf veterans to all Persian Gulf veterans and that the readers would consider these veterans’ perceptions of care as conclusive evidence about care received. As stated in the report, we agree that the responses of the 89 veterans cannot be generalized to any larger population and that the information on health status and health care received was based on veterans’ memories and perceptions. DOD officials, including the Deputy Assistant Secretary of Defense for Clinical Services, provided comments on the draft in an April 18, 1995, meeting. The officials said that they generally concurred with the information in the report, but expressed concern similar to that expressed by the Secretary of Veterans Affairs about the possibility that readers would generalize our findings beyond the 89 respondents. The officials also outlined additional outreach efforts that were being planned; we incorporated that information into the report. We are sending copies of this report to interested congressional committees, the Secretaries of Defense and Veterans Affairs, and other interested parties. This work was done under the supervision of Ruth Ann Heck, Assistant Director. Other major contributors were William Stanco, Edward Murphy, and Clarita Mrena. Please call me on (202) 512-7101 or Ms. Heck on (202) 512-7007 if you have any questions. Survey Scope and Methodology Survey Population Much of the information contained in this report is based on a survey we conducted with 125 of the 1,200 reservists from the 123rd Army Reserve Command (ARCOM) who were deployed to the Persian Gulf during Operation Desert Storm. These 125 reservists were scheduled to be evaluated in 1992 by the Walter Reed Army Institute of Research in response to concerns about their health that they expressed just after returning from the Persian Gulf. Data Collection To collect the data, we designed a mail questionnaire that included questions regarding the reservists’ current military status; health status; participation in special VA and DOD examinations; other health care received from VA, DOD, and other providers; opinions about the quality of the care received; and satisfaction with that care. To determine reservists’ current health status, we included a list of possible health problems. This list was adapted from items on a medical questionnaire developed by the Epidemiology Consultant Service within the Walter Reed Army Institute of Research and administered to those reservists from the ARCOM who were evaluated by the Institute in April 1992. The contents of the questionnaire were discussed with VA and DOD officials. The questionnaire itself was pretested with several members of the ARCOM. On the basis of these discussions and the pretests, the questionnaire was revised accordingly. To develop the mailing list for the veterans in our survey, we used databases maintained by the ARCOM, DOD’s Office of Reserve Affairs, the VA medical center in Indianapolis, and VA’s central information system. The questionnaire was first mailed to the reservists on October 28, 1994. Those who did not respond to the initial mailing were sent a second questionnaire. Subsequent to mailing out the questionnaire, we learned that 2 of the 125 reservists had passed away—one prior to the start of our survey, the other shortly after our first mailing. Eighty-nine of the remaining 123 reservists (72 percent) completed and returned our questionnaire. The information obtained through this survey pertains to only these 89 respondents and cannot be generalized to any other population. Data from surveys such as ours rely on respondents’ memories. Because of the extensive resources that would be involved, we did not conduct examinations or review medical files to verify the health status these veterans reported. As a limited check on the accuracy of the responses provided, we compared information available in VA and DOD automated records to respondents’ answers about their current military status, whether they had received the special examinations offered by VA and DOD, whether they had received inpatient or outpatient care in VA facilities. It was not feasible to compare responses regarding care received from DOD health facilities to DOD data because DOD medical records for the reservists are not centrally located. Taking into account that VA and DOD records did not always cover the same time periods addressed in our questionnaire, those survey responses we could compare with existing data are generally consistent with VA and DOD records. Nonresponse Analysis We also used automated information from these VA and DOD records to compare those who responded to our survey with those who did not. Nonrespondents and respondents were similar in many ways. About the same proportion of each group were still in the military at the time of our survey, were examined by the Walter Reed Army Institute of Research team in had received outpatient care from VA since returning from the Persian Gulf. In other ways, however, respondents and nonrespondents were different. Over one-third of the respondents received VA’s special Persian Gulf examination, as opposed to about one-fifth of the nonrespondents. Also, a few of the respondents were admitted to a VA medical facility from fiscal years 1991 to 1993, but none of the nonrespondents was admitted during that time. Summary of Questionnaire Responses Comments From the Secretary of Veterans Affairs 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. Address Correction Requested

Pursuant to a congressional request, GAO provided information on certain Persian Gulf War veterans' chronic health problems, focusing on: (1) the veterans' current military and health status; (2) the health care services they received after the war; and (3) their opinions on post-war care. GAO found that: (1) the veterans surveyed were still concerned about their health and were dissatisfied with the Department of Veterans Affairs' (VA) and the Department of Defense's (DOD) services; (2) most of these veterans were still on active duty and believe their health problems are linked to their service in the Persian Gulf; (3) less than half of the separated veterans reported that health problems related to their Persian Gulf service contributed to their discharges; (4) most of the veterans reported that their health problems limited their physical and social activities; (5) almost one-third of the respondents reported that family members also experienced health problems that were related to their Gulf service; (6) although over half of these veterans had used VA or DOD health care services, many veterans received care from sources other than VA or DOD; and (7) VA and DOD have taken a variety of actions to address Persian Gulf veterans' concerns by expanding special health examinations and their outreach efforts.