Commercial Aviation: Information on Passenger Assaults against Airline Customer Service Agents at Airports

Recent media reports have detailed incidents at airports where passengers have acted disruptively or violently toward airline customer service agents, who assist passengers checking into their flights and boarding aircraft, among other things. While state and local laws generally prohibit these types of actions, some stakeholders have raised questions about these agents' safety.

The FAA Reauthorization Act of 2018 included a provision that GAO examine passenger violence against airline customer service agents at airports. This report examines (1) what is known about assaults by passengers against customer service agents and (2) stakeholders' perspectives on the sufficiency of state and local laws and resources to deter and address such incidents. GAO interviewed and reviewed available information from a non-generalizable sample of representatives from five large airports and six large airlines. GAO also interviewed six airport law enforcement agencies, and seven prosecutors' offices. Further, GAO reviewed documents and interviewed two unions representing customer service agents and five federal agencies with airport safety or security responsibilities. GAO developed and administered a brief, non-generalizable survey to 104 customer service agents working at four selected large airports that GAO visited in March and April 2019. Survey results on customer service agents' experiences with passengers cannot be used to make inferences about all customer service agents but nevertheless provide valuable insights.

No comprehensive data are available to determine the nature and frequency of passenger assaults—e.g., verbal threats, attempted physical acts, or actual physical acts—against airline customer service agents at airports. This lack of data is due, in part, to the limited federal role in addressing such assaults. GAO's survey of 104 airline customer service agents showed that over half (61) reported experiencing such action in the past year, while almost all reported experiencing verbal harassment. About 10 percent reported experiencing physical assaults. Stakeholders GAO interviewed said that while passengers are often verbally disruptive, physical assaults are less frequent. These stakeholders also said that alcohol consumption, frustration over airlines' business practices (e.g., fees for checked or carry-on baggage), and long lines can contribute to these incidents.

Of the stakeholders—i.e., airlines, airports, law enforcement, and prosecutors— GAO interviewed who provided perspectives and have responsibilities for passenger assaults, all 23 said state and local laws sufficiently deter and address such incidents, and 15 (of 20) said current resources are sufficient. One prosecutor told GAO the transitory nature of airports makes it difficult to get witnesses to testify at trial; when prosecuted, passengers generally face misdemeanor charges. While stakeholders GAO interviewed generally did not identify gaps in resources, some said incidents could be further mitigated if, for example, airports made law enforcement's presence more visible or airlines provided conflict de-escalation training to customer service agents. The FAA Reauthorization Act of 2018 required that airlines (1) provide such training to all employees, and (2) submit plans to the Federal Aviation Administration (FAA) by January 2019 detailing how airlines respond to passenger assaults. In July 2019, FAA issued a notification to airlines reminding them to submit their plans; officials said they will continue to follow up with airlines until they receive the plans.

Media outlets have recently reported instances where passengers have  acted violently, abusively, or disruptively towards airline customer service  agents at airports. For example, according to media reports, in 2017, a  “near riot” broke out at Fort Lauderdale-Hollywood International Airport  after one airline canceled multiple flights, inciting unrest among roughly  500 passengers. Airport law enforcement reportedly arrested and  charged three passengers with disorderly conduct after the passengers  physically assaulted a customer service agent, among others, during the  incident. Such incidents can threaten safety and security at airports.

A number of state and local laws generally prohibit certain intentional  verbal and physical acts of aggression, among other types of harmful  actions, against another individual. Even though these laws may not  necessarily be specific to prohibiting such actions against customer  service agents at airports, they can be used to charge and prosecute  passengers. Yet, in recent years, some aviation stakeholders have raised  questions about the safety of customer service agents. The FAA  Reauthorization Act of 2018 included a provision for GAO to examine  “crimes of violence” committed by passengers against airline customer  service agents while they perform their duties at airports. Due to data  availability issues, for the purposes of our report, we refer to certain types  of incidents—to include verbal threats, attempted physical acts, or actual  physical acts—as “passenger assaults.” The Act also included a provision  that GAO conduct a gap analysis of state and local laws and resources to  determine if they adequately deter and address such assaults. This report  examines (1) what is known about instances of assaults by passengers  against airline customer service agents at airports, and (2) stakeholders’  perspectives on the sufficiency of existing laws and resources to deter  and address such incidents.

For both objectives, we interviewed a non-generalizable sample of 24  stakeholder groups—including representatives from five large hub  airports, six airlines, six airport law enforcement agencies, and seven  prosecutors’ offices. We selected airports based on a number of factors.  First, we limited our selection to those that FAA designated as large hub  airports in 2017 to capture airports that had a large number of passenger  boardings. We then sought to include airports across a range of  geographic locations as well as a variety of airlines operating at each  selected airport. Finally, we considered whether media outlets had  reported incidents between passengers and customer service agents in  the last 5 years. We selected our six airlines to include both network and low-cost airlines that boarded among the most passengers in 2017 and  serviced a diverse group of airports. During interviews with all  stakeholder groups, we asked representatives for their perspectives on  passenger assaults, including information on the most common type of  misconduct; frequency; whether gaps exist in laws or resources to deter  or address such incidents; and other actions, if any, that could deter or  address passenger assaults. In addition, we interviewed a non- generalizable sample of seven industry organizations—including  representatives from associations representing state prosecutors (two);  airports (one); airlines (one); airport law enforcement (one); and unions  representing customer service agents (two). We selected these  organizations based on the following factors: their inclusion in prior GAO  reports, their role in relevant industries, and recommendations from other  stakeholders.

We also reviewed available documents and interviewed officials from the  following five federal agencies that have responsibilities related to  aviation safety and security: the Department of Justice (DOJ);  Department of Transportation (DOT); Federal Aviation Administration  (FAA, a component of DOT); Federal Bureau of Investigation (FBI, a  component of DOJ); and the Transportation Security Administration (TSA,  a component of the Department of Homeland Security). As part of this  work, we also conducted a literature search to identify articles published  over the past 5 years about anxiety or stress at airports and identified one  additional study by searching the Transit Cooperative Research Program  Publications.

To understand what is known about passenger assaults—including the  frequency and most common type of passenger conduct—we reviewed  documentation and conducted interviews with officials at the five federal  agencies listed above about available data. We also developed and  administered a non-generalizable “intercept survey” to 104 selected customer service agents staffed at the ticket counter, gate area, or  baggage claim area at the four airports we visited in March and April 2019  to learn about their experiences as airline customer service agents. We  pre-tested our survey with four customer service agents to make sure  questions were clear. Results from this non-generalizable survey cannot  be used to make inferences about the population of customer service  agents but do provide insights into selected customer service agents’  experiences with passengers. Similarly, since we only administered our  survey at four large hub airports, it is possible that we would have  different results if we had surveyed agents at different airports. The final  survey is included in appendix I.

We conducted this performance audit from November 2018 to September  2019 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.

Airline customer service agents have a number of duties to assist  passengers at the airport (see fig. 1). Customer service agents can check  passengers into flights; handle and tag checked bags; and board and  deplane passengers on the aircraft; in addition to assisting passengers  when service failures occur, such as helping to locate a lost bag. At  many airports and airlines, customer service agents are trained to work  the ticket counter and the arrival and departure gates. In this role, airline  customer service agents’ interactions with passengers can range from  pleasant to routine to contentious. For example, if bad weather causes an  airline to delay or cancel flights, harried passengers trying to make  connecting flights or get to a destination may take their frustration out on  a customer service agent.

The following entities are responsible for helping to prevent or address  passenger assaults:

Airlines seek to provide a safe work environment for customer  service agents. Among other things, airlines set policies and  procedures instructing customer service agents how to handle and  report incidents, in addition to how management should respond.

Airport law enforcement responds to allegations of violence at  airports and enforces state and local laws. According to airport law  enforcement, when they respond to incidents, they generally capture  information in police reports.

Airport management, such as a security director, may be informed of  alleged passenger assaults at the airport or support ensuing  investigations and prosecutions.

Prosecutors at the federal and state level decide whether to charge  passengers for offenses that violate laws.

No one federal agency is responsible for addressing passenger assaults  against customer service agents at the airport. For example, FAA sets  policies that airlines and their employees must adhere to for aviation  safety, but TSA oversees the security of the nation’s civil aviation system.  However, officials from both TSA and FAA told us their responsibilities for  passenger assaults at airports are limited. In particular, FAA officials said  their primary responsibility is for assaults onboard aircraft as opposed to  at the airport. Similarly, TSA officials said they only get involved in  assaults of airline customer service agents in the rare instances where  incidents affect airport security. Within DOJ, FBI conducts investigations  of incidents that are deemed to violate federal law, and federal  prosecutors can decide whether to prosecute individuals for alleged  incidents that are deemed to violate federal law.

While Information Is Limited, Almost All Surveyed Customer Service Agents Reported Verbal Harassment, and Some Reported Physical Assaults

No Comprehensive Information Is Available to Understand Assaults by Passengers against Airline Customer Service Agents

Limited data are available to determine the frequency or nature of  passenger assaults at airports against airline customer service agents.  We reviewed selected data from DOJ, DOT, FAA, FBI, and TSA and  found that no dataset can isolate such passenger assaults. For example,  while the FBI collects transportation crime data from law enforcement  agencies about incidents that occur at air, bus, or train terminals— including information on the victim, offender, and location of the crime— the data cannot isolate passenger assaults against airline customer  service agents.

While representatives from selected airport law enforcement agencies  and airlines we interviewed said they collect information related to  passenger assaults for their respective airports or airlines, these data  were generally unavailable. In particular, representatives from all six  selected airport law enforcement agencies we interviewed said providing  data on passenger assaults against airline customer service agents would  require manually reviewing all police reports. Results from one selected  airport law enforcement agency that had manually reviewed its data for  2018 found that of the 237 assistance calls it received for incidents  between customer service agents and passengers, law enforcement  completed an incident report for 12 of these calls, and referred two  reports to state prosecutors. Representatives from five of the six  selected airlines declined to share data with us, saying data were not  readily available, or were business proprietary, or business sensitive.  Representatives from the remaining airline provided us with data from the  third and fourth quarters of 2018; this data indicated that incidents  between passengers and customer service agents generally remained  constant, with an average of approximately 1.2 disruptive passengers per  1,000 passenger boardings.

About 10 Percent of Surveyed Customer Service Agents Said Passengers Physically Assaulted Them in the Past Year

In the absence of available data, we surveyed a non-generalizable  sample of 104 randomly selected customer service agents to understand  their experiences performing their jobs over the last year. According to  these 104 customer service agents, almost all (96) reported experiencing  verbal harassment, such as passengers yelling, cursing, or being  argumentative (see fig. 2). Almost half (46) reported experiencing verbal  threats, such as passengers threatening to harm the customer service  agent. Twenty-two customer service agents reported that a passenger  attempted to physically assault them by, for example, attempting to push  them. Fewer (12) customer service agents said that passengers actually  physically assaulted them. We also found that about one-third (34) of  surveyed customer service agents said they experienced “other types of  harmful actions,” which agents said included passengers destroying  property, taking video of agents, grabbing agents’ identification badges,  and stalking agents after work.

Stakeholders we interviewed from selected airports, airport law  enforcement, and airlines generally agreed that passengers can be  verbally disruptive but that physical assaults are less frequent. More  specifically, of these 17 stakeholders, most (13) agreed that disruptive  passenger behavior is frequent. Most (11) also agreed that physical  assaults occur less frequently than verbal threats. Nevertheless, while  representatives from two selected unions did not have data on such  actions, they emphasized to us that the customer service agents they  represent face difficult working conditions. The union representatives also  stated that passenger assaults, including verbal threats and physical  assaults, are becoming more common. Further, three of the nine  stakeholders who provided a perspective said that incidents against  customer service agents are increasing. For example, representatives  from one airline we interviewed said that over the past 5 years, they have  observed an increase in both the frequency and severity of passenger  assaults, in addition to other disruptive behavior.

A number of factors may contribute to passenger assaults. Selected  stakeholders, including those from airlines, airports, airport law  enforcement, and other industry associations most commonly cited (24)  alcohol consumption at the airport or drug use as a contributing factor.  For example, according to representatives from one law enforcement  agency, when customer service agents deny boarding to intoxicated  passengers, passengers can become verbally or physically aggressive  toward customer service agents. Other stakeholders told us that  passengers increasingly have more opportunities to consume alcohol  while waiting for their flights, thereby increasing alcohol-related incidents.  For example, representatives from one airport noted that tablets at the  boarding area allow passengers to place orders for alcohol while seated  at the gate.

Seventeen selected stakeholders we interviewed also told us that airlines’  business practices, such as charging fees for checked and carry-on  baggage or policies around delays and cancellations might aggravate or  surprise passengers and lead them to be aggressive toward customer  service agents. Some stakeholders (10) also said that other factors, such  as long lines and large crowds in the airport can increase passengers’  stress levels. Moreover, according to some stakeholders, service  failures—such as flight delays, cancellations, or lost baggage—can  exacerbate these stressors.

Of the 61 surveyed customer service agents who reported experiencing  verbal threats, attempted physical assaults, actual physical assaults, or  other harmful actions, most (45) said these incidents negatively affected  their overall well-being. Similarly, selected union representatives we  interviewed also said that these incidents can increase stress and anxiety  for customer service agents.

Almost All Surveyed Customer Service Agents Who Said They Experienced a Passenger Assault Reported It, and Airline Management or Airport Law Enforcement Often Took Some Action

Almost all customer service agents (56 of 61) who stated in our survey  that they experienced passenger conduct amounting to more than  harassment said they reported the conduct to someone. Specifically, 46  customer service agents stated that they contacted their immediate airline  manager; 28 stated that they contacted airport law enforcement; and 6  stated that they contacted airport staff or other entities.

These actions described by customer service agents we surveyed  generally aligned with selected airlines’ procedures for handling  passenger assaults. Specifically, representatives from five selected  airlines told us that while their respective airline’s policy generally calls for  agents to contact management first, agents can also contact airport law  enforcement if they feel like their safety is threatened. However,  representatives from two selected unions told us that airline managers  are sometimes hesitant to inform law enforcement about incidents—or  have their agents contact law enforcement—or to elevate incidents  internally. According to one union representative, airlines prefer to keep  such incidents internal and emphasize providing on-time service to their  passengers. Contacting law enforcement could make this difficult to  achieve, so when disruptive passenger behavior occurs, airlines may be  inclined to allow the passenger onboard the aircraft instead of contacting  law enforcement.

Of the 56 customer service agents who stated they reported the  passenger conduct, over half (33) said that, to their knowledge,  representatives from airlines, law enforcement, or airports took action in  response. According to our survey results, these representatives generally took a range of actions, including but not limited to, requesting  that a passenger stop the disruptive behavior, completing an airline or  police report, denying a passenger boarding, or arresting a passenger.  Representatives most commonly removed passengers from an area or  denied passengers from boarding (18); diffused the situation (7); or  arrested the passenger (4). Twenty-six customer service agents said that  no action was taken in response to the incident, which left some to not  feel supported by airline management. Moreover, according to  representatives from one union, in some instances, customer service  agents feel that if airline management provides passengers with travel  benefits, such as seat upgrades or airline miles, to diffuse these types of  situations, it can appear to be condoning or rewarding any passenger  misbehavior.

The FAA Reauthorization Act of 2018 requires airlines to develop and  submit employee assault-prevention and response plans to FAA by  January 2019. In these plans, airlines are required to document:  reporting protocols for airline customer service agents who have been  the victim of a verbal or physical assault; protocols for notifying law enforcement after an incident of verbal or  physical assault committed against an airline customer service agent; protocols for informing federal law enforcement about violations of  federal law that prohibits interference with security screening  personnel; protocols for ensuring that a passenger involved in a violent incident  with an airline customer service agent is not allowed to move through  airport security or board an aircraft until appropriate law enforcement  has an opportunity to assess the incident and take appropriate action;  and protocols for informing passengers of federal laws protecting federal,  airport, and airline employees who have security duties within an  airport.

In March 2019, FAA officials said they had not received employee  assault-prevention and response plans from all of the 49 U.S. airlines that  were required to submit such plans. However, at that time, officials also  said they were not concerned about any delays because they believed  airlines already have internal policies and procedures for handling these  types of incidents. Nevertheless, FAA officials told us they intended to  issue a reminder to the airlines. Of the six selected airlines we  interviewed, representatives from two airlines said they had submitted  their plans to FAA, and representatives from the remaining four airlines  said their plans were in development. Further, when we asked airlines to  describe their policies for handling assaults, some of the policies that  representatives described aligned to some requirements in the Act for the  plans. For example, as discussed previously, all six selected airlines told  us they had policies for how customer service agents or managers should  notify airport law enforcement when assaults occur. Moreover,  representatives from all six airlines also described reports that that  customer service agents and employees complete when such incidents  occur.

In July 2019, FAA issued a notification to airlines, reminding them to  develop and submit their plans. FAA officials attributed delays in following  up with airlines to the government shutdown in early 2019 and multiple  competing requirements in the Act. FAA officials also said they were  initially hesitant to issue a notification around these plans, since the  agency has a limited role and does not promulgate requirements for the  training or oversight of customer service agents. Nevertheless, FAA  officials said they plan to continue to follow up with the airlines as needed  to collect the remaining plans.

Most Selected Stakeholders Said State and Local Laws and Resources Sufficiently Deter and Address Passenger Assaults against Airline Customer Service Agents Despite General Satisfaction, Some Said Stronger Penalties and Other Legal Avenues Could Be Pursued

All selected stakeholders we interviewed representing airlines, airports,  airport law enforcement, and prosecutors (23 of 23) who provided a  perspective said that current state and local laws sufficiently deter and  address passenger assaults. We spoke with seven selected state  prosecutors who told us that, among other offenses, they can charge  passengers for actions against customer service agents with assault;  battery (e.g., intentional causing of bodily harm); disorderly conduct (i.e.,  acts that are of a nature to outrage the sense of public decency, or affect  the peace and quiet of persons who may witness them, or engaging in  brawling or fighting); and trespassing. According to these prosecutors,  they typically charge passengers for assaults as misdemeanors, which  one prosecutor told us generally does not result in passengers’ serving  any jail time.

While four selected state prosecutors who regularly handle misdemeanor  prosecutions did not have data isolating these crimes, three recalled  charging passengers for assaults against customer service agents. For  example, a representative from one prosecutor’s office estimated that,  over the last 5 years, law enforcement had referred 25 to 30 of these  incidents to his office and that his office had prosecuted six or seven of  these cases. In determining whether to pursue a case, five prosecutors  we interviewed told us they weigh a number of factors, such as whether  the customer service agent is willing to file charges; whether law  enforcement observed the assault; and whether witnesses are available  to testify. Nonetheless, according to prosecutors we interviewed, crimes  committed at airports present unique challenges. More specifically,  according to one prosecutor we spoke with, the transitory nature of  airports makes it difficult to get witnesses to testify at a trial, because they  are often passing through the airport en route to another destination.

Four selected prosecutors also told us that passenger assaults might be  charged as felonies if, for example, the crime involves the use of a deadly  weapon or causes serious physical injury to the victim. However, these  prosecutors told us such instances are infrequent and incidents between  passengers and customer service agents rarely rise to the level of  severity of a felony charge. To that end, none of the three prosecutors we  interviewed who typically prosecute felony cases could remember  charging a passenger for an assault of a customer service agent within  the last year.

Nevertheless, some selected stakeholders told us opportunities exist to  strengthen penalties for passenger assaults. More broadly, a few  stakeholders that we interviewed—including one airline, one prosecutor,  and one union—suggested opportunities exist to pursue harsher  penalties. According to selected stakeholders, this could be achieved by,  for example, prosecuting passenger assaults as felonies, prosecuting  these incidents at the federal level, or seeking a legislative change to  classify airline customer service agents as a protected class. For  example, under Florida statute, an alleged battery against certain  specified protected classes, including elected officials and teachers, are  automatically reclassified from a first degree misdemeanor to a third  degree felony charge, resulting in potentially harsher penalties.

While Selected Stakeholders Generally Agreed Resources Are Sufficient, Some Suggested Improvements

Most selected stakeholders we interviewed who provided a perspective  said that their current resources sufficiently deter and address passenger  assaults. Specifically, of the 20 selected stakeholders who provided a  perspective, 15 said that current resources are sufficient and did not  identify other resources that could improve their ability to address or  mitigate passenger assaults. The remaining five stakeholders would like  to see additional resources directed toward airport’s law enforcement  agencies. In particular, four selected stakeholders said they believe that  increasing the number and presence of law enforcement in airports would  help deter or address passenger assaults. Representatives from one  airline told us they hired private security officers to monitor ticketing and  baggage areas at the airport to increase their security posture. While the  purpose is not to address passenger assaults, representatives told us that  these officers can respond to such assaults. The remaining stakeholder  suggested law enforcement could receive additional training to improve  responses when passenger assaults occur.

Some of the selected stakeholders we interviewed who did not identify  gaps in resources nonetheless offered suggestions to further deter or  mitigate passenger assaults, including:

Provide additional training for customer service agents. Three  stakeholders told us customer service agents should receive  additional training on conflict de-escalation.

Increase information sharing and reporting. Three selected  stakeholders said that information sharing could be improved among  relevant stakeholders—including airlines and airport law enforcement.  For example, representatives from one airline said they have limited  insight into the outcomes of passenger assaults unless they contact  airport law enforcement or prosecutors. Two selected union  representatives said that having better data on these incidents could  be beneficial to understand the scope of the problem.

Increase public education and support for customer service  agents. Representatives from two unions would like to see (1)  signage at airports saying that assaults by passengers are subject to  prosecution, and (2) airlines provide additional support to customer  service agents, in the form of legal assistance or time off, to press  charges against passengers alleged to have committed such assaults.

Moving forward, the FAA Reauthorization Act of 2018 requires airlines to  provide initial and recurrent training for all employees on, among other  things, de-escalating hostile situations, and, as previously noted, the  reporting protocols for these incidents. Providing such training and having  additional reporting protocols could provide customer service agents with  additional tools for diffusing these incidents and standardize how airlines  respond to these incidents, respectively.

We provided a draft of this report to DHS, DOJ, and DOT for review and  comment. DOJ provided technical comments, which we incorporated as  appropriate. DHS and DOT did not have any comments.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of the Department of Transportation, the  Attorney General, the Secretary of Homeland Security, and other  interested parties. In addition, the report is available at no charge on the  GAO website at http://www.gao.gov.

If you or your staff any have questions about this report, please contact  me at (202) 512-2834 or VonahA@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix II.

Appendix I: Survey for Airline Customer Service Agents

In the past year, how many times have experienced the following  incidents:  Passenger verbally harassed you  Passenger verbally threatened you (i.e., said they would do something  to you specifically)

Passenger attempted to physically assault you (tried to hurt you)

Passenger committed other harmful action (please describe)

3.  How, if at all, have these incidents affected your overall well-being?  a. No effect  b. Slightly negative effect  c. Very negative effect  4.  Now thinking about the most severe incident you have experienced in  the past year, which of the following airport officials, if any, did you  contact about this incident?  a. Immediate airline manager  b. Airport law enforcement  c. Airport staff  d. Other–Please identify ______________________________  e. None  5.  Did any airport or airline officials take action because of your most  severe incident in the past year?  a. No  b. Don’t know  c. Yes. Please describe the action that was taken.  6.  How, if at all, could airlines support customer-service representatives  when these incidents happen?

Appendix II: GAO Contact and Staff Acknowledgments

Andrew Von Ah, (202) 512-2834 or VonahA@gao.gov.

In addition to the individual named above, other key contributors to this  report were Jonathan Carver, Assistant Director; Melissa Swearingen,  Analyst-in-Charge; Emily Flores; Clara Goldrich; Geoffrey Hamilton;  Delwen Jones; Dawn Locke; Malika Rice; Kelly Rubin; and Amy Suntoke.

When travel plans go awry, airline passengers may take out their frustrations on customer service agents. We surveyed 104 customer service agents. About half said passengers had verbally threatened them and 10% said passengers had physically assaulted them in the past year.

We spoke with stakeholders (including prosecutors and airport police) who said current assault laws and law enforcement resources—primarily at the state and local levels—were generally sufficient to deal with these incidents. Airlines are also required under a new federal law to develop employee assault prevention and response plans for handling such incidents.


Nuclear Weapons: NNSA's Modernization Efforts Would Benefit from a Portfolio Management Approach

NNSA is simultaneously modernizing the nation's nuclear weapon stockpile and the infrastructure on which weapon programs depend. In a 2019 report, NNSA stated that this is the busiest time for the nuclear security enterprise since the Cold War era. GAO's April 2017 review of NNSA nuclear modernization programs concluded that NNSA made optimistic assumptions about future costs. DOD and DOE estimate that nuclear modernization will cost hundreds of billions of dollars over the next decade.

This statement is based on 18 GAO reports issued from July 2003 to February 2020 and selected updates. It discusses (1) NNSA's ongoing and planned programs and projects to modernize weapons and related infrastructure and challenges they present; (2) NNSA's improvements in managing these programs and projects, and additional steps NNSA could take to make further improvements; and (3) GAO's prior recommendation to NNSA on assessing the affordability of its portfolio of modernization programs. To conduct the updates, GAO reviewed DOE planning and budget documents.

The Department of Energy's (DOE) National Nuclear Security Administration (NNSA) is conducting four programs to modernize nuclear weapons, and the Department of Defense's (DOD) 2018 Nuclear Posture Review calls for NNSA to consider additional programs to refurbish or build new weapons over the next 2 decades. NNSA is also managing numerous, multi-billion-dollar construction projects to modernize the infrastructure it uses to produce components and materials needed for its weapon programs. GAO has reported on challenges NNSA faces in managing these efforts. For example, GAO's February 2020 report on the W87-1 warhead program found that NNSA's past challenges in managing plutonium activities cast doubt on NNSA's ability to produce the required number of plutonium weapon cores on schedule. GAO also found in June 2019 that future weapon programs will require newly produced explosives, including some that NNSA has not produced at scale since 1993.

NNSA has improved its management of weapon programs and related projects in some respects. For example, NNSA has established requirements for independent cost estimates in weapon programs and has made progress in revising plans for the Uranium Processing Facility project. However, GAO has identified additional actions that could further improve NNSA's management of weapon programs and projects. For example, in September 2017, GAO reported that NNSA had not developed a complete scope of work, a life-cycle cost estimate, or an integrated master schedule for its overall uranium program. GAO recommended that NNSA set a time frame for developing these plans. GAO expects to issue a report on NNSA's uranium program plans in March 2020.

GAO concluded in April 2017 that NNSA had not addressed a potential mismatch between funding needs and funding availability. GAO recommended that NNSA assess its portfolio of modernization programs—for example, by presenting options to align programs to potential future budgets, such as potentially deferring the start of or cancelling specific programs. NNSA did not explicitly agree or disagree with GAO's recommendation. NNSA included an affordability analysis in July 2019 planning documents, but the analysis does not fully respond to GAO's recommendation because it does not state how potential misalignment between program costs and budget projections may be addressed. GAO continues to believe that presenting options to align its portfolio of programs to potential future budgets could help Congress and NNSA better understand NNSA's priorities and trade-offs that may need to be undertaken in the future.

GAO has made numerous recommendations to NNSA, including that it assess its portfolio of modernization programs to present options to align programs and budgets. NNSA has taken some action but has not fully responded to this recommendation.

Thank you for the opportunity to discuss the challenges facing the  Department of Energy’s (DOE) National Nuclear Security Administration  (NNSA) as it works to sustain and modernize the nation’s nuclear  arsenal. NNSA’s work comprises two simultaneous, interdependent  efforts: modernizing the stockpile of nuclear bombs and warheads, and  modernizing the research and production infrastructure on which stockpile  programs depend. NNSA manages these efforts in coordination with the  Department of Defense (DOD), which undertakes related work to  modernize nuclear weapon delivery systems, including heavy bombers,  intercontinental ballistic missiles, and submarine-launched ballistic  missiles and the submarines that carry them. According to NNSA’s Fiscal  Year 2020 Stockpile Stewardship and Management Plan, the nuclear  security enterprise is experiencing its busiest time since the Cold War  era.

In an April 2017 report, we concluded that NNSA’s assessment on the  affordability of the agency’s nuclear modernization programs was  predicated on optimistic assumptions about future-year costs, particularly  for fiscal years 2022 through 2026. In particular, we reported that,  according to NNSA’s fiscal year 2017 budget materials and agency  officials, work deferred by NNSA contributed to a significant bow wave of  funding needs in future years as the agency made plans to undertake  multiple, simultaneous life extension programs (LEP) and other weapon  programs. A funding bow wave—that is, an impending and significant  increase in the requirements for additional funds—occurs when agencies  defer costs of their programs to the future, beyond their programming  periods, and often occurs when agencies are undertaking more programs  than their resources can support.

At the time of our April 2017 report, NNSA had concluded that its nuclear  modernization program plan was generally affordable because it  assumed that future budgets would meet or exceed the low range of  NNSA’s cost estimates for its programs. However, we found that,  particularly in the period of fiscal years 2022 through 2026, NNSA’s  budget estimates may have exceeded funding projections in the  President’s budget for those same years. We recommended that NNSA  include an assessment of its portfolio of modernization programs in future  versions of the Stockpile Stewardship and Management Plan—for  example, by presenting options NNSA could consider to bring its  estimates of modernization funding needs into alignment with potential  future budgets. This could include potentially deferring the start of or  canceling specific modernization programs if program budgets fell short of  program estimates.

Less than 1 year later, in February 2018, DOD issued the 2018 Nuclear  Posture Review, which outlined plans for starting several additional  nuclear weapon modernization programs while accelerating an existing  program. DOD and DOE cost estimates show that nuclear weapon  programs and related efforts are expected to cost hundreds of billions of  dollars over the next decade, but neither agency has yet released long- term budget estimates that fully reflect implementation of the 2018  Nuclear Posture Review’s priorities. The President’s fiscal year 2021  budget request includes a 25 percent increase for NNSA’s modernization  program, suggesting the bow wave has arrived.

My testimony today discusses (1) NNSA’s ongoing and planned programs  and projects to modernize the nuclear stockpile and related production  infrastructure and any challenges they present; (2) improvements in  NNSA’s management of weapon programs and related capital asset  projects, and additional steps NNSA could take to make further  improvements; and (3) our prior recommendation to NNSA on assessing  the affordability of its portfolio of modernization programs.

My statement is based primarily on our work from 18 GAO reports issued  from July 2003 to February 2020 and selected updates. Detailed  information about the scope and methodology we used to conduct our  prior work can be found in each of our issued reports. For the updates,  we interviewed NNSA officials to assess any actions NNSA has taken in  response to our April 2017 recommendation and included updated  information on the status of other recommendations based on  documentation NNSA provides to us periodically. In addition, we reviewed  several documents to provide selected updates to information on program  schedules, cost estimates, and budgets on which we had previously  reported. Specifically, we reviewed NNSA’s Fiscal Year 2020 Stockpile  Stewardship and Management Plan; the testimony of an NNSA official  from a September 2019 hearing on the status of two LEPs; the DOE  Office of Project Management’s January 2020 Monthly DOE Project  Portfolio Status Report; and the President’s DOE budget request for fiscal  year 2021. NNSA also reviewed information from a classified report we  issued in February 2020 to ensure that information we drew from that  report was suitable for public release.

We conducted the work on which this statement is based 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.

NNSA Faces Challenges in Executing Ongoing and Planned Weapon Programs and Related Capital Asset Projects to Modernize the Nuclear Stockpile

NNSA is executing and plans to carry out multiple weapon programs and  a range of related capital asset projects over the next 2 decades. First,  NNSA is currently conducting four weapon modernization programs: the  B61-12 LEP, the W88 Alteration 370, the W80-4 LEP, and the W87-1  Modification program. Table 1 provides more information on each of  these programs based on our prior work, with selected updates on  program schedules, cost estimates, and budgets from the Fiscal Year  2020 Stockpile Stewardship and Management Plan and NNSA testimony.

In addition to these four ongoing programs, the 2018 Nuclear Posture  Review calls for NNSA to consider additional weapon programs— specifically, a program to develop a modern nuclear-armed sea-launched  cruise missile, and another to develop a new submarine-launched ballistic  missile warhead (now being referred to as the W93). The Nuclear Posture  Review also instructs NNSA to maintain the B83-1 bomb until a suitable  replacement can be found.

To support and enable ongoing and planned weapon programs, NNSA  also plans to spend billions of dollars over the next 2 decades on capital  asset projects and other infrastructure risk reduction and recapitalization  efforts to modernize the production infrastructure NNSA uses to produce  components and materials needed for its weapon programs. Table 2  provides more information on selected NNSA capital asset projects  discussed in our recent reports, with selected updates on program  schedules and cost estimates from the DOE Office of Project  Management’s January 2020 Monthly DOE Project Portfolio Status  Report.

According to NNSA’s plans, the agency must carry out many of its  weapon programs while simultaneously modernizing the very  infrastructure on which these weapon programs rely for components and  other materials. Therefore, any delays or technical challenges that affect  NNSA’s plans for its production facilities may be expected to result in  delays and challenges to the weapon programs. Figure 1 shows the  estimated schedules for the weapon programs and related capital asset  projects described in tables 1 and 2 and reported on in our prior work,  with updated information as presented in the Fiscal Year 2020 Stockpile  Stewardship and Management Plan.

We have reported on the potential effects on NNSA’s weapon programs  of delays or technical challenges in modernizing its production facilities.  For example:

The W87-1 Modification program’s schedule may be particularly  vulnerable to production challenges, including pit production  challenges, because, as we reported in November 2018, it will require  all newly-made components, including pits. In our most recent report  on the W87-1 program, a classified report issued in February 2020,  we found that NNSA’s past challenges in managing plutonium  activities at Los Alamos and in executing projects of this size cast  doubt on NNSA’s ability to produce 80 pits per year in 2030. As we  note in that report, an independent assessment of NNSA’s pit  production strategy in March 2019 concluded that no options  evaluated by NNSA could be expected to produce 80 pits per year by  2030. The independent assessment further stated that NNSA had  no precedent for major projects costing more than $700 million dollars  that had been completed in fewer than 16 years, and that many  similar projects were eventually cancelled.

Future weapon programs will require newly produced explosives,  including some that NNSA has not produced at scale since 1993. As  we reported in June 2019, NNSA officials stated that producing these  materials will pose challenges that include replicating decades-old  recipes for the materials and preparing for their full-scale production in  aging facilities. As we noted in that report, similar problems  restarting dormant production capabilities have delayed past weapon  programs—notably, the W76-1 LEP, which NNSA completed in  December 2018. As we reported in March 2009, NNSA had to delay  first production of the W76-1 from September 2007 to September  2008 when it encountered problems restarting production of a key  material, known as Fogbank. NNSA is working to reconstitute its  high explosives capabilities, as we reported in June 2019.

Nonnuclear parts and components comprise over 80 percent of the  items in a nuclear weapon, and NNSA’s Kansas City National Security  Campus procures or produces most of these. In April 2019, we found  that work on the B61-12 LEP and W88 Alteration 370 was expected to  double at the Kansas City site during fiscal years 2020 through  2022. Our April 2019 report also identified challenges that could  complicate work at the site. For example, disruption to the established  supply chain for externally supplied parts—which comprise about 65  percent of the nonnuclear parts used at the Kansas City site—could  result in production delays, and the site needs hundreds of thousands  of additional square feet of manufacturing space to meet workload  demands.

We have also recently completed work in which we reported on  challenges integrating the schedules of NNSA’s weapon programs with  the schedules for DOD’s modernized delivery systems. For example, the  W87-1 warhead will need to be integrated on a delivery system that is  under development, an intercontinental ballistic missile known as the  Ground-Based Strategic Deterrent. We have ongoing work examining  DOD and DOE plans to modernize and integrate warheads and delivery  vehicles and expect to issue a classified report in spring 2020.

NNSA Has Taken Steps to Improve Its Management of Weapon Programs and Enabling Capital Asset Projects, but Additional Improvements Are Needed

As we have recently reported, NNSA has made improvements in its  management of some weapon modernization programs and enabling  capital asset projects. We have concluded that NNSA’s federal program  and project management capacity is improving, as are the controls it has  developed for program and project performance. For example:

We found in January 2018 that NNSA has established and  strengthened management requirements for LEPs. Specifically, in  January 2016, NNSA’s Office of Defense Programs issued a program  management directive that designates risk-based program execution  requirements that all programs must follow. The directive places  LEPs in one of the highest-risk categories, meaning these programs  are required to apply more rigorous management controls specified in  the directive, including using earned value management. Further, in  January 2017, NNSA issued two directives implementing  requirements for NNSA’s Office of Cost Estimating and Program  Evaluation to conduct independent cost estimates. In May 2018, we  found that the program cost estimate for the B61-12 LEP substantially  met the criteria for all four characteristics of a high-quality, reliable  cost estimate, in part because it was the first LEP to undergo an  independent cost estimate.

We reported in our February 2017 high-risk update that DOE  demonstrated a strong commitment and top leadership support for  improving project management. For example, DOE made changes  to its revised project management order, issued in May 2016, in  response to recommendations we made in prior years, such as  requiring that projects develop cost estimates and analyses of  alternatives according to best practices we identified.

In September 2017, we found that NNSA had made progress in  developing a revised scope of work, cost estimate, and schedule for  the Uranium Processing Facility project, which is to modernize  uranium production efforts at the Y-12 National Security Complex.  We reported at that time that these improvements may help NNSA  stabilize escalating project costs and technical risks experienced  under the previous strategy.

In November 2017, we found that NNSA had established programs to  manage strategic materials—specifically, uranium, plutonium, tritium,  and lithium—and had defined requirements and managerial roles for  program managers. Since that time, NNSA has taken steps to  implement a new enterprise-wide approach for managing explosives  activities, as we found in our June 2019 report on those activities.

However, we have identified additional actions NNSA could take to further  improve its management of weapon modernization programs and related  projects. As NNSA’s workload increases, additional management rigor  will help ensure that programs and projects are executed consistent with  cost and schedule estimates, and that risk is effectively managed and  communicated. For example:

We found in our January 2018 report that NNSA had not adopted the  best practice of having an independent team validate its earned value  management systems against the national standard for such systems,  which could help the agency better manage risk in its LEPs. We also  found that NNSA had not established specific benchmarks for  technology readiness at LEP decision points, consistent with best  practices. We recommended that NNSA require an independent team  to validate contractor earned value management systems for LEPs  and establish technology readiness requirements at LEP decision  points. According to an update NNSA provided to us in September  2019, the agency has not taken action to address these  recommendations. We continue to believe that it should do so.

We found in our September 2017 report that NNSA had not  developed a complete scope of work, a life-cycle cost estimate, or an  integrated master schedule for its overall uranium program—of which  the Uranium Processing Facility is only one part—and had no time  frame for doing so. We recommended that NNSA should set a time  frame for when the agency would develop a complete scope of work,  a life-cycle cost estimate, and an integrated master schedule for the  overall uranium program. NNSA generally agreed with our  recommendation and has taken actions to respond to it. We expect to  issue a report on the Uranium Processing Facility and NNSA’s plans  for its uranium program in March 2020.

As we reported in February 2020, the plutonium program has begun  to develop a schedule for pit production. However, NNSA allows  strategic materials programs such as the plutonium program to tailor  their approach to developing schedules and does not require that they  meet best practices for schedule estimating. We recommended that  NNSA ensure that the plutonium program develop a schedule for pit  production consistent with best practices for schedule development.  NNSA agreed with our recommendation.

Our ongoing work includes reviews of NNSA’s management of other  efforts essential to ongoing weapon modernization programs, such as the  production of radiation-hardened microelectronics at Sandia National  Laboratories in New Mexico and of depleted uranium at the Y-12 National  Security Complex in Tennessee.

NNSA Needs a Portfolio-based Approach to Managing Its Weapon Modernization Programs and Related Efforts

NNSA’s weapon modernization programs and enabling infrastructure  efforts have significant interdependencies that require integrated  management across the portfolio of programs to effectively manage cost,  schedule, and risk. Portfolio management best practices developed by  the Project Management Institute state that organizations can optimize  their portfolios of programs and projects by assessing their capability and  capacity to finance specific portfolio components; determining which  portfolio components should receive the highest priority; and identifying  components to be suspended, reprioritized, or terminated. In our April  2017 report on NNSA’s budget materials and modernization plans, we  found that NNSA did not clearly identify the extent to which its long-range  budget estimates for its overall modernization program fell short of  specific annual budget requests anticipated in this plan. We concluded  that NNSA had not addressed the projected bow wave of future funding  needs and the mismatch between those needs and the potential funding  available in the years in question. By not addressing the risks associated  with the potential funding shortfall, we concluded, NNSA raised questions  about its ability to achieve its modernization program goals at cost and on  schedule. As a result, as discussed above, we recommended that NNSA  include an assessment of the affordability of its portfolio of modernization  programs in future versions of the Stockpile Stewardship and  Management Plan—for example, by presenting options NNSA could  consider to bring its estimates of modernization funding needs into  alignment with potential future budgets, such as potentially deferring the  start of or canceling specific modernization programs. NNSA did not  explicitly agree or disagree with our recommendation. The President’s  fiscal year 2021 budget request for NNSA indicates that the bow wave  has arrived, requesting an increase of about $3.1 billion over the funding  enacted for Weapons Activities in fiscal year 2020—a year-to-year  increase of over 25 percent.

The Fiscal Year 2020 Stockpile Stewardship and Management Plan,  issued in July 2019, includes a new section on affordability analysis and  states that the section was added in response to our April 2017  recommendation. However, our review of this section indicates that it  does not fully respond to our recommendation because it does not  provide information about how potential misalignment between NNSA’s  modernization budget estimates and projections of the President’s  modernization budgets may be addressed, or about the potential impacts  of adjusting program schedules or cost or schedule overruns. Since the  issuance of the 2018 Nuclear Posture Review, NNSA’s portfolio of  planned programs has only grown more extensive and complex. We  continue to believe that NNSA, by assessing its portfolio of modernization  programs in future versions of the Stockpile Stewardship and  Management Plan—for example, by presenting options NNSA could  consider to bring its estimates of modernization funding needs into  alignment with potential future budgets, such as potentially deferring the  start of or canceling specific modernization programs—could help  congressional and NNSA decision makers better understand NNSA’s  priorities and trade-offs that it may need to undertake in the future,  depending on funding and program performance.

Chairman Cooper, Ranking Member Turner, and Members of the  Subcommittee, this completes my prepared statement. I would be  pleased to respond to any questions you may have at this time.

If you or your staff members have any questions about this testimony,  please contact me at (202) 512-3841 or bawdena@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this statement. GAO staff who made key  contributions to this testimony are Jason Holliday, Assistant Director;  Antoinette C. Capaccio; Julia Coulter; Rob Grace; John Hocker; Dan  Royer; and Kiki Theodoropoulos.

The following is a selection of GAO’s recent work assessing the National  Nuclear Security Administration’s management of nuclear weapon  programs and related capital asset projects:  Nuclear Weapons: NNSA Should Further Develop Cost, Schedule, and  Risk Information for the W87-1 Warhead Program. GAO-20-207C.  Washington, D.C.: February 28, 2020.

Nuclear Weapons Sustainment: Improvements Made to Budget Estimates  in Fiscal Year 2019 Joint Report, but Opportunities Remain to Enhance  Completeness. GAO-20-37R. Washington, D.C.: November 7, 2019.

Nuclear Weapons: Additional Actions Could Help Improve Management  of Activities Involving Explosive Materials. GAO-19-449. Washington,  D.C.: June 17, 2019.

Modernizing the Nuclear Security Enterprise: NNSA Is Taking Action to  Manage Increased Workload at Kansas City National Security Campus.  GAO-19-126. Washington, D.C.: April 12, 2019.

High-Risk Series: Substantial Efforts Needed to Achieve Greater  Progress on High-Risk Areas. GAO-19-157SP. Washington, D.C.: March  6, 2019.

Nuclear Weapons: NNSA Has Taken Steps to Prepare to Restart a  Program to Replace the W78 Warhead Capability. GAO-19-84.  Washington, D.C.: November 30, 2018.

B61-12 Nuclear Bomb: Cost Estimate for Life Extension Incorporated  Best Practices, and Steps Being Taken to Manage Remaining Program  Risks. GAO-18-456. Washington, D.C.: May 31, 2018.

Nuclear Weapons: NNSA Should Clarify Long-Term Uranium Enrichment  Mission Needs and Improve Technology Cost Estimates. GAO-18-126.  Washington, D.C.: February 16, 2018.

Nuclear Weapons: NNSA Should Adopt Additional Best Practices to  Better Manage Risk for Life Extension Programs. GAO-18-129.  Washington, D.C.: January 30, 2018.

Nuclear Weapons: NNSA Needs to Determine Critical Skills and  Competencies for Its Strategic Materials Programs. GAO-18-99.  Washington, D.C.: November 14, 2017.

Modernizing the Nuclear Security Enterprise: A Complete Scope of Work  Is Needed to Develop Timely Cost and Schedule Information for the  Uranium Program. GAO-17-577. Washington, D.C.: September 8, 2017.

National Nuclear Security Administration: Action Needed to Address  Affordability of Nuclear Modernization Programs. GAO-17-341.  Washington, D.C.: April 26, 2017.

High-Risk Series: Progress on Many High-Risk Areas, While Substantial  Efforts Needed on Others. GAO-17-317. Washington, D.C.: February 15,  2017.

DOE Project Management: NNSA Needs to Clarify Requirements for Its  Plutonium Analysis Project at Los Alamos. GAO-16-585. Washington,  D.C.: August 9, 2016.

DOE Project Management: NNSA Should Ensure Equal Consideration of  Alternatives for Lithium Production. GAO-15-525. Washington, D.C.: July  13, 2015.

Nuclear Weapons: NNSA and DOD Need to More Effectively Manage the  Stockpile Life Extension Program. GAO-09-385. Washington, D.C.: March  2, 2009.

GAO Cost Estimating and Assessment Guide: Best Practices for  Developing and Managing Capital Program Costs. GAO-09-3SP.  Washington, D.C.: March 2009.

Nuclear Weapons: Opportunities Exist to Improve the Budgeting, Cost  Accounting, and Management Associated with the Stockpile Life  Extension Program. GAO-03-583. Washington, D.C.: July 28, 2003.

This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

The National Nuclear Security Administration is working to modernize the nation’s nuclear weapon stockpile and the infrastructure on which weapon programs depend.

We testified that NNSA has improved some of its management practices for these modernization efforts. For example, the agency has established requirements for conducting independent cost estimates.

But NNSA still has trouble managing the costs and schedules for its efforts—with billions of dollars and years of work on the line. We previously recommended that NNSA assess the affordability of its efforts to help ensure it can achieve its modernization goals at cost and on schedule.


Individual Retirement Accounts: Formalizing Labor's and IRS's Collaborative Efforts Could Strengthen Oversight of Prohibited Transactions

IRA owners are able to invest in a wide variety of assets, but they are prohibited from engaging in certain transactions involving IRA assets. IRA owners who engage in prohibited transactions may incur increased income tax liability, additional taxes, and the loss of the tax-advantaged status of their accounts. DOL can grant exemptions from the prohibited transaction rules. IRS enforces tax laws relating to IRAs and can assess additional taxes.

GAO was asked to examine (1) DOL's process for granting exemptions for prohibited IRA transactions and outcomes of that process, and (2) the extent to which DOL and IRS collaborate on oversight of prohibited transaction rules for IRAs. GAO reviewed relevant federal laws and regulations; examined agency guidance, exemption process documentation, and application case files; assessed interagency coordination using internal control standards and prior work on interagency collaboration; and interviewed DOL and IRS officials.

The Department of Labor (DOL) has a process to grant administrative exemptions for individual retirement account (IRA) transactions that would otherwise be prohibited by law, such as an IRA buying investment property from the IRA owner. DOL evaluates applications using statutory criteria and follows administrative procedures codified in regulations. Applications for proposed transactions that are substantially similar to certain other transactions previously granted exemptions may follow an expedited process.

As shown in the figure, GAO found that roughly half (56) of the IRA prohibited transaction exemption applications it reviewed were withdrawn by the applicant before the review process was completed. In reviewing processed applications, GAO found that most of the prohibited transactions for which an exemption was sought involved the sale of IRA assets. With regard to DOL's application review process, GAO found that DOL has not sufficiently documented internal policies and procedures to help ensure effective internal control of its process. Documenting procedures could increase transparency about how applications are handled, reduce the risk of DOL employees carrying out their duties inconsistently, and provide a means to retain organizational knowledge should key personnel leave unexpectedly.

Although DOL and the Internal Revenue Service (IRS) share some information as part of their oversight responsibility for prohibited IRA transactions, no formal mechanism exists to help guide collaboration between the agencies. Of the 124 IRA applications GAO reviewed, only eight reflected DOL contact with IRS. GAO found that DOL has information about requested exemptions to prohibited IRA transaction rules that could be useful to IRS in carrying out its oversight responsibilities. For example, DOL does not share information on denials—information that could be useful as prohibited transaction examples for IRS examiner training and educational outreach to IRA owners. In prior work on interagency collaboration, GAO has found that formal agreements, such as a memorandum of understanding, can help agencies monitor, evaluate, and update interagency collaboration. Formalizing the sharing of information between DOL and IRS regarding IRA prohibited transaction exemptions could help the agencies better support their current coordination efforts and identify additional opportunities for greater collaboration.

GAO is recommending that DOL and IRS establish a formal means—such as a memorandum of understanding or other mechanism—to collaborate on oversight of prohibited IRA transaction exemptions. GAO is also recommending that DOL document policies and procedures for managing the exemptions process. DOL and IRS generally agreed with GAO's recommendations.

Individual retirement accounts (IRA) provide key tax advantages to  encourage individuals to save for retirement. While contributions to IRAs  are subject to annual dollar limits, there are few restrictions on the types  of investments allowable in an IRA. Many IRA owners invest in publicly  traded assets, such as stocks, bonds, and mutual funds. But as we have  previously reported, some IRA owners choose to invest in less  conventional or nonpublicly traded assets such as real estate, virtual  currency, or private equity. We have also reported that IRA owners who  have accumulated unusually large IRA balances likely have invested in  unconventional assets like nonpublicly traded shares of stock and  partnership interests.

IRA owners who invest in unconventional assets can assume greater  responsibility for managing their accounts and, as a result, can be  exposed to heightened risks of noncompliance with complex rules  governing tax-favored retirement accounts. For example, although IRA  owners are able to invest in a wide variety of types of assets, they are not  permitted to engage in certain transactions involving those assets. These  transactions are prohibited to prevent misuse of the IRA to benefit the  owner in a way other than as a vehicle to save for retirement, such as  using an IRA to purchase a personal residence. IRA owners who engage  in prohibited transactions may incur increased income tax liability,  additional taxes, and the loss of the tax-advantaged status of their  account.

The Department of Labor (DOL) and the Internal Revenue Service (IRS)  within the Department of the Treasury each have responsibilities for  overseeing prohibited transactions relating to IRAs. DOL has primary  responsibility for interpretive guidance and exclusive authority to grant  exemptions from the prohibited transaction rules for retirement plans and  IRAs. Whereas IRS and DOL share oversight responsibilities for  employer-sponsored retirement plans such as 401(k) plans, IRS is  responsible for enforcing tax laws relating to IRAs and, among other  things, assessing additional taxes for early distributions for IRA owners  that engage in prohibited transactions.

You asked us to examine the challenges associated with enforcing rules  governing IRAs invested in unconventional assets. This report examines:  (1) the DOL process for granting exemptions for prohibited IRA  transactions and outcomes of that process, and (2) the extent to which  IRS and DOL collaborate on oversight for prohibited transaction rules for  IRAs. This report is part of a larger body of work on retirement security—a  key issue we have identified facing the nation.

To describe the process for granting exemptions for prohibited IRA  transactions, we examined relevant federal laws and regulations. We  reviewed DOL procedures and guidance for granting administrative  exemptions for certain prohibited transactions. We interviewed DOL  officials from the Employee Benefits Security Administration (EBSA)  about their prohibited transaction exemption process and procedures.  Specifically, we asked officials within EBSA’s Office of Exemption  Determinations about IRA exemption application submissions; steps and  criteria for the application approval process; and communication with  applicants and IRA owners, as well as with IRS, regarding application  decisions.

To describe the outcomes of the DOL exemption process, we reviewed  DOL’s internal Case Tracking System data on 124 IRA applications  processed over an 11-year period from January 1, 2006, to   May 16, 2017. To report on the types of exemptions granted, denied, or  withdrawn by applicants, we reviewed the system reference guide and  DOL’s definitions of subject codes used to categorize the IRA  transactions. We reviewed the subject codes DOL assigned to each  application and summarized the types of transactions and assets for  which applicants most often requested an exemption. To assess the  reliability of the data, we compared selected key data points to  documentation in the supporting case files, which we had requested from  DOL for this purpose. We interviewed DOL officials about the reliability of  the data and discussed suspected anomalies we found. Based on our  analysis and discussions with DOL officials, we determined that the DOL  data were sufficiently reliable for the purposes of our descriptive analysis  for the period we reviewed.

To determine the extent to which IRS and DOL collaborate on oversight  for prohibited transaction rules for IRAs, we reviewed the 124 applications  for documentation of DOL coordination with IRS about the application  review or decision. We interviewed DOL officials responsible for the  exemption process about their interactions with IRS regarding prohibited  IRA transactions. We interviewed IRS officials responsible for  enforcement of prohibited transactions rules on IRAs about their use of  DOL exemption information. We assessed coordination using the relevant  Standards for Internal Control in the Federal Government and our prior  work on interagency collaboration that identifies key practices and  considerations for implementing collaborative mechanisms.

We conducted this performance audit from December 2016 to June 2019  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.

IRA owners are not permitted to engage in certain prohibited transactions  involving IRA assets. Prohibited transactions generally fall into two  categories:

Transaction involving disqualified persons. An IRA is prohibited  from engaging in a transaction with disqualified persons, such as  members of the IRA owner’s family or an IRA fiduciary.

Transaction involving self-dealing. An IRA owner who is a fiduciary  is prohibited from engaging in a transaction with the IRA where the  IRA owner personally benefits (other than through the receipt of a  distribution).

We previously reported that prohibited transactions are more likely to  arise when IRA owners make unconventional IRA investments. Unlike  conventional IRA investments in publicly traded stocks, bonds, and  mutual funds, unconventional investments in real estate, virtual currency,  or private equity are more likely to involve the IRA owner, disqualified  family members, or other disqualified persons. For example, an IRA  invested in rental real estate can leave IRA owners susceptible to a  number of prohibited transactions, such as renting to family or paying for  repairs with personal funds.

IRA owners may face adverse and potentially severe tax consequences if  they are found to have engaged in a prohibited transaction. Specifically,  the IRA could lose its tax-favored status. The account would then be  treated as distributing all its assets to the IRA owner at the fair market  value on the first day of the year in which the prohibited transaction  occurred. The IRA owner may be subject to additional income taxes  because of any early distribution from an IRA. The prohibited  transaction may also be subject to excise taxes.

The Employee Retirement Income Security Act of 1974 (ERISA), which  established IRAs and rules prohibiting certain IRA transactions, assigned  IRA oversight roles to both DOL and IRS. To avoid confusion over dual  jurisdiction, a 1978 Executive Order further clarified the agencies’ roles  and responsibilities regarding prohibited transactions. As a result, the  authority to interpret the prohibited transaction rules and grant  exemptions to those rules was transferred to DOL. The transfer did not  affect IRS’ ability to enforce the excise tax provisions or the tax  consequences for IRA owners who are found to have engaged in a  prohibited transaction. However, in enforcing such tax consequences,  IRS is bound by the regulations, rulings, opinions, and exemptions issued  by DOL.

DOL has the authority to grant administrative exemptions to the prohibited  transaction rules on either an individual or a class basis. DOL can grant  prospective exemptions for a transaction that an IRA is considering, as  well as retroactive exemptions for transactions that have already  occurred.

DOL Has Not Sufficiently Documented Internal Policies and Procedures for Reviewing Prohibited IRA Transaction Exemption Applications

To grant an exemption from prohibited IRA transaction rules, DOL  evaluates applications using statutory criteria, and follows administrative  procedures codified in regulations. Generally, DOL may not grant an  exemption unless it finds the exemption to be:  in the interest of the plan and its participants and beneficiaries, and protective of the rights of plan participants and beneficiaries.

Before granting an exemption, DOL generally must publish a notice of  proposed exemption in the Federal Register inviting interested parties to  comment on the proposed exemption.

DOL Has a Process to Grant Administrative Exemptions for Otherwise Prohibited IRA Transactions

DOL regulations lay out the process for filing and processing prohibited  transaction exemptions applications. Among other things, the  regulations explain: who may apply, what information must be included with an application, when a conference with DOL can be requested, when a request for reconsideration of a DOL decision can be made, how DOL and the applicant will notify interested persons if DOL  decides a tentative approval is warranted.

DOL also publishes a booklet that provides an explanation of the  regulations and applicable laws, and includes additional information for  applicants like examples of common types of exemption requests.

IRA owners or their fiduciaries file applications for exemptions with DOL’s  Office of Exemption Determinations which is part of EBSA. Applicants can  research information about past exemptions granted by the agency on  EBSA’s website. As explained in the DOL booklet describing the  application requirements, applicants have the burden of demonstrating  that they should be granted an exemption.

If DOL tentatively denies an application, applicants have options for  requesting that the denial be reconsidered. Within 20 days of the tentative  denial, applicants can request a conference with DOL, or notify DOL of  their intent to submit additional information. If, after a conference has  been convened, DOL issues a final denial of the application, DOL will  entertain one request for reconsideration if the applicant presents  significant new facts or arguments, which, for good reason, could not  have been submitted earlier.

After DOL publishes a notice of proposed exemption in the Federal  Register that describes the pending application, the applicant must notify  interested persons of the pending exemption. Often, the contents of the  information sent to all interested persons, the manner in which it is sent,  and any associated deadlines will have previously been agreed to by  DOL and the applicant. DOL may also hold public hearings during the  comment period. For example, if the transaction involves potential  fiduciary self-dealing or conflicts of interest, any individual potentially  adversely affected by the exemption may submit a request for a public  hearing to DOL. If granted, DOL publishes information about the  exemption in the Federal Register and on its website. Figure 1 provides  an overview of the exemption application process.

The regulations describe circumstances in which DOL will ordinarily not  consider an application. For example, DOL generally will not consider  an individual application if DOL already has under consideration a class  exemption relating to the same type of transaction. DOL will also not  consider an application for transactions subject to DOL or IRS  investigations. DOL requires applicants to disclose in their applications  whether exemption transactions are, or have been, subject to an  investigation or enforcement action by DOL or IRS. In addition, if the  applicant or any other party in interest becomes the subject of an  investigation or enforcement action, the applicant is required to promptly  notify DOL.

If applicants find that their prospective transaction is substantially similar  to other transactions for which the agency has previously granted  exemptions, they can follow an expedited process by submitting an  “EXPRO” application. EXPRO applications are required to cite prior  exemptions granted by DOL to demonstrate that the proposed IRA  transaction is substantially similar to other IRA transactions for which  DOL has previously provided an exemption. Specifically, EXPRO  applicants must cite as substantially similar, either (1) two individual  exemptions granted by DOL within the previous 5 years, or (2) one  individual exemption granted within the past 10 years, and one  transaction authorized pursuant to the EXPRO class exemption within the  past 5 years. The applicant must give notice to all interested persons, and  the applicant must resolve all substantive adverse comments provided by  interested persons before DOL will grant final approval.

The time to complete the exemption process can range from a few  months to more than a year. DOL officials told us that the process  generally takes about 1 year for an individual IRA application that is  relatively simple or routine. EXPRO applications have been processed in  as few as 78 days. According to DOL officials, the process can start  before an applicant submits a formal application because applicants can,  and do, request informal consultations and conferences with DOL. DOL  officials explained that sometimes potential applicants decide not to file  an application after an informal conference because applicants realize  that their application would likely be denied.

DOL officials explained that during the review process, they first confirm  their understanding and characterization of the proposed exemption  through correspondence with the applicants. Then, in response, DOL  often sets conditions under which relief from the prohibited transaction  rules is contingent, such as on the applicant taking additional actions and  remaining in compliance with those conditions. For example, if an  applicant wants to sell or purchase an asset in what would be an  otherwise prohibited IRA transaction, DOL may stipulate that the  applicant first obtain an independent appraisal or valuation assessment to  determine a fair-market value of that asset.

After applications are formally submitted, many IRA applicants withdraw  during DOL’s review process. Over an 11-year period, we found that of  the 124 IRA applications, applicants withdrew roughly half (56) before the  review process was completed (see table 1). Of the remaining 68  applications that continued with the review process, DOL granted 48,  denied 16, and closed four application cases for administrative or other  reasons. DOL officials did not dispute the results of our analysis, but  they said that it would be misleading to conclude that DOL is more likely  to grant than deny applications. Rather, they said that their practice of  encouraging applicants to consult with DOL in advance leads some  potential applicants to decide not to pursue an exemption.

In our review of processed applications, we found that most of the  applications involved the sale of IRA assets. We found that 88 of the 124  applications were for transactions involving the sale of IRA assets. Most  of these were sales of securities or real property (see appendix I for  additional information). The next most common type of transaction was  for the purchase of assets (21 applications), and most of those also  involved securities or real property. The remaining applications involved  other transactions, including leases, loans, and extensions of credit.

DOL Lacks Documented Policies and Procedures to Manage Its Reviews and Data

DOL has not sufficiently documented internal policies and procedures to  manage and help ensure effective internal controls of its prohibited  transactions exemption process. While DOL regulations and guidance  detail the requirements for applicants, DOL generally lacks internal  documentation of the steps and actions DOL officials are to follow when  processing applications, and the roles and responsibilities of agency  officials.

DOL officials told us that they use a case tracking system to record and  track applications. When an application is received by DOL, the division  chief of EBSA’s Office of Exemption Determinations (OED) reviews the  application and assigns it to an OED supervisor. Either the division chief  or the supervisor enters preliminary information from the application into  the system, and classifies the transaction by applying one or multiple  subject matter codes. The supervisor then reviews the information in the  applicant’s case file and assigns the case to an OED analyst. DOL  officials told us that any interim data, such as the publication date for a  proposed exemption, is entered by the supervisor in the system. If an  application is withdrawn by an applicant, denied, or granted, the  supervisor records this information in the system, including the dates of  these actions. When a case is closed, the analyst completes a close-out  index form and submits it to the supervisor for review, and the supervisor  enters a closing code in the system. DOL officials told us that they can  use the system to generate management reports, such as on the number  of applications filed and the amount of time to process cases.

Neither the process described above, nor the different roles and  responsibilities of the OED division chief, supervisors, and analysts in that  process, were documented in the internal documents that DOL provided.  A system reference guide included instructions to system users for how to  input and modify case records, generate reports, and add or modify  users. The reference guide also included screen prints indicating which  fields are required by the system to process a case. However, the  reference guide did not contain information about responsibilities and  duties for these data entry activities, and how those duties are assigned.  The documentation provided is unclear regarding who within OED is  ultimately responsible for making final decisions on applications.

According to Standards for Internal Control in the Federal Government,  documentation of an agency’s policies and procedures is a necessary  part of an effective internal control system. Such documentation can  appear, for example, in management directives or operating manuals,  and it should be readily available for examination. Policies and  procedures can also help document internal control responsibilities within  the agency.

DOL officials told us that OED is a small and compact organization, and  as such, its policies and procedures can easily be communicated “person  to person” and through onsite training. DOL officials also said that the  process for entering data is not difficult, and there are few opportunities  for error because nearly all data on applications is prepopulated.

The principles of internal control, however, apply to both large and small  organizations. The level and nature of documentation may vary based on  the size of the organization and the complexity of the processes the  organization performs, but documentation is still necessary. By  documenting policies and procedures, management will be better  positioned to monitor whether the organization’s activities are aligned with  those policies and procedures, and assess whether the organization is  achieving its objectives. Documenting procedures also would provide  greater transparency about how applications are handled, and can reduce  the risk of employees carrying out their duties inconsistently. For a small  organization like OED, documentation of policies and procedures  provides a means to retain organizational knowledge, and can help  ensure continuity of and consistency in operations if key personnel leave  the organization unexpectedly.

DOL and IRS Currently Share Some Information on Exemption Applications, but More Formalized Collaboration Could Improve Their Oversight Efforts

Some information sharing takes place between DOL and IRS on  applications for IRA prohibited transaction exemptions, but no formal  mechanism exists to help guide collaboration between the two agencies.  As previously discussed, DOL and IRS share oversight responsibility for  prohibited IRA transactions. Based on our review of applications and DOL  data as well as interviews with agency officials, we found that interactions  between DOL and IRS regarding applications for prohibited transaction  exemptions are infrequent and limited in scope. Of the 124 applications  we reviewed, only eight were coded in OED’s Case Tracking System as  having “external contact with IRS,” and DOL officials confirmed that this  accurately reflects the level of interagency coordination. DOL officials  stated that they sometimes contact IRS about exemption applications,  and IRS officials confirmed to us that they periodically receive  communications from DOL. IRS officials also told us that they  occasionally contact DOL.

Both agencies described to us how their current interaction occurs. DOL  officials told us that they coordinate with IRS in the following ways:  If, during the application review process, OED staff identify  applications that may warrant further review or investigation for tax  violations, they refer the case to EBSA’s Office of Enforcement, which  may then coordinate or refer the case to IRS.

DOL officials said that OED staff review the IRS “Dirty Dozen” list of  potentially abusive tax scams and schemes.

IRS officials said that when possible prohibited transactions arise during  an examination that might require DOL input, IRS examiners reach out to  DOL to ensure that IRS understands DOL decisions on those  transactions.

DOL officials said that, in their view, most requested prohibited IRA  transaction exemptions do not require extensive interaction with IRS.  They questioned the potential usefulness of information about denied or  withdrawn applications that might be shared with IRS, but said that IRS  could certainly obtain this information if IRS requested it.

IRS officials, however, told us that more information from DOL about  prohibited IRA transactions and requested exemptions could be useful in  carrying out IRS’s oversight responsibilities. For example, DOL does not  share information on denied or withdrawn applications with IRS,  information that IRS officials told us would be helpful to them. We found  that denial information could be useful to IRS as illustrative examples of  prohibited transactions for examiner training and educational outreach to  IRA owners. Information about the types of transactions in withdrawn  applications could also help IRS identify emerging issues or trends in  potential prohibited transactions marketed to IRA owners.

Although some limited collaboration between DOL and IRS exists, the  agencies have not applied to their oversight of prohibited transactions  some key practices we have identified in prior reviews of interagency  collaboration. Specifically, developing a mechanism to formalize the  sharing of information between DOL and IRS could help support current  collaboration activities, and could be useful in helping the agencies  identify opportunities for greater collaboration going forward. Furthermore,  documentation is a necessary part of an effective internal control  system. Documenting the procedures for interagency collaboration  would improve internal control over the agencies’ activities. A formal  agreement, such as a memorandum of understanding (MOU) or other  mechanism, can further help agencies monitor, evaluate, and update  interagency collaboration.

For example, DOL and IRS have previously formalized their collaboration  regarding oversight of a different type of retirement savings vehicle— employer-sponsored retirement plans. DOL and IRS have oversight  responsibilities for employer-sponsored retirement plans, such as  pensions, and in 2003, DOL and IRS completed an MOU to implement  collaboration between the two agencies with regards to investigations of  and litigation involving employer-sponsored retirement plans. The  employer retirement plan MOU and the implementing guidance contain  some features of interagency collaboration mechanisms that we have  identified in prior work. For example:

The responsibilities of each agency are documented, and responsible  agency components and officials are identified.

The agencies use collaboration tools (checklists) for determining  whether issues presented in an examination or investigation by one  agency should be referred to the other.

A system and process exists to track referrals, and the agencies  reconcile their data about referrals (including pending referrals)  quarterly.

The employer retirement plan MOU also established a process to  periodically monitor its effectiveness, and the MOU was last updated in  2013. Developing a similar mechanism to formalize the sharing of  information between DOL and IRS regarding IRA prohibited transaction  exemptions could help the agencies better support their current  coordination efforts and identify additional opportunities for greater  collaboration.

IRAs are a key vehicle for individuals to save for retirement. IRA owners’  decisions to invest in unconventional assets can expand their role and  responsibilities substantially. The consequences for account owners who  make a mistake can be severe.

When IRA owners request an exemption from rules on prohibited  transactions, DOL evaluates applications using statutory criteria, and  follows administrative procedures codified in regulations. However, DOL  has not sufficiently documented internal policies and procedures for how  to manage its process for granting exemptions. Such documentation is a  necessary part of an agency’s effective internal control system.

DOL and IRS share oversight responsibility of prohibited IRA  transactions. While the two agencies do share some information, they do not have a formal mechanism to guide and monitor their collaboration. By  formalizing interagency collaboration, such as through an MOU or other  mechanism, DOL and IRS could help reinforce their current information  sharing and potentially identify new opportunities to improve their  oversight efforts through greater collaboration. Documenting procedures  for DOL and IRS collaboration on prohibited IRA transactions would also  help introduce better internal control over these activities.

We are making a total of three recommendations, including two to DOL  and one to IRS.

The Secretary of Labor should document internal policies and procedures  for managing the IRA prohibited transaction exemption process.  (Recommendation 1)

The Secretary of Labor, in consultation with the Commissioner of Internal  Revenue, should establish a formal means, such as a memorandum of  understanding or other mechanism, to support and guide DOL’s and  IRS’s collaborative efforts to oversee IRA prohibited transaction  exemptions. (Recommendation 2)

The Commissioner of Internal Revenue, in consultation with the Secretary  of Labor, should establish a formal means, such as a memorandum of  understanding or other mechanism, to support and guide DOL’s and  IRS’s collaborative efforts to oversee IRA prohibited transaction  exemptions. (Recommendation 3)

We provided a draft of this report to the Secretary of Labor, the  Commissioner of Internal Revenue, and the Secretary of the Treasury for  review and comment.

In its comments, reproduced in appendix II, DOL generally agreed with  our two recommendations directed to it. For recommendation 1, DOL  plans to create an internal procedure manual formalizing OED’s  administrative case processing procedures to help in passing along  institutional knowledge. For recommendation 2, DOL agreed to  periodically discuss all IRA exemption cases with IRS and did not  elaborate on the formal means for this information sharing. DOL also  provided technical comments which we incorporated as appropriate.

In its comments, reproduced in appendix III, IRS generally agreed with  our recommendation directed to it. For recommendation 3, IRS said it is  committed to discussing an appropriate mechanism, including periodic  meetings, to formalize collaboration on IRA prohibited transaction  exemptions. IRS plans to consider expanding its formal collaboration with  DOL as part of the next periodic update of the existing employer plan  MOU. IRS also provided technical comments which we incorporated as  appropriate.

The Department of the Treasury provided technical comments which we  incorporated as appropriate.

As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the appropriate  congressional committees, the Secretary of Labor, the Secretary of the  Treasury, and the Commissioner of Internal Revenue. In addition, the  report will be available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff have any questions about this report, please contact  James R. McTigue, Jr. at (202) 512-9110 or Charles A. Jeszeck at   (202) 512-7215. You may also reach us by email at mctiguej@gao.gov or  jeszeckc@gao.gov. GAO staff making key contributions to this report are  listed in appendix IV.

Appendix I: Applications for Individual Retirement Account Exempted Transactions by Type

Appendix II: Comments from the Department of Labor

Appendix III: Comments from the Internal Revenue Service

Appendix IV: GAO Contact and Staff Acknowledgments

In addition to the contacts named above, MaryLynn Sergent and David  Lehrer (Assistant Directors), Ted Burik, Susan Chin, Steven Flint, Emily  Gruenwald, Mark Kehoe, Jungjin Park, and David Reed made key  contributions to this report. James Bennett, Amy Bowser, Jacqueline  Chapin, Edward J. Nannenhorn, Andrew J. Stephens, Walter Vance, and  Adam Wendel also provided support.

If you have an individual retirement account (IRA), you know its tax breaks can make it easier to save for retirement. Most IRAs hold investments in traditional assets like stocks and mutual funds. But if you want to invest in non-traditional assets like real estate or virtual currency, your IRA might run afoul of tax laws. You can, however, apply for an exemption from the Department of Labor. The IRS and Labor each have IRA oversight duties. Labor reviews these applications.

We saw evidence that Labor contacted IRS in only 8 of the 124 applications we reviewed. We recommended the agencies establish a formal collaboration process.