Airports: Information on Prices for Aviation Services and FAA's Oversight of Grant Requirements

Since 2007, the FAA has provided more than $37 billion in grants to airports to fund capital development and is responsible for ensuring compliance with requirements airports assume when they accept these grants. One such requirement is that the airports provide users equal access to airport services such as fueling and parking. Recently, an industry group and pilots raised concerns about the transparency and reasonableness of prices charged for these and other services at airports.

GAO was asked to examine FBOs' pricing and FAA's oversight of related airport grant assurances. This report examines: (1) the transparency of FBO prices, (2) the factors that influence prices, and (3) the extent to which FAA ensures compliance with federal airport grant assurances related to FBO activities.

GAO analyzed FAA data related to complaints from 2013 through 2018 and reviewed relevant literature, key laws and regulations, and program documentation. GAO developed a statistical model to analyze variation in fuel prices across airports in the contiguous United States. GAO interviewed FAA compliance staff at headquarters and all regional offices, as well as a non-probability selection of stakeholders.

Fixed base operators (FBO) at airports (see figure) offer a variety of services to pilots and passengers. While anyone can view fuel prices offered by FBOs online, other service fees, such as for aircraft parking, can vary by type of aircraft and are not always available online, although they can be obtained by calling the FBO. Recently, industry groups developed the “Know Before You Go” campaign that calls for greater transparency of FBO prices. Some of the FBOs GAO interviewed list their fees online; however, others do not.

Stakeholders GAO interviewed––including general aviation pilots, airports, FBOs, and industry groups––said FBOs' costs to build and maintain facilities—such as hangars and fueling facilities—as well as operating expenses such as labor and fuel––influence their prices. Stakeholders also said that demand for FBOs' services can influence prices, such as when seasonal demand affects operations at an airport near a ski resort. Finally, they also said that competition affects FBO's prices. GAO's statistical model confirmed a correlation between many cost and demand factors and aviation fuel prices and found higher prices at airports with higher costs and demand. This model also found that on-airport competition is associated with lower prices at the country's busiest airports: Prices for aviation fuels were lower at such airports with more than one FBO. However, not all airports can support more than one FBO due to, for example, the amount of business each gets.

Airports receiving Federal Aviation Administration (FAA) grants must meet “grant assurances” such as charging reasonable and not unjustly discriminatory prices for services, including prices charged by FBOs. FAA officials said FAA oversight relies on (1) airports' consent to adhere to grant assurances; (2) training and outreach; and (3) complaints. Since 2013, in complaints received by FAA, GAO found few complaints about FBOs' prices. GAO found each regional office independently records additional inquiries. FAA is moving to collect regional inquires centrally, and by 2020 that step may allow FAA to stay abreast of apparent nationwide trends or issues with any grant assurance concerns.

Since 2007, the Federal Aviation Administration (FAA) through the Airport  Improvement Program (AIP), has provided more than $37 billion in  federal grants to fund airport capital development and is responsible for  overseeing airports’ compliance with the federal requirements related to  these grants, called airport grant assurances. Airports receiving grants  agree to meet 39 grant assurances, and one such requirement is that the  airport must provide users equal access to airport facilities. Recently  some general aviation pilots along with the Aircraft Owners and Pilots  Association (AOPA) expressed concerns about the cost and transparency  of certain services—primarily aircraft fuel and parking—provided by fixed  base operators (FBO) at airports. An FBO usually operates on site as a  business providing not only fuel and parking but also, depending on the  airport, flight training and, aircraft rental and maintenance, among other  things. Approximately 3,000 public use airports in the contiguous United  States receive FAA grants and each must ensure that FBOs and other  tenants at their airport act in accordance with the conditions of their grant  funding.

You asked us to review FBOs’ prices and FAA’s oversight of airports’  grant compliance and FBOs. This report examines:  the transparency of FBO prices,  the factors that influence prices, and  the extent to which FAA ensures compliance with federal airport grant  assurances related to FBO activities.

To determine what is known about FBOs’ price transparency and to help  identify the factors that may influence FBOs’ prices, we performed a  literature search of reports, presentations, and articles about the FBO  industry. We also reviewed two websites that list fuel prices for many  FBOs as well as individual websites for the 16 FBOs we interviewed, to  understand the extent to which prices for FBO services are posted  publicly. To add stakeholder perspectives, we selected a non-probability  sample of 26 airports and interviewed the airports’ officials to discuss their  operations and grant oversight process. We selected these airports to  obtain a geographic dispersion, aircraft traffic levels, and the number and  type of FBOs at the airport, among other factors. We also interviewed 16  FBOs at these airports to discuss their operations, relationship with the  airport, and prices. See appendix I for a list of the selected airports and  FBOs. We also selected a non-probability sample of 18 general aviation  pilots to obtain perspectives on how they view the FBO market and how  they choose FBOs to patronize. Our findings from our interviews with  airports, FBOs and selected pilots are not generalizable to all airports,  FBOs, and pilots.

To further understand factors that correlate with FBO fuel prices, we  obtained data on posted aviation fuel prices, information that we used— along with data from FAA, the Department of Commerce’s Bureau of  Economic Analysis, and other sources, to examine the relationship  between the price of aviation fuel and selected cost factors, demand  factors, and factors related to the extent of competition among FBOs at  each airport. In addition, we met with the Department of Justice (DOJ) to  discuss competition and a recent FBO merger. We also discussed our  approach for analyzing fuel price information with DOJ officials. See  appendix II for further discussion of this analysis. Finally, we also  interviewed industry associations—the Aircraft Owners and Pilots  Association, the National Air Transportation Association, the National  Business Aircraft Association, Airport Council International–North  America, the American Association of Airport Executives, and the General  Aviation Manufacturers Association—regarding their perspectives on FBO  prices.

To determine the extent to which FAA ensures compliance with federal  airport grant assurances related to FBO activities, we reviewed pertinent  documentation related to FAA’s airport compliance and grant programs,  such as its airport compliance manual and complaint procedures. We also  reviewed FAA’s complaint process including obtaining data on informal  and formal complaints made to the agency between 2013 and 2018. We  interviewed officials from FAA’s Office of Airport Compliance and  compliance officials in each of FAA’s nine regions to obtain an  understanding of their compliance oversight activities. In addition, we  asked the selected airport and FBO officials (staff and managers) and  industry associations about their observations of FAA oversight.

We conducted this performance audit from April 2018 to October 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.

FAA defines an FBO as a business granted the right by the airport to  operate fueling facilities, hangars, aircraft tie-downs, aircraft rental,  aircraft maintenance, flight instruction, and other aeronautical services at  an airport. In addition, FBOs sometimes manage parking ramps for  transient aircraft at the airport. FBOs may charge a fee for parking, as  they also maintain the ramp areas for the airport. According to FAA,  airports, within certain parameters, have the ability to charge or not to  charge users for access to airport ramp space. FBOs generally serve  pilots who operate general aviation aircraft, but can also support  commercial flights. The type of amenities and services any one FBO  provides varies. For example, representatives of one FBO said that it  provides high-level customer service and offers more services such as  catering, pilot lounges, concierge services, and aircraft maintenance and  repair facilities for its clients. See figure 1 for an illustration of FBO  services.

As of March 2019, we identified 3,070 FBOs operating at 3,016 airports  located in the contiguous United States; these airports are included in  FAA’s National Plan of Integrated Airport Systems (NPIAS). FBOs can  be run by the airport, an independent operator, or a network chain with  multiple locations. The Transportation Research Board estimated in 2016  that 47 percent of all FBO locations were airport-operated.

Most stakeholders with whom we spoke agreed that there are fewer  FBOs today than in the past, although estimates vary on the extent of the  decline in FBO numbers. Stakeholders we interviewed said that this  decline is due to factors such as a drop in general aviation activity that  resulted in a reduction in fuel sales. More recent innovations, such as  more fuel-efficient aircraft and decision-making software that provides  information to pilots on where to purchase fuel to fly more efficiently, also  contributed to the decline.

Airport and Federal Oversight of FBO Activities

Airports that receive federal AIP grants contractually agree to FAA “grant  assurances” that require those airports to adhere to certain  requirements. One of those key grant assurances is a prohibition of  unjust economic discrimination. This assurance requires airports to  provide to users equal access to airport facilities. Likewise, tenant  businesses (e.g. FBOs) operating at airports are required to make  services available and price those services not in an unduly  discriminatory fashion. Although FAA is required to ensure that airports,  as a condition for accepting federal grants, provide fair and equal access  to services and nondiscriminatory pricing, FAA does not regulate prices in  the FBO industry. As a condition of accepting federal grants, airports  have a responsibility to ensure that they and their contractors and  concessionaires abide by the grant assurances. FAA’s Airport  Compliance Office oversees airports’ adherence to grant assurances by  taking and responding to inquiries and complaints, developing and  circulating advisories and guidance documents, and coordinating with  airports and industry to conduct compliance training and airport land use  inspections.

The Department of Justice (DOJ) also plays a role in overseeing the FBO  industry under its antitrust responsibilities to preserve competition. For  example, in the Final Judgement entered by a federal court in the DOJ’s  case regarding the acquisition by BBA Aviation (Signature Flight Support)  acquisition of Landmark Aviation, BBA was required to divest FBO  facilities in six locations where the transaction would have created a  monopoly or duopoly for FBO services. In addition, the court order  required BBA to provide advance notice of certain future acquisitions for  the 10-year duration of the final judgment.

Transparency of FBO Fees Varies by Service

Based on our review of FBO and third party websites, we found that fuel  prices at FBOs are readily available to anyone on the internet. Nearly all  of the pilots we spoke with told us they use these resources for making  flight plans. For example, current prices for fuel are readily available on  third party websites such as AirNav and Sky Vector, among others, and  on about a third of the websites for FBOs we visited. See figure 2 for a  representation of a website providing FBO information.

However, fees for other services such as for parking and aircraft handling  are less transparent. Our review of FBO and third-party websites found  that such fees are not always available online, and that fees may vary by  type of aircraft, are sometimes waived, and are called by different terms.  According to FBO staff we spoke with, fees for services other than fueling  can be lengthy and unwieldy to post on their websites for multiple  reasons. First, some fees will vary based on the size and approved  weight of the aircraft. For example, the price sheet for services other than  fuel at one FBO showed fees varying by the aircraft’s approved weight, so  there were 11 different prices for each of those services. The same  pricing sheet also included prices for dozens of incidental services, such  as aircraft towing and lavatory service that are not based on aircraft  weight. Additionally, customers may be eligible for discounts on fuel  purchases either by volume or through a membership program. FBOs  may also waive fees in some cases—for example, with a qualifying fuel  purchase an FBO might waive a parking, ramp, or handling fee. Further, a  few stakeholders and pilots we spoke to indicated that FBOs don’t always  use the same terms for a fee. For example, a landing fee or a ramp fee  might be a fee for doing essentially the same thing. Consequently, to find  out how much an FBO visit will cost, 16 of the 18 pilots we interviewed  told us they call the FBO in advance. Based on information such as their  type of aircraft, length of stay, and other services they might require, the  FBO provides an estimate of their total cost.

Recently, some industry stakeholders have called for increased price  transparency and consistency among FBOs regarding how they  characterize their fees, and have taken some actions to increase the  transparency of fees. A campaign called, “Know Before You Go,”  developed through the cooperation of six aviation associations,  encourages FBOs to communicate and expeditiously provide available  services and a listing of currently applicable posted fuel prices, as well as  fees and charges for other available services. Further, the campaign  suggests that these fees and charges should be made accessible to  aircraft operators online in a user friendly manner and with sufficient  clarity. Additionally, it encourages customers to contact the FBO to ask  questions so pilots can make informed decisions. In response, one large- chain FBO began posting fees online for piston aircraft at its locations and  another FBO company created a trip calculator on its web site for pilots to  calculate the cost of their visit (see fig 3). We also found that a third party  company recently began a web site that provides FBO parking ramp fees  similar to those providing fuel prices. In addition, AOPA invited FBOs to  include their fees in the association’s online airport directory. The  association also indicated it categorizes the variety of fees into basic  types of fees such as landing, using a hanger, or using lavatory service to  help clarify what pilots could be expected to pay. In October 2019, AOPA  officials indicated that FBOs’ posting of fees had not increased as much  as they hoped.

Various Cost and Demand Factors and the Extent of Competition Are Associated with FBO Prices

Selected stakeholders we interviewed—including officials from 26  airports, 16 FBOs, as well as 18 general aviation pilots—highlighted key  factors that may influence FBO prices at airports across the country. Our  statistical model confirmed a correlation between certain key factors  identified by stakeholders and FBO prices. Consistent with general  economic theory, these factors fall into three groups: (1) an FBO’s costs,  (2) demand for an FBO’s services, and (3) competition among FBOs.

Stakeholders Reported That Cost Factors May Influence Prices

Selected stakeholders we interviewed highlighted cost factors such as  airport leases, infrastructure investment, fuel, labor, and security as  influencing FBO prices. They cited the following examples:

Airport Leases. Airport leases dictate terms and conditions of  contracts between an FBO and an airport and include provisions  related to the services an FBO must provide for pilots. Depending on  the specific requirements or minimum standards developed at a given  airport, FBO lease requirements vary and can affect an FBO’s costs.  For example, at one airport we visited, the FBO is required to offer an  after-hours self-service fueling option, which necessitates the  acquisition and maintenance of additional equipment. In another case,  the manager at an FBO we spoke to said that its overhead costs are  relatively high because it is required to offer flight training and aircraft  maintenance as part of its lease. To offer these services the FBO  needs additional hangar space and must pay qualified skilled  employees.

Infrastructure Investment. As with leasing costs, the greater the  investment an FBO makes at an airport, the higher its prices to users  may be. According to airport and interest group officials we spoke  with, FBOs typically have 20 to 30 year leases during which they may  make infrastructure investments such as building hangars or lounges,  based on FBO’s assessment of customer demand for its services. For  example, according to airport and FBO officials we spoke to, an FBO  will choose to invest in high-end facilities and amenities if it  determines there is sufficient demand and revenues earned are  expected to be sufficient to recoup the costs over the term of the  lease.

Fuel Transportation Costs. FBOs generally sell two types of aviation  fuel for general aviation aircraft: Jet A and 100 low lead (100LL). Jet A  is generally delivered over long distances via pipeline. According to  one petroleum company, 100LL is generally moved by truck, rail, or  barge—less cost-effective methods of transport than pipeline—due to  the smaller volumes being produced. Further, there are parts of the  United States, specifically on the East Coast, where little or no 100LL  is produced and, as a result, transportation costs can significantly  affect the cost of fuel to the FBO.

Labor costs. FBOs compete in the local labor market for staff. The  cost of labor for FBOs may vary across local labor markets around the  country. Further, a particular FBO may need specialized skills to  provide the services they offer, and this factor can affect the FBO’s  costs. For example, some FBOs offer maintenance services, so will  have trained mechanics on staff to perform such services.

State taxes. Aviation fuel excise taxes on 100LL vary considerably  from state to state and may also affect the costs to a consumer. For  example, both Oregon and Idaho have a lower state aviation fuel tax  compared to neighboring Washington State. An FBO manager told us  that in some cases, a pilot will fly over to Idaho to obtain less  expensive fuel, even though he or she may base the aircraft in  Washington.

Security. Some airports—particularly those with commercial  service—are responsible for implementing security requirements in  accordance with their Transportation Security Administration (TSA)- approved security programs, notably the security of perimeters and  access controls protecting restricted areas of the airport, such as  ramps and taxiways. We found that some FBOs are responsible for  security and access controls on their leased property based on our  review of individual lease requirements and the airport security plan.  These FBOs might require staff on site 24 hours a day to maintain  airfield and perimeter security, a requirement that can increase FBO  costs. For example, an FBO operating at an airport with commercial  service told us that it is responsible for perimeter security on the land  it leases from the airport. In addition, it is subject to unannounced  security checks by TSA. In contrast, smaller general aviation airports  without commercial service are not required to have as many security  requirements.

Stakeholders Said Demand Factors May Influence Prices

Selected stakeholders told us that the location of an airport may influence  demand for FBO services. Economic theory indicates that increased  demand for a service will generally result in increased prices, all else  equal. In particular, stakeholders cited the following examples of demand  factors that may influence prices:

Busy and congested airports may have higher prices for FBO services  due to greater demand.

Prices may be higher during part of the year in locations with  significant seasonal traffic, such as beach resorts with a summer high  season and ski resorts with a winter high season. The increased  demand at FBOs during high seasons results in higher prices than  during the off season.

An airport’s proximity to the central business district may be  associated with higher demand and higher prices in such locations.

Stakeholders Described How the Extent of Competition May Influence FBO Prices

In addition to cost and demand factors, the extent to which the market for  FBO services is competitive may also influence prices. According to the  stakeholders we interviewed, competition among FBOs may lead to lower  prices than would be the case when only one FBO provides the service at  that airport. In our analysis of FAA airport and FBO data, however, we  found that nearly 90 percent of NPIAS airports that offer FBO services are  served by only one FBO (see table 1). According to a Transportation  Research Board report, a strong indicator of the number of FBOs that can  be financially viable at an airport can be the amount of fuel sales. For  example, two airport managers we spoke to said that there was an  insufficient volume of fuel sold at their airports to support more than one  FBO.

While the majority of NPIAS airports in the contiguous United States have  only one FBO, pilots we spoke to said that competition from FBOs at  nearby airports can also affect prices. For example, within 30 miles of  Spokane International Airport, there are five other airports, each of which  is served by an FBO that may compete with the services provided at  Spokane International. (See fig. 4)

We asked selected managers of FBOs and airports and selected general  aviation pilots to describe how off-airport competition may influence FBO  pricing. FBO and airport managers told us that they view nearby airports  as competitors and monitor the FBO prices at these locations. For  example, an FBO manager in Maine told us he regularly checks the  prices at the larger international airport that is nearby. This finding  suggests that when an FBO sets its prices, it takes into account the  extent to which nearby airports may compete for its services. On the  buyer’s side of the market, 11 of the 18 general aviation pilots we  interviewed told us that they generally “price shop” for aviation fuel.  Further, most general aviation pilots we spoke with told us they use online  flight-planning tools to map their route and consider the fuel cost and  service fees of the airports along that route. Further, four pilots and an  FBO manager indicated that on longer trips that require refueling before  reaching a destination, pilots may have options that are hundreds of miles  from each other. For example, when flying from California to Texas, a  pilot could choose to stop either in New Mexico or Arizona to obtain fuel.  In this scenario, a pilot would compare prices of many FBOs in those two  states and likely choose one with lower fuel prices. Likewise, an FBO  manager in Kansas indicated that for these types of customers, he  competes with FBOs at airports more than 100 miles away.

However, we interviewed some pilots who said that they do not consider  every nearby airport as a substitute. To be a true substitute the airport  must meet the pilot’s needs to be a viable option. For example, the  airport’s runway must be of sufficient length for the aircraft, and some  runways may be too short for certain aircraft. Also, pilots take into  account the type of fuel offered at an FBO. The pilot of a piston-driven  aircraft will be unable to refuel at an FBO that offers only jet fuel. Finally,  some pilots said the price differential would need to be sufficiently large to  compensate them for any inconvenience. Some mentioned that the price  of 100LL would have to be 30 to 40 cents per gallon lower to affect their  flight plan, while others put that threshold at a lower point, 25 to 30 cents  per gallon. Pilots also told us they take travel time into account. For  example, some pilots said that they would consider landing at an  alternative airport with lower prices if it were no more than 20 to 30 miles  out of their way and if the change in destination were to add no more than  10 to 20 minutes to their trip.

As a first step in examining the relationship of FBO competition with  pricing, we examined differences in the average posted prices for 100LL  and Jet A across NPIAS airports in the contiguous United States where  only one FBO sold a fuel type compared to airports at which more than  one FBO sold that fuel, without controlling for other factors that might also  be correlated with prices. We also calculated the average prices at  airports with one FBO and airports with multiple FBOs for a subset of  airports with an air traffic control tower. We examined this subset of  towered-airports, as they generally have more operations, and thus more  demand. As shown in table 2 below, the average price per gallon of  aviation fuel was lower at airports with only one FBO than at airports with  on-airport competition. For example, at airports with only one FBO, the  average price posted for full-service 100LL was $5.01 per gallon, while  the average price posted at airports with more than one FBO was about  73 cents higher.

However, examining average differences in price fails to control for other  factors that might be correlated with prices. In particular, airports that  have more than one FBO are likely to be those that have higher traffic  volumes and that are located in areas with larger populations and higher  per-capita incomes—all factors likely correlated with higher prices.  Therefore, to more fully assess the issue, we developed a statistical  model that examines how fuel prices may be correlated with measures of  competition when controlling for other factors, such as demand, that also  may be correlated with prices.

Our Statistical Model Indicates Several Factors Are Correlated with FBO Fuel Prices

Our statistical model confirmed a correlation between selected cost and  demand factors and FBO-posted pricing of full-service 100LL and Jet A. It  also confirmed a correlation between some of the competition factors  described by stakeholders and the price of aviation fuel. Our analysis  included information on posted prices for both 100LL as well as Jet A. In  addition to running the model for NPIAS airports in the contiguous United  States for which posted prices were available (all-airports), we also ran  the model for a subset of these airports that have air traffic control towers  (towered-airports). See appendix II for a more detailed discussion of the  model structure and findings.

As we have noted, we expected fuel prices to be correlated with a variety  of cost, demand, and competition factors that pertain to characteristics of  airports and their locations, as well as characteristics of FBOs operating  at airports. We found the following correlations:

Airport Characteristics. Our model found that the size of an  airport—measured as the total number of operations—was associated  with higher prices for both 100LL and Jet A. The operational size of an  airport is likely associated with higher demand for airport services and  also is likely related to higher costs of providing those services.  Specifically, we found that an increase of 10,000 airport operations  per year was associated with higher prices of about 2 cents per gallon  for both 100LL and Jet A in both the all-airports and towered-airports  datasets. The length of the longest runway available at an airport was  also correlated with higher fuel prices. The length of the runway is an  indicator of the types of aircraft an airport can support. In particular,  longer runways are able to accommodate larger and heavier aircraft— aircraft that generally use more fuel and thus may indicate higher  demand for fuel at the airport. Specifically, we found that a 1,000-foot  increase in runway length was associated with a higher price of about  7 to 8 cents per gallon for both fuels.

Demographic Characteristics of Airport Location. Our analysis  found that FBOs’ fuel prices were generally higher at airports in areas  with higher incomes, but not always at airports in areas with larger  population. We found that prices for both types of fuel were higher at  airports located in counties with higher per-capita incomes. Where  incomes are higher, we would expect the demand for travel to be  greater. Moreover, where there are higher incomes, the cost of  providing FBO services—particularly labor costs—are likely higher.  We found income correlated with fuel prices for both the 100LL and  Jet A in the all-airports datasets and for 100LL in the towered-only  airport dataset. We also found that 100LL aviation fuel prices were  higher at airports located in counties with larger populations. This was  expected due to the likely greater demand for air travel in more  populous areas. However, county population was not statistically  significant in relation to the price of Jet A.

Geographic Characteristics of Airport. Our model found that  airports located in states on the East Coast tend to have higher 100LL  prices. Specifically, the model suggests that 100LL prices are  between 22 to 26 cents higher per gallon on average in these  states. We expected FBOs operating in East Coast states to have  higher 100LL prices due to higher transportation costs, as we found  that there is no production of 100LL in these states. As mentioned  earlier, 100LL is generally moved by truck, rail or barge due to the  smaller volumes being produced—a less cost-effective means of  transport than pipeline. Jet A, on the other hand, is transported by  pipeline over long distances. We thus expected higher prices for  100LL at airports in these states. We found this geographic differential  in all specifications for the 100LL model.

Large-Chain FBOs. Our model found that both types of fuel tend to  have higher posted prices at airports that have a large-chain FBO  operating on the premises, regardless of whether or not there was  another competitor on the premises. Specifically we found that when  a large-chain FBO operates at an airport, fuel at the airport tends to  be more expensive on average—on the order of 60 cents more per  gallon for 100LL, and an even greater differential for Jet A, more than  $1.20 per gallon.

Availability of Self-Serve 100LL fuel. Our model found that when  self-serve 100LL is available at an airport, the prices for full-serve  100LL tend to be lower than at airports with no self-serve 100LL  available. Specifically, we found that if a self-serve 100LL option is  available at an airport, the price of full-service 100LL will be about  10.5 cents per gallon lower, on average, compared to FBOs at  airports without self-service 100LL. We expected a self-service option  might be correlated with somewhat lower prices for full service  100LL—even if the full service option is provided by the same FBO— because pilots are presented with a lower price option may constrain  the prices that FBOs will charge for a full-service option.

Competition. Within our statistical model, we examined whether the  extent of competition among FBOs had a correlation with fuel pricing  in two ways.

On-airport competition. On-airport competition occurs when two or  more FBOs at an airport sell the same kind of fuel.

We estimated that the price of Jet A is lower, on average, at an  airport when two or more FBOs provided that fuel at an airport.  Specifically, for the all-airports dataset, we found that, on average,  the posted price of Jet A was 35 cents per gallon higher if only  one FBO sold the fuel at an airport compared to the case when at  least one additional competitor also served the airport. In the  towered-airports dataset, the posted price of Jet A was about 50  cents higher on average if there were only one FBO at the  airport.

For 100LL, we did not find a statistical relationship between on- airport competition and prices in the all-airports dataset; however,  we did find a statistical relationship between on-airport competition  and prices in the towered-airports dataset. The finding of no  correlation between on-airport competition and 100LL prices may  be linked to the rarity of airports with more than one FBO selling  100LL in the all-airports dataset. In fact, in the all-airports dataset,  only 13 percent of FBOs faced on-airport competition in the sale of  100LL while in the towered-airports dataset about one-third of  FBOs faced competition in the sale of 100LL. Specifically, we  estimated that the price of 100LL is 11 cents lower, on average, if  there are at least two FBOs selling that fuel at a towered airport.

Nearby competition. Our model also tested whether the availability  of additional FBOs at airports within a 30-mile distance from a  given airport had any correlation to prices for 100LL. We included  this factor because many of the stakeholders we spoke to noted  that general aviation pilots will consider using an airport near their  preferred airport if prices were more favorable at the alternative  location. However, across all model specifications, we did not find  that prices for 100LL were correlated with the presence of FBOs  at nearby airports.

FAA’s Compliance Activities Have Not Identified FBO Pricing as a Widespread Area of Concern, and FAA Is Taking Steps to Consolidate and Review Regional Inquiries

FAA officials told us they primarily rely on airports to self-certify their  compliance with federal airport grant assurances when they accept AIP  grant funding. This reliance includes the grant assurance that relates to  FBO fees—an airport must ensure aeronautical services are available to  all users on a reasonable and not unjustly discriminatory basis. FAA  officials indicated that airport compliance staff conduct outreach to  stakeholders and provide training aimed at ensuring that airports comply  with these assurances. One recent outreach effort focused on FBO  pricing. Additionally, FAA responds to phone and email inquiries and  informal and formal complaints, and conducts periodic airport land use  inspections, as discussed below, but none of these efforts has identified  FBO pricing as a widespread area of concern.

Training and Outreach. According to FAA, compliance staff conducts  periodic training and outreach to the airport community on a variety of  compliance issues. FAA headquarters annually conducts recurrent  compliance training—which includes overseeing airport grant  assurances—with regional and other FAA offices. FAA officials told us  they use these sessions to address concerns brought up by regional  compliance officials and airport compliance staff. One example of FAA’s  outreach efforts occurred in December 2017 after AOPA raised questions  about FBO pricing earlier that year. To bring clarity to the issue of FBO  pricing and the role of FAA, the agency released questions and answers  that emphasized: (1) FAA does not regulate FBO prices; and (2) airports  are responsible for ensuring FBO prices are reasonable and applied in a  non-unjustly discriminatory manner. Furthermore, FAA stated that  whether an FBO’s fees are reasonable (i.e., higher than average than  other FBOs) involves a number of economic, business, and other factors  that vary widely from airport to airport and FBO to FBO and may include  underlying costs, market conditions, quality of service, and other factors.

Inquiries and Complaints. According to FAA, airport compliance staff  respond to (1) phone and e-mail inquiries, (2) informal complaints, and (3)  formal complaints. FAA officials told us that, while FAA does not regulate  FBO prices, if someone contacts them with inquiries or a concern about a  potential grant assurance violation, such as one involving FBO prices,  they first refer the issue to the local airport to resolve. If the issue is not  resolved, the complainant may file an informal complaint with an FAA  regional office. According to FAA guidance, each FAA regional office  will review the complaint and issue a letter indicating whether FAA sees a  grant violation that the airport should fix or not. If the complainant is  dissatisfied with the regional office’s letter, the complainant may then file  a formal complaint about a violation of grant assurances with  headquarters. Headquarters will then review the circumstances of the  complaint and make a formal determination as to whether a grant  violation occurred and work with the airport to address the violation.

Data on informal and formal complaints filed with FAA headquarters and  regional offices indicate FAA has not received many complaints on FBO  pricing. Specifically, we reviewed informal complaint data from 2013  through 2018 from each FAA region, and found a total of 142 informal  complaints about potential grant violations. Seven of these complaints  related to FBO prices, and FAA found one violation later resolved by the  airport by providing space for aircraft to do routine maintenance. In  addition, we obtained and reviewed FAA’s responses to formal  complaints from 2013 through 2018, and found that none of these formal  complaint responses dealt with FBO prices. While FAA received few  complaints related to FBO prices, there are limitations in relying on  complaint data to understand the magnitude of an issue. For example,  some pilots we spoke with stated if they have an issue with an FBO, they  will use an alternative FBO rather than submit a complaint to FAA.

We found that in addition to informal and formal complaints, each FAA  regional office independently records inquiries about airport grant  assurance issues ranging from inappropriate hanger use to noise  complaints to FBO lease arrangements. Further, each region varies in the  way it captures airport compliance information such as airport location,  dates, and description of an inquiry or concern. For example, some  regions indicate the specific grant assurance that was potentially violated  while others simply describe the nature of the concern. To help see if  there is a pattern of concerns across the country, FAA’s Office of Airport  Compliance in headquarters has an initiative to centralize information on  inquiries and concerns about grant assurances, including any that may be  related to FBO prices. As envisioned, this “Enhanced Information Sharing  Initiative” will provide FAA compliance staff with the ability to record and  track inquires and complaints in comparable systems and should facilitate  information sharing among regions and between regions and  headquarters. According to FAA officials, centralizing this information will  help identify issues that may be of a concern to airport users. According  to FAA officials, this initiative, originally planned to be completed in  August 2019, has faced delays due to a government shutdown earlier this  year and information technology security difficulties. However, FAA has  hired a new contractor and anticipates completion sometime in fiscal year  2020. According to an FAA compliance manager, problems that arise in  the regions are brought to the attention of the airport compliance offices  and discussed, and whether additional actions should be taken.

Airport Land-Use Inspections. FAA is required to conduct a minimum of  two airport land-use inspections per year per region, reviewing whether  airports are complying with grant assurances such as airport property use  requirements and lease agreements. We reviewed FAA’s annual land use  inspection reports to Congress from fiscal year 2013 through 2018 and  did not identify any FBO pricing concerns.

We provided a draft of this report to DOJ and DOT for review and  comment. DOJ provided technical comments, which we incorporated as  appropriate. DOJ also suggested that we discuss more directly the  implications that airport ownership of FBOs might have for fuel prices. We  agree that airport-owned FBOs might price fuel differently than privately- owned FBOs. However, we were not able to obtain reliable data on  airport ownership of FBOs. 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, 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 III.

Appendix I: Airports and Fixed Base Operators GAO Interviewed

Appendix II: Analysis of Factors Associated with Aviation Fuel Prices

This appendix describes a model we developed to assess factors that  may correlate with fixed base operator (FBO) aviation fuel prices across  airports. The model uses data on posted prices for full-service 100LL  aviation fuel (100LL) and Jet A (Jet A) fuel at a sample of airports in the  contiguous United States that are part of the National Plan of Integrated  Airport Systems (NPIAS), along with data on selected other factors that  may be correlated with fuel prices. Specifically, this appendix discusses  (1) the structure of the model, data sources, and variable definitions, and  (2) base-case and alternative model results.

Structure of Model, Data Sources, and Variable Definitions

Based on our audit work as well as economic reasoning, we hypothesized  that a variety of factors may be correlated with aviation fuel prices across  airports. Generally, factors that influence the price of any product are the  demand for the product, the cost of producing and marketing the product,  and the extent of competition among those selling the product. To  examine the correlation between these factors and the price of both  100LL and Jet A fuel sold by FBOs, we developed an econometric model.  Specifically, our model analyzed the independent correlation of selected  key factors with aviation fuel prices. We used several specifications of  the model for both full-service 100LL and full-service Jet A.

Each specification used airport-level data to analyze variation in the price  of a single type of fuel across airports. For each type of fuel, we included  only NPIAS airports within the contiguous United States for which our  data on aviation fuel prices reported a price for at least one FBO. In  addition, we ran the analysis not only on the full dataset of all of the  airports for which we were able to obtain fuel-pricing information (which  we refer to as the all-airports dataset), but also on a subset of airports  limited to those with an air traffic control tower (towered-airports dataset).

For each type of aviation fuel, the dependent variable—or the variable to  be explained in the model—is the average price of that fuel at an airport,  net of state taxes. If an airport has only one FBO selling a fuel, the  average price of that fuel at that airport is simply the price charged by the  FBO that sells it. At an airport where two or more FBOs compete to sell  the same type of fuel, the average price of the fuel is calculated as a  simple (unweighted) average across all of the FBOs that sell the fuel at  the airport. For 100LL, about 87 percent of airports in the all-airports  dataset are served by only one FBO, and for Jet A, the share is lower, at  about 84 percent. We obtained data on posted aviation fuel prices from a  company that publishes such data online for two separate dates—a  Wednesday in October of 2018 and a Wednesday in May of 2019. All of  the fuel price data we received had been updated within 30 days of these  dates.

Independent variables in our model included a variety of demand, cost,  and competitive factors that we hypothesized may explain the variation in  fuel prices across airports. In particular, these factors relate to  characteristics of (1) airports, (2) the locations where an airport resides,  (3) the FBOs operating at a given airport, and (4) the availability of  competing FBOs.

Characteristics of airports. We expected certain characteristics of each  airport to be related to the level of fuel prices.

Airport size. We measured airport size based on the number of total  operations—takeoffs and landings—at the airport. Greater activity at  an airport reflects higher demand for services, which we expected to  correlate with higher prices. Moreover, it is likely more costly to  provide services at these busier airports. As such, based on both  demand and cost factors, we expected larger airports to have higher  fuel prices. We obtained data on airport operations from the Federal  Aviation Administration (FAA).

Length of the longest runway. Longer runways can accommodate  larger and heavier aircraft, which may increase demand of such  traffic. Because larger and heavier aircraft require more fuel, a longer  runway may be indicative of greater demand for fuel at the airport. At  the same time, longer runways are more costly to construct and  maintain. Thus both demand and supply factors related to having a  longer runway would suggest that fuel prices could be higher at such  airports. We obtained information on runway length, which we  measure in thousands of feet, from FAA.

Characteristics of locations. We also expected demographic and  geographic characteristics of the location of each airport to be correlated  with fuel prices.

Demographic characteristics of the population living in the area near  an airport.

Personal income per capita. Areas where per-capita incomes are  higher could signal a greater demand for air travel and airport  services. At the same time, areas with higher per-capita incomes  also suggest that costs for labor and other resources the FBO will  need to procure will be higher. Thus, we hypothesize that airports  located in counties with higher per-capita incomes will have higher  fuel prices. We obtained data on personal income per capita by  county from the Bureau of Economic Analysis, Department of  Commerce.

Square of per-capita income. We also expected that, as income  levels rise, the effect of even higher levels of income on fuel prices  will attenuate. To account for the possibility of a nonlinear  relationship between income and fuel prices, we included a  variable equal to the square of personal income per capita.

Population. A larger population in the area surrounding an airport  would likely indicate higher demand for airport services. We  obtained population data by county from the Bureau of Economic  Analysis, Department of Commerce.

Distance from Source of 100LL aviation fuel production. Following  production, 100LL is typically shipped over longer distances by truck,  rail, or barge, while Jet A tends to be transported over longer  distances by pipeline. As such, long-haul transport is relatively more  costly for 100LL. We found that there is no production of 100LL in  East Coast states, while most other states in the contiguous United  States have production sources for 100LL in closer proximity.  Therefore, we controlled for the greater cost of transporting 100LL to  states along the East Coast with a dummy variable in the 100LL  pricing model. We obtained information on production sources for  100LL from the Energy Information Administration, Department of  Energy.

Characteristics of FBOs. We included two variables in the model that  relate to the services provided by FBOs at the airport

Large-Chain FBOs. Based on our audit work, we hypothesized that  large-chain FBOs—those with operations at numerous airports—are  more likely to focus their business model on meeting the demands of  pilots looking for a suite of services and amenities. We thus expected  that an airport served by a large-chain FBO may have higher average  fuel prices due to the costs of providing such services. We used the  data on aviation fuel prices to determine the number of operations run  by each FBO. For purposes of the model, we defined an FBO as a  large-chain if the owner had at least 25 FBO operations across  airports reported in our dataset.

Availability of self-service fuel at airport. We hypothesized that the  price for full-service 100LL might be lower at an airport where a self- service 100LL is also offered for sale. That is, the ready availability  of a cheaper fueling option may influence the pricing of full-service  100LL. Therefore, we included a dummy variable in the 100LL pricing  model if self-service 100LL was also available at the airport. In many  cases, only one FBO is available at an airport and provides both self- service and full-service 100LL. The variable is derived from the data  on aviation fuel prices.

Degree of competition among FBOs. Economic theory suggests that  market prices for a product will be lower when more firms are selling a  product, all else equal. We examined “on-airport” competition among  FBOs for both fuels, and for 100LL, we also developed a variable to  account for competition at nearby airports.

The number of on-airport FBOs selling a given fuel. The most  immediate and likely relevant competition among FBOs would occur  at a given airport. To examine the correlation between on-airport  competition and aviation fuel prices, we used two alternative  measures: (1) the number of FBOs selling the fuel at each airport and  (2) a dummy variable that equals 1 for airports where more than one  FBO sells the fuel and 0 otherwise. These competition measures were  derived from the data on aviation fuel prices.

Availability of alternative FBOs at airports in the vicinity. Because  stakeholders we interviewed said that pilots using 100LL may  consider using nearby airports where that fuel is less expensive rather  than their intended destination airport, we examined whether the  availability of FBO services at nearby airports correlated with 100LL  prices. Specifically, we counted the number of different FBOs selling  100LL at airports within a 30-mile radius of each airport where 100LL  is sold. We derived this measure of competition from nearby airports  by combining geospatial data for each airport with information from  our data on aviation fuel prices.

As noted, we ran the fuel-pricing model for both 100LL and Jet A aviation  fuels. Table 4 provides descriptive statistics for all of the variables  included in the models. We report regression results for several  specifications in tables 5–9. Specifically these tables provide the extent  and direction (plus or minus) of the estimated correlation of each of the  independent variables on aviation fuel prices. We also indicate whether  each estimated correlation is statistically different from zero.

The per-gallon price of aviation fuel (100LL and Jet A)—the dependent  variable in our model—is measured in dollars and cents. Some of the  independent variables are measured in levels—for example, annual  airport operations are measured in tens of thousands, and the length of  the longest runway in thousands of feet. For these variables, the  regression model results indicate the estimated correlation of a one-unit  increase in the level of the independent variable on the price of aviation  fuel. For example, as shown in table 4, an increase in runway length of  1,000 feet is associated with an increase in the price of both 100LL and  Jet A of about 8 cents, and this estimated correlation is statistically  different from zero at the 1 percent level. The model also includes some  “dummy” variables—variables that take a value of either 1 or 0,  depending on whether a specific attribute does or does not apply. For a  dummy variable, the estimated correlation is interpreted as the effect of  the attribute on the per-gallon fuel price. Based on the findings in table 5,  being located on the East Coast is associated with an increase in the  price per gallon of 100LL fuel of about 22 cents. This correlation was also  found to be statistically different from zero. In another example, the model  specification shown on table 5 uses a dummy variable to indicate the  presence of competition at an airport—the variable equals 1 for airports  that are served by more than one FBO and 0 for airports that are served  by only one FBO. Results in table 5 indicate that the price per gallon of  Jet A fuel is about 35 cents lower at airports that are served by more than  one FBO than at airports with only one FBO.

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the individual named above, Cathy Cowell (Assistant  Director); Nick Nadarski (Analyst-in-Charge); Amy Abramowitz; Dave  Hooper; Christopher Jones; Ned Malone; Malika Rice; Ardith Spence; and  Michelle Weathers; made key contributions to this report.

Private pilots and plane owners have raised concerns about how much fuel and other aviation services cost at airports.

The statistical model we developed found that, at busy airports, aviation fuel prices were higher when there was less competition between service providers, in particular where there was only one provider. However, not all airports have enough demand to support multiple providers. While FAA oversees airport grantees, it does not regulate these prices.


School Meals Programs: USDA Has Reported Taking Some Steps to Reduce Improper Payments but Should Comprehensively Assess Fraud Risks

In 2018, almost 30 million children participated in the National School Lunch Program and over 14 million participated in the School Breakfast Program, with cash payments totaling almost $17 billion. Historically, the school meals programs have reported high estimated improper payment error rates, which suggest that these programs may also be vulnerable to fraud.

GAO was asked to review improper payment error rates and potential fraud in the school meals programs. This report (1) describes steps USDA has reported taking since 2015 to lower improper payment error rates and (2) examines the extent to which USDA has assessed areas of risk for fraud in the school meals programs.

GAO reviewed the results of the most recent study USDA uses to estimate improper payments in the school meals programs, as well as the error rates and actions to reduce them reported in USDA's agency financial reports from fiscal years 2015 through 2018. Further, GAO analyzed guidance for key oversight practices and documentation regarding USDA's risk assessment processes. GAO examined these processes against the leading practices in the Fraud Risk Framework for assessing fraud risks. GAO also interviewed agency officials.

The Department of Agriculture (USDA) has reported various actions aimed at lowering estimated improper payment error rates in the National School Lunch Program and School Breakfast Program (school meals programs). Examples include a new application prototype intended to reduce applicant errors and training for food service workers to reduce administrative errors. USDA uses a model based on a periodic study to estimate improper payments, and reported error rates will generally not reflect the effect of most actions until USDA's next study is released, likely in 2020. However, in fiscal year 2018, USDA redefined what it considers an improper payment. Specifically, meal claiming errors—for example, meals that are missing a required nutritional component but that are counted as reimbursable—are no longer considered improper payments, resulting in error rates for fiscal year 2018 that are not comparable to prior years.

USDA has not assessed fraud risks in the school meals programs, which hinders its ability to ensure that its key oversight practices—extensive processes designed for broad monitoring purposes—address areas at risk for fraud. The assess component of A Framework for Managing Fraud Risks in Federal Programs (Fraud Risk Framework) calls for managers to plan regular fraud risk assessments and to assess risks to determine a fraud risk profile. USDA officials stated that the agency considers fraud risks through efforts to assess overall program integrity risk in the programs, which include research projects and consideration of specific risks when allocating monitoring resources. However, GAO found that USDA's efforts to assess risk do not comprehensively consider fraud risks. As a result, these efforts are not aligned with the overarching concepts of planning and conducting fraud risk assessments in the Fraud Risk Framework. Establishing a process to plan and conduct regular fraud risk assessments that align with the leading practices in the Fraud Risk Framework—including those in the figure below—will help USDA design and implement an antifraud strategy, as well as evaluate and adapt its strategy to improve fraud risk management in the school meals programs.

GAO recommends that USDA establish a process to plan and conduct regular fraud risk assessments for the school meals programs that align with the leading practices in the Fraud Risk Framework. USDA generally agreed with the recommendation.

A well-balanced and nutritional diet for school children is essential for  their overall health and well-being and helps promote academic  achievement. In 1946, the Richard B. Russell National School Lunch Act  established the National School Lunch Program, and in 1966, the Child  Nutrition Act established the School Breakfast Program. Through these  programs, the federal government provides reimbursement to schools for  meals that meet federal requirements, and students may be eligible to  receive meals for free or at a reduced price. The school meals programs  are overseen by the Food and Nutrition Service (FNS) at the Department  of Agriculture (USDA). In fiscal year 2018, almost 30 million children  participated in the National School Lunch Program, and over 14 million  participated in the School Breakfast Program, with cash payments of  $12.5 billion and $4.4 billion, respectively.

Historically, the school meals programs have reported high improper  payment error rates, as high as almost 16 percent for the National School  Lunch Program and almost 23 percent for the School Breakfast Program  over the past 4 years. A high improper payment error rate may suggest  that a program may also be vulnerable to fraud, although it is important to  note that fraud is one specific type of improper payment, and improper  payment estimates are not intended to measure fraud in a particular  program. We have previously reported that fraud poses a significant risk  to the integrity of federal programs and erodes public trust in government.  Implementing effective fraud risk management processes can help  ensure that federal programs fulfill their intended purpose, spend their  funding effectively, and safeguard assets.

You asked us to review improper payment error rates and potential fraud  in the school meals programs. This report (1) describes the steps USDA  has reported taking since 2015 to reduce improper payment error rates in  the school meals programs and (2) examines the extent to which USDA  has assessed areas of risk for fraud in the school meals programs.

To address our first objective, we reviewed the results of the most recent  Access, Participation, Eligibility, and Certification (APEC) study—which  USDA uses to estimate improper payments in the school meals  programs—published in May 2015, as well as estimated improper  payment error rates and actions aimed at reducing them reported in  USDA’s agency financial reports from fiscal years 2015 through 2018.

To address our second objective, we analyzed documentation related to  USDA’s risk assessment processes, including the assessment of fraud  risks. We examined these processes against the leading practices in A  Framework for Managing Fraud Risks in Federal Programs (Fraud Risk  Framework) related to assessing fraud risks. The Fraud Risk Framework  describes leading practices in four components: commit, assess, design  and implement, and evaluate and adapt. We selected the leading  practices within the assess component because the identification and  assessment of fraud risks are an important step in determining whether  USDA’s oversight practices identify and address areas at risk for fraud.  We analyzed USDA guidance related to two key oversight processes— management evaluations and administrative reviews. In addition, we  interviewed agency officials about efforts to reduce improper payment  error rates and manage fraud risks.

We conducted this performance audit from June 2018 to May 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.

Administration and Oversight of the School Meals Programs

The Food and Nutrition Service at USDA is responsible for overseeing the  school meals programs at the federal level, which includes issuing  regulations and guidance. The school meals programs are administered  at the state level by a designated state agency—generally an education  or agriculture agency—that issues guidance to school districts providing  the meals. School districts are responsible for certifying students as  eligible for free or reduced-price meals, providing children with  nutritionally balanced meals each school day, and counting and claiming  eligible meals for federal reimbursement, among other things. USDA and  state agencies also conduct oversight of the school meals programs.  Figure 1 summarizes the responsibilities of the different entities within the  school meals programs.

All students in schools operating the school meals programs may  participate in the programs, and eligible students may be certified to  receive free or reduced-price meals. Individual students can be certified  into the school meals programs either through household application or  direct certification.

Household application. A household can submit an application that  lists all sources of household income and the names of all household  members, among other information. School districts compare this  information to income-eligibility guidelines to determine whether the  student is eligible for free or reduced-price meals. Alternatively, the  household can indicate on the application that it participates in certain  public-assistance programs—such as the Supplemental Nutrition  Assistance Program (SNAP)—or that the student meets an approved  designation, which confers categorical (automatic) eligibility for free  meals. No documentation to support income listings—such as tax  returns or pay stubs—is required at the time of application.

Direct certification. Under the direct certification method, data  matching is used to identify and certify students who are categorically  eligible for free meals. State agencies are required by statute to match  student enrollment records against SNAP records and may also  match against records for other public-assistance programs or  approved designations. Students who are directly certified into the  school meals programs are eligible for free meals without a household  application.

Alternatively, schools can use certain program provisions to serve meals  at no charge to all students (i.e., eligibility is not determined for each  student individually on an annual basis).

Community eligibility provision. Schools and school districts may  apply for community eligibility if their percentage of students identified  as eligible for free meals without an application—known as the  identified student percentage—is at or above 40 percent. Meals  served at schools using the community eligibility provision are  reimbursed using a formula based on the identified student  percentage.

Other special provisions. Under these special provisions, schools  generally use standard procedures to certify free and reduced-price  eligible students and count meals by eligibility category to establish a  base year. Following the base year, schools serve free meals to all  students and are reimbursed based on the information collected in the  base year.

USDA reimburses state agencies, which in turn reimburse school  districts, for qualifying meals through the process of meal counting and  claiming. A meal is reimbursable if it meets federal nutrition requirements  and is not reimbursable if it is missing a required food component or fails  to meet the meal pattern requirements. Meals are recorded at the point  of sale in a school. Generally, individual meals are recorded as either  free, reduced price, or paid based on the student’s certification status,  unless the school is operating under community eligibility or a special  provision.

Reimbursable meals are tallied at each school. School districts aggregate  meal tallies from each school and then report to the respective state  agencies on a monthly basis. State agencies then aggregate the reports  from each district and submit tallies of free, reduced-price, and paid  meals to USDA. USDA then reimburses states for the amount reported.  Meals in each category (free, reduced-price, and paid) are reimbursed at  different rates.

Given that the school meals programs are administered on a daily basis  at schools across the country, USDA officials stated that the agency relies  on two key oversight practices—management evaluations and  administrative reviews—to monitor these programs.

Management evaluations. USDA conducts management evaluations  of state agencies’ administration of the school meals programs. USDA  uses risk-based criteria, such as the level of turnover in state agency  staff, to select the state agencies to review each year. According to  USDA officials, starting in fiscal year 2019, USDA will automatically  select a state agency for review if it has not been reviewed in the past  3 years. According to USDA guidance, examples of operations it  reviews during management evaluations include (1) state oversight of  certification and verification of students into the school meals  programs, (2) administrative reviews of school districts conducted by  state agencies, (3) claims for reimbursement, and (4) state oversight  of compliance with federal meal pattern requirements, among other  areas. According to USDA officials, if USDA considers state agencies  reviewed in one year as high risk for program noncompliance, those  agencies may receive an additional management evaluation in the  following year focused on technical assistance.

Administrative reviews. USDA develops guidance for administrative  reviews in which state agencies review school districts’ administration  of the school meals programs. State agencies are required to conduct  administrative reviews of each of their school districts at least once in  a 3-year review cycle. USDA guidance states that the objectives of  administrative reviews include identifying noncompliance, providing  technical assistance, and assessing fiscal actions. Among other  things, state agency staff are to review a school district’s certification  records and its meal counting and claiming data for the most recent  month for which a claim for reimbursement was submitted. State  agency staff are also to review school meals served while the staff are  on-site to determine whether the meals contain the required food  components. State agency staff are to record any identified  noncompliance and also provide technical assistance to school district  staff.

Estimation of Improper Payments in the School Meals Programs

The Improper Payments Information Act of 2002 (IPIA), as amended,  requires agencies to identify, estimate, and report their improper payment  amounts and to develop and implement improper payment reduction  plans, among other things. USDA estimates improper payments for the  school meals programs through a model based on its APEC study, which  is conducted by contractors. The most recent APEC study (APEC II) was  released in May 2015 and covered activity during the 2012–2013 school  year. USDA conducts an APEC study about every 5 years, with APEC III  expected to be released in 2020.

Conducting the APEC study involves multiple sampling and data analysis  efforts, including the following examples from APEC II.

In-person surveys. Contractors conducted in-person surveys of over  3,000 sampled households to collect information on each household’s  circumstances at the time of application, including income, household  size, and receipt of other public-assistance benefits. Using this  information, contractors determined a sampled student’s eligibility  status and compared it to the school district’s master benefit list and  application or direct certification documentation.

Data matching. Contractors assessed the accuracy of the identified  student percentage—the figure used to determine reimbursement for  schools using the community eligibility provision—for over 100  sampled schools. To do so, contactors used an iterative process to  match sampled students to SNAP and Temporary Assistance for  Needy Families records, as well as additional data sources if  necessary.

Observation of meal service. Contractors observed approximately  25,000 lunch transactions and 23,000 breakfast transactions at over  400 sampled schools to identify the food items in each meal at the  point of sale, whether the meal was served to a student or  nonstudent, and whether the meal was recorded as reimbursable.

USDA determined that conducting the APEC study annually would not be  feasible. Instead, the APEC study includes a model that allows USDA to  use program participation data to report estimated improper payment  error rates on an annual basis. Changes in program participation data  result in small changes to the estimated improper payment error rates  USDA reports during years between APEC studies.

Fraud Risk Management Standards and Guidance

According to federal standards and guidance, executive-branch agency  managers are responsible for managing fraud risks and implementing  practices for combating those risks. Federal internal control standards call  for agency management officials to assess the internal and external risks  their entities face as they seek to achieve their objectives. The  standards state that as part of this overall assessment, management  should consider the potential for fraud when identifying, analyzing, and  responding to risks.

In July 2015, GAO issued the Fraud Risk Framework, which provides a  comprehensive set of key components and leading practices that serve  as a guide for agency managers to use when developing efforts to  combat fraud in a strategic, risk-based way. The Fraud Risk Framework  describes leading practices in four components, as shown in figure 2.

The Fraud Reduction and Data Analytics Act of 2015, enacted in June  2016, requires the Office of Management and Budget (OMB) to establish  guidelines for federal agencies to create controls to identify and assess  fraud risks and design and implement antifraud control activities. The act  further requires OMB to incorporate the leading practices from the Fraud  Risk Framework in the guidelines. In July 2016, OMB published  guidance about enterprise risk management and internal controls in  federal executive departments and agencies. Among other things, this  guidance affirms that managers should adhere to the leading practices  identified in the Fraud Risk Framework. Further, the act requires federal  agencies to submit to Congress a progress report each year for 3  consecutive years on the implementation of controls established under  OMB guidance, among other things.

It is important to note that fraud and “fraud risk” are distinct concepts.  Fraud is challenging to detect because of its deceptive nature.  Additionally, once suspected fraud is identified, alleged fraud cases may  be prosecuted. If the court determines that fraud took place, then  fraudulent spending may be recovered. Fraud risk exists when individuals  have an opportunity to engage in fraudulent activity, have an incentive or  are under pressure to commit fraud, or are able to rationalize committing  fraud. When fraud risks can be identified and mitigated, fraud may be less  likely to occur.

Although the occurrence of fraud indicates there is a fraud risk, a fraud  risk can exist even if fraud has not yet been identified or occurred. For  example, suspicious billing patterns or complexities in program design  may indicate a risk of fraud. Information to help identify potential fraud  risks may come from various sources, including whistleblowers, agency  officials, contractors, law-enforcement agencies, or beneficiaries.

USDA Has Reported Taking Various Steps to Reduce Improper Payment Error Rates, but Redefined What It Considers to Be an Improper Payment in Fiscal Year 2018

USDA Reported Taking Steps to Reduce School Meals Improper Payment Error Rates

USDA has reported various actions aimed at lowering the school meals  improper payment error rates in its agency financial reports. These  actions—including onetime actions and longer-term efforts—cover  multiple aspects of the programs. The actions USDA reported included  the creation of a new household application prototype intended to reduce  applicant errors and the development of training for food service workers  to address administrative errors. USDA also reported on mechanisms to  collect information on program errors to support agency analysis and  monitoring efforts. Examples of the reported actions are illustrated in  figure 3 below.

Because the study used to develop improper payment error rates in  school meals programs—APEC—is conducted about once every 5 years,  the effect of these actions is currently unknown. Estimated improper  payment error rates reported in years between APEC studies will  generally not reflect the effect of most actions until the next study is  released. Currently, the next APEC study is expected to be released in  2020.

Reported Error Rates for Fiscal Year 2018 Are Not Comparable to Prior Years Because of a Change in Definition

USDA changed what it considers to be an improper payment in the  school meals programs for fiscal year 2018 reporting, resulting in  improper payment error rates that are not comparable to those of prior  years. Specifically, USDA determined that meal claiming errors do not  meet the definition of an improper payment. According to USDA, meal  claiming errors occur when meals are incorrectly categorized as  reimbursable or nonreimbursable at the point of sale. For example, a  meal claiming error occurs when a meal that is missing a required meal  component (e.g., the required quantity of a vegetable) is counted as  reimbursable.

USDA officials reported that the rationale for the change in what  constitutes an improper payment is that meal claiming error does not  result in the payment of federal funds for services that were not provided  or that were provided to ineligible recipients. Agency officials also stated  that the remedy for meal claiming error is to add the missing food  component to the meal, so correcting the error would not reduce program  payments. Although the errors will not be considered in determining the  reported estimated improper payment error rates, USDA officials stated  that the agency is committed to reducing meal claiming error and will  continue to measure it as part of its periodic APEC studies.

Prior to fiscal year 2018 reporting, meal claiming errors were considered  improper payments. As a result, this change contributed to a significant  decrease in the estimated improper payment error rates for the school  meals programs reported for fiscal year 2018, as shown in figure 4.  Accordingly, the results shown for 2015 through 2018 in figure 4 are not  comparable.

Limited Risk Assessment Hinders USDA’s Ability to Better Ensure Oversight Practices Address Fraud Risks

Although USDA considers certain program integrity risks through specific  processes, it has not assessed fraud risks in the school meals programs.  As a result, USDA cannot determine whether its key oversight  processes—extensive efforts designed for broad monitoring purposes— address areas at risk for fraud. The assess component of the Fraud Risk  Framework calls for federal managers to plan regular fraud risk  assessments and to assess risks to determine a fraud risk profile.  Furthermore, federal internal control standards state that management  should consider the potential for fraud when identifying, analyzing, and  responding to risks.

According to USDA officials, fraud in the school meals programs would  look the same as nonfraudulent errors. For example, income listed on an  application may be misreported intentionally or unintentionally.  Consequently, agency officials stated that they have not established a  process to plan or conduct a specific fraud risk assessment for these  programs. Instead, fraud risks are considered through the agency’s  efforts to assess overall program integrity risk in the programs. We have  previously reported that integrating fraud risk management into a larger  program integrity approach could limit the amount of resources and  attention focused specifically on fraud prevention, detection, and  response. The deceptive nature of fraud makes it harder to detect than  nonfraudulent errors, potentially requiring control activities that are  specifically designed to prevent and detect criminal intent.

According to agency officials, USDA’s efforts to assess overall program  integrity risks in the school meals programs include researching,  monitoring, and reporting activities designed to identify areas of program  operations susceptible to improper payments and program error.  Specifically, agency officials stated that these efforts include research  projects—the APEC study used to estimate improper payment error rates  and other smaller-scale, informal projects—and a consideration of  specific risks when annually determining which states USDA will review  through management evaluations.

These efforts to assess overall program integrity risk serve specific  purposes and are not designed to identify or address fraud risks in the  school meals programs. For example, the purpose of one research  project mentioned by USDA officials was to identify challenges related to  alternative service models for the School Breakfast Program, which  include serving breakfast in locations other than a cafeteria and at a later  time in the morning. USDA has not developed a process to consider  these disparate efforts to comprehensively assess fraud risks. As a result,  USDA’s efforts do not align with the overarching concepts of planning and  conducting fraud risk assessments in the Fraud Risk Framework.

The Fraud Risk Framework identifies leading practices for planning fraud  risk assessments. Specifically, the leading practices include tailoring the  fraud risk assessment to the program and planning to conduct the  assessment at regular intervals and when there are changes to the  program or operating environment. The leading practices also include  identifying the tools, methods, and sources for gathering information  about fraud risks and involving relevant stakeholders in the assessment  process. Information to help identify potential fraud risks may come from  various sources, including whistleblowers, agency officials, contractors,  law-enforcement agencies, or beneficiaries. Existing oversight efforts— such as USDA’s management evaluations and administrative reviews— may also be a useful source, as information on errors and noncompliance  may highlight areas at risk for fraud.

The Fraud Risk Framework also identifies leading practices for  conducting fraud risk assessments, as illustrated in figure 5.

Without a process to plan and conduct regular assessments, USDA  cannot identify and assess fraud risks facing the school meals programs.  Such information is necessary to appropriately design and implement an  antifraud strategy—including specific controls like USDA’s key oversight  processes—and evaluate and adapt its strategy and controls to improve  fraud risk management in these programs.

Historically, the school meals programs have reported high estimated  improper payment error rates. USDA has reported various steps to  reduce the error rates, though a change in what USDA considers an  improper payment in the school meals programs resulted in error rates for  fiscal year 2018 that are not comparable to those of prior years. Although  the two concepts are different, high improper payment error rates may  suggest that the school meals programs may also be inherently  vulnerable to fraud. However, USDA has not established a process to  plan and conduct regular fraud risk assessments for the school meals  programs, and existing efforts to assess specific risks in the school meals  programs do not comprehensively consider fraud risks. According to  leading practices, such an assessment is a pivotal step in managing fraud  risks, helping to ensure that USDA’s key oversight efforts are targeted at  areas at greatest risk for fraud in these programs, and helping safeguard  the government’s substantial investment in them.

The Administrator of the Food and Nutrition Service should establish a  process to plan and conduct regular fraud risk assessments for the school  meals programs that align with the leading practices in the Fraud Risk  Framework. (Recommendation 1)

We provided a draft of this report to USDA for review and comment. On  April 29, 2019, the Director of the Office of Program Integrity for Child  Nutrition provided us with the agency’s oral comments on the draft report.  FNS officials generally agreed with the recommendation in the draft  report. FNS officials noted that the agency does not currently conduct a  formal fraud risk assessment, but they explained that the agency  considers fraud risks through multiple existing efforts. These efforts  include APEC and other studies, as well as key oversight processes. For  example, FNS noted that the APEC study aims to identify the factors that  contribute to errors in the school meals programs. Officials explained that  this study includes an interview of sampled households, in part to  determine whether these households underreported income on their  applications and whether such underreporting suggests anything about  the applicants’ intent. As noted in our report, we agree that these efforts  may be a useful source of information on areas at risk for fraud. However,  we continue to believe that additional action is necessary to  comprehensively assess fraud risks in the school meals programs,  consistent with the Fraud Risk Framework. USDA also provided technical  comments, which we incorporated into the report, as appropriate.

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If you or your staff have any questions about this report, please contact  me at (202) 512-6722 or bagdoyans@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 I.

Appendix I: GAO Contact and Staff Acknowledgments

In addition to the contact named above, the following staff members  made key contributions to this report: Gabrielle M. Fagan, Assistant  Director; James M. Healy, Analyst in Charge; and Matthew L. McKnight.  Also contributing to this report were Rachel Frisk, Maria McMullen, Jean  McSween, and Sabrina Streagle.

The Department of Agriculture's National School Lunch Program and School Breakfast Program give schools billions of dollars every year to provide meals for children. Historically, the rates of estimated payment errors have been high, suggesting that the programs may be vulnerable to fraud.

USDA has reported taking steps to reduce these errors. However, we found that USDA doesn't regularly assess the programs' fraud risks. Without such assessment, it's hard to tell whether USDA's oversight activities are effectively monitoring, preventing, and addressing the greatest sources of potential fraud.

We recommended regularly assessing fraud risks.